Category Archives: labor market

The Great K-L Substitution

Posted on by

Loukas Karabarbounis and Brent Neiman have a paper on the decline in labor’s share of income.

We start by documenting the pervasive decline in labor shares around the world at the country, U.S. state, and industry levels. Next, we document a decline in the relative price of investment goods, which we later show to be the key factor explaining the global trend in the labor share.

Recall that Timothy Taylor blogged on this topic (although not on this paper in particular). The story is that computers and computer-driven machines are getting cheaper, leading businesses to substitute capital for labor, causing labor’s share of income to fall.

To me, this, along with factor price equalization, is the most intuitively plausible account for trends in the distribution of income over the past twenty years.

On K-L substitution, TechReview has a new article on Brynjolffson and McAfee, although scanning it I did not see anything new (I liked their e-book and their debate with Tyler Cowen.)

Labor’s Share of Income

Posted on by

Timothy Taylor quotes a report by the International Labor Organization showing that labor’s share of income has declined between 1990 and 2009 in 26 out of the 30 countries surveyed. Taylor comments,

When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too. Looking for a “cause” based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point.

This is a stereotypical Tim Taylor find–who else would read through an ILO report?

Moises Naim Watch

Posted on by

Mark Manson writes,

One of my best friends recently told me that the prestigious multinational corporation he worked for was itching to permanently send him to India. They wanted him to manage their expansion into that market. And, obviously, India is a huge emerging market. They gave him the Godfather offer to go — enough money to live in a mansion, with personal chefs, private drivers, everything. The irony, of course, was that my friend is a first generation Indian-American. His parents gave up everything decades ago and fought their way to the US to give their kids opportunities they would never have had back in India. They succeeded. What they didn’t expect was that that opportunity for their son they gave up everything for? It was back in India.

One of my big take-aways from Naim’s The End of Power is that emerging economies have a lot going for them. If the future belongs to auto-didacts, it also belongs to people who are comfortable living in more than one country.

Redistribution Recession watch

Posted on by

The WSJ reports,

Michael Feroli, chief U.S. economist for J.P. Morgan, JPM +1.40% estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.

Pointer from Tyler Cowen.

This is one of those topics where the three-axis model correctly predicts that there will be no communication across ideological boundaries.

1. From the progressive perspective, an unemployed person is oppressed by a lack of aggregate demand, end of story. Anyone who suggests otherwise (I’m looking at you, Casey Mulligan) is going to be attacked without mercy. And these are people on disability, for crying out loud. If they are not members in good standing of the oppressed class, then who is?

2. Libertarians see government coercing some of us to give others incentives to be unemployed. In fact, if I were one of those libertarians who felt schadenfreude pleasure out of pointing out the stupidity and perversity of the way that government executes programs, disability insurance would make me happy.

3. Conservatives think that everyone should be like this guy:

Mr. Mann, age 30, said many disabled people can work with the right help, and he included himself. Paralyzed in a diving accident as a teenager, he graduated from Princeton University and earned a doctorate in economics from the University of Pennsylvania. He uses a motorized wheelchair to navigate Mathematica’s Princeton, N.J., offices.

Now that’s civilization for ya.

Since I do not think that there will be a meaningful debate or attempt to reach middle ground, I want to lie low on the issue. For substantive analysis, I outsource to Reihan Salam.

The Minimum Wage Debate

Posted on by

Clearly, the debate left things unsettled, because the protagonists are still arguing. [update: Betsey Stevenson contributes noise to the debate.]

The point that I would like to hear shouted from the rooftops is that the minimum wage in the United States is just barely effective. We teach in freshman economics that a price floor is only binding if it is above the equilibrium price. But looking at the number of workers covered by the minimum wage is small, and knowing that the vast majority of unemployed workers are not clamoring for minimum-wage jobs, I would say that you should draw your labor supply and demand diagram with the minimum wage just epsilon above the market equilibrium. It should be hard to see the effect of the minimum wage on employment in your diagram, and it should be hard to see the effect in the real world.

In that sense, Elizabeth Warren is right–if you really want to have an effective minimum wage, it needs to be a lot higher. That is what the debate should focus on, in my opinion. What would happen if we raised the minimum wage by $5 an hour or more? In that case, if somebody wants to try to argue that the effect on employment would be negligible, good luck to them.

Is the Demand for Skill Falling?

Posted on by

Paul Beaudry, David A. Green, and Benjamin M. Sand have a paper with an intriguing abstract, which says in part,

Many researchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. In this paper, we document a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow. We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together.

If true, this would upset nearly everyone’s narrative apple cart, including mine.

