- Industry: Economy; Printing & publishing
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The price of labor. In theory, wages ought to change so that the supply and demand in the labor market are always in equilibrium. In practice, wages are often sticky, especially in a downward direction: when demand for labor falls, wages do not fall. In this situation, the fall in demand results in higher involuntary unemployment. Trade unions may use collective bargaining to keep wages above the market-clearing rate. Furthermore, many governments impose a minimum wage that employers must pay. Firms may choose to pay above the equilibrium wage to increase the productivity of workers. Such so-called efficiency wages may make workers less likely to join another firm, so cutting the employer’s hiring and training costs. They may encourage workers to do a better job. They may also attract a higher quality of worker than wages at the market-clearing rate; better workers may have a higher reservation wage (the lowest wage for which they are willing to work) than the market-clearing equilibrium. In recent years, employers have tried to reduce wage stickiness by increasing the proportion of pay that is linked to the performance of their firm. Thus if falling demand reduces the employer’s profit the pay of its employees falls automatically, so it does not have to lay off as many workers as it otherwise would. Performance-related wages can also reduce agency costs by giving hired hands a stronger incentive to do a good job.
Industry:Economy
As people get wealthier, they consume more. This wealth effect has important consequences for monetary policy. When there is an interest rate increase, future income from assets such as equities must be discounted at a higher rate than before. As a result their owners feel poorer and spend less. A cut in interest rates has the opposite effect. Economists disagree on the wealth elasticity of consumption: how much consumer spending would rise if wealth increased by, say, 1%. Different consumers may have different wealth elasticity. If most of the increase in wealth goes to poorer people this may have a different wealth effect than if most of it went to people who are already wealthy. The source of the wealth increase may also matter. If share prices rise or interest rates fall, consumers may be slow to spend out of their increased wealth if they think the increase may be temporary. However, if they think a sharp rise in share prices is permanent and the stock market then tumbles, the result may be that consumption falls by enough to cause a recession. The wealth effect of rising house prices is particularly uncertain.
Industry:Economy
In most countries, the majority of wealth is concentrated in a fairly small number of hands. This makes a wealth tax appealing to politicians, as it should allow substantial amounts of revenue to be raised from comparatively few people, allowing the tax burden on the majority of the population to be kept down. It also appeals because it promotes meritocracy by making it harder to be born with a silver spoon in your mouth. A wealth tax reduces the disparities in wealth rather than income that are the biggest determinant of how the scales are weighted for succeeding generations. What could be better than a tax that produces lots of money for the government and strikes most voters as being extremely fair?
Alas, as critics point out, wealth taxes may cause inefficiency by discouraging wealth-creating economic activities. Moreover, the revenue collected may prove disappointing. The wealthiest people are often the most skilled at tax avoidance, not least because they can afford good tax accountants. Despite the enormous concentration of wealth in a small part of the population, on average across the OECD wealth taxes account for less than 2% of total tax revenue. A wealth tax can achieve horizontal equity and vertical equity (so that people of similar means pay the same and those with more pay more) in ways that income tax cannot. For instance, neither a poor person nor a rich person with no income would pay income tax, and only the rich person would pay the wealth tax. Wealth taxes come in two main forms. Capital transfer taxes are levied when wealth changes hands, either at death (inheritance tax) or through donation (gift tax). Annual wealth taxes are levied each year as a fraction of the taxpayer’s net worth. Some people regard capital gains tax as a wealth tax, but, strictly speaking, it is a tax on the income earned on capital, rather than a wealth tax on the capital itself.
Industry:Economy
At the start of the 21st century, the total output of the American economy weighed roughly the same as it did 100 years earlier. Yet the value of that output, in real terms, was 20 times greater. Output is increasingly weightless, produced from intellectual capital rather than physical materials. Production has shifted from steel, heavy copper wire and vacuum tubes to microprocessors, fine fiber-optic cables and transistors. Services have increased their share of GDP. This weightless or dematerialized economy, most economists agree, is not just lighter but also more efficient.
Industry:Economy
Americans use welfare as shorthand for government handouts to the poor. Economists use it to describe the well being of an individual or society, as in “Are tax cuts welfare-enhancing?”. This is economist-speak for “Will tax cuts improve the overall well being of the country?” (See utility. )
Industry:Economy
Economics with a heart. The study of how different forms of economic activity and different methods of allocating scarce resources affect the well being of different individuals or countries. Welfare economics focuses on questions about equity as well as efficiency.
Industry:Economy
Active labor market policies, in which government handouts to the unemployed come with strings attached, designed to get the recipient off welfare and back to work as quickly as possible.
Industry:Economy
Income you do not expect, such as winning a lottery prize. Economists have long argued about whether people are likely to save such windfalls or spend them. According to the permanent income hypothesis, favored by most economists, people save the lion's share of windfall gains. But real life often contradicts this; ask any lottery winner.
Industry:Economy
A controversial concept, often used by politicians to justify imposing a tax on profit that in theory is earned unexpectedly, through circumstances beyond the control of the company concerned, and is thus deemed undeserved and ripe for the taking by the tax authorities. As the profits were neither expected nor a result of the efforts of the firm, taxing them should not harm the firm’s incentives to maximize future profits. The problem comes when greedy politicians start claiming that profits are windfalls when in fact they are deserved and expected. Then taxing them sends a signal to firms that they should not try too hard to make profits, as if they do too well they will not get to keep the profits anyway. If this became widely believed, effort would probably decline and economic growth would be slower.
Industry:Economy
No time for losers. In certain jobs, the market pays individuals not according to their absolute performance but according to their performance relative to others. The income of window cleaners depends upon how many windows they clean, but investment bankers’ pay may depend upon their performance ranking. Slightly more talented window cleaners will make only a small difference to the transparency of their customers’ windows, but in the markets for selling bonds that slight edge can mean everything. Rewards at the top are therefore disproportionately high, and rewards below the top are disproportionately low. People in these professions are often willing to work for very little just to have the chance to compete for the top job and the jackpot that comes with it. This sort of economics has long been prevalent in celebrity-dominated businesses such as entertainment and sport. But this reward structure is spreading to more and more occupations, including journalism, the law, medicine and corporate management. Globalization has expanded the market for skills, increasing the opportunities for the rich to become even richer. In a normal market, sumptuous superstar incomes would attract competition from more applicants to do the jobs that pay them. This would then bring salaries down to less exotic levels. In a winner-takes-all market, this does not happen. An investment bank wants the best analysts and dealers; second best will not do. It can also afford to pay. Some economists believe that because of more liberalized markets there will be growing inequality in most professions and the emergence of a winner-takes-all society.
Industry:Economy
