Results for “"minimum wage"” 290 found
Assorted links
1. John Currin and Rachel Feinstein have unusual politics, see the end of the article.
2. New neutrality results for the minimum wage.
4. Hear different.
Assorted links
1. Page numbers are for wussies.
2. First chapter of Agnar Sandmo's Economics Evolving: A History of Economic Thought.
3. Via Chris F. Masse, life imitates art?
4. The pirate non-tragedy of the commons.
5. How much is the minimum wage at fault?
6. Kevin Drum on "left-wing mistakes".
Assorted links
1. Tristan Reed's notes on economics papers.
2. How to cure all of your problems.
3. What is the American Sociological Association up to?
4. Coke to buy the rest of Honest Tea, Barry Nalebuff's company.
The simple macroeconomics of labor unions
From Nick Rowe, via Scott Sumner:
If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off. That's why booms are good, because it brings the economy closer to the competitive equilibrium. And why recessions are bad, because they take the economy further away from the competitive equilibrium.
And cartels, like labour unions, just make the problem worse. Because by joining together with similar sellers into a group, the demand curve facing the group is steeper than the demand curve facing the individual, since members of the group no longer compete against each other for buyers. So there is an even bigger difference between the downward-sloping trade-off facing the group of sellers and the horizontal trade-off facing us all.
Unions are bad for the very same reason that recessions are bad.
All New Keynesian macroeconomists have understood the above for the last 20 years. Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc.. OK. It's why they should be opposed to such things.
But alas, we do not quite find consistency on these issues…
Sumner and Krugman on zero MP workers
Scott's post is here, Krugman's is here. (My first post on the topic is here, my last post here). Let's start with Scott, excerpt:
This post by Stephen Gordon shows US employment in 2010:3 falling about 5% below its 2008:1 peak, while output seems to have declined only about 0.7%. This is what Cowen finds puzzling.
But I don’t see any puzzle at all. If employment didn’t change, I’d expect US output to grow at about 2% a year, which is the trend rate of productivity growth. Because we are looking at a two and a half year period, you’d expect output to grow roughly 5% with stable employment. Now assume that employment actually fell 5%. If the workers who lost jobs were similar to those who remained employed, I’d expect output to be flat over that 2.5 year period. Because output fell slightly, it seems like the workers who lost jobs were slightly more productive than those who remain employed.
Do I believe this? No, for several reasons I think they were less skilled than those who remained employed. Labor productivity growth (assuming we were at full employment) probably slowed in the most recent 2.5 years, as investment in new capital declined. Measured productivity continued to rise briskly, partly because technological progress continues in good times and bad, and partly because those workers still employed are somewhat higher skilled, or perhaps are trying harder in fear of losing their own jobs. So Tyler is probably right that those workers who lost their jobs have a lower than average marginal product. I just don’t see why zero is the natural starting point for consideration of the issue, as you only get that number by making some fairly extreme assumptions about technological progress coming to a screeching halt after 2008:
A few points:
1. The claim is that some workers have zero marginal product (net of employment costs), not all workers (as Krugman inexplicably ponders for two full paragraphs), and not even all unemployed workers. Just as a hypothetical example, if unemployment is 9.5 percent and the natural rate is 5.5 and zero MP helps account for half of that difference, that's two percent of the labor force at zero MP. Try hiring labor for a while and see how crazy that sounds.
2. Zero MP is a property which may hold in an AS-AD equilibrium, it is not a substitute for an AS-AD view. Krugman mischaracterizes the hypothesis here, by identifying it with "AD denialism." In my post which Krugman links to (and indeed for years), I've made it clear that demand matters in any coherent account of the equilibrium.
Oddly, Krugman himself stated one of the coherent versions of the Zero MP view in July 2010, and then he considered it possible and appropriately, he expressed uncertainty about what might be going on.
