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Jared Bernstein Gives Us The Best Graph on the Employment Effects of Minimum Wage Increases

February 21st, 2014 2 comments

They say sample size matters. A handful of sample points in a study doesn’t tell you much, because they could just be showing random variation. This is also true not when you’re looking at many studies. You need to look at lots of research that uses different methodologies and data sets to get a confident feel for the facts on the ground.

Jared Bernstein points us to exactly such an effort, looking at 64 studies on the employment effects of minimum-wage increases, with a wonderfully informative display:

Note: “se” refers to standard error; 1/se is a measure of statistical significance. The dots up high are generally more believable.

“Employment elasticity” is a measure of the impact of minimum-wage increases. A measure of -.1 (left of the zero line) suggests that 10% MW increase reduces employment by 1%.

All the high-statistical-significance studies put elasticity at zero: no employment effect.

There’s some clustering to the left of the line versus the right down at the bottom, suggesting a small negative employment effect, but none of those studies has high statistical significance.

And this doesn’t consider “file-drawer/publication bias”: studies that find no effect don’t get published, because researchers don’t submit them or journals don’t accept them for publication. The CBO explains this in its new report on minimum-wage effects (PDF). Emphasis mine.

an unexpectedly large number of studies report a negative effect on employment with a degree of precision just above conventional thresholds for publication. That would suggest that journals’ failure to publish studies finding weak effects of minimum-wage changes on employment may have led to a published literature skewed toward stronger effects.

And that doesn’t consider (pas possible!) negative-effect researchers finding ways to get to that publishable statistical-significance level. (It’s curious that those finding a positive effect don’t display this anomaly…)

So at least, you can mentally add a whole lot more unpublished dots to that tall vertical line. At most, you can shift a bunch of those published dots on the left farther to the right, and down.

Cross-posted at Angry Bear.

The Conservative Case for a Minimum Wage Hike

February 18th, 2014 2 comments

Most conservatives disparage minimum-wage laws with straightforward economic reasoning, based on Econ 101 textbook theory: demand curves slope down. If you institute a price floor, raising the price of labor, you’ll get less labor demanded — less jobs. This hurts poor people, especially entry-level folks like teenagers.

At first blush, the argument’s got legs. And there’s been a fair amount of research over the decades suggesting that higher minimum wages do hurt employment. But conservative economists know that life’s more complicated than that. There’s also good research suggesting that this effect isn’t very strong in the low-wage labor market; many other economic effects are at play.

One of those other effects — also based on textbook Econ-101 reasoning — bears serious consideration by conservatives: economic incidenceIt’s often darned hard to know where the effects (the “incidence”) of a policy or system will land — who will get the benefits and bear the burdens — especially in a complex system with lots of moving parts. That’s a core conservative belief (“unintended consequences”).

On the minimum wage, it’s not crazy to suggest that minimum-wage employers — many of whose workers inevitably rely on government benefits — are the actual beneficiaries of those benefits. Those employers are able to get workers at lower wages than they would absent those benefits, so to some extent at least (depending on incidence) those businesses thrive at the expense of taxpayers. The dole goes, largely or partially, to the employer’s bottom line.

How do we suss out these incidence effects? In recent years we’ve seen some excellent new research on the employment and earnings effects of different minimum-wage laws, in particular great work by Arindrajit Dube et. al. comparing adjacent counties across state lines with different minimum wages (levels and changes).

This research has a big leg up on all the previous studies. It very cleverly exploits the implicit “control group” of an ongoing natural experiment across the whole country, over a quarter-century, to tease out cause, effect, and result. Dube and his cohort are incredibly careful, diligent, competent, and thoughtful researchers and analysts. Read their stuff. I think you’ll be hard-pressed to disagree.

Results? They find that minimum-wage laws have had little influence on employment levels, at the minimum-wage levels we’ve seen over past decades — too small to consider either statistically or truly significant. But they find significant increases in earnings from higher minimum wages. Minimum-wage laws have the rather intuitive  effect of increasing poor people’s earnings. (Some might deride this intuition as unsophisticated “folk economics,” but: 1. it’s actually much more economically sophisticated than the Econ-101 thinking, and 2. it seems to be correct.)

And here’s the key takeaway for conservatives: if higher minimum wages increase poor people’s market incomes, they reduce their reliance on government handouts, and reduce government spending. That’s not even Econ 101. It’s just arithmetic.

