No, competition does not cause a fall in wages — labor does

by Jehu

Real World Economics Review has posted a short article by David F. Ruccio purporting to tell us how the reserve army works: “How the reserve army works”. According to Russio, “Excess workers keep wages dampened.”

homeless_blogThe term, ‘reserve army of labor’ is originally taken from labor theory of value, specifically Frederick Engels’ masterful work, The Condition of the Working Class in England.

It seems improbable that ideas from that work, perhaps the first example of the historical materialist method of analysis, should find its way into the literature of simpleton economists in late capitalism, but Ruccio is an economist who has declared his interest in Marxian theory and (bizarrely) economics methodology.

Ruccio hghlights the reserve army of labor to explain a rather interesting paradox: although unemployment (as measured by the Bureau of Labor Statistics) is falling and new jobs (again, as measured by the Bureau of Labor Statistics) are being created, wages continue to fall relentlessly.

To explain how the reserve army ‘works’, Ruccio borrows a quote from Ben Casselman, FiveThirtyEight’s chief economics writer, and his take on the March employment report. According to Casselman, recent increases in the labor force participation rate have acted to increase competition for jobs, thus depressing wages generally. By recent increases in the labor force participation rate, Casselman is referring to a slight rise in the last six months or so.

Casselman’s chart on labor force participation is shown below:


For some reason this dumb Marxist economist, Ruccio, has adopted this to explain how Engels’ original concept of the reserve army of labor works. According to Ruccio:

“The fact is, the Second Great Depression created a large pool of potential workers who haven’t formally been part of the labor force but who would be willing to work—to take a job or search for a job—under the right circumstances. In the meantime, while they’re not part of the official labor force, these people do lots of things: they work at home, they work with and for their friends and neighbors, and they engage in a variety of other activities (both legal and illegal). They form part of capitalism’s relative surplus population.

Their existence—as potential members of the official labor force, first-time members of the labor force, or as reentrants to the labor force—puts downward pressure on all workers’ wages.”

Despite professing an avowed interest in Marxian theory, Ruccio’s appears to be stating the reason these folks have been out of work is that circumstances have not been right. They have been pursuing other vocations: puttering around the house, hustling, selling drugs or prostitution, etc. For some unexplained reason, they have suddenly reentered the labor force in the last six months because circumstance are “right” — whatever that means.

Casselman cautions that the data should be taken with a grain of salt, because it is decidedly sketchy. No great conclusions should be drawn, he states, but, of course, he is a bourgeois simpleton, and can’t help drawing them anyways:

“But assuming the rebound is real, it’s hard to overstate how important this trend is for the U.S. economy. Labor force participation has been a dark cloud hanging over the economy in recent years, even as other job-market indicators have shown steady improvement.”

Assuming, for a moment, that Ruccio is correct to infer the existence of a reserve army of labor from the labor force participation rate– a fact he does not actually demonstrate — Casselman is basically admitting that despite what he calls, “steady improvement” in other job-market indicators, the reserve army of labor has been growing relentlessly since 2010, where Casselman’s data series begins. Where in this is any evidence for steady improvement in labor market indicators?

As a matter of fact, the situation is far worse than Casselman even hints, since although his series begins in 2010, labor force participation has been falling for 16 years:


That is “one-six” years — 16 — not six as is shown on Casselman’s own chart. In other words, the labor reserve army, as defined by Ruccio, had been growing for more than a decade before the point where Casselman’s chart takes up the decline and well before what Ruccio calls “the Second Great Depression”. When set against the backdrop of the decade-and-a-half long decline in labor force participation, the latest so-called rise is a meaningless blip.

I really never got the hang of statistics, but, to my eye, the recent uptick in labor force participation appears statistically insignificant and well within what Casselman himself calls a noisy measure.

It appears to me that Casselman’s argument does not hold up to the empirical data; he cannot attribute the recent decline in nominal wages to a slight uptick in labor force participation. While, Ruccio’s argument is stronger, since the stagnation and decline of real wages obviously predates the 2008-09 crisis. The problem is that Ruccio erroneously linked his argument to Casselman’s data and thus weakened it.

Fine, right?

Well, not so much.

Looking at my chart of the long-term, it turns out that even Ruccio’s argument cannot explain why wages have been, at best, stagnant since the 1970s. The problem, as is evident from the chart, is that the labor force participation rate increased from the 1960s until around 2001,when it began falling. Meanwhile, wages at first rose with the labor force participation rate until about the 1970s, then they began to stagnate or fall even as the labor force participation rate continued to rise. Thus, for most of the period from 1970-2000, labor force participation rose, while wages mostly stagnated (according to government data) or declined (according to my own data, which is calculated using a commodity money).

Using either measure, the data would seem to call into question Ruccio’s argument on the reserve army entirely. Casselman’s argument is, of course, complete bullshit on both counts, but Ruccio’s argument is defied by the data from 1970-2000. Moreover, both arguments are based on the erroneous idea that the reserve army and competition among the unemployed to sell their labor power acts to depress the wages of the employed.

So, what the fuck is up with that? And how does this relate to Engels’ original concept of the reserve army of labor?

Basically, Engels’ argument has been distorted by Ruccio and most Marxist writers: The purpose of the reserve army is not, as many Marxists believe, to hold down the wages of the employed, but to serve as additional labor power resources for capitalist expansion:

“From this it is clear that English manufacture must have, at all times save the brief periods of highest prosperity, an unemployed reserve army of workers in order to be able to produce the masses of goods required by the market in the liveliest months”

Engels, who came from a family of manufacturers, had intimate knowledge of how the process worked. To understand his argument, think of the reserve an army maintains going into a battle. That force is held in reserve in order to be thrown into the fray at the point where the battle reaches its most decisive moment. Likewise, the capitalists throw their labor reserves into battle at the moment when capitalist expansion requires additional resources.

The reserve army may indeed also hold down wages in times of depression, but its purpose to capital is to provide additional labor power for production of surplus value during expansions. Neither Engels nor Marx relied on the existence of a reserve army of labor to explain either the wages of the working class or its fall. This false doctrine has been spread by many folks who self-identify as Marxists, but has no theoretical basis in Marx’s labor theory. The exchange value of the wages of the working class is the expression of the value of labor power, not the product of competition among the proletarians.

This is why, in chapter nine of his book, Wage Labor and Capital, Marx attributes the fall in wages not to competition, but to labor.