…during the recovery, we should be standing by the alarms but not quite sounding them yet. Personal consumption expenditures… contributed 1.31 percentage points… a deceleration…. Net exports were the biggest drag… 1.25 percentage points… a dramatic decrease in the level of exports…. Gross fixed investment was also a drag… shaving off 0.4 percentage points….
Real private domestic final purchases… is a good measure of the underlying momentum of the economy and predictive of the next quarter’s growth rate. In the first quarter, it only grew at about 1 percent…
So let’s review:
Over the past four quarters U.S. real GDP has grown at a rate of 3.0%/year:
Over the past eight quarters U.S. real GDP has grown at a rate of 2.5%/year:
Over the past sixteen quarters U.S. real GDP has grown at a rate of 2.3%/year:
Thus there has been no gap-closing at all throughout the recovery in real GDP relative to pre-2007 trends:
The labor market has recovered between 1/2 and 1/3 of the gap between the Lesser Depression nadir and what we used to see as full employment:
But that labor-side gap closing has been offset by the shadow the Lesser Depression casts on future growth via depressed investment and depressed business organization development. And we still do not know whether the gap between current labor-force utilization and full employment remains large, or whether the Lesser Depression has also deeply and permanently damaged the job-worker matching process. The unemployment rate’s rapid decline hints at the second, but only hints.
All this makes me conclude that talking about, let alone undertaking, monetary and fiscal policy normalization in the U.S. right now seems to me to simply be not fully sane. The balance of risks and opportunities is such that we ought to be talking about how to alter fiscal, monetary, and credit policies in order to sharply increase demand and put people back to work–and then to back off such policies if the inflation numbers tell us that the Lesser Depression did so much damage to potential output growth that we are, right now, in fact close to the economy’s current sustainable productive potential.
…raised fresh doubt about the trustworthiness of China’s own statistics…. Citibank… could be below 6%…. Capital Economics pegging the quarter at 4.9%…. Lombard Street Research at 3.8%…. China’s… figures are suspiciously smooth… methodology often appears inconsistent or contradictory…. Economists point to the discrepancy between headline GDP growth and industrial production… weaker recent readings for electricity consumption, investment, industrial profits, manufacturing output and real-estate investment, among others…
The U.S. Bureau of Economic Analysis this morning released data showing the annual growth rate of gross domestic product was 0.2 percent during the first three months of 2015. This topline result certainly isn’t encouraging, with an expected growth of 1 percent. But given the volatility in the numbers and the trends in GDP growth during the recovery, we should be standing by the alarms but not quite sounding them yet.
Personal consumption expenditures led the way, increasing at a 1.9 percent rate during the first quarter. This sector of the economy contributed 1.31 percentage points toward the overall growth rate. While these numbers are positive, they are a deceleration from the last quarter of 2014. During the last three months of 2014, personal consumption expenditures grew by 4.4 percent. This past quarter, the strongest subsector of personal consumption expenditures was consumption of services, which grew at a 2.8 percent rate and contributed 1.26 percentage points to the overall GDP growth rate, or approximately 96 percent of the overall contribution of personal consumption expenditures.
Net exports were the biggest drag on growth during the quarter. The difference between exports and imports reduced the overall GDP growth rate by 1.25 percentage points. The decline in net exports was driven mostly by a dramatic decrease in the level of exports rather than a dramatic increase in imports. During the quarter, the inflation-adjustment amount of exports of goods and services declined by 7.2 percent while imports increased by 1.8 percent.
This decline is attributable entirely to a massive decline in the exports of goods (a decrease of 13.3 percent) while the exports of service actually increased (7.3 percent). This drop-off in exports shouldn’t be surprising given the strong appreciation in the dollar in recent months. A rising dollar makes U.S. goods more expensive and all things equal reduces exports. In the battle between cheap oil and a dear dollar, it looks like the dollar is winning.
Gross fixed investment was also a drag on growth during the first quarter, shaving off 0.4 percentage points from the overall growth rate. Investment in nonresidential structures, such as office buildings was a biggest drag, lopping off 0.44 percentage points. Government expenditures was also a slight drag as it took off 0.15 percentage points, with the declining centering in the state and local governments.