Conservatives oughtta love that. And they should also like the part about responsibility: require all business owners to do what most already do: make a profit while paying the actual cost of keeping their workers alive, in decent health, trained, educated, mobile, and employable, rather than irresponsibly externalizing those costs onto taxpayers and pocketing the profits.

How do workers’ livings get paid for — through government benefits or employers’ wages? Conservatives would naturally vote for private enterprise.

But here’s where it gets a lot more interesting. A new study out of the Chicago Fed (PDF) uses the same adjacent-county, natural-experiment methodology, and looks at what happens to companies in higher minimum-wage environments:

Firm entry and exit both rise.

Again, they find minor employment effects and significant earnings effects. But there’s more churn among companies. New companies emerge that thrive and profit in the higher minimum-wage environment, because their business models are more labor-efficient and they invest more in productive capital. (Not just drill presses, but human and organizational capital developed through training, retention, efficient business processes, etc.)

Companies that are less labor-efficient and more reliant on low wages (and, hence, taxpayer subsidies/handouts) are less successful in this environment. Inefficient businesses that can’t pay the full cost of their workers and still make a profit, fade away and go out of business.

Schumpeter. Creative destruction.

In the language of (neo)classical economics, higher minimum wages (again, within the ranges we’ve seen over past decades) seem to push the whole system to a new, higher equilibrium. Employees earn more. Businesses invest more in productivity. All boats rise. The pie gets bigger. We all take another step, together, up toward that shining city on the hill.

The real (inflation-adjusted) minimum wage is at a historically quite low level right now, so it’s reasonable to expect that the effects of increases that have played out over past decades will also play out over the next ten, twenty, or thirty years. We’ll all be better off in three decades if we raise the minimum wage today.

But suppose that isn’t true. Suppose we end up in the same place thirty years from now that we would without a minimum-wage hike. Over the course of those decades, tens of millions of workers and their families will have lived better, more prosperous lives — for decades on end. The promise of American opportunity, embodied. To quote the great economist Abba Lerner, “In the long run, we’re always in the short run.”

If you’re a conservative who wants to:

• Get people off the government dole

• Reduce government spending

• Encourage investment in productive capital

• Spur the process of creative destruction, and

• Demonstrate the manifest benefits of hard work and American opportunity…

You might consider throwing your full-throated support behind a minimum-wage increase.

Dozens of the country’s most prominent economists, of diverse political persuasions, agree 4:1 that an increase “would be a desirable policy.” Bill O’Reilly supports it. So do hundreds of Patriotic Millionaires and Smart Capitalists for American Prosperity

Here’s to suggest that other conservatives and business leaders might find a very comfortable seat on this bandwagon.

Cross-posted at Angry Bear.

My Head Talking on the Thom Hartmann Show

February 17th, 2014 1 comment

The Global Labor Glut

February 17th, 2014 30 comments

Ryan Avent’s excellent post at The Economist finally provides me the impetus to respond to Josh Mason’s comments on my recent post.

I suggested:

 What we have instead of a Global Savings Glut is:

1. A Global Labor Glut: more human effort and ability available than is needed to provide goods that provide high aggregate marginal utility, and,

2. A global financial and political system that — despite the reality of #1 — fails to transform that abundance into maximum aggregate human utility via reasonable distribution of that abundance.

Josh sed:

I think your conclusion that unemployment must be a glut of labor is both wrong and politically destructive. By turning this into a labor-market problem, you are implicitly accepting Say’s law and rejecting the principle of aggregate demand. And you are wrong factually. All factors of production are in excess supply in a recession, not just labor.

What you are saying here is that changes in (realized or desired) balance sheet positions never affect the real economy. I’m sure you don’t think that’s what you’re saying, but it is.

Josh may be right. But I really don’t think that’s what I was saying, and my gentle readers will know that it’s very much not what I want to be saying. I think he’s framing my argument in terms that implicitly concede the exact false assumption I was dismantling in my post — that more saving causes lower rates so more borrowing so more investment.

This gets messy so I’ll just say: We have the amusing situation where Josh and I — who as far as I can tell agree on almost everything — are mutually accusing each other of sleeping with the enemy.

