Category: Uncategorized

Are your views on sticky nominal wages and the minimum wage consistent?

by  Tyler Cowen

Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you.

In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless.  (Analogous to “self-deportation,” a sarcastic wag might suggest.)

Let’s say, alternatively, that you finally decided to settle for $10 but the law now stipulates $12.  It’s not quite the same (“the public regime has shifted”), but still I can imagine that an employer, if he did not hire you in the first setting, also would not hire you in the second setting with the higher legal minimum.

Keynesians believe that worker-imposed minimum wages do not lead to reemployment very readily.  Other people, some of whom are also Keynesians, believe that state-imposed minimum wages are reasonably consistent with employment/reemployment.

If there is significant monopsony in labor markets, can a worker-imposed minimum wage improve outcomes?

I know many economists who will argue: “let’s raise the state-imposed minimum wage.  Employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”  I do not know many Keynesians who will argue: “In light of the worker-imposed minimum wage, employers will respond by creating higher-productivity jobs, or by paying more, and few jobs will be lost.”

Again, I am not saying that the worker-imposed minimum wage and the state-imposed minimum wage are identical in their nature.  Still, it would be interesting, in terms of a model, to deduce where the relevant difference comes from.

Is the difference that the worker-imposed minimum wage is too high?  That the worker has not publicly precommitted to his or her personal stubbornness?  That a legal minimum wage applies to a larger and broader class of workers?  Something else?

In policy terms, does it suffice to argue that minimum wage increases should be restricted to periods of high or at least adequate demand?  Have you noticed that is not what we are seeing?

Addendum: For an additional exercise, under what model are your views on the minimum wage, sticky nominal wages, and payroll tax cuts consistent?  Consider please a payroll tax for each side of the market.  Toss in the liquidity trap for true extra credit.

From my email, about the deadweight loss of Valentine’s Day

by  Tyler Cowen in

Consider:

Single people report feelings of inadequacy, anxiety.
People in relationships suffer from the tyranny of expectations. Good experiences are met with hedonic adaptation, bad experiences can be, I’m reliably informed, remembered for decades.
Florists, restaurateurs, etc., demand – and receive – excess producer surplus for their services.

For years, my solution has been to randomly select a surprise Valentine’s day substitute. Our private utility is well served (the wife loves the arrangement), and as a bonus I think I am minimizing the negative consumption externality.

In my estimation, 1 and 2 outweigh 3, resulting in a deadweight loss.  I’m not a naive utilitarian; yes, I understand there is value in signaling, and, believe it or not, I’m a romantic. I just think that by coordinating this behavior in holiday form we suffer on both demand side (expectations, zero-sum positional goods) and supply (constraints in providing flowers, restaurant tables).

That is from Shiraz Allidina, MR reader.

World music CDs of recent times/2012

by  Tyler Cowen in

I now realize that last year I neglected to cover “Best World Music CDs of the year.”  So here goes:

1. Bahamas: Goombay 1951-1959.  I listened to this CD last year more than any other.  It’s also some of the wittiest music I own, and it has plenty of economic themes.

2. Bwati Kono, by Lobi Traore, raw electric blues from Bamako, hypnotic, Jimi Hendrix of West Africa stuff.

3. Pete Seeger, The Complete Bowdoin College Concert 1960.  Some people think of Seeger as a “right place, right time” sort of guy, but that does him an injustice.  He was one of the most talented American musicians of his generation, and this live two-CD set shows him at his versatile peak, as a kind of walking human jukebox of American musical traditions, with lots of world music too.

For an honorable mention I would suggest Y’anbessaw Tezeta, by Getachew Mekuria and The Ex & Friends, Ethiopian saxophone.

Here are two free songs from Revue Noire a Tana, one of my favorite world music albums, years old but I am still listening to it regularly.  It’s not on Amazon, maybe you can find a copy somewhere in these links.

Assorted links

by  Tyler Cowen

1. Reddit thread on queuing.

2. Addition by subtraction?, or more on the Patrick Ewing theory.

3. How Australia handles youth, disabilities, and minimum wages.  (Their “assessed capacity” metric seems screwy to me; who gets to decide and on what basis?)

4. Robert Cottrell on how to read the internet.

5. How are the details on the preschool plan developing?

6. The culture that is North Korea (music video, not Gangnam style, recommended nonetheless).

Are Government Spending Multipliers Greater During Periods of Slack?

by  Tyler Cowen in

The embarrassing result here is that no, it seems they are not:

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jordà’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

That is from a new paper by Michael T. Owyang, Valerie A. Ramey, and Sarah Zubairy.

I see a few views (among others) of the multiplier:

1. The crude form of Say’s Law is true and fiscal policy simply remixes funds with no real impact.

2. Say’s Law is not really true as stated, but why should we be so impressed with a one-time uptick in monetary velocity, also called fiscal policy, unless the supply-side effects are also really good?

3. Fiscal policy effectively targets and mobilizes unemployed resources.

4. Fiscal policy postpones adjustment issues (this can be from AD too, it doesn’t have to be a “structural” problem), and may usefully smooth consumption, but it doesn’t do a good job targeting and mobilizing unemployed resources.

