Tuesday Morning Links

This and that for your Tuesday reading.

- Branko Milanovic discusses how rent theory fits into the glaring gap between productivity and wages:

Bob Solow explored a couple of days ago another possibility. Going back to his own initial work on the theory of growth, some 60 years ago, Solow asked the following question: why did we assume that there is perfect competition and that factors are paid their perfect completion marginal products? We knew, continued Solow, that there were monopolies; moreover, the theory of imperfect competition (Chamberlin and Joan Robinson) existed since the 1930s. Solow said: “I could not find a good reason, but since theory and facts were broadly in accord, nobody bothered much with the assumption”. That is, until recently. How can we explain, continued Solow, a sustained and significant divergence between nonfarm sector productivity and real wage? Despite some quibbles about the measurement of the two, there is no doubt that the they have diverged. But that goes against everything we thought we knew! (I am paraphrasing Solow here.)

However, if you assume a model of imperfect competition, where in addition to labor and capital being paid their marginal product, there is also a rent (due to the fact that price is greater than the marginal revenue product), the issue becomes: how is that rent going to be distributed between labor and capital? And until the early 1980, due to trade union density (“The treaty of Detroit”), relative shortage of labor, trilateral (government-capital-labor) negotiations etc., the rent was divided in a way that favored labor. But with the decline of the unions, ideological assault on labor (the Reagan revolution) and a huge expansion of available wage-labor worldwide (as China and Eastern Europe rejoined the world economy), the bargaining power of labor waned and that of capital increased. Consequently, the share of capital in national income increased, and productivity growth got decoupled from real wage growth.
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In Solow’s view, the determination of what share of the rent goes to labor and what to capital is not solely political. It depends also on their relative scarcities (or put it the other way round, on the reserve army of the unemployed). But political factors do play a role too: power of trade unions, ideology, who controls the government, probably fear or not of a social revolution. So, as these political factors have receded, or more exactly, have moved in a direction adverse for labor, the division of the pie has become more favorable to capital.

- Dylan Matthews offers a useful survey of views on a basic income. And Scott Santens points out that a basic income is entirely consistent with the goals of the labour movement.

- Atul Gawande discusses how a U.S. medical system which doles out unnecessary treatment in the name of profits produces both higher costs and worse health outcomes. And Sabrina Tavernise connects Baltimore's poverty and poor health - which have been allowed to fester for decades - to the rightful frustration of citizens.

- Eric Jaffe argues that investment in transit does plenty of good for a city's development - including by providing a far more reliable pool of workers for employers. But Jordon Cooper writes that instead, Saskatoon (like far too many other Canadian cities) is set up to make transit more costly than driving for residents.

- Finally, Mitchell Anderson writes that Alberta voters are rightly asking what's happened to the promised benefits of an oil boom.