Largely by stepping toward an economy in which workers bear the burden of distributing healthcare and housing with little regard to ability or willingness to pay, the Build Back Better bill (BBB) would implement the single largest permanent increase in work disincentives since the income tax came into its own during World War II.
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The implicit employment and income taxes in BBB would increase marginal tax rates on work by about 7 percentage points. I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs.
Category Archives: labor market
A better form of unemployment insurance?
Personal Unemployment Insurance Accounts (PISAs) were pioneered by Chile in 2002. The accounts are financed through a payroll‐tax contribution from both the employer and employee and are individually owned by workers. During spells of unemployment, idled workers can make withdrawals to compensate for the loss to their incomes, but when employed they continue to build their balances. At retirement, workers can use the balances in these accounts to bolster their retirement income or transfer the funds to their heirs. The program includes a solidarity fund — a public safety net — financed by employers and the government. Unemployed workers can receive payment from the solidarity fund when their own savings are insufficient to cover their period of employment.
The theoretical advantage of this is that because you as a worker own your insurance account, you retain an incentive to find work as soon as you can.
I can always self-insure against a spell of unemployment. It’s called saving. Relative to that, a PISA does two things. First, it forces me to save for this purpose. Second, when my savings run out, the general fund kicks in. So I have something like catastrophic unemployment insurance.
ZMP in today’s economy
Tyler Cowen coined the phrase zero marginal product workers, or ZMP, to describe the uneven impact of the 2008 financial crisis on highly-educated and less-educated workers. I think we need to consider ZMP much more broadly.
1. As I wrote at the time, the Garrett Jones worker (Jones memorably tweeted that most of us do not produce widgets but instead build organizational capital) has no measurable marginal product. You cannot compute the MRP for accountants, marketing strategists, and project managers, but corporations need them.
One of my oldest catch-phrases is “Price discrimination explains everything.” That is because most businesses have very high overhead costs relative to variable costs. This is most obviously true with Internet-based businesses. But it is also true of movie theaters (when that was a business), hospitals, air transport, and more.
2. A growing share of the work force is engaged in what we might call the ZMP sector: non-profits, government bureaucracy, health care administration, and corporate departments of political posturing–including much of HR these days.
3. The gap between the college-educated and the less-educated is arguably due to differential treatment by government programs and billionaire philanthropists. We create a well-paying job for a college-educated ZMP in the “sustainability office” of a government agency or industry trade group. Then that sustainability office destroys a less-educated worker’s high-paying job related to fossil fuels and tells the resulting ZMP to find employment installing solar panels.
We need to think about the real world of ZMP, not the imaginary world of neoclassical equilibrium.
The plight of American low-skilled workers
America’s overall unemployment rate today is lower than at any time since the 1960s, and the official unemployment rate for prime-age men is just 3%. Yet for every prime-age man who is out of work and looking for a job, there are four more who are neither working nor looking. This is not a problem that can be solved by more Keynesian stimulus, a new industrial policy, or other so-called “demand-side tools.”
. . .Barely half of native-born, prime-age American men with no high school degree are in the job market at all. By contrast, labor force participation rates for their foreign-born dropout counterparts are as robust as for native-born college graduates.
Turning to supply-side factors, he writes,
the vast and yet somehow invisible army of former convicts; the new normal of unfathomably slow advances in educational attainment—these are just some of the major problems hiding in plain sight.
Let me add these possibilities to the list:
1. The cumulative effect on the worth ethic of people experiencing significant assistance for not working and high marginal tax rates on those benefits when they do work.
2. Assortative mating, with the lower portion of the male skill distribution made much less attractive as husbands because of (1).
3. A mismatch between demand and supply. Perhaps the demand is for working with people (elder care, child care) and those out of the labor force, particularly men, prefer working with things.
Uber and macroeconomic adjustment
Vyacheslav Fos and other write,
Following Uber’s entry into a market, workers with access to the ridesharing platform are 4.8 percent less likely to receive UI benefits. Moreover, they experience a relative decrease in total outstanding balances of $544, or 1.3 percent of the average individual’s debt burden. Finally, we find that the effects of the ridesharing platform extend to credit performance, with workers experiencing a relative decrease in delinquencies of 2.9 percent.
I know someone who does IT consulting who, between jobs, used driving for Uber to make ends meet. The article insinuates that the ability to do this helps reduce the burden of unemployment in general. But this has not been stress tested by a recession. I doubt that we could add half a million Uber drivers in the course of a couple of months without creating a significant excess supply.
Male labor force participation
positive co-movement between employment and wages is closer to the exception than the norm in modern U.S. history. Second, most estimates of the wage elasticity of male labor supply are small, suggesting that male employment responds little to persistent wage changes. And third, prominent labor demand forces were found in a recent review to account for less than half of observed decline in U.S. employment since 1999 (Abraham and Kearney, 2018). These facts suggest that factors beyond labor demand are necessary to explain the secular decline in noncollege men’s involvement in the labor market.
Pointer from Tyler Cowen.
This decline in male labor force participation among those without a college degree is a significant issue. Note that even though the unemployment rate has come down for those workers, their rate of labor force participation is still way down.
Economists on the left tend to assume that this is due to a drop in demand for workers at the low end of the skill distribution. Binder’s claim is that instead one factor in declining participation is an increase in the ability of women to participate in the labor market, which in turn lowers the advantage of marrying a man. The reduced interest in marriage on the part of women attenuates the incentive for men to work.
