Category Archives: labor market

Are locational wage differentials also productivity differentials?

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I think that an argument about this arose in the comments on this post. Let me provide a framework for discussion.

Suppose that we observe that zip code X has higher average wages for waiters than zip code Y. Can we infer that waiters in X are more productive than waiters in Y? Can we infer that removing barriers to mobility so that waiters can move more easily from Y to X will raise real GDP?

I think that we need to know more about why waiters are paid more in X.

a. It could be that, working with a given level of capital, the same waiter can serve more customers per hour in X than in Y. Maybe restaurants in zip code X are better managed. Or maybe restaurants in zip code Y do not get enough customers.

b. It could be that the cost of living is higher in X than in Y. Waiters serve the same number of customers per hour in each, but if you raised wages in Y all the waiters would move there to get a higher real income. There has to be a wage differential to compensate for the cost of living differential.

If (a) is true, then removing mobility barriers would raise real GDP in the restaurant industry. But if (b) is true, then removing mobility barriers would not raise real GDP in the restaurant industry.

Suppose that the mobility barrier is a housing market restriction in X. Then getting rid of the housing restriction might raise social welfare by making the housing market function more efficiently. But there is no additional benefit from waiter productivity. What would happen if you got rid of the housing market restriction is that the wages of restaurant workers in X and Y would equalize. As waiters move from Y to X, the wage differential would go away. The new wage would be somewhere between the old wage in X and the old wage in Y.

Note that in case (b), restaurants might use more capital in X than in Y, because the cost of labor is higher (because the cost of living is higher). That would enable waiters in X to serve more customers per hour than in Y, but this is not a pure productivity differential. If you remove the mobility restriction, then eventually the capital intensity of restaurants in X and Y will be equalized.

What if the main difference between zip code X and zip code Y is that quality of life is better in zip code X? In that case, other things equal, cash wages ought to be lower in zip code X. Of course, other things are unlikely to be equal. Housing supply is probably not perfectly elastic, so some of the quality-of-life differential should be eaten up by housing costs. And of course, quality of life means different things to people with different tastes, and that accounts for some (much?) of location choice.

If I might try to coin a phrase of opprobrium, I believe that economists who equate locational wage differentials to productivity differentials are guilty of casual neoclassicism. They should be required to read James Buchanan’s Cost and Choice and take an exam afterward.

Disaggregating the economy: levels of digital skills

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Mark Muro writes,

the wage premium for digital skills (highlighted above) has nearly doubled since 2002. That means that the mean pay of workers in higher-level digital occupations (about $73,000) now more than doubles the $30,000 wage of low-digital workers.

…women—despite having slightly higher mean digital scores—remain heavily under-represented in highly digital computer and engineering occupations (but over-represented in office admin, education, and health occupations). Likewise, blacks are overrepresented in medium-digital occupations like office support and health care support, while Hispanics are greatly underrepresented in highly digital tech positions and overrepresented in low-digital domains such as farming, construction, and building and grounds maintenance.

… the digital rich among metro areas appear to be getting even richer, and now—as a consequence—are pulling away from the rest of metros on basic measures of prosperity.

Turning to the full report by Muro and co-authors, I find

In 2002, 56 percent of the jobs studied required low amounts of digital skills. Nearly 40 percent of jobs required medium digital skills and just 5 percent required high digital skills.

A lot has changed. By 2016, the share of jobs requiring high digital skills had jumped to 23 percent. The share requiring medium digital skills rose to 48 percent. And in a huge shift, the share of jobs requiring low digital skills fell from 56 to 30 percent.

Work becomes optional

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John Coglianese writes,

participation has changed along an understudied margin of labor supply. I find that “in-and-outs”—men who temporarily leave the labor force—represent a growing fraction of prime age men across multiple data sources and are responsible for roughly one third of the decline in the participation rate since 1977. In-and-outs take short, infrequent breaks out of the labor force in between jobs, but they are otherwise continuously attached to the labor force. Leading explanations for the growing share of permanent labor force dropouts, such as disability, do not apply to in-and-outs. Instead, reduced-form evidence and a structural model of household labor supply both indicate that the rise of in-and-outs reflects a shift in labor supply, largely due to the increasing earnings of men’s partners and the growth of men living with their parents.

