Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
A question on the equations... You say:
The general expression for the zeroth-order income reduction from restoring unit labour cost parity through a wage cut is
[domestic unit labour costs]:[foreign unit labour costs] - 1

Sorry, that's a snafu. It should be 1 - [foreign ULC]:[domestic ULC]

Both are "true," it's just a matter of whether you're saying "wages were N % higher before Austerity" or "Austerity will make wages go down by M %." We're saying the latter, so it should be 1 - [foreign ULC]:[domestic ULC].

Do foreign unit costs cancel out here, or are the first unit labor costs and the second total costs...?

Neither. The formula is good as written. Recall that division has higher rank than subtraction.

If the foreign unit costs are smaller than domestic costs this is a negative quantity.

Yes. The second equation gives you the change, not the reduction, because when I derived it I didn't bother splitting the derivation between the more and less competitive cases.

Also is there a standard reference for these equations, somewhere I could point to for the Serious people that might condemn the "unseriousness" of the writers credentials

Not as such, no. But I'm just using three standard short-run, low-order macro assumptions: Static expectations, sticky prices, constant import quota.

If they wanna argue those, then we can talk. If they just wanna toss credentialism at you, you can say "standard short-run macro assumptions about price stickiness and structural import dependencies."

I have the impression that absolute unit labor costs in Greece are substantially lower already than those in Germany (but where would one find these listed online?), and what is being paraded in the press is the fact that relative labor costs have increased faster in Greece than in Germany since Euro adoption.

I think you are confusing hourly wages and unit wages. Hourly wages are indeed much lower, but unit wages - that is, wages per widgit that actually goes out of the factory - are (supposedly) higher.

Thus I think labor costs are reduced to make up for non-labor costs that "can't"... How does that affect the argument if at all...

Yes, that's part of the larger argument we're making. Wages and profits are two sides of the same coin, accounting-wise. If AusterityTM is indicated for wages, then it is also indicated for profits. (The converse, however, does not always hold, as profits have a lower marginal rate of expenditure than wages. So there exists a demand regime where wage Austerity can kill your recovery even while profit Austerity helps it.)

But in the short term it doesn't matter, except as a historical digression, because in the short term what's killing the Greek economy is that it has excess hard-currency debts and a hard-currency trade deficit. How they came about is irrelevant to the economics (although they may well be relevant to the political blame game). The solution are the same in either case: The debts must be defaulted upon, and the hard-currency deficit must be turned into a soft-currency deficit. The first bit Greece can do on its own. The last bit can be done either unilaterally, by Greece leaving the Euro, or federally, with the ECB starting to do its goddamn job and provide unlimited and unrestricted funding for countercyclical stabilisation policy at the state level.

In the longer term, Greece can rebalance its foreign trade, but in the short term, "default and print money" is the only solution, and the only choice Greece and Europe has is whether it happens before or after the Greek economy has ceased to exist (resp. before or after Deutche Bank's private profligacy has been moved to the public balance sheet).

So where does that leave the discussion? Does it matter?

Yes. You want to keep citing that as often as you can get away with. Because what that quote essentially says is that Greece's current account problem is not a problem of high unit labour costs. Which means that it is either a problem of too-high profits, a problem of institutional barriers to industrialisation (including the federal rules against industrial policy) or a problem of the private Greek banking system creating a boom based on Ponzi finance.

(I think that large part of the discussion is fictional to begin with, since what was monstrous in these past years in Greece was profits per worker: in that way the bubbly "boom" was for the working people half swallowed up by high inflation and half sent to swiss bank accounts and used to finance yachts, villas and, as its main "productive" outlet, corruption.)

That would be the "excessive profits" and "irresponsible private banks" explanations from the list above.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 9th, 2011 at 12:50:53 PM EST
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