Month: January 2014

Things to Read at Lunchtime on Thursday, January 30, 2014

Posted on by Brad DeLong

Must-Reads:

  1. Jonathan Cohn: Obamacare Death Spiral Not Happening: “In the world of Obamacare hate, the law’s failure is imminent and inevitable… an insurance ‘death spiral’…. Could Obamacare enrollment really go so awry? Sure. But some news from Wednesday is one more sign that such a crisis is unlikely…. Wellpoint… officials announced that enrollment in their health plans was meeting expectations… 400,000 new customers already and expected to have close to a million by… the final day of March…. If the pattern holds, Wellpoint won’t be taking the kinds of losses that force higher prices next year.”

  2. Simon Wren-Lewis: Understanding ever-increasing executive pay: “Why did executive pay start taking off in the 1980s?… Tax rates on top incomes were… substantially reduced… the CEO has a much greater incentive to put lots of effort into the bargaining process with the company… microeconomic evidence that CEO pay for firm’s performance that is outside the CEO’s control (i.e. that is industry wide, and so does not reflect personal performance) is more important when tax rates are low…. There is a nice parallel between the compensation bargaining model and the union bargaining model popular outside the US in the 1970s/80s, which made many economists somewhat antagonistic to growing union power…”

  3. Igor Volsky: 6 Ways Extreme Income Inequality Is Making Your Life Worse: “1979-2007… top 1 percent… families experienced a 278 percent increase… families in the middle 60 percent saw an increase of less than 40 percent…. 1. Income inequality forces Americans into debt…. 2. Income inequality makes America sick…. 3. Income inequality makes America less safe…. 4. Income inequality makes America less democratic…. 5. Income inequality undermines the American dream…. 6. Income inequality is undermining long-term economic growth…”

  4. Mark Thoma: Sharing the Gains from Economic Growth: “Reducing inequality a major part of his State of the Union Address…. But to avoid being accused of waging class warfare, he will talk about creating ‘ladders of opportunity’ instead of focusing directly on the inequality problem. This shift in emphasis is a mistake…. Opportunity is unequal, and creating ‘ladders of opportunity’ should be part of any attempt to address the inequality problem. But… the distribution mechanism is broken, the gains from economic growth have not been widely shared… focus solely on opportunity does nothing to solve the problem of income being misdirected to the upper end of the income distribution.”

Continue reading “Things to Read at Lunchtime on Thursday, January 30, 2014” →

Economics Research and the State of the Union

Posted on by Aidan Orsino

Last night in his State of the Union address, President Obama made a variety of statements about the state of the economy and public policy. We want to highlight a few ideas that the President put on the table that, according to serious economic research, will both address inequality and benefit the economy.

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“But average wages have barely budged.  Inequality has deepened.  Upward mobility has stalled”

  • Inequality has certainly deepened. According to data from Emmanuel Saez, an Equitable Growth Steering Committee member, and Thomas Piketty, the share of income going to the top 1 percent of earners increase from about 8 percent in 1979 to approximately 19 percent in 2012. At the same time, recent research by Equitable Growth Steering Committee members Raj Chetty and Saez has shown that economic mobility in the United States has stayed constant for the last several decades. However, there is a tremendous variation in opportunity across regions in the country. The research by Chetty, Saez, and their coauthors can be found at the Equality of Opportunity Project.

“I’m also convinced we can help Americans return to the workforce faster by reforming unemployment insurance so that it’s more effective in today’s economy.  But first, this Congress needs to restore the unemployment insurance you just let expire for 1.6 million people.”

“Research shows that one of the best investments we can make in a child’s life is high-quality early education.”

  • Here’s some of the research on early education, including work by Nobel Laureate James Heckman. Early childhood education has long term effects such as gains in employment, later schooling, and earnings.

“Today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here.  Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10.”

  • The President supports the raising the minimum wage to $10.10 an hour. For those interested in the economics of such an increase or other topics related to the minimum wage, check out our researcher profile of Equitable Growth Research Advisory Board member Arin Dube

“There are other steps we can take to help families make ends meet, and few are more effective at reducing inequality and helping families pull themselves up through hard work than the Earned Income Tax Credit.  Right now, it helps about half of all parents at some point.  But I agree with Republicans like Senator Rubio that it doesn’t do enough for single workers who don’t have kids.  So let’s work together to strengthen the credit, reward work, and help more Americans get ahead.”

  • A higher minimum wage and a more generous Earned Income Tax Credit would be an effective combination of policies. Research by Equitable Growth Research Advisory Board member Jesse Rothstein has shown that employers capture 27 percent of the value of the EITC. A higher minimum wage could help counteract that capture. A larger EITC would get more workers into the labor force and a higher minimum wage would insure they were properly rewarded for their work.

