We are about to enter the phase of the year when I avoid driving on River Road between Boothbay and Damariscotta. The frost heaves can make one’s car grow old before its time.
During the past century, our understanding of frost heaves has grown substantially. In short, frost heaves form from underground “frost lenses.” Such “lenses,” or substantial ice pockets, begin as small amounts of moisture under the earth’s surface. When winter cold reaches down into the earth, the moisture freezes. The act of freezing creates a dry zone that attracts more moisture from around the immediate area.
Capillary action (you remember this from high school chemistry, n’est-ce pas?) takes over at this point. Water exhibits the twin properties of cohesion and adhesion. In other words, water is sticky. Its molecules cling to each other (cohesion) and cling to other surfaces (adhesion). As moisture begins to freeze underground, the formerly damp area becomes dry and frozen. The capillary action causes water molecules below the freezing zone to travel upward, thereby defying gravity as it sticks to the surfaces of the soil and to each other. Once the water reaches the freezing zone, it too freezes.
Gradually, the ice lens grows as the process continues over time. Since ice expands as it freezes, the path of least resistance is upward toward the surface of the earth. We see the evidence of ice lenses by noting frost heaves in the roads. While it is possible to make roads nearly frost-heave-free, most of our back roads have not been constructed with the care required to avoid the heaves.
As the years pass, the roads eventually break up to a point that repaving is necessary to avoid abandoning the road. At this point, I know what you are thinking: is this going to be on the final exam, and what, pray tell, does this have to do with economics? The answers are no, and much. Our labor market is also sticky and has much in common with the capillary action of water.
We noted several weeks ago that our labor market is characterized by enormous turnover. On an average day, from 75,000-100,000 workers are laid off and find themselves looking for a new job.
Several reasons exist for the job turnover. Technological advances alter the nature of jobs. For example, once upon a time most of us bought music at record stores. Today, most music is sold via the internet. This one minor change in our economy has had enormous effects in the labor market. When was the last time you saw a record store in a shopping mall?
Some jobs are gained and lost due to changes in tastes and preferences of consumers. A new gluten-free industry has sprung up almost overnight, which is displacing the previous food model.
International trade can be disruptive to the labor market. Here in Maine, we have seen many clothing mills shut down as a result of trade with Latin America, Eastern Europe, and China. Poor management can also cause workers to be ousted in favor of a more productive competitor in another city or state.
Regardless of the reason, when the pink slips come to a community, those who have lost jobs immediately begin scaling back on their spending. Just as the freezing moisture in our newly formed ice lens creates a dry zone that attracts more moisture to freeze, our furloughed workers attract more layoffs by their lack of spending. Before long, a community or region can find itself with quite a glut of workers in search of employment.
Although national unemployment insurance gives workers a little breathing room as they search for a replacement career, workers generally feel the need to get a job very quickly. As savings begin to decline, the necessity of settling for any suitable employment becomes apparent.
This brings us to an important economic reality: pricing power in the labor market is not symmetric. Workers have far less power to set wages than do employers. Employers have the opportunity to chose from a pool of workers which is receiving scores of thousands of new laborers everyday, many of whom begin to feel the pinch very soon after entering the pool of the unemployed.
A dynamic pattern unfolds over time. Some of the workers who have been laid off find a job that pays more than the previous job. Some find work at a similar salary. But most find that they need to settle for less to stay employed.
Another aspect of this dynamic concerns workers who continue to have a job within a community that is suffering from large-scale layoffs. Employers see what is happening. They are generally in a position to take advantage of the situation by offering very small wage increases when salaries come due for renegotiation. Workers whose neighbors are unemployed feel lucky to have a job and are therefore far less likely to drive a hard bargain at the wage table.
Little by little, wages in the middle-income cohort soften. Over time, without some sort of intervention, middle-income recipients are left behind as the economy enjoys ever greater levels of prosperity and productivity.
Just as the frost heaves break up the road, diminished wages gradually break up our labor market and society in general. The shift in pay from employee to employer, i.e., the redistribution of income from the middle class to the upper class, eventually undermines democracy by bought elections and other types of corruption. It occurs to me that we are seeing more and more of this here in the U.S.
Just as water can rise to overcome gravity through capillary action, wages in the labor market can fall and thus overcome the rise in prosperity and productivity through the dynamics we have described. So how do we offset this tendency for relative wages to gradually drop over time? We will examine that next week.
(Marcus Hutchins is a former economist, treasury-bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at coastaleconomist@me.com.)