Pointer from Tyler Cowen. My thoughts:

1. When we think of labor force participation declining, we think of, say, John Smith, deciding to never work again. What this paper is saying is that the statistics reflect something different. One month Smith takes a break, then next month he gets a job and Tom Jones takes a break.

2. I think we have always had a large number of workers who are not fully employed year round. That is, there have always been a lot of workers who take breaks between jobs. This is common in construction work, for example.

3. I don’t know if this matters for the phenomenon at hand, but we used to have inventory recessions. In those cases, workers would be out of a job for a while, but they would still be in the labor force, because they were waiting to be recalled by the firm that had laid them off.

4. It seems to me that this is an important paper. Re-read the last sentence in the quoted excerpt.

Two stories about Shake Shack

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1. CNBC reports,

[Shake Shack founder Danny] Meyer has long been an employee advocate, going so far as to eliminate tipping at his full-service restaurants last year in favor of compensating staff so they don’t need to rely on tips. Meyer has said this makes the restaurant experience better for customers and staff.

2. The New York Post reports,

Robots will replace humans and cash won’t be accepted at a soon-to-open Shake Shack in the East Village, reps for the popular burger chain said Monday.

The comments about employee-friendly corporate policies write themselves.

Scott Winship on labor-force participation

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From a summary of his research:

Obama’s Council of Economic Advisers (CEA) makes the argument that the decline in prime-age male labor is a demand-side issue that ought to be addressed through stimulative infrastructure spending, subsidized jobs, wage insurance, and generous safety-net programs. If the CEA is mistaken, however, then these expensive policies may be ineffective or even counterproductive.

The CEA is mistaken—the evidence suggests there has been no significant drop in demand, but rather a change in the labor supply driven by declining interest in work relative to other options.

  • There are several problems with the assumptions and measurements that the CEA uses to build its case for a demand-side explanation for the rise in inactive prime-age men.
  • In spite of conventional wisdom, the prospect for high-wage work for prime-age men has not declined much over time, and may even have improved.
  • Measures of discouraged workers, nonworkers marginally attached to the workforce, part-time workers who wish to work full-time, and prime-age men who have lost their job involuntarily have not risen over time.
  • The health status of prime-age men has not declined over time.
  • More Social Security Disability Insurance claims are being filed for difficult-to-assess conditions than previously.
    Most inactive men live in households where someone receives government benefits that help to lessen the cost of inactivity.

Perhaps the CEA was doing normative sociology.

Should we miss the working class?

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Brink Lindsey writes,

people are not machines, and they don’t like being treated as such. By inducing millions of people to take up factory work and creating a social order in which those millions’ physical survival depended upon their doing such work for most of their waking hours, industrial capitalism created a state of affairs deeply inconsistent with the requirements of human flourishing—and, not unrelatedly, a highly unstable one at that.

…In pursuing the technical efficiency of mass production regardless of its human costs, the class system created by industrial capitalism divided people along very stark lines: those who work with their brains and those who work with their bodies; those who command and those who obey; those who are treated as full-fledged human beings and those who are treated as something less.

I spent two summers working in a plant that produced speakers for sound systems for buildings (think of the music piped in at shopping malls). A lot of the work was with materials that probably were dangerous to one’s lungs, including jute and fiberglass. Maybe my chronic cough comes from that. Otherwise, the work was not as rote as Lindsey depicts, and even when it was rote the time would pass reasonably well. On the plus side, there was no office politics, no ambitious co-workers stabbing you in the back or trying to steal credit for your ideas. But on net, I would tend to agree with Lindsey that we should be happy to see old-fashioned manufacturing production work phase out.

The last time I looked, which was a few years ago, the share of manufacturing production workers (as opposed to managers and supervisors) in the labor force was down to just over 5 percent. Fifty years ago, I believe it was more than 20 percent.

The erstwhile working class has moved in two directions. One direction is white-collar work. However, the other direction is non-employment. To address the latter, Lindsey offers this:

A more humane economy, and a more inclusive prosperity, is possible. For example, new technologies hold out the possibility of a radical reduction in the average size of economic enterprises, creating the possibility of work that is more creative and collaborative at a scale convivial to family, community, and polis. All that hold us back are inertia and a failure of imagination—and perhaps a fear of what we have not yet experienced. There is a land of milk and honey beyond this wilderness, if we have the vision and resolve to reach it.