Should we be very concerned by the weak first quarter economic growth number for 2015? It’s just too early to tell. The numbers released today are the advanced estimates that will be revised twice before we have a final estimate. Those revisions could show a much stronger first quarter. Or a much weaker one. We just don’t know. Furthermore, there’s some evidence that the seasonal adjustments for GDP growth might be understating overall growth as economist Justin Wolfers writes in the New York Times.
At the same time, the data do show some troubling signs. Real private domestic final purchases, defined as the sum of consumption and fixed investment, is a good measure of the underlying momentum of the economy and predictive of the next quarter’s growth rate. In the first quarter, it only grew at about 1 percent compared to 4.3 percent during the fourth quarter.
So we can’t say definitely yet whether we need to be concerned about growth dipping downward. But perhaps we should get prepared to consider that possibility.
States and cities across the United States are increasing minimum wages within their jurisdictions, sparking other policymakers around the nation and on Capitol Hill to consider whether these changes affect the wages of all workers—not just those at the very bottom of the hourly pay scale who immediately benefit from a higher minimum wage. This question is especially timely this year, as 19 states have already increased the minimum hourly wage. And many cities are also boosting low-income workers’ pay, among them Oakland, CA, which increased its minimum wage to $12.25 an hour, and Seattle, WA, which now requires large employers to pay at least $11.00 an hour.
So how will these boosts in pay across the nation affect workers? In addition to minimum wage workers who receive a direct increase, which portions of the workforce receive indirect raises from a minimum wage increase? When our nation’s capital, Washington, DC, raises its minimum wage in July to $10.50, how will that affect the wages of workers who already earn $11.50?
This question is important for gathering a more complete understanding of the effects of raising the minimum wage beyond the lowest-paid workers. This issue brief explores the available economic research on these ripple effects, finding that increases in the minimum wage do raise the wages of those earning above the minimum wage. These ripple effects are critical to reducing wage inequality between those earning low- and middle-class wages.
Although the minimum wages enhances the bargaining power of many low-wage workers, an increased minimum wage’s effectiveness in doing so dissipates as it spreads across the wage spectrum, essentially disappearing for middle-class wage earners. At the same time, assessing the exact impact of raising the minimum wage on specific earners may require higher-quality hourly wage data on all workers than is currently available in standard household surveys in the United States.
What are minimum wage ripple effects and how do they occur?
In a recent study, Arindrajit Dube of the University of Massachusetts-Amherst, Laura Giuliano of the University of Miami, and Jonathan Leonard of the University of California-Berkeley find substantial evidence of a ripple effect in a large U.S. retailer’s pay policies. In 1996 and 1997, the federal government raised the minimum wage of $4.25 an hour in two steps to $4.75 and $5.15. The authors find that the large retail company, which was promised anonymity in order to provide data for study, raised its wages by 30 to 40 percent across its entire hourly workforce even though only 5 to 10 percent of this national firm’s employees earned less than the minimum wage.
There are good reasons to expect to see this same kind of ripple effect of raising the minimum wage more broadly in the U.S. labor market. In particular, economic theory suggests that increasing the minimum wage will raise the wages of other workers when employers need to compete for workers, as in some search-and-matching models of the labor market. Imagine all firms occupy rungs on a ladder, ranked by how well they pay their workers. After a minimum wage increase, the lowest paying firms raise their wage to the new minimum. This leads the next rungs of higher-paying firms to raise wages as well—to increase their ability to recruit and retain workers who would have better options elsewhere due to the minimum wage increase. The minimum wage then filters its way up the labor market, with ripple effects declining in influence further up the ladder.
Alternatively, workers may care about how they are paid relative to other workers at in their own workplace. After a minimum wage increase, will a supervisor be content with a wage similar to her now more highly paid staff? To the extent that employees are concerned about relative wages within a business, firms may raise wages in accordance with their institutional norms.
