Month: June 2014

Where are the gains from productivity?

Posted on by Nick Bunker

The U.S. Bureau of Labor Statistics today released updated data on labor productivity, defined as output per hour worked, showing that it decreased by 3.2 percent on an annual basis during the first three months of 2014. On a year to year basis, productivity grew by 1 percent since the first quarter of 2013. The decline is discouraging since growth in labor productivity is the source of prosperity for workers.

According to economic theory, labor productivity is at the root of wages. A worker should be compensated for their marginal value of labor, the amount of value they add to their employer by working one more hour. The value created depends on the price of the good or service being created as well as the worker’s productivity. The higher the worker’s productivity, the higher her wage should be. Of course, this theory doesn’t work out perfectly in the real world and misses important parts of the wage-setting process. But productivity serves as a good baseline of where wages should be.

Even with rising productivity, workers’ wages may not increase as quickly as they could. The past several decades have seen the link between productivity and the returns to workers break. So where have the rewards of productivity gone?

Data show a decoupling between productivity and compensation in the U.S. labor market since 1973. (We use total compensation here since using just wages would miss out other forms from compensation such as retirement benefits and health insurance.) According to an analysis by Larry Mishel of the Economic Policy Institute, labor productivity grew by an average annual rate of 1.6 percent from 1973 to 2011 while median hourly compensation grew at an average annual rate of about 0.3.

Mishel finds that three main factors contributed to the divergence. The first is a technical difference between the different price indices used to deflate the output and wage data. In other words, inflation for goods workers produce has been slower than for goods workers buy. Mishel finds that this divergence explains about one-third of the divergence.

The second source of divergence is a shift from income from labor to capital. Workers aren’t receiving all of the gains of their productivity; some of those gains are going to owners of capital instead. Mishel finds that this shift is responsible for about one-fifth of the gap.

The largest source of divergence is the rise in the inequality of compensation, responsible for just over 45 percent of the gap. The compensation of the typical worker is not growing with productivity since more and more of compensation is going to the top earners. Other research corroborates this point. Ian Dew-Becker of Duke University and Robert Gordon of Northwestern University find that from 1966 to 2001, only the top 10 percent of earners saw wage growth at or above productivity growth.

Increasing productivity is a necessary part of increasing wages for workers. But the last several decades have shown that it’s not a sufficient part.

Marriage promotion isn’t the only solution to America’s mobility problem

Posted on by Ed Paisley

We at the Washington Center for Equitable Growth and much of the economics blogosphere have given substantial attention to the recent work on mobility in the United States by Harvard economists Raj Chetty and Nathanial Hendren and University of California—Berkeley economists Emmanuel Saez and Patrick Kline. One of the study’s key findings is that there is strong, statistically significant relationship between the share of single mothers in an area and the gap in mobility between children from high- and low-income families (Chetty and his co-authors refer to this as a measure of relative mobility).

Brad Wilcox, University of Virginia sociologist and Director of the National Marriage Project, employs this finding to promote pro-marriage policies. His research on the issue is intriguing (though he bases his recommendations on regressions that suffer from multicollinearity, because all of the independent variables are highly correlated with each other, and thus his analysis is statistically questionable). His analysis may leave policymakers with the wrong message. When policymakers focus on marriage as the most important path to higher economic mobility, it allows them to ignore the pro-family policies that can help improve mobility. After looking at the data more deeply, I think they are drawing the wrong conclusions and should look at ways to support families of all types instead of pushing a specific family model.

My issue brief, “A Regional Look at Single Moms and Mobility,” indicates that the Pacific states of California, Hawaii, Oregon, and Washington stand out for having relatively high rates of single mothers while also having relatively high mobility. (See map) These states tend to have more family-friendly laws like paid sick days so that parents can take care of sick children and they have relatively generous parental leave so that new parents can spend more time with their newborn children. This analysis is far from definitive, but it does imply that these kinds of pro-family policies can improve mobility in the absence of a high rate of two-parent households.

