Monday, August 11, 2008

Inefficient Labor Market Outcomes (NY Yankee Edition)

One point made by Keynes is that the classical assumption that labor supply is based on the marginal disutility of working ignores the fact that people care about their relative wages. For example, SI's John Heyman reports:
Saw a headline the other today in an NY paper: "Pavano Solid.'' And I can't think of any bigger waste of space. To learn what Pavano's about, read John Feinstein's interesting book Living on the Black, about Mike Mussina and Tom Glavine. In one story, when Mussina was offered slightly less than $10 million a year in a new contract by the Yankees, he told Cashman, "I can't be paid less than Pavano,'' or words to that effect, and Cashman understood completely. Mussina was then paid $11.5 million a year, or slightly more than the sedentary Pavano.
Keynes (General Theory, ch. 2):
Though the struggle over money-wages between individuals and groups is often believed to determine the general level of real-wages, it is, in fact, concerned with a different object. Since there is imperfect mobility of labour, and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals, who consent to a reduction of money-wages relatively to others, will suffer a relative reduction in real wages, which is a sufficient justification for them to resist it....

In other words, the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups, and not its average amount per unit of employment, which depends, as we shall see, on a different set of forces. The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system.

Of course, the marginal product of Mussina's labor is way, way higher than Pavano's (a fixed nominal contract the Yankees surely regret).

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