3. The Zero MP hypothesis is simply another way of talking about "labor hoarding," a well-known and time-honored idea, except that the labor is not in fact hoarded. It doesn't encounter strange paradoxes and it is more intuitive than when the labor is hoarded (which appears to violate first-order conditions). There is plenty of very specific and indeed striking evidence that the "previously hoarded labor" isn't being hoarded any more. That same link implies that Krugman's invocation of 1983 is a red herring and probably not a good instance for finding many zero MP workers. The "oughties" job market differs in a number of other "real" ways from the 1980s, including the fact that we've had no net job growth over the last decade, not even pre-crisis. Here is further evidence on how productivity patterns were different during the early 1980s.
4. For another take on #3, during the job-destroying periods of 2009, per hour labor productivity growth is rising at astonishing rates, try 3.4, 8.4, 7, and 6 percent, each quarter, annualized. That's not just the regular accretion of technological progress (though some of it may be), it is an artifact from dumping lower quality and zero MP workers. If I look in the second quarter and see labor hours go down 7.9 percent and see per hour productivity rise 8.4 percent, well, that's no proof but I sure go hmm….
5. I would not take it for granted that "normal" productivity growth continues in times of shock and crisis. Maybe yes, maybe no. Scott's talk of the "trend rate" is assuming that the growth and cyclical components are separable and that is begging part of the question.
6. The zero MP hypothesis helps explain why unemployment is so much more severe among the less educated and the lower earners. In contrast, Krugman writes: "As Mike Konczal points out, basically everyone’s unemployment rate has doubled, no matter their education level or location." In reality, that kind of multiplicative relationship is very much consistent with joint AS-AD determination, including a zero MP for many workers in the equilibrium. I'll write an entire blog post on that question soon, and then we'll see that this result actually discriminates against pure AD theories or is at best a neutral pointer.
7. What does the zero MP hypothesis add? First, the zero MP hypothesis explains why wage adjustments can't do the trick for a lot of the unemployed, as wages won't fall below zero. Second, the zero MP hypothesis explains why you need steady real growth, boosting the entire chain of demand, to reemploy lots of workers and reflation alone won't do the trick. (I still, by the way, favor reflation because I think it will do some good.) Those predictions are not looking terrible these days.
8. The AD-only theories, taken alone, encounter major and indeed worsening problems with the data. Year-to-year, industrial output is up almost six percent, sales up more than six percent, but the labor market has barely improved. How does that square with the AD-only hypothesis? Has it been seriously addressed? Arnold Kling also has relevant comments and in passing I'll note that the "increases in the risk premium" factor is being neglected in this discussion of Kling's points.
9. Krugman (not Scott), in particular, is proposing an alternative view with a) upward-sloping AD, b) downward-sloping AS, c) the implication that huge boosts in the minimum wage would restore the economy and employment, and d) requires a tight liquidity trap when the theoretical literature distinguishes between "interest rates literally at zero" and "interest rates near zero." His comparison of ZIRP and ZMP does not raise those issues on the other side of the ledger.
I think Scott is underplaying some of the more detailed facts about labor markets, such as mentioned in #3, #4, #6, and #8. Krugman simply isn't considering the stronger versions of the zero MP hypothesis and thus he is dismissive rather than confronting the very real problems in the AD-only point of view.
Addendum: Arnold Kling has more.
Have the rich caused middle class wage stagnation?
I don't always agree with Kevin Drum, but usually I find that he has good arguments. In this passage, however, I think he is overreaching:
Still, I don't think that a plausible story of causation [the gains of the wealthy to the stagnation of other incomes] is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.
First, money matters in the short-run most of all. Tight money (unless maybe it is radical deflation, but even then the U.S. resumed growth out of the GD fairly quickly and furthermore the median worker was not unemployed) is not a plausible cause of median income stagnation over decades. The link between trade and wage stagnation does not find support in the data. Deregulation hurt the wages of air traffic controllers, but how many other groups? Enough to shift the median? Stagnation in the real minimum wage shouldn't much hurt median wage growth over a forty year period. Unions fell mostly because of the shift to services, and furthermore the "union wage premium" in the data is a one-time ten to fifteen percent gap, not an ongoing change in rates over decades, and it is reaped by some not all workers.
