<p>
</p>
<p>And that’s why I often times disagree with economists, because prices do not adjust quickly, and sometimes not at all, due to the legions of distortions inherent to labor markets. To wit, economists are enamored with long-run equilibrium points where markets will indeed clear as supply and demand equilibrate. But as Keynes famously said, in the long run, we’re all dead, highlighting the point that economists never discuss the speed at which markets will adjust. Sure, perhaps one day the relative wages of engineers vis-a-vis consultants/financiers will ultimately reach an equilibrium point, but that date may well be decades in the future when we’re all retired, hence that equilibrium is irrelevant to us in our lifetimes. {In fact, the notion of long-run equilibria is one of the many unfalsifiable and therefore unscientific claims that economists have long made, as any evidence of a market failure can always be explained away as the markets still not having yet reached equilibrium. How very convenient of economists to postulate claims that can only be shown to be false long after everybody living today is dead.}</p>
<p>Let me put it to you this way. Honestly, how many times does anybody actually truly ‘interact’ with the labor market - that is, try to find a new job? Maybe once every few years, if that? In contrast, most of us receive a steady paycheck every month - the pay of which is not subject to market forces but is rather an internal social/political calculation within the company that we work for. Companies interact in supply/demand markets every day, which then pass through to investors through the financial markets, but individual employees are largely shielded from any kind of market. If a company accrues a billion dollars of extra profit this quarter, perhaps only a small slice of that will be allocated to the employees through a profit-sharing arrangement, but the rest otherwise accrues to the investors. Put more starkly, if the company suddenly loses a billion dollars this quarter, that doesn’t mean that all employees suddenly go unpaid. They still receive a steady paycheck nonetheless. Granted, some of them might be laid off, but those who remain will still be paid their regular wage, even as the company loses money. The employer therefore acts as a risk-bearing mechanism that shields employees from market pass-through. </p>
<p>What that then means is that, because employees directly interact with markets only rarely, wages will then tend to transition towards their equilibrium point very slowly. By the time such a point is reached, we may well all be dead.</p>