New Perspectives

In Economics and Finance

Eyes That Will Not See

Labor Economics has a blind spot, and not a small one. For all we learn from it about the macro, micro and mixed dimensions of the subject, the marginal productivity of this one and that one, and the ups and downs of the almost infinite measures of employment, under-employment, unemployment, disemployment and even future prospects for employment, one key characteristic remains utterly mysterious. Where does labor, the labor force come from?

According to reigning theory “the labor force is a non-produced input” into the economy. Of extra-Economic origin!, in the last analysis a free gift from nature and/or society!, costless until actually hired! Of course, labor economists, ‘manpower’ experts, human capital investigators and several whole other professions will quarrel with my citing this, arguing that I take too seriously the influence of high, even esoteric theory as General Equilibrium analysis and should instead come down to earth to the day-to-day labors of those who specialize in the nitty-gritty of actual research.

But in at least one area our labor economists are chronically wrong. They too implicitly accept this “non-produced input” business when it comes to raising the minimum wage. I cannot ever recall a public and/or professional discussion that didn’t exhaust itself solely around the issue that raising it would (or would not) harm the employment prospects of those already unfortunate workers.

On the other hand, we know that about 1 in 4 full-time workers in the US require government assistance to get by – food stamps, housing assistance, “reverse income tax’, things of that nature. And at a cost of about $150 billion per year to the tax-payer. (Cohen 2015)

One can treat this as just another “welfare” give-out. But if the labor force, like every other productive factor, has a cost of production, we ought to treat that $150 billion as a socialized wage paid out to make good the cost of producing and maintaining this lowest quarter of the working labor force. (Note too that that $150 billion is a subsidy to the employers.)

There are other indicators that our public policy and public understanding is deeply affected by that idea that, ultimately, labor is a “non-produced input” into the private economy. It erases the reality that public investment in the US economy outweighs the private variety by about 1.8 to 1, evidently because most of that investment goes to producing and altering the labor force. Here the (mis)leading idea is that moneys public and private spent on education and training come under the Economics category of Expenditures and not those of Savings and/or Investment.

We are now too in a period in which both official and professional opinion are celebrating lowering unemployment rates and reports of a shortfall of workers to fill open job spots. Apparently here too the focus is on “the labor market”, emphasis “market”, which narrows the domain of Labor Economics and thus overlooks the deep, socially worrying changes in what was once a reasonably adequate employment relationship. What are we to make of employers who are now giving one-off bonuses instead of enduring raises?, who are changing employees into (benefit-less) sub-contractors?, who offer only two-tier wage and benefit rates to new employees?, or who give only terminal contracts, or offer on-call employment, demand weekend and holiday home-work?, even impose limits on what jobs their former employees may take even after they’ve left that employer?

To my notions of the matter, Science imposes no blinders on itself. We economists have something to learn here.


Arrow, Kenneth J. and F(rank) H. Hahn. 1971. General Competitive Analysis. San Francisco; Holden-Day.

Cohen, Patricia. 2015. “Counting Up the Hidden Costs of Low Pay.”. The New York Times. April 13, 2015: B1 over to B3

McDermott, John [F.M.]. 2017. Employers’ Economics Versus Employees’ Economy.: How Adam Smith’s Legacy Obscures Public Investment in the Private Sector. Cham (Switzerland);Palgrave Macmillan.

John F. M. McDermott is Professor Emeritus of the State University of New York. His most recent book is Employers’ Economics versus Employees’ Economy: How Adam Smith’s Legacy Obscures Public Investment in the Private Sector (Palgrave Macmillan 2017).

Employers’ Economics versus Employees’ Economy