States with Family Friendly Policies have Better Economic Mobility

A regional look at single moms and upward mobility

Posted on by Carter Price

One of the big takeaways from the recent work by Harvard economists Raj Chetty and Nathanial Hendren and University of California—Berkeley economists Emmanuel Saez and Patrick Kline is that differences in family structure are strongly associated with differences in economic mobility.[1] Some scholars and policymakers have used these findings as an opportunity to encourage marriage promotion policies, but a deeper look at the data raises some important questions.[2]

For example, why is it that the West Coast states of California, Oregon, and Washington stand out for having relatively high rates of single mothers while also having relatively high rates of economic mobility? Conversely, why are other parts of America characterized by low rates of single mothers but very low rates of economic mobility?

Understanding economic mobility can yield insights into whether and how economic inequality and economic growth are linked. And scholars and policymakers across academic disciplines and political divides agree that understanding how single mothers fare in our economy is critical to future economic growth, powered by their contributions today and the future contributions of their children.

Read a PDF of the full document
Read a PDF of the appendix

This issue brief explores where single mothers are more likely to be moving up the economic ladder, relying upon the latest research on mobility in the United States by Chetty and his colleagues.[3] One of their study’s key findings is that there is a strong, statistically significant relationship between a higher gap in mobility between children from high- and low-income families, which Chetty and his co-authors refer to as relative mobility, and a higher share of families headed by single mothers.

This insight enables us to look at this “mobility gap” in an area, compare the share of single-mother households, and then look at the difference between the share of single mothers and the mobility gap.[4] This difference tells us whether the mobility gap is higher, lower, or about what would be expected given the share of single mothers in an area. In the pages that follow, this issue brief will present these data analyses in more detail. But the upshot of this analysis is that states with more family friendly laws, [5] such as paid sick days so that parents can take care of sick children and relatively generous parental leave policies so that new parents can spend more time with their newborn children, are more likely to have a relatively high rates of economic mobility despite high rates of single mothers—among them California, Oregon, and Washington.

Conversely, parts of America, particularly parts of the Rust Belt, are significantly less mobile than one would expect given the relatively low share of households headed by single mothers. This analysis is far from definitive, but it does suggest that pro-family policies can improve mobility in the absence of a high rate of two-parent households.

Our first map in this issue brief tells the tale, at least for those born in the United States when the tail end of Generation X—1965-1980—gave way to the Millennials born between 1981 and 2000. (See Figure 1.)

Figure 1

States with Family Friendly Policies have Better Economic Mobility

Parsing the data on mobility and single mothers

These differences in the mobility of single moms that we mapped on Figure 1 can be further refined down to metropolitan regions of the country. Figure 2 below shows the relationship between the share of households led by single mothers and the gap in mobility between the children of high- and low-income families. Each dot represents a commuting zone (areas within which people are more likely to live and work). The arrow represents the “best-fit-line” on these points and indicates that places with a higher share of single mothers also tend to have a higher gap in mobility—indicating lower relative mobility. Because of the strength of this relationship, many commentators have identified marriage promotion as the silver bullet policy to improve economic mobility.

Figure 2

Single Mothers Struggle with Upward Mobility

While Figure 2 provides a pretty convincing picture that a higher rate of single motherhood is associated with a higher gap in mobility between children from high- and low-income families, there may be something missing. High- and low-income children born in large West Coast cities such as Seattle and San Diego have a much smaller gap in mobility than high- and low-income children born in cities such as Cincinnati or Indianapolis, despite having a similar share of single mothers. So before making sweeping policy proclamations, we should dig a little deeper to understand this relationship.

Figure 3 is a map of the mobility gap between the children of high- and low-income families. The mobility gap is the difference in incomes as adults between people born into the lowest-earning and highest-earning households. A lower ‘mobility gap’ implies greater mobility, and vice versa.[6] The lightly colored areas in the map are those that have a low mobility gap, while the dark green areas have a much higher mobility gap. The South and much of the Rust Belt have particularly low economic mobility, while the West Coast and many parts of the Great Plains states are particularly economically mobile.

Figure 3

How Hard is it to Climb the Ladder?

