Economist Bryan Caplan discusses the important topic of market-clearing wages. Why are wages not falling during the recession in order to establish equilibrium and full employment? Caplan gives an answer that seems common sense but receives little attention from professional economists and politicians.
Is labor market rigidity a market failure? I’m afraid so. But strangely enough, this market failure is largely caused by anti-market bias! The main reason workers hate wage cuts is that they imagine that wage-cutting employers are satanically “unfair.” If workers saw wage cuts for what they are – a full-employment mechanism – they’d sing a different tune. While they wouldn’t be happy to see their wages cut, they’d grudgingly accept that a little wage variability is a fair price to pay for near-total employment security. Once this economically enlightened perspective took hold, employers would eagerly cater to it – and the market failure would largely go away.
Bryan Caplan’s position may have implications that he may be reluctant to acknowledge. If the absence of widespread anti-market bias is a necessary condition for the proper function of the price mechanism, arguments that immigration can alter the cultural prerequisites for sustainable capitalism (let alone laissez faire) can no longer be dismissed as “nationalist” or “collectivist.” The potential for capitalism will become a function of the genetic and cultural traits of a population.