Like all economic research of this kind, I would take this with a grain of salt. But if it is true, then I would say that if we could substitute a universal basic income for our current in-kind transfer programs, then the marginal tax rate for the working class would go down, and this might restore some of the incentive for marriage.
Marrying a person vs. marrying a job
A commenter asked me to spell out more of the differences.
I start with an old-fashioned opinion about marriage, which is that the main point is to raise children. I find myself quite baffled by the “new” view that just treats children as a troublesome time-sink.
There are certainly childless couples with good marriages. I have nothing against it. But for the childless, I see marriage as just an option.
If we limit the discussion to couples who have children, then I think that you owe it to your children to try to behave positively toward your spouse. If you remain married, then events like family get-togethers, your children’s graduations, their marriages, and the births of their own children become highlights of your life. If you don’t remain married, then those moments are awkward at best and painful at worst.
Those elements are not present in a job. If you leave an employer, you might leave behind a pet project or two. But that is not the same thing as messing up your relationship with your children.
And I think that it’s easy to err on the side of becoming too committed to a job. You can be very giving and self-sacrificing, but the relationship is transactional. Your employer does not and cannot love you unconditionally.
If you are in a marriage with children, it’s stupid to go around asking yourself if there is a better potential spouse out there somewhere. With your career, it’s stupid not to ask yourself if there is a better potential job out there somewhere.
The poverty trap
“>Ariel J. Binder and John Bound write,
The existing literature, in our view, has not satisfactorily explained the decline in less-educated male labor-force participation. This leads us to develop a new explanation. As others have documented, family structure in the United States has changed dramatically since the 1960s, featuring a tremendous decline in the share of less-educated men forming and maintaining stable marriages. We additionally show an increase in the share of less-educated men living with their parents or other relatives. Providing for a new family plausibly incentivizes a man to engage in labor market activity: a reduction in the prospects of forming and maintaining a stable family, then, removes an important labor supply incentive. At the same time, the possibility of drawing income support from existing relatives creates a feasible labor-force exit. We suspect that changing family structure not only shifts male labor supply incentives independently of labor market conditions, but also moderates the effect of a male labor demand shock on labor-force participation. Since male earning potential is an important determinant of new marriage formation, a persistent labor demand shock which reduces male earning potential exerts an impact on male labor-force participation which operates through the marriage market.
Thanks to a reader for forwarding the paper.
Let me add to their story. Once upon a time, a woman with a child needed a husband for support. But in recent decades, government benefits have provided support. Moreover, these benefits go away as a household earns income. At the margin, a man who earns a modest wage has his income implicitly taxed at a high rate should he marry the mother of his child. The woman has little or no economic incentive to marry him, because together they cannot keep much of the income that he earns. And so he drops out of the labor force, because he no longer is motivated to work in order to get married.
Most studies fail to show an effect on labor supply of policies that change the way that benefits are provided and taxed. But these studies are limited to short time periods. In my view, our benefits policies have over a long period of time created a poverty trap by changing cultural habits. If we were to change those policies, and in particular replace existing means-tested programs with a universal basic income, it would take a long time for cultural habits to re-adjust. But my hope is that if government stopped holding people in the poverty trap, cultural habits eventually would improve.
Wages and productivity
Scott Alexander writes,
Median wages tracked productivity until 1973, then stopped. Productivity kept growing, but wages remained stagnant.
This is called “wage decoupling”. Sometimes people talk about wages decoupling from GDP, or from GDP per capita, but it all works out pretty much the same way. Increasing growth no longer produces increasing wages for ordinary workers.
Is this true? If so, why?
He makes a valiant effort to summarize and assess the economic literature. But this is where orthodox economics is hopeless.
Productivity by definition is output divided by the amount of labor input. Let me make three points:
1. You can’t measure the numerator very well.
2. You can’t measure the denominator very well.
3. The U.S. is not just one big GDP factory. Both the numerator and the denominator are affected by shifts in the composition of the economy, even if actual productivity and wages were not changing at all.
The numerator is output. How many people work in businesses with measurable output? Scott Alexander doesn’t. I never have. Most of my readers never have. There are entire industries, like health care, education, and finance, where we do not have any idea how to measure output. And even within an industry that has quantifiable output, we still have the issue that, as Garett Jones pointed out many years ago, most workers are not engaged in actual production; they are building organizational capabilities. Even if the factory managers can count widget production, they cannot measure the productivity of the tax accountants or of the team developing a new marketing initiative.
The denominator is labor input. But most of labor input consists of human capital. To measure labor input, you need to be able to measure quality, not just quantity. What is the incremental value of X years of schooling and Y years of experience? We do not have a reliable way to do that. One approach uses wage rates as an indicator of quality, but that amounts to assuming that productivity and wage rates are tightly coupled, but that amounts to assuming away the question that Alexander is raising.
We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.
I think that for economists to say anything useful about productivity and wages, they should try to study individual units of individual firms. My guess is if you were to undertake such a study, you would be overwhelmed by doubts about the precision of your measurements and the difficulty of obtaining a decent signal-to-noise ratio. It’s perverse that you would instead look at the aggregate statistics cranked out by the Commerce Department and the Labor Department and pretend that it’s 100 percent signal.
How the Scandinavians encourage work
But Kleven also points out that the higher Scandinavian taxes finance government policies that make it easier for many people to work — in particular “provision of child care, preschool, and elderly care.” He writes: “Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. … [T]he Scandinavian countries … spend more on such [labor] participation subsidies … than any other country. …”
I like the phrase “complementary to working.” Obviously, getting transfer payments is a substitute for working. But getting support for child care and elder care is complementary to working.