Results for “new service sector” 331 found
Is (productive) big business taking over services?
From today’s WSJ, by Chang-Tai Hsieh and Esteban Rossi-Hansberg:
If you live in a midsize American city, you’ve probably noticed that an increasing share of local services are provided by chain establishments such as the Cheesecake Factory and Wegmans. Why? It’s because the industrial revolution that transformed U.S. manufacturing more than a century ago is finally reaching many local services, which had long resisted standardization.
…Locals sometimes lament when a new chain in town bears down on a mom-and-pop shop. But in the past four decades industries in which top firms have grown in share have created many more jobs than ones where market share is dispersed among small peers. Companies that have taken advantage of the industrial revolution in services grow by expanding into smaller cities or exurbs, and provide competition to previously dominant local monopolists. This brings jobs, as well as cheaper and higher quality services from groceries to health care, to areas that need them most.
In contrast, employment has shrunk in sectors still dominated by small independent operators, such as plumbing and electrical wiring. Over the past four decades, the growth of the top 10% of firms in local services in a given year has accounted for 80% of the cumulative wage and employment growth in the U.S.
Might this also someday mean that services will become easier to export? I am also happy to recommend the authors’ underlying piece The Industrial Revolution in Services.
Those old service sector jobs
At Fountain Court Chambers in central London, the senior clerk is called Alex Taylor. A trim, bald 54-year-old who favors Italian suiting, Taylor isn’t actually named Alex. Traditionally in English law, should a newly hired clerk have the same Christian name as an existing member of the staff, he’s given a new one, allegedly to avoid confusion on the telephone. During his career, Taylor has been through no fewer than three names. His birth certificate reads “Mark.” When he first got to Fountain Court in 1979, the presence of another Mark saw him renamed John. Taylor remained a John through moves to two other chambers. Upon returning to Fountain Court, in 2008, he became Alex. At home his wife still calls him Mark.
Alex/John/Mark Taylor belongs to one of the last surviving professions of Dickensian London. Clerks have co-existed with chimney sweeps and gene splicers. It’s a trade that one can enter as a teenager, with no formal qualifications, and that’s astonishingly well-paid. A senior clerk can earn a half-million pounds per year, or more than $650,000, and some who are especially entrenched make far more.
Clerks—pronounced “clarks”—have no equivalent in the U.S. legal system, and have nothing in common with the Ivy League–trained Supreme Court aides of the same spelling.
Here is the full story, interesting throughout, via the excellent Samir Varma.
New results on the China shock, furthermore the China shock is largely over
Using Census micro data we find that the impact of Chinese import competition on US manufacturing had a striking regional variation. In high-human capital areas (for example, much of the West Coast or New England) most manufacturing job losses came from establishments industry switching to services. The establishment remained open but changed to research, design, management or wholesale. In the low human-capital areas (for example, much of the South and mid-West) manufacturing job-losses came from plant closure without much offsetting gain in service employment. Offshoring appears to drive these manufacturing job losses – the Chinese trade impact arose primarily in large importing firms that were simultaneously expanding service sector employment. Hence, our data suggest Chinese trade redistributed jobs from manufacturing in lower income areas to services in higher income areas. Finally, the impact of Chinese imports appear to have disappeared after 2007 – we find strong employment impacts from 2000 to 2007, but nothing since from 2008 to 2015.
That is from a new paper by Nicholas Bloom, Kyle Handley, André Kurmann, and Philip Luck. Via Bryan Caplan.
The New Zealand real estate problem, with reference to Palmerston North
From my email, from Ryan Reynolds:
I’ve worked in Palmerston North, as well as Tauranga and Auckland (all briefly). I’m Australian too, so my perspective may be shaded vs what a Kiwi or someone from further afield might say.
The major issue is just supply of new dwellings and the permitting and development process. All the rest of the factors noted point to increases in demand (immigration, natural population growth, easy credit, real income growth, tax structures, chinese buyers) – but without a limit on supply you would have expected those factors to result in a building boom not a rapid price appreciation. That’s obviously not the way reality has played out.