Whether ripple effects are largely market-mediated across firms or are instead based on relative pay concerns within the firm are open questions that get to the heart of wage-setting mechanisms in the labor market. The research by Dube, Giuliano, and Leonard on the large U.S. retailer suggests that within-firm pay concerns may matter a great deal because they affect how employees search for jobs. The retail industry famously boasts a high rate of employee turnover, and the authors find that workers quit their job significantly less often after minimum wage increases. This effect, however, largely occurs through relative pay concerns, such as when a worker receives a pay raise relative to her peers, she is far less likely to quit than if she had not received that relative increase in pay.
In addition to this one case study, economists find general evidence of these kinds of ripple effects from raising the U.S. minimum wage. The best estimates, though, appear in research conducted by economists David Autor of the Massachusetts Institute of Technology, Alan Manning of the London School of Economics, and Christopher Smith of the Federal Reserve Board. They study all state and federal minimum wage increases from 1979 through 2012, and measure the effect of the raises at each point of the wage distribution.
The authors find that the sharpest wage increases due to raising the minimum wage occur for workers at the bottom five percent of the wage scale, where U.S. minimum-wage workers are most likely to be concentrated. A ten percent increase in the minimum wage raises that 5th percentile wage by about 2.9 percent. The study also finds evidence of ripple effects as the minimum wage increases wages for workers who make more than the minimum—and that these ripple effects dissipate the further one moves up the wage ladder. The same ten percent minimum wage increase raises the wages of workers at the 10th percentile of wages by about 1.6 percent and raises the wages of those in the 20th percentile by a statistically significant 0.7 percent. After the 25th percentile, wage effects are typically very small and statistically indistinguishable from zero. (See Figure 1.)
Figure 1
How do ripple effects affect wage inequality?
A ripple effect for the bottom 20 percent of workers has important implications for wage inequality among workers in the United States. Over the 1979-2012 period studied by Autor, Manning, and Smith, the real (inflation-adjusted) value of the minimum wage fell and wage inequality increased, with those workers at the bottom 10 percent of the wage scale falling relative to the median wage by more than 22 percent. The authors estimate that the declining minimum wage during that period was responsible for nearly 39 percent of the increase in wage inequality between the typical worker at the middle of the wage spectrum and the worker at the bottom ten percent. Without ripple effects, the minimum wage may not have affected inequality at all because most minimum wage workers fall below the tenth percentile wage during the study period. (See Figure 2.)
Figure 2
Because women are generally paid less than men and therefore fall closer to the bottom of the wage spectrum, the minimum wage has larger effects on female wage inequality. For wage inequality among women, Autor, Manning, and Smith find that the minimum wage had particularly strong consequences. Between 1979 and 2012, the declining minimum wage was responsible for 48 percent of the increase in female wage inequality between the bottom and middle of the wage distribution. (See Figure 2.) This finding highlights that raising minimum wages in general disproportionately affects women. A female employee is more than 60 percent more likely to be a minimum wage worker than a male employee.
As significant as these ripple effects seem on their own and for the causes of wage inequality, Autor, Manning, and Smith themselves raise an important concern about these estimates: could the results simply be a product of survey measurement error? The authors rely on the best available source for U.S. wage data, the Current Population Survey of households, but misreported wage data in this survey poses a problem for distinguishing true ripple effects from fiction.
To understand why misreported data may skewer the findings about ripple effects, consider the current minimum wage of $7.25, which is roughly at the 4th percentile of wage earners. If the wage data contain substantial measurement errors, then some of these workers earning the minimum wage may misreport higher wages, perhaps reporting wages up to the 10th percentile. In that case, even if there were no ripple effects, raising the minimum wage above $7.25 will appear in the data as though it increased wages at the 10th percentile, even if that didn’t happen in reality.
Although measurement error in the U.S. survey data may complicate estimates of the size of the ripple effects of raising the minimum wage, better quality data suggests these ripples do exist. The recent study of a U.S. retailer by Dube, Giuliano, and Leonard, which used high-quality payroll data, is one case in point. Similarly, using employer-reported data in the United Kingdom that may be more accurate than U.S. household survey data, Richard Dickens of the University of Sussex and Alan Manning and Tim Butcher of the UK Low Pay Commission find that although the minimum wage only affected the bottom 5 percent of the wage distribution, ripple effects extended to the 25th percentile.