Passover 2013 Edition

Posted on by

Random thoughts:

1. Passover is the original oppressor-oppressed narrative.

2. Sheryl Sandberg is much in the news with her book arguing that women ought to be more willing to choose to be ambitious and men ought to be more accomodating toward ambitious women. Here is her Ted talk. My takes:

a. I think a lot of the pushback that she gets in fact reinforces one of her points, which is that leadership qualities that are admired in men are resented in women.

b. The main pushback I would give is that I do not think that our goal should be to raise some women’s ambition up the level of that of the most-ambitious men. I think that hyper-ambitious males are a problem. They are a problem in finance, where they take excessive risks with other people’s money. They are a problem in government, where they exercise too much power. I think that ambition requires checks and balances. The market works imperfectly as a check on the ambition of executives. I think that institutional structures and social norms can provide a check on the ambition of politicians, and I regret that in our country both the structures and the norms have deteriorated considerably from that perspective.

c. I think that Sandberg’s thesis would provide a good discussion topic for a seder.

3. On April 3, Russ Roberts and Jared Bernstein will participate in a debate on whether or not to abolish the minimum wage. Tickets are $40. I am not sure what the audience expects at that price, and I expect that the price will affect the outcome. If you pay that much to get in, how can you not feel guilty voting to abolish the minimum wage? Especially so soon after Passover? My thoughts are:

a. The optimum minimum wage is probably closer to 0 than to $22 an hour, which is where Elizabeth Warren claims it might be.

b. The minimum wage issue is high on symbolism and low on substance. Few workers earn the minimum wage. As a practical matter, most workers’ reservation wage is much, much higher, as is demonstrated by the existence of unemployment. And most of the friction in the labor market comes from other factors, such as the payroll tax and employer-provided health insurance.

Where Wages Are Stickiest

Posted on by

From the National Employment Law Project:

Industry dynamics are playing an important role in shaping the unbalanced recovery. We find that three lowwage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, fully 43 percent of net employment growth. At the same time, better-paying industries (like construction; manufacturing; finance, insurance and real estate; and information) did not grow, or did not grow enough to make up for recession losses. Other better-paying industries (like professional and technical services) saw solid growth, but not in their mid-wage occupations. And steep cuts in state and local government have hit mid- and higher-wage occupations the hardest.

Pointer from Tyler Cowen (also Mark Thoma).

Focus on the last sentence. What if pay for all government workers–federal, state and local–had been reduced by 5 percent at the start of the recession? How many jobs would have been saved?

In general, I think that we mis-frame the government budget issue when we talk about taxes vs. program cuts. Instead, we should be talking about taxes vs. reductions in compensation for government workers. It is not at all clear to me that we need to reduce incomes in the private sector in order to maintain incomes in the public sector.

Vickies and Thetes

Posted on by

Ross Douthat writes,

Yet the decline of work isn’t actually some wild Marxist scenario. It’s a basic reality of 21st-century American life, one that predates the financial crash and promises to continue apace even as normal economic growth returns. This decline isn’t unemployment in the usual sense, where people look for work and can’t find it. It’s a kind of post-employment, in which people drop out of the work force and find ways to live, more or less permanently, without a steady job. So instead of spreading from the top down, leisure time — wanted or unwanted — is expanding from the bottom up. Long hours are increasingly the province of the rich.

Pointer from Reihan Salam.

As befits his role as a conservative NYT columnist, Douthat gives this a civilization vs. barbarism spin.

Here the decline in work-force participation is of a piece with the broader turn away from community in America — from family breakdown and declining churchgoing to the retreat into the virtual forms of sport and sex and friendship. Like many of these trends, it poses a much greater threat to social mobility than to absolute prosperity. (A nonworking working class may not be immiserated; neither will its members ever find a way to rise above their station.) And its costs will be felt in people’s private lives and inner worlds even when they don’t show up in the nation’s G.D.P.

Note: Joseph Sunde thinks along similar lines.

What Belongs on the Left-Hand Side?

Posted on by

Business Week reports,

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.)

Pointer from Tyler Cowen.

Beware of the interpretation that there is a clump of “long-term unemployed” that is separate and distinct from the short-term unemployed. That is, I would not assume that the causality runs from long-term unemployment to the unemployment rate, with the former boosting the latter.

Consider the alternative of putting total unemployment on the right-hand side. That is, the length of time to find a job is a function of the number of unemployed people with whom you are competing. As the unemployment rate goes up, the rate of long-term unemployment goes up.

How much long-term unemployment can be mathematically explained by the overall drop in the job-finding rate, and how much represents a drop in the job-finding rate for the long-term unemployed relative to that for the short-term unemployed? The article hints that perhaps some of the latter has taken place, but it is not clear how much.