From a permitting side, the Resource Management Act heavily constrains lots of building decisions and imposes a lot of bureaucracy (and time delays and uncertainty). Less specifically, Kiwi’s appear to have strong preferences for careful building and urban sprawl in lots of dimensions. That includes specific issues like building heights, overshadowing, retaining views of specific hills or valleys (including Maori heritage sites) and retaining its environmental and cultural heritage (however brief it may seem to outsiders). These preferences are captured in major urban plans which set out acceptable terms for developments, but often even urban plans won’t contain enough zoned land to meet demand (see the bun fight over the Auckland Unitary Plan from 2016), and even then those plans took years to put together. This plays out in a strong community undercurrent and politicians of both stripes use scare campaigns about the horrors of inappropriate development. Anything two stories or over can count as ‘inappropriate’.
From a policy perspective there seems to be no understanding of the practical trade off between housing demand and conservation, except from economists outside the planning departments (see NZ Initative or Michael Reddell, ex RBNZ) or from the central government threatening to unwind urban plans.
The second issue is that NZ also has a lot of partly and wholly government owned and operated utilities (water supply, networks and wastewater; electricity and gas networks; electricity generation) and services provided under government monopolies required for new developments (roads, education, healthcare, and other social services). In many cases the entities charged with providing these services are capital and/or budget constrained and they don’t have the funds to provide major new capex works in the short to medium term. Furthermore, the revenues earned from providing these services are often inadequate to cover economic costs. For instance, water supply and wastewater is provided at below cost price in many cases in NZ, and in large parts of the country water supply is un-metered. And there is serious community opposition to either privatization or changes in tariffs. As a consequence though, capex projects in the water sector are effectively large donations of capital for no return for the water corporation. As is the case for virtually all roads, schools, or hospital projects, any of which could prevent or stall major new urban developments. So even if new land was zoned as ‘fit for development’ (which it won’t be), the entities required to facilitate that development don’t have the funds to do so and nobody else is allowed to fill that gap.
And yes, Palmerston North is still dull. But then people say that Switzerland is dull too. I’ve seen much worse.
A simple theory of service sector productivity
It is often about time, says Diane Coyle in the FT:
In many retail industries, higher productivity means faster service. There are many routine services where getting more for less requires less time to be spent performing them. This applies to parts of many sectors of the economy. There are past examples — think of the impact of the washing machine on doing the laundry or the ATM on taking money out of the bank — but now we are seeing much more automation in new areas such as legal search, scrutiny of medical tests and buying train tickets online. There is surely much further to go as artificial intelligence advances.
Of course a lot of service sector transactions aren’t so much about product quality as simply having a barrier removed from a basic enjoyment of life. How long did it take the CVS clerk or the DMV to serve you?
Should this point make us feel better or worse about the biases in productivity statistics? If nothing else, traffic congestion has become worse. On the other hand, with smart phones and iPads, waiting in line never has been better.
Those old (ZMP) service sector jobs
Austrian hermit edition:
An Austrian town is looking to employ someone to live in a hermitage that has no heating nor running water in what appears to be one of the worst jobs in the world.
Saalfelden in the state of Salzburg is looking for a candidate to move into a 350-year-old building, that is built into a cliff-face, to meet and greet Christian pilgrims who frequent the site’s chapel for prayer and self reflection.
Local resident Alois Moser and Saalfelden’s mayor Erich Rohrmoser, will select the new hermit and have told a radio station the traits they are looking for in their new employee.
Moser told state broadcaster ORF that they want ‘a self-sufficient person who is at peace with their self, and willing to talk to people, but not to impose’.
He also said the successful candidate should have a Christian outlook and be ready to greet visiting pilgrims and locals who make their way up the steep cliff face to the house.
