Crisis and Inequality. Mattias Vermeiren
who have a lower marginal product of labour and therefore should be paid less by their firm.
The other dimension of the SBTC interpretation is that a worker’s marginal product of labour depends not only on his or her skills but also on the supply and demand for these skills in the labour market – that is, the market where employers and workers interact as, respectively, buyers and sellers of labour. Although SBTC created more demand for high-skilled labour like engineers and software developers, the educational system failed to generate enough ‘supply’ of high-skilled labour. In some countries, like the United States, ‘educational progress’ – that is, the degree to which children attain levels of education higher than those of their parents – has even come to a standstill since the 1980s. Claudia Goldin and Lawrence Katz’s book The Race Between Technology and Education (2008) is the key reference text for this interpretation of rising income inequality in the advanced capitalist world:
During the first three-quarters of the twentieth century, the rising supply of educated workers outstripped the increased demand caused by technological advances. Higher real incomes were accompanied by lower inequality. But during the last two decades of the century the reverse was the case and there was sharply rising inequality. Put another way, in the first half of the century, education raced ahead of technology, but later in the century, technology raced ahead of educational gains.8
The neoclassical theory of SBTC is a clear attempt to explain the rise in income inequality by way of ‘market forces’ that are regulated by the ‘law of supply and demand’: if demand for a specific good (in this case, skilled labour) increases for any given supply of that good, the price of that good (in this case, the wage of skilled workers) will increase. The alleged efficiency of the ‘price mechanism’ to balance supply and demand in markets for goods and services (in this case, labour markets) is one of the key principles of neoclassical economics (box 1.2).
Box 1.2 The market price mechanism
Figure 1.8 presents a simple illustration of how the market price of a good or service is determined by the relationship between supply and demand. Demand is indicated by the downward-sloping curve, representing the phenomenon whereby a falling price of a good or service leads to a greater willingness among consumers to buy more of that good or service: if the price of a good increases, consumers will buy less of the good and purchase alternatives; if the price of a good drops, they will consume more of it. Supply is indicated by the upward-sloping curve, reflecting the phenomenon whereby rising prices make it more attractive and profitable for firms to increase their production: if the price of a good increases, producers of the good will produce and try to sell more (not because they like the consumers, but because they can make more profit); lower prices discourage supply because firms will make less profit. In a free market there will be a single price which brings demand and supply into balance, called the equilibrium price. The equilibrium price is also called the market clearing price, because it is the price at which the exact quantity that producers supply to market will be bought by consumers. This is efficient because there is neither an excess of supply and wasted output, nor a shortage – the market clears efficiently.
Figure 1.8 The market price mechanism
In figure 1.8 the market will be in equilibrium at a price of 60. At this price the demand equals the supply, and the market will clear: a quantity of 500 units will be offered for sale at 60 and 500 units will be bought – there will be no excess demand or supply at this price. Market prices have a key signalling function, as changes in prices provide information to producers and consumers about changes in market conditions. If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand; if there is excess supply in the market, the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.9
In order to allow markets to clear efficiently, one important condition needs to be in place: free competition. According to neoclassical economists, the most effective ‘regulator’ of firms is competition in the free market system, which forces firms to produce goods and services that are demanded by consumers and sell these goods and services only at the price that consumers are willing to pay for them. Suppose in the above example that a producer wants to make an excess profit by asking a higher price than the equilibrium price of 60. If there is free competition, the producer will be unable to sell his goods as consumers can always buy the same good from another producer at the lower equilibrium price: if a producer raises his price above the equilibrium price to gain extra profits, competitors will step in and undersell him. Even if many producers unite and agree to charge an unduly high price, the collusive coalition will be broken by new firms entering the market: if there is free competition, the excessively high price will be a signal to entrepreneurs that it will be highly profitable to manufacture the good and steal the market from the colluding firms by underselling their price. Due to the entry of new competitors in the market, the price will return to the equilibrium price.
Another presumed benefit of free markets and the price mechanism, according to neoclassical economists, is that demand and supply adjust to external shocks until a new market equilibrium has been reached. Because free markets are believed to be self-adjusting, they work best without excessive government intervention. As Robert Heilbroner summarizes the self-adjusting and self-regulating nature of markets in his widely acclaimed book The Worldly Philosophers (1953):10
The beautiful consequence of the market is that it is its own guardian. If output or prices stray away from their socially ordained levels, forces are set into motion to bring them back to the fold. It is a curious paradox that thus ensues: the market, which is the acme of individual economic freedom, is the strictest taskmaster of all. One may appeal the ruling of a planning board or win the dispensation of a minister; but there is no appeal, no dispensation, from the anonymous pressures of the market mechanism.
Figure 1.9 offers an explanation of how SBTC raises income inequality through the operation of the price mechanism in labour markets for low-skilled and high-skilled workers. Due to the availability of new technologies and machineries that substitute for low-skilled workers, employers will demand fewer of these workers: graphically, the demand curve for low-skilled labour shifts to the left from D0 to D1 until a new equilibrium (E1) is reached, with lower wages and quantity (numbers) hired than in the original equilibrium (E0). Since the same new technologies and machineries are a complement to high-skill workers – such as engineers – there will be more demand for these types of workers: the demand curve for high-skilled labour shifts to the right from D0 to D1 until a new equilibrium (E1) is reached, with higher wages and quantity hired than in the original equilibrium (E0).
Figure 1.9 Skill-biased technological change and the price mechanism in labour markets
Akin to SBTC, economic globalization reduced demand for low-skilled workers and boosted demand for high-skilled workers in advanced capitalist countries. Increased competition with low-wage countries has forced firms in labour-intensive sectors of these countries – for example, textile and apparel – to close their business or move parts of the production process – for example, the stitching of clothes or the assembly of consumer electronic goods such as personal computers and smartphones – to developing countries. In a widely discussed study, US economists have estimated that the rise