In any case, what Josh thinks I’m saying is certainly not what Ryan Avent is saying, when he says exactly the same thing I was saying:

…full employment is no longer compatible with full utilisation of capital. The “great savings glut” story may indeed be a tale of insufficient investment opportunity. The return on capital is low because the return on labour is low: because society is allowing the market to become glutted with labour, none of the potential high-return capital investments are economical. The global savings glut might well be thought of as a global labour glut.

This is an abundance versus scarcity argument, not a production-causes-income argument. The dominant resource — effective, efficient, productive human labor — is not scarce. As productivity steadily increases, it’s ever more abundant.

And the takeaway? I’ll leave that to Ryan:

Fiscal expansion could help, but the gain from fiscal policy is likely to be limited unless it is structured to try and reduce labour supply. That’s right, reduce labour supply.

In other words, the very anathema of the right: paying people not to work.

The ultimate goal of increased productivity is straightforward: more stuff, less work. The problem is that those who own the stuff don’t want the people who don’t own the stuff to slack off or get a larger share of the stuff. They only like that mantra when it applies to them.

And they don’t understand the inexorably destructive arithmetic of their selfish rivalry in a high-productivity economy — that their refusal to share the wealth, their frantic hoarding, results in us all having less wealth. It’s a classic coordination failure, a tragedy of the common good.

I’m pretty sure Josh agrees with me (and Ryan) on that 100%.

Cross-posted at Angry Bear.

John Cochrane: I Would Never Dream of Suggesting that this Correlation Implies Causation!

February 5th, 2014 Comments off

Let’s say you come across this on the interwebs:

Then the person who posted it says this:

I purposely did not make any argument, draw any conclusions or anything else.

And the person who posted it is a prominent, high-profile right-wing economist.

What conclusions do you draw about that economist? About the economic effect of unemployment benefits?

Then you find this, from another high-profile economist:

Now what conclusions do you draw?

Cross-posted at Angry Bear.

Letter: Smart Capitalists and Patriotic Millionaires Say Hike the Minimum Wage

February 3rd, 2014 Comments off

The Agenda Project (which is behind Patriotic Millionaires, Top Wonks, and other progressive initiatives) is preparing an open letter supporting an increase in the minimum wage.

They’re looking for more signatories.

SMART CAPITALISTS FOR AMERICAN PROSPERITY

Dear Mr. President and Honorable Members of the U.S. Senate and House of Representatives,

We are writing to ask you to put partisan differences aside to advance growth, prosperity and economic freedom by raising the minimum wage to at least $11.00 per hour and indexing it to inflation.

We make this request as business owners, employers and investors who are members of the so-called Top 1%.

We make this request for the following reasons:

1.       IT’S GOOD FOR AMERICAN BUSINESS.  Workers with higher wages are consumers with greater disposable income.  More customers with more money = higher profits for American businesses.

2.       IT’S GOOD FOR AMERICAN TAXPAYERS.  Minimum wage earners don’t make enough to support their families and as a result many rely on government programs to make ends meet.  A decent wage would increase the number of self-reliant Americans and decrease government expenditures.

3.       IT’S GOOD FOR AMERICA’S GLOBAL LEADERSHIP.   The US is the richest county in the world but its minimum wage significantly trails that of other developed countries.   In order to maintain its global leadership, the U.S. must ensure decent earnings for its working citizens.

Raise the minimum wage.

Thank you,

Smart Capitalists for American Prosperity

If you’re in that rarified company, your voice is incredibly powerful. Drop a line to Erica Payne (epayne at agendaproject.org) to add your signature. And if you know anybody who’s in that category, psssst: pass it on.

Cross posted at Angry Bear.

Does Upward Redistribution Cause Secular Stagnation?

February 3rd, 2014 5 comments

A while back I built a  model to look at the long-term economic effects of upward and downward redistribution. Posts here and here.

Commenter JGF pointed out an error in the model. I’ve revised and corrected it. The spreadsheet’s here.

The model is based on marginal propensities to spend out of wealth and income. Poor people spend more of their wealth and income each year than rich people, so if income and wealth are less concentrated, there’s more spending — faster turnover of the “money stock”.

The model displays only one economic effect (there are many others, of course), and the effect is purely arithmetic. But as such, the effect is arithmetically inexorable.

Here are the results. Explanations below.