The chosen candidate will be selected more on the basis of personality than training and professional experience but will need to be prepared to live without a computer and television, job specifications say.
The parish have stressed the position, which runs from April to November each year, is unpaid despite the sacrifices one would have to make when accepting the post.
Although it appears to be an unattractive proposition the role was has been widely coveted in the past.
Here is the full story, via the excellent Mark Thorson.
Why won’t more men take service sector jobs?
Lawrence Katz, an economist at Harvard, has a term for this: “retrospective wait unemployment,” or “looking for the job you used to have.”
“It’s not a skill mismatch, but an identity mismatch,” he said. “It’s not that they couldn’t become a health worker, it’s that people have backward views of what their identity is.”
That is from a longer and interesting piece by Claire Cain Miller (NYT).
Is the cost disease of services an illusion?
That is a new suggestion made by Alwyn Young in the latest American Economic Review.
The cost disease argument suggests that some services do not augment their productivity very readily (e.g., the barber), and furthermore the demand for many services is income elastic and price inelastic, so with economic growth services take up a rising percentage of gdp over time. The relative cost of producing service output rises. And since services are more sluggish in productivity, and being weighted more heavily in output, we can expect economy-wide productivity rates to decline.
Young’s argument is to draw out the implications of the heterogeneity of workers. Let’s say that a worker’s skill in one sector is only loosely correlated with his skill in some other sector. That will mean when individual workers have comparative advantage in a sector, they also are likely to have absolute advantage in that same sector. The typist really is a better typist than the lawyer.
Now let’s go back to the services sector. It expands over time and sucks in labor by offering higher relative wages. That draws in more individuals with low comparative and also low absolute advantage in that sector. More concretely, the system ends up pulling in a lot of losers into law and medicine, while we are left with only the very best factory workers still on the job. Or think of all those mediocrities who flooded into punk rock in the early 1980s. It’s a bit like a Peter Principle.
The services sector will appear less efficient, but what is called “underlying true levels of productivity growth” — taking into account the average efficacies of the workers present in the two sectors — might not be changing much at all. In other words, a quite different mechanism can generate the same observation as Baumol’s cost disease.
The paper presents plenty of industry-level evidence that this declining efficacy of service workers is indeed the case.
An ungated version of the paper is here, the published, gated version is here.
“In a data-chic world, a chief economist is the new marketing must-have.”
The rest of the WaPo story, by Lydia DePillis, is here. Here is one excerpt:
The market for consumer-facing economists is certainly getting crowded. Big Internet companies have had chief economists for years now; Google’s Hal Varian is an oft-quoted exponent of his employer’s capabilities and worldview. Microsoft recently hired Yahoo’s former chief economist to push a more “data-driven culture” at the tech dinosaur.
But they’re not just looking for super-wonks. More importantly for Richardson, rival real estate sites Zillow, Trulia, and CoreLogic have offered their chief economists as media-friendly talking heads, always available to explain national trends: Stan Humphries, Jed Kolko, and Mark Fleming have essentially become their companies’ most visible employees, speaking at conferences and testifying on Capitol Hill. That’s why Apartmentlist.com’s recent listing for a chief economist includes the following in its job description: “Act as the face of the company with key journalists for both print and tv interviews with leading publications,” “work closely with our PR and branding teams,” and have “excellent stage presence.”
File under “Those New Service Sector Jobs.”
Baumol’s new book on the cost disease
It is self-recommending, here are a few points of relevance:
1. There has been a clear cost disease in most kinds of education and many kinds of medicine, but I blame institutions and laws as much as the intrinsic nature of the product.
2. I do not see the arts as subject to the cost disease very much at all. As for the “live performing arts,” the disease seems to afflict the older and less innovative sectors, such as opera and the symphony. There is plenty of live music these days, it is offered in innovative ways, and much of it is free.