In my view the gains of the top one percent and the stagnation at the median are largely separate phenomena; note that the top gains so dramatically only in the Anglosphere, whereas growth stagnation affects most of the OECD after the early 1970s.
How then might rent-seeking in the top income brackets damage ordinary Americans, as I have myself suggested? The most plausible mechanism is this: gains of the wealthy through capital markets come at the expense of other individuals in capital markets. Some kinds of capital — for instance finance capital – had been profiting more and implicitly taxing other kinds of capital, often through "trading," broadly not narrowly construed. The taxed capital "retreats" and this has adverse affects on labor, much as an increase in the corporate income tax falls partially on labor and partially on consumers (which also shows up as lower real wages).
The labor which is "subsidized" by this change in capital returns is smaller in number and more concentrated, sectorally, than the labor which is taxed.
I wouldn't say there is massively firm evidence for this hypothesis, but rather it is the major contender by process of elimination. If you are wondering, many of the years of wage stagnation have shown relatively low shares of investment in gdp; see the new McKinsey report "Farewell to cheap capital?".
So there we have one factor connecting the gains at the top to losses at the median but still I do not think it is the major factor behind median stagnation. I will be writing more on this.
“Why work?”
Here's a claim, with concrete numbers, that:
"a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year."
That's after various government benefits and taxes, but the calculation seems incorrect to me. For instance, should the Medicaid and CHIP benefits of the poorer household actually be valued — to the user — at $16,500 a year? (Is that number coming from some kind of cost basis? If so, is it adjusted for the age of the Medicaid recipients to rule out nursing home expenditures?) Is the $60,000 per year family receiving employer-supplied health insurance? The assumption seems to be that they do not.
Still, even if you make adjustments this is a scary comparison. I'd like to see a more exact calculation of the implicit marginal tax rates of the poor, as they climb from say 15k a year through the 60k range. Does anyone know of such a table?
For the pointer I thank CC.
Addendum: Andrew Gelman comments.
Assorted links
1. Who again is going to cut Medicare spending?
3. We are referred to Charo's Wikipedia page.
4. Ireland may cut minimum wage; they know that AS and AD curves still have their traditional slope.
5. The horse race continues, with news from Portugal: "Pedro Passos Coelho told a meeting of his Social Democratic Party items like state-run companies' debts were not included in the overall public debt, which the government puts at 82 per cent of gross domestic product this year.
He said that the "true" total public debt stood as high as 112 per cent of GDP, while the budget deficit should be at 9.5 per cent of GDP, far above the minority Socialist government's target of 7.3 percent for the end of the year."
Sentences to ponder
In four years' time, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year.
That's John Goodman, via Arnold Kling.
Economic Misconceptions
Students typically come to an economics class with many misconceptions, not just random errors but systematic biases (see especially Caplan 2002).
Bill Goffe recently (2009) surveyed one of his macro principles classes and found, for example, that the median student believes that 35% of workers earn the minimum wage and a substantial fraction think that a majority of workers earn the minimum wage (Actual rate in 2007: 2.3% of hourly-paid workers and a smaller share of all workers earn the minimum wage, rates are probably somewhat higher today since the min. wage has risen and wages have not).
When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).
When asked about the inflation rate over the last year (survey was in 2009) the median student guessed 11%. Actual rate: much closer to 0%. Note, how important such misconceptions could be to policy.
When asked by how much has income per person in the United States changed since 1950 (after adjusting for inflation) the median student said an increase of 25%. Actual rate an increase of about 248%, thus the median student was off by a factor of 10.
I would add that there are also theoretical misconceptions that are probably even more important than factual misconceptions. For example, I think it would be useful to ask questions such as:
1. A number of new furniture manufacturers open in North Carolina, since the new competition forced existing manufacturers to reduce prices the effect of this additional competition was to reduce wages for workers in the furniture industry.
Rate this argument on a 1 to 10 scale from least to most plausible or likely.