The mobility gap is an obviously useful measure of the chances of the children of families achieving the American Dream, but to complete our analysis presented in Figure 1, we need to calculate the share of single mothers in our nation. Figure 4 does that, with lightly colored places indicating an area in which a higher share of households are headed by single mothers than average for the country, while dark green indicates a lower share. The South and much of the West have higher shares of single mothers that the rest of the country, while the Great Plains states in particular have the lowest share of households led by single mothers.

Figure 4

Concentrations of Single Mothers

This brings us back to the first map in this issue brief. It looks at the difference between the actual mobility gap and what one would expect the mobility gap to be based only on knowing the share of single mothers. The brown indicates those places where you would expect mobility to be better given the relatively low share of households led by single mothers, while the green indicates those places where the mobility is better than you would expect given the high share of single mothers. The geographic distribution of the colors is telling. Table 1 details the states with the more long-standing family friendly policies.

Table 1

States with Longstanding Family-Friendly Policies

The West Coast states of California, Oregon, and Washington stand out for having relatively high rates of single mothers while also having relatively high mobility. Several New England states, among them Rhode Island, Maine, and Vermont, also have higher levels of mobility than would be expected given the share of households headed by single mothers. As seen in Table 1, these states tend to historically have had more family-friendly laws,[7] such as parental leave so that new parents can spend more time with their newborn children. This analysis is far from definitive, but it does imply that these kinds of pro-family policies can improve mobility in the absence of a high rate of two-parent households.

To look a little deeper into the relationship between mobility and marriage, we also did an international comparison akin to the famous Great Gatsby Curve.[8] Figure 5 has the intergenerational earnings elasticity (a measure of the variability in earnings for one generation that is associated with the variability in earnings from the previous generation.) from University of Ottawa economist Miles Corak[9] plotted against the share of children that live primarily with one parent using data from the OECD.[10]

At the international level, we find the opposite relationship between single parenthood and mobility that we see from data in the United States, as seen in Figure 2. While it appears that higher shares of children primarily living in single-parent households is weakly associated with lower intergenerational earnings elasticity, the United States is an outlier, and by excluding it from the calculations, the cross-country association is quite strong. This is almost certainly not an indication that single-parent households are better for mobility, but instead an indication that what matter are other differences between countries, such as public policy. Those countries that have a larger share of single mothers, other than the United States, also tend to do a much better job providing support services to families of all types.[11] (See Figure 5.)

Figure 5

The United States Compares Poorly in Economic Mobility

By comparing the maps of mobility with family structure and also seeing the international relationship, we see that those places with stronger support for families of all types appear to be less impacted by any adverse effect on mobility from having a high share of single mothers. This suggests that low mobility stemming from a high proportion of single-parent households may be largely a function of policy choices rather than an inherent characteristic associated with the prevalence of different family structures.

Conclusion

While none of this analysis constitutes definitive economic analysis, it does highlight areas for researchers to focus their efforts and also for policymakers to consider. Marriage promotion may be one possible policy solution to the low mobility in the United States, though evidence would be needed to show what it is about marriage that leads to higher economic mobility. But we may want to try what already appears to be working in some states and in other developed nations too.

The notion that low mobility is driven by family structure alone allows policymakers to ignore their role in the problem and implies solutions that ignore more fundamental economic and work-related problems. Thus, it is important for researchers to do more than just a cursory analysis of these data and to understand the mechanisms of mobility before making strong policy recommendations.

Endnotes

[1] Raj Chetty et al., Where Is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States, Working Paper (Cambridge, MA: National Bureau of Economic Research, January 2014), http://www.nber.org/papers/w19843.

[2] W. Bradford Wilcox, If You Really Care About Ending Poverty, Stop Talking About Inequality, The Atlantic, January 8th, 2014,  http://www.theatlantic.com/business/archive/2014/01/if-you-really-care-about-ending-poverty-stop-talking-about-inequality/282906/

[3] Chetty et al, 2014.

[4] We used the residual from a regression of single mothers on the relative mobility as the difference.