To me, this sounds like the sort of utopian hope that we held for the Internet twenty years ago. As I pointed out in several posts a week ago, the reality has recently seemed to differ.

Occupation and Gender

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Justin Fox writes,

If you are one of those who believe that men are congenitally disposed to prefer working with things and women to prefer working with people, these numbers offer some support for your position.

Some support? If you go to his post, you will find that every single one of the top male occupations involves things, and the top 9 female occupations involve people. This has to be one of the most powerful separations in all of social research.

Pointer from Mark Thoma.

Wages and Perks

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Megan McArdle writes,

Both the supply curves and the demand curves for labor have been undergoing substantial transformations that may simply have shifted the economy to a new equilibrium. Which is an economic jargonish way of saying this may be the new normal.

The new normal is slow wage growth.

I think that one should watch what is happening to non-wage benefits. Anecdotally, I keep hearing more stories about very generous family leave policies. With things like health care benefits and (401) K matching policies, firms have a lot of ways adjusting compensation that do not involve wages. Many of these are difficult for government statisticians to track.

Why American Cities Cannot Compete on Cost

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Handle comments,

if a company can move some operations even 50 miles away from a high price place, then why not move them to the cheapest feasible place?

…If a job doesn’t have such distance-limitations regarding interactions with other humans, it will immediately be outsourced from high wage counties to the cheapest place.

If your company needs to plug into a specific talent pool, you want that talent pool close by. If your company can use just anyone, then the lowest-cost place to locate is not a cheap American city but an even-cheaper foreign city.

Noah Smith on Labor Supply and Demand

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He writes,

What is a better theory of the labor market? Maybe general equilibrium (which might say that immigration creates its own demand). Maybe a model with imperfect competition (which might say that minimum wage reduces monopsony power). Maybe search and matching theory (which might say that frictions make all short-term effects pretty small). Maybe a theory with very heterogeneous types of labor. Maybe something else.

Pointer from Mark Thoma.

This is the middle of the movie, so to speak. At the start of the movie, Smith looks at two stylized facts about the short run. One is that an immigration surge has little effect on wages. This suggests that labor demand is highly elastic. The other is that a minimum wage increase has little effect on employment. This suggests that labor demand is highly inelastic. It cannot be both.

Of course, you do have the option of denying the veracity of one or both stylized facts. But I do not want to go there. I vote for “very heterogeneous types of labor.” There is no such thing as “aggregate labor demand” in the labor market. There are patterns of specialization and trade. And these tend to be sticky, both in terms of wages and the quantity of each type of worker employed.

The “labor market diagram” makes it appear that you can have either a sticky wage or a sticky quantity of labor, but not both. Behind this (false) theorem lies the presumption that it is very easy to substitute among workers. This is an instance in which mathematical modeling serves to confound rather than help the modeler.

In fact, workers are specialized. Even relatively unskilled workers have been trained to perform their particular tasks. The substitutability that is implicit in the labor market diagram does not exist in the real world.

Labor market adjustment comes primarily from changes in the patterns of sustainable specialization and trade. Because it takes time for old patterns of trade to become unsustainable and for new sustainable patterns to form, neither wages nor quantities change as much in the short run as they do in the long run.

The effect of the minimum wage in the short run on existing firms can be small. They mostly just suck it up and pay the higher wage. However, over time, there will be a tendency for processes that use low-skilled workers to be less profitable and processes that instead use capital and high-skilled workers to be relatively more profitable. So the patterns of specialization and trade that break up will tend to be those that have been employing low-skilled workers, and the new ones that form will tend to employ fewer low-skilled workers than would have been the case otherwise.

As for immigration, what Noah calls general equilibrium I call creating new patterns of specialization and trade. There is no “lump of labor demand” that immigrants and natives are competing to fill. Firms do not say, “Oh, goody. Now I can now fire my native workers and hire immigrants for $1 an hour less.” Instead, entrepreneurs who are thinking of starting firms ask, “Where can I get the best workers for the least cost?” And in many cases immigrants are the answer. As this process plays out, my guess is that the main wage-depressing effect is on native workers just entering the labor force. But of course a lot of them have specialized skills that insulate them from competition from immigrants. So the effect on natives’ wages is limited in scope and stretched out in time.