“Today, women make up about half our workforce.  But they still make 77 cents for every dollar a man earns.  That is wrong, and in 2014, it’s an embarrassment. A woman deserves equal pay for equal work.  She deserves to have a baby without sacrificing her job.  A mother deserves a day off to care for a sick child or sick parent without running into hardship – and you know what, a father does, too.  It’s time to do away with workplace policies that belong in a “Mad Men” episode.  This year, let’s all come together – Congress, the White House, and businesses from Wall Street to Main Street – to give every woman the opportunity she deserves.  Because I firmly believe when women succeed, America succeeds.”

“A pre-existing condition used to mean that someone like Amanda Shelley, a physician assistant and single mom from Arizona, couldn’t get health insurance. But on January 1st, she got covered. On January 3rd, she felt a sharp pain. On January 6th, she had emergency surgery. Just one week earlier, Amanda said, that surgery would’ve meant bankruptcy.

“That’s what health insurance reform is all about – the peace of mind that if misfortune strikes, you don’t have to lose everything.”

  • Work by researchers at the RAND Corporation found that the Affordable Care Act will substantially reduce the financial risks to low income people. The study found that out-of-pocket spending on health care would decrease for all groups considered.

“More than nine million Americans have signed up for private health insurance or Medicaid coverage.”

Research published in Health Affairs by Carter Price and Christine Eibner found that Medicaid expansion will increase coverage, reduce state spending on uncompensated health care costs, and bring more federal spending into the state.

Thinking About Brynjolfsson and McAfee’s Second Machine Age: Wednesday Focus: January 29, 2014

Posted on by Brad DeLong

So last night I went down to the Commonwealth Club on Market Street in San Francisco to listen to Eric Brynjolffson and Andrew McAfee talk about their book [The Second Machine Age}(http://www.amazon.com/gp/product/0393239357/ref=aslitf_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0393239357&linkCode=as2&tag=brde-20). It is somewhat odd that I did this: I have, by now, spent about five hours reading and explicitly thinking about this 100,000-word book. In a sixty-minute seminar, with back-and-fill, false starts, and so forth, we are lucky to hear 50 words a minute. 50 words/minute x 60 minutes = 3000 words. So why if I have spent five hours on 100,000 words do I feel that there is significant value to be gained by spending one hour and processing only 3000?

Continue reading “Thinking About Brynjolfsson and McAfee’s Second Machine Age: Wednesday Focus: January 29, 2014” →

Erik Brynjolfsson and Andrew McAfee: The Second Machine Age: Commonwealth Club, 595 Market Street, 2nd Floor, San Francisco, CA 94105

Posted on by Brad DeLong

Tuesday, January 28, 2014 6 PM PST: Erik Brynjolfsson and Andrew McAfee: : The Second Machine Age @ Commonwealth Club:

Welcome to the modern age, where computers diagnose diseases, drive cars and write clean prose. Advances like these have created unprecedented economic bounty. Meanwhile, median income has stagnated and unemployment has risen. Erik Brynjolfsson and Andrew McAfee reveal the technological forces behind this economic sea change in what New York Times writer Thomas Friedman praised as their “fascinating new book,” The Second Machine Age. As business researchers at MIT they predict that the path to prosperity lies in businesses and individuals using ingenuity to race with machines.

Afternoon Must-Read: Mark Thoma: Sharing the Gains from Economic Growth

Posted on by Brad DeLong

Mark Thoma: Sharing the Gains from Economic Growth: “President Obama will make reducing inequality a major part of his State of the Union Address according to several reports.

But to avoid being accused of waging class warfare, he will talk about creating “ladders of opportunity” instead of focusing directly on the inequality problem.

This shift in emphasis is a mistake because it misses a key part of the inequality problem. It’s true that opportunity is unequal, and creating “ladders of opportunity” should be part of any attempt to address the inequality problem. But it’s also true that the distribution mechanism is broken, the gains from economic growth have not been widely shared, and a focus solely on opportunity does nothing to solve the problem of income being misdirected to the upper end of the income distribution.

Continue reading “Afternoon Must-Read: Mark Thoma: Sharing the Gains from Economic Growth” →

Researcher in Focus: Arin Dube

Posted on by Aidan Orsino

The minimum wage has been a live issue in public policy debates over the past year or so. And the attention paid to the issue will most likely continue throughout 2014. Without doubt, the political arguments will result in opponents and proponents of raising the nation’s wage floor arguing about the economic impacts with each other, particularly about its effect on employment growth.

Instead of trying to resolve this debate for you, we thought it would be more interesting to flag one researcher who has done considerable work on the minimum wage.

Below is an overview of the work of Arin Dube, one of the most prominent researchers on the economics of minimum wage. If you want just a broad introduction to the economics of the minimum wage, the first two sections will suffice. But if you want to read in depth about the economic arguments, you may be more interested in the last two sections.

Arindrajit Dube, associate professor of economics at the University of Massachusetts, Amherst; Research Fellow, IZA; Research Advisory Board member, Washington Center for Equitable Growth.

A Layman’s Introduction:

“The Minimum We Can Do,” November 30, 2013

  • In a blog post for the New York Times’s The Great Divide series, Dube surveys the past, present and future of the minimum wage in the United States

“Minimum Wage 101,” The American Prospect, February 14, 2013

  • Dube discusses the minimum wage with an emphasis on its policy effectiveness in an interview with Mike Konczal.