3. Even “the live performing arts” can be broken down into underlying characteristics, many of which show a great deal of recent innovation. For instance the supply of “musical immediacy” has been non-stagnant through YouTube, which often gives you a better glimpse of the performer than you get through nosebleed seats and giant screens. YouTube isn’t “live,” but there is no particular reason to break down the analysis at that level and certainly it is not a sacred category for consumers.
4. In many sectors of the arts, especially music, consumers demand constant turnover of product. Old music becomes “obsolete” — for whatever sociological reasons — and in this sense the sector is creating lots of new value every year. From an “objectivist” point of view they are still strumming guitars with the same speed, but from a subjectivist point of view — the relevant one for the economist – they are remarkably innovative all the time in the battle against obsolescence. A lot of the cost disease argument is actually an aesthetic objection that the art forms which have already peaked — such as Mozart — sometimes have a hard time holding their ground in terms of cost and innovation.
5. In general “cost disease” sectors do not remain constant over time. Agriculture has been unusually stagnant for the last twenty or so years, but it is hardly obvious that this trend will continue for the next century to come and it certainly was not the case for the period 1948-1990, quite the contrary.
6. The stagnancy of one sector may depend on the stagnancy of other sectors in non-transparent ways. “Live music” may seem like it doesn’t change much, but lifting the embargo on Cuba would boost the quantity and quality of my consumption of spectacular concert experiences, as would a non-stop flight to Haiti.
You can buy the book here.
Addendum: Matt Yglesias comments.
Yana reviews the new John Goodman book
You can buy Priceless: Curing the Health Care Crisis here, her comments are under the fold…
Goodman’s *Priceless: Curing the Healthcare Crisis* is an excellent treatise on the healthcare industry and how our political solutions are making that world increasingly perverse, ineffective, and stagnant. Tyler has written before about how healthcare is one of the few remaining industries with low-hanging fruit for innovation. In my work I am consistently struck by how many great healthcare delivery ideas are illegal and Goodman showcases many examples of healthcare entrepreneurship which aren’t allowed to take off because of the regulatory environment and the entrenchment of major players.
Goodman at once lays a strong foundation for healthcare as a system “too complex for any single individual (or group of individuals) to grasp or understand” and makes a strong case for how much hubris policy has had in trying to address the problems of the industry. Herein lies the most powerful lesson of the book: while it is impossible that any entrepreneur will devise an overarching solution for our healthcare problems we have forgotten how to let process innovators test solutions and chip away at problems the way they do to roaring success in other industries.
Goodman pinpoints various turns the US has taken to bring existing private coverage and provision of services under the government umbrella. Woven together, these examples provide a vivid picture of systematically government payers have crowded out private sector solutions. This has led to stagnation while propagating the myth that the government is the only capable provider of services for everything from prescription drug coverage (with the passage of Medicare Part D) to comparative-effectiveness research ($1.1 billion allocated under the stimulus bill alone). This has led to a price system so broken that it does not exist. Goodman’s discussion of time prices exposes that we cannot simply push prices down without shifting the costs to other means of rationing. Similarly, his comparison of Medicaid to food stamps showcases how ridiculous Medicaid’s prohibitions on supplementing care with cash are, even within the internal logic of a robust welfare state.
Goodman is not shy about exposing the politics of healthcare and how it stands in the way of treating those who need care the most, including the poor and elderly, but this book is no exercise in partisanship. Rather, he homes in on one of the biggest insurmountable obstacles that the political debate brings to bear:
“Normally I do not comment on the motives of people I disagree with…Yet through the years I have discovered that the most important differences people have over health policy have little to do with facts, reasoning or logical argument. The most important differences stem from differences in fundamental world views. There are a very large number of people in this field who find the price system distasteful – at least for medical care…For well-intentioned reasons perhaps, they are emotionally predisposed to favor the suppression of normal market processes.”
