Friday, July 1, 2016

A Scarcity of Rents?

One common fallacy is the notion that jobs are scarce and so it is important to protect jobs.

Labor is scarce, so there are more than enough jobs for people to do.

If labor is to be used to produce as much as possible of whatever it is that people consider most important, then sometimes what labor is used to produce must shift due to new opportunities.

In a command economy that would occur by people being transferred from less important tasks to more important tasks.

In a market economy, what happens is that people lose jobs and have to find new ones.   It isn't that they have done anything wrong.  And it is unlikely that that their old jobs producing nothing of value at all.  It is rather than their time can be better spent doing something else.

Fortunately, the long run trend has been for labor to be compensated by more and better goods and services.   Unfortunately, for some workers sometimes, there might be a set back and they end up in new jobs that provide less than the old jobs, at least for a time.  

And while this could be a consequence of competitive markets, it might sometimes be the result of a loss of rents.  

For example, suppose the steel industry is unionized.   The steel workers earn rents mostly at the expense of those who use products that include steel.   Somewhat fewer of those products are purchased, less steel is produced than otherwise, and fewer steelworkers are employed.   Displaced steelworkers find other work, slightly depressing wages in the rest of the economy.   That extra labor results in more production of other products and slightly reduced prices of those goods and services that utilize less steel.   Steelworkers earn higher real incomes and a less efficient allocation of resources results in slightly lower real incomes for everyone else.

Now, suppose foreign steel producers begin to expand their market share.   Domestic steel production and employment contract.   The displaced workers find other jobs and produce more.   More steel and more other goods and services are produced increasing total economic well being.   But some of the steel workers have lost their rents.  

Suppose the rents collected by the steelworkers makes it profitable to introduce labor saving technology--something that would be too expensive if steelworkers earned a competitive wage.   More steel is produced and the unionized steel workers that are displaced find other jobs and produce other goods and services.   Total output and income increase.   But some of the steelworkers have lost their rents.

So, labor is scarce.  Jobs aren't scarce.  But perhaps rents are scarce.

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