[5] Waldfogel, Jane. 1999. “Family Leave Coverage in the 1990s.” Monthly Labor Review 10 (October): 13–21.

[6] Raj Chetty et al., Where Is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States, Working Paper (Cambridge, MA: National Bureau of Economic Research, January 2014), pp.2-3, http://www.nber.org/papers/w19843.

[7] National Conference of State Legislatures, State family and Medical Leave Laws, December, 31st, 2013, http://www.ncsl.org/research/labor-and-employment/state-family-and-medical-leave-laws.aspx

[8] Alan Krueger, “The Rise and Consequences of Inequality” (Center for American Progress, January 12, 2012). http://www.whitehouse.gov/sites/default/files/krueger_cap_speech_final_remarks.pdf.

[9] Miles Corak, Inequality from Generation to Generation: The United States in Comparison, 2012, http://milescorak.files.wordpress.com/2012/01/inequality-from-generation-to-generation-the-united-states-in-comparison-v3.pdf.

[10] OECD, Living arrangements of children, OECD Family Database, January 7, 2010, http://www.oecd.org/social/family/41919559.pdf.

[11] Wikiprogress, Hours Worked, http://www.wikiprogress.org/index.php/Hours_Worked

Things to Read on the Morning of June 4, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Terry J. Fitzgerald and Juan Pablo Nicolini: Is There a Stable Relationship between Unemployment and Future Inflation? Evidence from U.S. Cities: “This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.”

  2. Mike Albertus and Victor Menaldo: How democracies are gamed for power and profit: an addendum to Piketty: “We find that some countries adopt policies that systematically tend to favor the majority of the population and thus reduce inequality, whereas others instead create policies that favor elites and the wealthy more broadly. The chief determinant of this broad difference… is political institutions. Democracy can… be the great equalizer… when transition occurs in the wake of revolution or, alternatively, when elites are unable to impose a constitution that persists…. If, by contrast, economic elites are strong on the eve of democratization, this result reverses. Less redistributive policies that allow inequality to grow ensue…. Capitalism need not churn inexorably toward spiraling inequality. Indeed, we find that in democracies where elites have little say in writing the social contract, redistribution is more likely…. Most countries inherit elite biases from former periods of autocratic rule that hobble their capacity to counteract increasing inequality…. Elite influence can choke off egalitarian policies even in well-established democracies such as the United States and Great Britain that democratized gradually and were never quite able to tame the disproportionate power of elites. Recent work by Gilens and Page makes this point abundantly clear–even going so far as suggesting that the United States looks more like an oligarchy in democratic clothing.”

  3. Marshall Steinbaum: Missing the Point on Income Inequality in the 1920s and Today: “Gary Burtless… takes issue with widely publicized findings that income inequality in the United States has reached the level that prevailed in the 1920s…. According to Burtless, that conclusion ignores the creation of the welfare state, consisting of Social Security, Medicare, Medicaid, and other government programs that aim to redistribute disposable income and goods and services…. The potential for policies to rectify income inequality and boost economic growth is very high, which by itself invalidates long-term conservative arguments that government is powerless or ineffective in the face of ‘the market’s’ inexorable force. Burtless’ claim is correct, but [should have noted that] some conservative critics… are using the welfare state they… [seek to] dismantl[e] to… argu[e] that inequality either doesn’t really exist or is at least not as bad…”

  4. Nick Bunker: When does health insurance count as income?: “The debate over growing income inequality… involves… what exactly constitutes income…. Prior to 2012, CBO valued Medicare, Medicaid and the Children’s Health Insurance Program based on how much money these health insurance programs freed up for the household….Starting in 2012, CBO… simply impute[s] the average cost… [so] any increase in the cost of the program—an increase in payments to doctors, for example—would register as an increase in household income…. As health economist Uwe Reinhardt at Princeton University points out, CBO can’t be blamed for muddling through with these data issues. Economists really don’t have a consensus on how to measure the value of these programs…”

Should Be Aware of:

And:

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Afternoon Must-Read: Max Auffhammer: Why I Think Not Building Keystone XL Leaves a Billion Barrels of Bitumen in the Ground. |