Goodman has a strong grasp of realities such as the fact that many acute care services will always be sticky to being provided locally but that ambulatory and elective procedures make up the majority of the market and have the potential for reinventing how healthcare is delivered. Many will disagree with the ideas presented but the book will push the thinking of anyone involved in healthcare. This is especially true since Goodman has a thoroughgoing understanding of healthcare as an industry, a quality which most of the loudest voices in policy sorely lack.
What does the new gdp report imply for structural explanations of our current troubles?
How should we revise structural interpretations of unemployment in light of the new gdp revisions? (For summaries, here are a few economists’ reactions to the report.) Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes. I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.
A key result of the new numbers is that we had been overestimating productivity growth during a period when it actually was feeble. That is not only consistent with this structural view but it plays right into it: the high productivity growth of 2007-2009 now turns out to be an illusion and indeed the structural story all along was suggesting we all had illusions about the ongoing rate of productivity growth. As of even a mere few days ago, some of those illusions were still up and running (are they all gone now? I doubt it.)
On one specific, it is quite possible that the new numbers diminish the relevance of the zero marginal product (ZMP) worker story. The ZMP worker story tries to match the old data, which showed a lot of layoffs and skyrocketing per hour labor productivity in the very same or immediately succeeding quarters. Those numbers, taken literally, imply that the laid off workers were either producing very little to begin with or they were producing for the more distant future, a’la the Garett Jones hypothesis. The new gdp numbers will imply less of a boom in per hour labor productivity in the period when people are fired in great numbers, though I would be surprised if the final adjustments made this initially stark effect go away. BLS estimates from June 2011 still show quite a strong ZMP effect, although you can argue the final numbers for that series are not yet in. (I don’t see the relevant quarterly adjustments for per hour labor productivity in the new report, which comes from Commerce, not the BLS.) Furthermore there is plenty of evidence that the unemployed face “discrimination” when trying to find a new job. Finally, the strange and indeed relatively new countercyclicality of labor productivity also occurred in the last two recessions and it survived various rounds of data revisions. It would be premature — in the extreme — to conclude we’ve simply had normal labor market behavior in this last recession. That’s unlikely to prove the result.
Most generally, the ZMP hypothesis tries to rationalize an otherwise embarrassing fact for the structural hypothesis, namely high measured per hour labor productivity in recent crunch periods. If somehow that measure were diminished, that helps the structural story, though it would make ZMP less necessary as an auxiliary hypothesis, some would say fudge.
Other parts of the structural story find ready support in the revisions. Real wealth has fallen and so consumers have much less interest in wealth-elastic goods and services. This shows up most visibly in state and local government employment, which has fallen sharply since the beginning of the recession. Rightly or wrongly, consumers/voters view paying for these jobs as a luxury and so their number has been shrinking. Construction employment is another structural issue, and given the negative wealth effect, and the disruption of previously secure plans, there is no reason to expect excess labor demand in many sectors.
In the new report “profits before tax” are revised upward for each year. That further supports the idea of a whammy falling disproportionately on labor and the elimination of some very low product laborers.
Measured real rates of return remain negative, which is very much consistent with a structural story. Multi-factor productivity remains miserably low. In my view, a slow recovery was in the cards all along. Finally, you shouldn’t take any of this to deny the joint significance of AD problems; AS and AD problems have very much compounded each other.
*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson
That's the new book by Jacob Hacker and Paul Pierson. I have a different take on the main argument, but this is an important book for raising some of the key questions of our time. I would recommend that people read it and give it serious thought. The writing style is also clear and accessible. Two of the key arguments are:
1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.
2. "The guilty party is American politics."
You'll find an article-length version of some of the Hacker-Pierson argument here, although the book covers much more.
I agree with #1, so let me explain why my take on #2 differs:
1. Median income starts stagnating in 1973 and income inequality starts exploding in 1984, according to the authors. However, I consider this a "long" time gap for the question under consideration, namely whether there is a direct causal relation and whether people at the top are using politics to skim from people further below in the income distribution. Furthermore income growth stagnates around 1973 for many countries, not just the United States, and most of those countries never experienced the subsequent "inequality boom" of the Anglosphere. If they avoided the later inequality, why didn't they also avoid the stagnation? The discussion of the causal issues here isn't convincing and the authors' hypothesis is not compared to alternatives or tested against possible disconfirming evidence.