2. Competition from Korean automobile manufacturers caused US manufacturers to cut quality in order to reduce their costs. Rate this argument on a 1 to 10 scale from least to most plausible or likely.
3. A law that prevents supermarkets from advertising the prices of their products will reduce the supermarket costs and in turn this will reduce prices to consumers. Rate this argument on a 1 to 10 scale from least to most plausible or likely.
Note that the point here is not to say that an answer is wrong but to understand the implicit models that students are using. It can help a teacher to know what these conceptions and misconceptions are in advance so that they can be addressed.
To further this research, Bill Goffe is putting together a colloborative database on economic misconceptions that teachers are welcome to contribute towards. See also Bill's page on the large literature on teaching in physics much of which is also relevant to economics.
Structural Unemployment in South Africa
Unemployment in South Africa is now running at 24% overall with significantly higher rates for blacks. A shift away from low-skill labor combined with minimum wages and strong trade unions, however, has meant that it is very difficult to lower wages and reduce unemployment. From a very good piece in the NYTimes:
The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor – the supposed beneficiaries of the crackdown – clambered atop cutting tables and ironing boards to raise anguished cries against it…
Further complicating matters, just as poorly educated blacks surged into the labor force, the economy was shifting to more skills-intensive sectors like retail and financial services, while agriculture and mining, which had historically offered opportunities for common laborers, were in decline.
The country’s leaders invested heavily in schools, hoping the next generation would overcome the country’s racist legacy, but the failures of the post-apartheid education system have left many poor blacks unable to compete in an economy where accountants, engineers and managers are in high demand….
Last year, as South Africa’s economy contracted amid the global
financial crisis, unions negotiated wage increases that averaged 9.3
percent [inflation is 5.1%, AT]….Eight months ago, Mr. Zuma proposed a wage subsidy
to encourage the hiring of young, inexperienced workers. But it ran
into vociferous opposition from Cosatu, the two-million-member trade
union federation that is part of the governing alliance [insiders v. outsiders, AT], which
contended that it would displace established workers.
Hat tip: Brandon Fuller.
Why is there a boom in temporary hiring?
Trevor Frankel offers his thoughts:
The part that most clearly indicates policy is the problem is the temp hiring. If businesses are hiring temps off the bottom of a recession, it means that they're seeing demand pick up but they're too uncertain to actually hire someone full time. This is usually followed by permanent hiring, but in this recovery, it has not been. The only obvious culprits here are a) higher required wages and healthcare costs (minimum wage, housing interventions and Obamacare are prime candidates here) and b) general lack of confidence in the economy and policy (the political climate in general is the prime candidate here).
Here is some background:
Temp hiring has been off the charts – temp jobs are up 20% year over year, while permanent private sector jobs are down 1%. (source: http://www.ritholtz.com/blog/2010/08/follow-up-on-temp-services-hiring/)
This is not an argument which I have been pushing, but the boom in temporary hiring does lend some support to it.
Is current unemployment all about aggregate demand?
Christie Romer basically says yes, Arnold Kling dissents.
I don't expect Romer to turn a speech into an academic debate and in this sense I don't fault her. Nonetheless I did not find her account very persuasive.
I would start with the fact that output has bounced back more robustly than employment has. AD theories per se do not explain that differential. One simple possibility is that better management and better measurement have allowed us to identify (and fire) hundreds of thousands of low-wage people who just weren't producing much of value. That's a real shock, even if it does not qualify as a sectoral shift in the traditional sense.
It's also the case that the rate of new job creation has been especially low. Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements. Tell stories as you may, but it's hard for me to see that as exclusively an AD problem.
I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage. I'm all for behavioral economics, but I don't buy the necessary story here.
I don't want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor. Those are real factors too.
I also see that wages, and the job market, are more flexible today than in a long time, with so much service sector employment, so much flex-time and part-time, and such a low rate of unionization. In most AD theories that implies the job market bounces back relatively quickly yet that is not what we observe.