Conclusion
Both the theoretical and empirical research point to economically meaningful ripple effects from raising the minimum wage, although even the best measurements of the exact size of these effects in the United States are not completely certain. The evidence also seems clear that in the short run, minimum wages do not appear to have ripple effects for those workers earning middle-class wages or higher. In particular, the kinds of changes in the minimum wage that the United States experienced over the past three decades do not seem to affect the median wage or the wages of those at the top. Minimum wages, then, are an important piece of the policy toolkit affecting wage inequality and boosting stagnant wages at the bottom of the wage ladder. Improving middle-class wages will require other strategies.
—Ben Zipperer is a research economist at the Washington Center for Equitable Growth
What makes a U.S. primary or secondary school successful? Traditionally, education policy has focused on factors such as teachers’ advanced degrees and training, the class size, aRnd spending per pupil. Yet research by Harvard University economics professor Roland G. Fryer, Jr., has challenged our notions of what makes our nation’s schools most effective. Fryer, this year’s recipient of the prestigious John Bates Clark medal, given to the most promising American economist under 40, is the first African American to win the coveted prize.
Fryer’s research is characterized by rigorous empirical testing of theoretical hypotheses such as whether smaller class size and increased spending per pupil are correlated with improved school effectiveness and better student outcomes. His research and subsequent award are part of a larger trend of the economics world embracing empirical work as opposed to just theoretical modeling.
Fryer and his colleague, Will Dobbie of Princeton University, looked at 39 New York City charter schools. Because these schools are not subject to the uniform standards that public schools must follow, the two researchers were able to compare a diverse range of educational strategies. Some schools, for example, focused on immersing their students in the arts in order to inspire success. Other schools were defined by a more militant “no-excuses” environment characterized by frequent testing, long school days, and harsh discipline for even the smallest infractions—what has been called the “broken windows” educational policy.
Fryer and Dobbie’s research found that a strictly controlled environment seemed to work best in fostering success among charter school students. Out of the 500 variables they studied, they found that five policies employed by “no-excuses” charter schools accounted for almost 45 percent of the variation in the school effectiveness. Fryer wondered whether these five “tenets” of student achievement—frequent teacher feedback, the use of data to guide instruction, frequent and high-quality tutoring, extended school day and year, and a culture of high expectations—could be successfully scaled up and broadly adopted by public schools.
So, in 2010, he began working with Houston school superintendent Terry Geier to implement a program based on Fryer and Dobbie’s five tenets. The program, deemed “Apollo 20,” after Houston’s historic role in the U.S. space program, targeted 20 of the city’s worst performing schools, including four that were slated to close before Fryer stepped in. The program was controversial because it involved firing most of the principals at the selected schools and due to its high costs, which were covered mostly by public funds.
According to a follow up report done by Fryer himself, the results have been mixed. While students made significant gains in math, reading remained stagnant, highlighting the problem of trying to replicate charter school success stories on a larger scale. Regardless, other cities have taken note. Select schools in Denver and Chicago have since adopted similar programs. Fryer has recently acknowledged the differences between public and charter schools and has suggested tweaks to the Apollo program that might make it more effective.
Fryer’s empirical work follows in the footsteps of other recent John Bates Clark medal winners, such as Emmanuel Saez at the University of California-Berkeley and Raj Chetty at Harvard University. They and other prominent economists, among them Amir Sufi at the University of Chicago, are more focused on the kind of data-driven research that results in effective policy interventions rather than on theoretical models that may or may not translate into actual policy directives for the real world.
Fryer, however, has gone to greater lengths than most economists to implement the findings of his research. And, as we saw with the Apollo project, he also uses this empirically driven approach to find holes in his own research—and is open to addressing approaches that do not work. As an expert on the racial achievement gap who himself grew up in a troubled home, Fryer has a boots-on-the-ground approach to combatting inequality through a dual approach of research and application. In doing so, he is a role model for the ways in which the academic world can provide evidence-based solutions to make the world more efficient and prosperous.
Must-Read: Eric Rosengren: Most developed countries’ central banks have experienced difficulty in providing sufficient monetary stimulus to spur a robust recovery in their economies. This may imply that inflation targets have been set too low…
The advocates for the TPP and TATIP should be making the following points:
The gains from trade from these agreements will be equitably distributed as a result of policies X.