Posted on by Brad DeLong

Max Auffhammer: It just doesn’t add up. Why I think not building Keystone XL will likely leave a billion barrels worth of bitumen in the ground: “Whenever oil sands come up in casual conversation, many of my economist friends argue that…

…“The Canadians are just going to build pipelines to the East and West and ship the stuff to Asia and elsewhere.”… Alberta’s oil sand reserves are estimated at 168.7 billion barrels, which eclipses the reserves of Iran, Iraq, Kuwait and Russia…. They are in the form of crude bitumen… well to wheel emissions from these oil sands are 14-20% higher than those of a weighted average of transportation fuels used in the United States…. Even if every pipeline project on record is built on time and rail capacity is expanded aggressively, there still is not enough transport capacity to meet industry projected supply. This means, of course, that Keystone XL matters…. I think that… not permitting Keystone XL will likely leave 1 billion barrels in the ground by 2030….

There is simply not sufficient transport capacity to realize the supply projections by Canadian Petroleum Producers out to 2030… regulatory uncertainty… currently oil sands enjoy an unfair advantage… in the absence of a carbon tax or other price based mechanism, its price is artificially lower than socially optimal… delaying extraction of oil sands now will lead to lower demand in the future… higher transport costs by rail… the very costly development of local refining capacity in Alberta…. Of course, globally speaking, 1 billion barrels sounds like a lot, but the US consumes that amount in about 50 days. As carbon is a stock pollutant as far as human time frames are concerned, not permitting Keystone “buys time” for alternative transportation fuels and climate policies to develop…

Afternoon Must-Read: Larry Ball: Long-Term Damage from the Great Recession in OECD Countries

Posted on by Brad DeLong

Larry Ball: Long-Term Damage from the Great Recession in OECD Countries: “This paper estimates the long-term effects…

…of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.

Things to Read on the Afternoon of June 3, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Christopher Smith: FRB: FEDS Notes: The effect of labor slack on wages: Evidence from state-level relationships: “Some have argued that the unemployment rate may overestimate labor market slack, because the LTU are largely structurally unemployed and exert significantly less wage and price pressure. If so, then using the aggregate unemployment rate to forecast wage or price inflation may be misleading. However, this Note, along with the companion note showing that a state’s LTU rate normalizes as its STU rate normalizes, and the cross-city inflation-based evidence presented in Kiley (2014), suggest against the idea that the LTU should be strongly discounted from measures of labor market slack. This Note also provides some suggestive empirical support for possibly considering broader measures of labor market slack, such as those including non-participants who may be somewhat attached to the labor market, when assessing wage and price pressures…. Moreover, because some segments of those not in the labor force also appear to generally apply downward pressure to wages as well, the unemployment rate may somewhat understate the degree of labor slack that matters for aggregate wage and price movements…”

  2. Jonathan Chait: Here Are the Papers That Think You’re an Idiot: “The Obama administration just unveiled one of the most consequential and far-reaching proposals of this presidency. One might think that, for good or ill, this constitutes an important story…. Some publications are covering this enormous policy story. Others find that way too boring and have moved on to the vital question of how will this affect the midterm elections?… The Washington Post leads with a story about the midterm ramifications. Politico leads with–ha-ha, you don’t really need to ask, do you?… The New York Times leads with a policy story…. The Huffington Post — mocked by the journalistic establishment as sideboob/aggregation clickbait — leads with links to nine stories, eight of which deal with policy…”

  3. Nick Bunker: Workers’ declining share of income: “The recent decline in the labor share of income is verified by any number of researchers—here’s a good summary…. The share of income going to capital may have increased because the price of capital goods has declined…. This is exactly the result found by economists Loukas Karabarbounis and Brent Neiman, both of the University of Chicago, who estimate about half of the decline is due to the lower price of investment goods…. Michael Elsy… Bart Hobkin… and Aysegul Sahin… find that the increasing offshoring is a ‘leading potential explanation’… Tali Kristal… finds that the decline in unionization, added by technological change, was the primary driver of the decline…”

Should Be Aware of:

And:

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