5. The size of the multiplier is determined by the expected monetary policy accommodation, and not by the quantity of unemployed resources.

I would say this paper provides evidence against #1 and #3.

Quotations from China

by  Tyler Cowen in

“The genetic basis of intelligence has been ignored for a very long time,” says Mr. Zhao. “Our data will be ready in three months’ time.”

There is more here.  Here is some further explanation:

At the Hong Kong facility, more than 100 powerful gene-sequencing machines are deciphering about 2,200 DNA samples, reading off their 3.2 billion chemical base pairs one letter at a time. These are no ordinary DNA samples. Most come from some of America’s brightest people—extreme outliers in the intelligence sweepstakes.

Assorted links

by  Tyler Cowen

1. Markets in everything: sleeping in the workplace.

2. Interesting comparisons of NYC real estate prices over time.

3. Extensive data about porn stars (as safe for work as such a link could be, I suppose, in any case the material is analytical).

4. The top ten emerging technologies for 2013?

5. FT article about economics lessons from virtual gaming and on-line worlds.

6. Bill Eadington, economist who studied gambling, passes away.

Would Hayek have favored Obamacare?

by  Tyler Cowen in

In this video Nick Gillespie interviews Erik Angner and Erik is (with qualifications) positively inclined.   A few points:

1. When Hayek wrote, health care costs were quite low as a percentage of gdp.  The same can be said of early Friedman writings (it is startling how little attention Capitalism and Freedom, dating from 1962, pays to “the problems of old people”).  It is not clear how views formed in that era should be extrapolated to the current day.

2. Angner-interpreting-Hayek draws a distinction between mandates — which are allowed — and price controls — which are verboten.  Yet it is hard to have major government involvement in health care without price controls, or should I write “price controls,” in some manner or another.  Third party payments cannot be made at any prices that suppliers might like.  Single payer systems have to bargain over price.  For that matter mandates have to put some limits on what suppliers can charge for the mandated good, including quality limits.  The results may not literally be the same as legally mandated price maximums but a) it is hard for a health care-subsidizing government to avoid interfering with the price mechanism, and b) when viewed in these terms, it is not obvious why interfering with the price mechanism is worse per se than mandates or redistribution.  Mandates and redistribution also interfere with the price mechanism, the former as shown by economic theorems about quantity-price duality and the latter once you think of an income as a price or the result of a set of prices.

3. To make it quite speculative, I believe Hayek — if fast-forwarded into the present — might favor a mix of forced savings into health savings accounts, cash transfers to the poor, and direct government provision of basic health care services for the very needy.  Whether or not I am right, Hayek is far from laissez-faire on health care.  But I doubt Hayek would have come close to supporting ACA.  Most of all, I think he would have been horrified by the lack of legal generality and universality in the different categories of treatment, coverage, prices, subsidies, reimbursement rates, and so on.  I think he would have seen this as a sign of our legal and philosophic barbarism, noting that I am not trying to put the predominance of blame on Obama here.

Here is Eric’s Politico piece on the same topic.

Assorted links

by  Tyler Cowen

1. How the Snickers bar has changed over time.

2. Correlation does not prove causation, Danish marriage edition.

3. Will spending caps work?, and more here from Matt.

4. Very good older piece from Fuchsia Dunlop, “Perplexing encounter with a gastro-nihilist.”

5. Bill Gates answers questions on Reddit.

6. Say law follies, by Scott Sumner.

7. Are we bending the health care cost curve?, by Annie Lowrey, and see this chart on hospital construction.

8. Brad DeLong has on-the-mark comments on the Ezra profile.

Why are they diluting the bourbon?

by  Tyler Cowen in

Numerous readers have requested that I cover this topic, and here is one report:

Maker’s Mark, the Loretto, Kentucky, bourbon manufacturer, has the sort of problem that every consumer-products company wishes it had: too much demand for too little product. But the company’s solution might surprise the very consumers demanding its product—adding water to its existing supply of bourbon, thereby cutting the alcohol content in each bottle from 45 percent to 42 percent.

Let me first note that I have zero institutional knowledge of bourbon.  I have never tried bourbon (I have eaten in the excellent restaurant Bourbon Steak), and even worse I have never read a book about bourbon, but here is one hypothesis.  Could it be that future buyers, who have never tried the older 45 percent will accept the 42 percent as the normal taste?  (The company might even fool some of the current drinkers.)  In that case, if the company has a large flow of future buyers, relative to the current stock of buyers, this won’t even count as a price increase/quality degradation for the future flow.  A direct price increase, in contrast, would be a price increase for everyone, present and future.

This explanation, however, runs the risk of being “too good” (read: not good).  If it is that easy, why didn’t they degrade the quality in the first place, until reaching a margin where framing effects won’t make up most of the difference?

Caveat emptor!  Ask an expert instead.

The composition of unemployment into short- and long-term

by  Tyler Cowen

This is not new news, but Peter Coy frames it quite memorably:

The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.) A striking statistic: The long-term unemployed make up 38 percent of all workers without jobs, double the average share and just a few notches down from the 2010-11 peak of 45 percent.

That is another way to think about why rapid labor market improvement appears unlikely.