2. There is a lot of talk of unions, but I could concede various points and that's still just a ten to fifteen percent one-time wage premium, when workers are unionized. It won't much explain persistent changes in growth rates over time, whether for the top one percent or the slow income growth at the median. Furthermore the main U.S. sectors are harder to usefully unionize than, say, Canada's mineral and resource wealth or Europe's manufacturing.
3. The authors underestimate the role of finance in driving the growth in income inequality. Their p.46 shows a graph suggesting that non-financial professionals are 40.8% of the top 0.1 percent. Maybe so, but the key question is what percentage of income those professionals account for. The Kaplan and Rauh paper, not cited in this book, suggests a central role for finance. In 2007 the top 5 hedge fund earners pulled in more income than all the CEOs of the S&P 500 put together. On top of that, some "non-financial" incomes are driven by financial market trading, such as in energy or commodity companies. And a lot of top-earning lawyers are doing financial deals, etc.
Turn to Table 7 of the paper cited by the authors, p.56 here. The "non-financial" category still looks bigger but it's incomes in the finance category which grow most rapidly and Bakija and Heim suggest that stock options and asset price movements account for a big share of the growth in "non-financial" incomes. My view is that the increasing liquidity of financial markets drove much of the trend, which was distributed across both the "non-financial" and the "financial" sector. If liquid financial markets allow a privately-owned warehouse company to buy a trucking company on the cheap, and profit greatly (plus the managers pull in a lot), I am calling that a financial markets development, even though it's in the "non-financial" sector.
4. Let's say the story at the top is mostly one of finance. You could describe that as: "some change in financial markets led to rapid income growth for the top earners and politics did nothing about that." Fair enough. But it's still a big leap from that claim to portraying politics as the active force behind the change. Politics was only the allowing force and I don't think there was much of a conspiracy, even if various wealthy figures did push for deregulation or more importantly an absence of new regulation. I also don't think anybody was expecting incomes at the top to rise at the rates they did; it was a kind of pleasant surprise for the top earners to be so lucratively rewarded. So the major change is left unexplained, for the most part, and the whole story is then shifted onto the passive actor, namely the public sector, which is elevated to a major causal role which it does not deserve.
5. pp.47-51 the authors talk about tax rates. If we had kept earlier high marginal rates, the top earners would not have received nearly so much and also they would not have worked so hard. Maybe so, yet this won't much explain the stagnating pre-tax incomes at the median and it doesn't fit very well into the overall story, unless you wish to make a complicated "lower tax revenue, lower quality public services, MP of the median earner goes down" sort of story.
6. If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs. Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up. Yet no evidence for these predictions is given, nor are the predictions considered. It is likely that the predictions are false.
7. To the extent the high incomes at the top come through capital markets, it is either value created or a transfer/redistribution. You can argue over the percentages, but to the extent it is the former it is not at the expense of the median. To the extent it is the latter, the losers will be other investors, not the median earner or household, who does not hold much in the way of stock (lower pension fund returns don't count in the measure of median stagnation).
8. What follows p.72 is an engaging, readable progressive history of recent American politics, but the economic foundations of the underlying story have not been pinned down.
9. In my view, most likely we have two largely separate phenomena: a) median wage growth slows in 1973 because technology stagnates in some regards, and b) liquid financial markets, in various detailed ways, allow people with resources to earn a lot more than before. Politics may well play a role in each development, but with respect to b) its role has been largely passively, rather than architectural and driving.
Anyway, I found it a very useful book for organizing my thoughts on these topics.
Addendum: Matt Yglesias comments.
Do we find sectoral shifts in the job market data?