A Literature Review for the Policy-Minded:

Statement before the U.S. Senate Committee on Health, Education, Labor and Pensions, Hearing on “Keeping up with a Changing Economy: Indexing the Minimum Wage,” March 14, 2013

  • Dube’s prepared remarks provide a good and accessible literature review of the academic research.

Select Papers:

“Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties,” Arindrajit Dube, T. William Lester, and Michael Reich, The Review of Economics and Statistics, 2010

  • David Card and Alan Krueger’s 1994 paper may be more widely cited in the popular press, but Dube’s paper with Lester and Reich is the best piece of evidence that moderate increases in the minimum wage don’t significantly affect employment. Instead of looking at the changes along one border, like Pennsylvania and New Jersey, Dube, Lester, and Reich look at the difference in employment growth across every pair of counties with different minimum wages from 1990 to 2006. This generalized version finds no significant disemployment effect.

“Minimum Wage Shocks, Employment Flows and Labor Market Frictions,” Arindrajit Dube, T. William Lester, and Michael Reich, Working Paper, 2013

  • This paper focuses on the effect of a minimum wage increase on employment flows such as hires, quits and layoffs instead of net employment as most research does. The authors find that labor turnover falls quite a bit for affected workers. This result supports a view of a labor market where the cost of looking for a job or a worker is considerable.

“Minimum Wages and the Distribution of Family Incomes,” Arindrajit Dube, Working Paper, 2013

  • In this paper, Dube attempts to quantify the effect of the minimum wage on family incomes. Specifically, he finds that an increase in the minimum wage would reduce poverty. According to Dube’s preferred model, a 10 percent increase in the minimum wage would reduce the poverty rate by 2.4 percent.

The Best Criticism:

There is disagreement on many of the issues Dube has researched, so anyone interested in the area should read the disagreeing papers. Below is the paper we think best responds to one aspect of Dube’s research.

“Effects of the Minimum Wage on Employment Dynamics,” Jonathan Meer and Jeremy West, Working Paper, 2013

  • Meer and West argue that Dube’s preferred method of analyzing the impact of the minimum wage on employment, including a control trend, makes his estimates too imprecise. Using an alternate approach, they agree that an increase in the minimum wage doesn’t decrease employment, but the wage increase does slow down employment growth.

Nick Bunker is a Research Associate at the Washington Center for Equitable Growth.

Simon-Wren Lewis Is Puzzled by Economists and Monetary Policymakers Calling for More Contractionary Monetary and More Contractionary Fiscal Policy: Tuesday Focus: January 28, 2014

Posted on by Brad DeLong

He is puzzled. And so am I…

Simon Wren-Lewis: Mainly Macro: Bullard on the ‘Death of a Theory’:

James Bullard, President of the St. Louis Fed… kindly sent me his article (pdf) entitled ‘Death of a Theory’… the theory he is referring to is the idea of fiscal stimulus at the Zero Lower Bound (ZLB)…. I… think the article reflects the views of many economists. For these reasons, I thought it would be useful to say why I disagree…. Bullard gives three reasons why “Fiscal policy should return to being set for the medium and longer run.” They are that:

  1. Actual political systems are ill-suited to implement the advice from the theory.
  2. Monetary stabilization policy has been quite effective [at the ZLB], making fiscal experiments redundant.
  3. Governments pushed distortionary taxes into the future, which in the theory reduces or eliminates the desired effects.

Let me take each in reverse order….

Continue reading “Simon-Wren Lewis Is Puzzled by Economists and Monetary Policymakers Calling for More Contractionary Monetary and More Contractionary Fiscal Policy: Tuesday Focus: January 28, 2014” →

Economics research supports higher minimum wage for contractors

Posted on by Aidan Orsino

President Obama has announced that as of January 2015, all new federal contractors will be required to pay a minimum wage of $10.10.

This executive order is grounded in the economics research. First, there is evidence that paying workers above a market-clearing wage can improve economic efficiency. In efficiency wage theory, employers may opt to pay above the “market clearing” wage in order to improve productivity or reduce turnover, either of which are good for the firm and the economy more generally. The idea that there are “information asymmetries” in the labor market was an important contribution of Berkeley professor George Akerlof and Columbia professor Joseph Stiglitz that led to their receiving the 2001 Nobel Prize, along with A. Michael Spence.

Second, there is a large body of literature pointing to the conclusion that raising the minimum wage does not have a negative employment effect. By looking at the difference in employment between states or counties with different minimum wages, careful empirical work has found that modest increases in the minimum wage have no significant effect on employment. Specifically, research by Arin Dube, of the University of Massachusetts, Amherst, T. William Lester, of the University of North Carolina, and Michael Reich, of the University of California, Berkeley, found no significant employment effect after looking at all differences in the minimum wage from 1990 to 2006.

Heather Boushey is the Executive Director and Chief Economist of the Washington Center for Equitable Growth