Detroit and Prices

Via Tyler Cowen:

They are a cornerstone of Chrysler’s unlikely comeback: 900 employees turning out a Jeep Grand Cherokee sport utility vehicle every 48 seconds of the working day at an assembly plant here.

Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that.

…the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries.

After a half-decade of too tight monetary policy, Detroit is finally managing to cut prices on its own–a positive outcome insofar as it helps reduce the 20% unemployment rate in the city of Detroit proper. It would be great if there were a much swifter and broader based mechanism (beside individual bargaining in the market for new employees) that would allow prices in Detroit to adjust relative to those elsewhere, helping prevent such prolonged episodes of unemployment, bankruptcy, and misery. If only.

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4 thoughts on “Detroit and Prices

  1. So, I’m still wrapping my head around these concepts you’ve been throwing out. Detroit would then have a different currency than that of say Columbus which has a relatively low unemployment rate (compared to nearby rust belt cities)? What happens then to inter and intra-state/city trade and jobs/people aren’t located only in Detroit? Does that question make sense or am I missing something still (which is likely).

    Love the posts’ ideas by the way.

  2. I am kind of blending a couple different ideas here, which is probably confusing. So here they are, (in simplistic/stylzed form):

    1. It is good when prices/wages and production/employment adjust fairly quickly to changing conditions. If people everywhere really don’t value buying cars from Detroit, then the best thing would be for car industry prices, wages, (and profits) to drop fairly quickly, leading to quits and layoffs. These price and wage cuts are a signal that the activity of carmaking is no longer viable, and other industries where wages and profits are higher signal the opportunities that await the newly unemployed workers. Dragging this process out longer ensures that the eventual break-up will be more severe–in this case, it required massive bailouts and correspondingly massive socialized costs. This is basically a New Keynesian argument.

    2. Related to how quickly prices adjust, it is good for people to know about these adjustments–otherwise they can’t act on them. If a laid off autoworker knows what sectors have high wages and profits (and where), then she can seek them out. But without that knowledge, she probably won’t find as much success. My focus on cities and such is due to the where aspect of finding these new higher wages and profits: while we might have a solid grasp on local conditions, it’s often the case that new and better jobs aren’t in the same place that unemployed people are. Even if our autoworker is willing to move, if she doesn’t know where to go, then she remains stuck.

    3. This is where the currency stuff comes in. If a city has a particularly large number of growth sectors–on average, profits and wages are up more than in most places–their currency would start to appreciate against other currencies. If such a signal is more visible to our autoworker, then she has better information to act on. Instead of being stuck, she has indicators about where the next opportunities are, and she can focus on looking at that particular city (say, Columbus!), rather than casting about wherever she happens to here about success stories. A city-level currency serves to aggregate information about the success of businesses in the city, and provide that information to individuals elsewhere.

    More generally, to maybe get at what you were talking about: I am hypothesizing that the bounds of people’s “good” information are fairly local. I generally would say that they extend as far as the edge of the city (broadly defined, say by Metropolitan Statistical Area or Combined Statistical Area–not just Fort Collins separate from Wellington or whatever). I hypothesize this because those areas tend to be the bounds of local labor markets, and it seems plausible that information about jobs in a labor market would travel faster over the extent of that labor market, and much slower beyond. Hence, the area within a local labor market has no need for separate currencies within, but they have a role for spreading information about relative successes between and amongst separate labor markets.

    Does that help at all? I’m still feeling through these ideas myself, obviously!

  3. That does make more sense. And I’ve had an idea that may or may not have occurred to you or that may or may not be in the purview of your studies.

    You’re talking a lot about knowledge of a given worker, and market systems assume varying levels of knowledge on the part of rational actors (how else can one make a fully rational choice, etc. etc.). So, if a gap in that knowledge for the worker–where to go, what prices/wages should be, etc.–is that an area where the government might help?

    Of course, several parties might hate this. Some would undoubtedly hate it for knee-jerk ideological reasons (big government = bad). Others, say large corporations who desire low wages, might not like it since it helps (I think) the worker more than the business owners.

  4. You’d have to spell out in more detail what you are thinking the government should specifically do. I think that the institutional role of the gov’t is important; currency choices being an important one here. But in general, I have trouble seeing how government would be particularly well placed to identify, promote, and disseminate information about new firm and employment opportunities.

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