Screen shot 2014-02-03 at 7.48.34 AM

Here it is displayed as compounded annual change:

Screen shot 2014-02-03 at 7.56.06 AM

The change-in-income graphs look almost identical. (Because annual income in this model is a simple function of the previous year’s spending, and spending is a simple function of wealth.)

Short story:

• Total wealth grows in every scenario. (It’s a model of a growing economy.)

• Every individual’s wealth increases in almost every redistribution scenario. Rich and poor alike.

• Total wealth grows faster with downward redistribution.

• Poorer people’s wealth increases faster/more with more downward redistribution, and the rich people’s wealth doesn’t grow as fast. (But it still grows in most scenarios.)

• Maintaining the status quo wealth concentration  requires annual upward redistribution of about 3%. For the rich to maintain their relative wealth proportion, they have to be subsidized by the poor.

• Note the exponential curves, with steep slopes on the left. The effect of upward redistribution is more powerful than downward redistribution. As upward redistribution increases, the rich get richer, faster. The poor stagnate or get poorer, faster. Ditto total wealth (though that effect is more muted). The opposite is true with downward redistribution; as it increases, the ultimate effect on end-of period wealth gets steadily weaker.

Look at the 2% downward redistribution scenario:

• Poorer people’s wealth grows 2.5X.

• The richer person’s wealth (only) increases 1.2X.

• Total wealth grows 1.7X, compared to 1.65X in the status-quo scenario.

Is this Pareto efficient/Pareto optimal, “a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off”?

It depends on your counterfactual. “Worse off” compared to what? Compared to Year One, or compared to a different redistribution percentage?

Everybody’s better off than Year One at almost every redistribution percentage. The rich person is less better off with downward redistribution than they’d be with upward distribution. But they’re not worse off than they were at the beginning.

Meanwhile the poorer people are much better off with downward redistribution, and “everyone” is also better off. You decide.

Explanation of the Model

Spending drives production. In an 80%-service economy where many real goods are produced just-in-time, if you don’t spend, it doesn’t get produced. (Think: massages and iPhones.)

Production delivers a surplus. More value comes out than goes in. In this model as displayed the surplus is 5%. (This results in an average 3.3% annual increase in incomes/spending/GDP at 0% redistribution.)

More spending causes more production, so more surplus, so faster growth.

There is one richer person starting with 60% of the wealth, and ten poorer people starting with 4% each–40% total. (In the U.S. today, the top ten percent hold roughly 60-65% of the wealth.)

The rich person spends 30% of their wealth annually. The poorer people spend 80%.

Everyone receives all the  resulting income in proportion to their spending. So everyone gets more income and wealth every year. (There’s that 5% surplus from production. The economy is growing steadily.)

Some percent of income is transferred, redistributed, every year — upward from the poorer people to the richer person, or vice versa.

The model doesn’t consider how the redistribution takes place — what forms it takes (explicit transfers and subsidies, labor vs. investment tax rates, minimum-wage laws, free public education and health care, whatever). Rather it just looks at the results of upward and downward redistribution, and the resulting wealth and income growth, and concentration versus diffusion.

Assumptions. This model, I believe, makes only five assumptions:

Economic assumptions (you can change these numbers in the model):

1. Production yields a 5% surplus, which is transformed into monetary income via the magic of the private/central-bank/government financial system. Praised be the Lord. That production/transformation process is a black box.

2. Spending is a function of wealth. Rich people spend 30% of their wealth each year; poor people spend 80%. Since income is a function of wealth in this model, income and spending maintain a plausible relationship for all agents at all wealth levels. A more sophisticated consumption/spending function would incorporate interacting functions for spending out of income and spending out of wealth. But #3, below, would remain generally true.

Behavioral assumptions:

3. Rich people spend a smaller percentage of their wealth each year than poor people. (Declining marginal propensity to spend out of wealth.)

4. Producers respond to increased spending by increasing production. (Not prices — there’s zero percent inflation.)

5. There are no other behavioral effects.

Of course, there are other behavioral effects. Incentives matter, blah blah blah. And there is price and wage inflation. To repeat: This model displays just one, purely arithmetic effect. But as such, that effect is arithmetically inexorable.

The picture changes when you change the variables for the economic assumptions. The crossing point moves, and the curves change, but the basic shape doesn’t. I encourage my gentle readers to download the spreadsheet and run it through its paces.

Cross-posted at Angry Bear.