Rothbard writes:
If a quick fall in wage rates ends and even reverses withholding of the purchase of labor, a slow, sluggish, downward drift of wage rates will aggravate matters, because (a) it will perpetuate wages above free market levels and therefore perpetuate unemployment; and (b) it will stimulate withholding of labor purchases, thereby tending to aggravate the unemployment problem even further.
What is the difference between (a) and (b)? Aren't they both saying that if wages are too high, employers won't hire?
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Yes, but it seems more like cause and affect, that a will happen and b will sharply follow. Can you post the whole paragraph that's from? The first part of it confused me a bit, I feel like I need it in full context.
I think the first sentence is introducing a change in topic. Until then he was talking about a quick fall in wages, and now he is going to talk about the opposite, a slow sluggish fall.
It's a long piece, here is what I think will help out with context:
Suppose, however, that the highly improbable “worst” occurs, and the demand for labor turns out to be inelastic, i.e., total payrolls decline as a result of a cut in wage rates. What then? First, such inelasticity could only be due to businesses holding off from investing in labor in expectation that wage rates will fall further. But the way to meet such speculation is to permit wage rates to fall as quickly and rapidly as possible. A quick fall to the free-market rate will demonstrate to businessmen that wage rates have fallen their maximum viable amount. Not only will this not lead businesses to wait further before investing in labor, it will stimulate businesses to hurry and invest before wage rates rise again...
If businessmen overspeculate in inventory of a certain good, for example, the piling up of unsold stock will lead to losses and speedy correction. Similarly, if businessmen wait too long to purchase labor, labor “shortages” will develop and businessmen will quickly bid up wage rates to their “true” free-market rates. Entrepreneurs, we remember, are trained to forecast the market correctly; they only make mass errors when governmental or bank intervention distorts the “signals” of the market and misleads them on the true state of underlying supply and demand. There is no interventionary deception here; on the contrary, we are discussing a return to the free market after a previous intervention has been eliminated.
He seems to be saying that (a) perpetuates unemployment [=no new jobs] and (b) aggravates unemployment [= even less jobs]. OK, then I guess my q is how will it aggrevate unemployment? Who will get fired?
I'm not positive by "labor purchases" he means "hiring people". He could be talking about any purchase having to do with the labor sector...meaning any capital equipment a firm might buy for employees to use (e.g. backhoe), meaning less work/jobs for people who make backhoes and all their compliments and inputs...or perhaps he could even be talking about purchases made by those in the labor industry...i.e. consumers...and he only used the term "labor purchases" to illustrate the connection between them (i.e. labor employees are consumers).
I think it's the former.
I can follow til the first statement of the last paragraph, but I might have it figured out. A quick fall in wages will help, but if this ends it can reverse withholding of purchasing power, when I focus on reverse withholding of purchasing power it seems that now if wages have reached their lowest point businesses will want to quickly hire at this point now before rising again. If wages slowly drift downwards (slowest rates possible) they will hold off waiting for the lowest possible prolonging unemployment (compared to a fast drop), by saying "perpetuate wages about free-market levels" it seems that what a business thinks is the lowest is just a false indicator, and that the wages are actually not at market value (because they have not fully dropped), this will further stimulate withholding of labor purchases as it's a longer process, and they will withhold from making those purchases until they are certain it's at market levels.
What I get from this is that a fast drop in wages will cause short term withholding, when a reasonable (subjective to the business hiring) wage has come to surface, they will hire again at that rate, but if the wages slowly drop they waiting is longer so they can get the lowest, which takes longer than a fast drop.
It aggrevates unemployment due to the time preference of those looking for employment and those looking to hire. Those who want employment want it immediately, while if wages are slowly dropping businesses will wait for it to reach it's bottom before hiring again. (Let's say a fast drop in wages was within a 6 month period, and a slow drop in a year or more, etc.)
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