Menzie Chinn discusses the evidence on sectoral shifts hypotheses. See also the piece by Valletta and Cleary.
These are intriguing and useful studies but I don't think they get at the core of the matter, mostly because sectoral shifts and aggregate demand shocks are so closely intertwined in this recession.
Here's a very simple story. The prices of homes and stocks fall, plus there is some panic, so people spend less. On the surface, that's an AD story, following from an economy-wide negative wealth effect. But it's also a sectoral shifts story, because people are not cutting spending proportionately on all items. For instance luxury consumption and debt-financed consumption have been hit especially hard, not to mention real estate and financial services (for other reasons). And since I do not expect a quick rebound of real estate or stock prices, this is more or less a permanent change in sectoral priorities. Still, in the data the AD shock might well absorb most of the "credit" for what happened.
We're also seeing job losses in virtually every sector. It's not for instance a "sectoral shift away from services and into matchstick production and tungsten." It's a shift out of jobs which are revealed as unprofitable and a lot of people not knowing where the new jobs will be created.
If someone wants to insist that "this is really an AD shock, not a sectoral shift," I'm not so keen on fighting to keep one term over the other. I would insist, however, on an issue of substance, namely that not all AD shocks are alike. If we are going to switch terminology, it could be said that this is a real AD shock and not just a nominal AD shock. (Though there have been nominal AD shocks too.) A nominal AD shock can be offset more easily by goosing up some mix of M and V and restoring the previous level of nominal demand. If you want an example of a nominal AD shock, imagine a more neutral change in monetary variables and indeed those have happened in the postwar era. Or read David Hume's parable of the money under the pillow. In those cases you don't need to make people feel wealthier in real terms, you just need to get the flow of spending up again. Today, part of the problem is that people feel less wealthy in real terms and that influences the content of their spending and investment decisions.
When a real AD shock comes, policy still should be expansionary in response, but there is an important difference. In absolute terms, nominal expansion won't much help the labor market, which still has to reallocate workers from some sectors to others, given the collapse in asset prices and expectations.
You'll see indirect recognition of this from many current Keynesian writers, when they talk of the jobless recovery or fear that the economy will fall back next year after the stimulus money runs out. In general I agree with those points. Yet these writers are less willing to consider the implied conclusion that a bigger stimulus won't much help — and may hurt — the longer-run adjustments which are required. Boosting MV will restore employment only to a very limited extent. It's still the case that recovery will require a great deal of sectoral readjustment and that will take a good bit of time.
How do/would unions differ in service industries?
Most unions are found in manufacturing, but the new pro-union arguments emphasize the creation of unions in service industries. I can think of a few differences between manufacturing and services:
1. Labor costs are more important in service industries, so unions have less scope to raise wages. This is Megan McArdle’s argument.
2. There is more long-term fixed capital in manufacturing, and that gives unions greater scope to confiscate those quasi-rents. This is related to #1. (In a service industry, would the transfer be taken away from the return to brand name capital?)
3. On average there is more market power in manufacturing, which again gives unions greater room to raise wages in those sectors. In a perfectly competitive industries, extra wage demands will bankrupt the firm.
4. Many service sector firms face less foreign competition, but I believe they nonetheless face more competition overall. Lower fixed costs mean a more competitive industry, which brings us back to #3.
5. Jobs have shorter duration in service industries, which tightens the link between wages and the current state of the labor market. That also means a smaller role for unions.
6. We have a mental model of service sector companies such as Wal-Mart, which try to get by on the cheap in labor markets. It is harder to make the same claim about General Motors.
The bottom line: Except for #6, most of the effects imply that unions will be less effective in the service sector. You’ll all think of some mechanisms I didn’t, but my tentative conclusion is that unions bring both lower costs and lower benefits in service industries.
I might add I once belonged to a service sector union, in a supermarket as a teen. It was not a pretty picture. I paid high dues and received no apparent benefit, relative to the workers in non-unionized supermarkets. I even heard rumors of corruption.