A separate question is what Romer believes the major AD shock to have been. She clearly repudiates the Scott Sumner story that monetary policy was too tight. Is it all from the collapsed bubble in the housing market? Keep in mind those are paper values and that the real services from the country's housing stock haven't declined. Again, you can tell behavioral stories about the asymmetric perception of losses vs. future gains (for many people, buying a future home is now much cheaper, though perhaps they don't notice the positive wealth effect), but is that going to drive the whole cycle?
To be sure, AD is a major factor in this recession but it is not the entire story by any means. In major recessions usually it is AD and AS forces together.
Most of all, the Romer essay convinces me that current economic policymakers — not to mention many bloggers — should not be so certain they understand what is going on.
Addendum: I sometimes have the feeling that commentators on the left reject the "real shocks" hypothesis because they think it implies government can't do much to make things better. That doesn't follow. Most of what government does, for better or worse, is an attempt to solve a real rather than a nominal problem. It might imply "intervention is less effective" but it also (possibly) can imply "intervention is more necessary."
How much of the world is in a liquidity trap?
Presumably in response to Scott Sumner, Paul Krugman writes:
And by that criterion, how much of the world is currently in a liquidity trap? Almost all advanced countries. The US, obviously; Japan, even more obviously; the eurozone, because the ECB probably couldn’t engage in Fed-style quantitative easing even if it wanted to, given the lack of a single backing government; Britain.
Krugman concludes that seventy percent of the world's gdp is in a liquidity trap. Krugman also defines a liquidity trap:
In my analysis, you’re in a liquidity trap when conventional open-market operations – purchases of short-term government debt by the central bank – have lost traction, because short-term rates are close to zero.
Krugman I am sure is aware that European short-term rates have not been always close to zero since the crisis started; as I read his post as a whole, he is simply noting that Europe refuses to use sufficiently expansive monetary policy. In essence "a shortfall in aggregate demand" is now defined as a liquidity trap.
But they're not the same thing, either definitionally, or more importantly in terms of their economic effects. In a true liquidity trap, money demand is a black hole which soaks up or shuts down all kinds of potentially expansive processes. Fundamental portfolio decisions stand at microeconomic "corners," as Keynes understood. Simply experiencing a "shortfall in aggregate demand" does not generate the same stultifying results. In the latter case there is still plenty of spending and investing on the "second round effects" of a policy change. For instance today investment is not shutting down as it would in a traditional liquidity trap; even gross investment should be drying up. It seems that investment (and intermediation) responds to plenty of incentives, positive and negative. There's simply not an infinite demand at the margin to hold non-interest-bearing assets.
A separate point is that overall aggregate demand can be too low, but some sectors, indeed many sectors, can be at margins which respond quite normally to supply-side incentives. Those sectors may rule the net comparative statics, even if we, at the same time, wish aggregate demand to be higher. A big tax on wages right now, for instance, would almost certainly do more harm than good, as would a big increase in the minimum wage. At the very least, both blades of the scissors matter, unless of course you think the demand curve for money is literally horizontal, which it does not seem to be.
In my view zero percent of the world is in a liquidity trap. Or you can redefine liquidity trap to mean "ongoing shortfall in aggregate demand," but then our new "liquidity trap" doesn't have the extreme counterintuitive properties which Keynes found so intriguing.
The wise man expunges "positive v. normative" from his vocabulary. Ises and oughts are easily and naturally translated into one another, based on the purposes of the interlocutors and the discourse situation.
The words "positive" and "normative" do not mean nothing, but what they mean can always be expressed in better terms. "Normative" often means outspoken, unconventional, strident, etc. It can also mean loose, vague, and indeterminate.
Tell me "positive" or "normative" for each of the following:
(1) The minimum wage ought to be repealed.
(2) I think the minimum wage ought to be repealed.
(3) The minimum wage reduces social welfare.
(4) Wise people oppose the minimum wage.
The primary verb of (1) is an ought, while the primary verbs of (2), (3), and (4) are ises. But all four statements are really the same.
Coase used the term "affectation" for posing as "positive" and not "normative."