The stronger copyright protections will actually boost world growth.
Alternatively, if (2) is false and the stronger copyright protections are actually bad for the world, it will benefit the United States to receive higher rents from our past and future investments in intellectual property, and the United States ought to exert its bargaining power to get a better deal for us.
The dispute-settlement provisions will lead to better political-economic governance in the world as a whole, and will lead to harmonization at the top rather than a race to the regulatory bottom via policies Y.
Those are the arguments that should be made–if they can–to command general support for the TPP and the TATIP.
But, as Dean Baker points out, those are not the arguments that are being made:
…to help push fast-track trade authority through Congress. He headlined a column:
‘Economists actually agree on this point: The Wisdom of Free Trade.’
The piece then goes on to argue for fast-track trade authority to allow for the passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP).
It’s nice that Mankiw has apparently gotten out his bag of economist’s holy water and blessed them both as free trade agreements, but that doesn’t make it true. (Hey, I want to have the Congress Gives $1 Trillion to Dean Baker Free Trade Act. As an economist in good standing, Mankiw will have to support this free trade measure.)… There are merits to reducing trade barriers, but traditional trade deals will have winners and losers…. So people, including economist people, may reasonably oppose them if they think the losers will be hurt so much that it offsets the gains from the deal. (Yes, we can do redistribution, but that is a children’s story. We don’t.)
But the key point here is that neither the TPP or TTIP is a traditional trade deal…. These deals are mostly about putting in place a business-friendly structure of regulation. Some of this business friendly regulation involves increasing barriers in the form of stronger and longer patent and copyright protection. (Yes, that is ‘protection,’ as in protectionism.)…
There is one other big point which in Mankiw’s piece which needs correcting. Mankiw tells readers:
Politicians and pundits often recoil at imports because they destroy domestic jobs, while they applaud exports because they create jobs.Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs.
Mankiw probably missed it, but we had a really bad recession when the housing bubble collapsed in 2007-2009 and the labor market still has not fully recovered. Millions of people are still unemployed or have given up looking for work. Tens of millions are unable to get wage gains because of the continuing weakness of the labor market. In principle we could get back to full employment with large government budget deficits, but that is not going to happen for political reasons…. If we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw’s textbook.)…
Must-Read: Robert Skidelsky: Debating the Confidence Fairy: “Any Keynesian knows… a slump… is… a deficiency in total spending…
…To try to cure it by spending less is like trying to cure a sick person by bleeding. So it was natural to ask economist/advocates of bleeding like Harvard’s Alberto Alesina and Kenneth Rogoff how they expected their cure to work. Their answer was… the confidence fairy…. Alesina argued that… [the] beneficial impact on expectations would more than offset its debilitating effects. Buoyed by assurance of recovery, the half-dead patient would leap out of bed, start running, jumping, and eating normally, and would soon be restored to full vigor. The bleeding school produced some flaky evidence to show that this had happened in a few instances. Conservatives who wanted to cut public spending for ideological reasons found the bond vigilante/confidence fairy story to be ideally suited to their purpose. Talking up previous fiscal extravagance made a bond-market attack on heavily indebted governments seem more plausible (and more likely); the confidence fairy promised to reward fiscal frugality by making the economy more productive….
The cure… came about years behind schedule not through fiscal bleeding but by massive monetary stimulus…. The champions of fiscal bleeding triumphantly proclaimed that austerity had worked…. In his first budget in June 2010, Chancellor of the Exchequer George Osborne warned that ‘you can see in Greece an example of a country that didn’t face up to its problems, and that’s a fate I am determined to avoid.’ In presenting the United Kingdom’s 2015 budget in March, Osborne claimed that austerity had made Britain ‘walk tall’ again. On May 7, that claim will be put to the test in the UK’s parliamentary election. British voters, still wobbly from Osborne’s medicine, can be forgiven if they decide that they should have stayed in bed.
Must-Read: Steve Cecchetti and Kermit L. Schoenholtz: The Euro Area’s Debt Hangover: “You wouldn’t know it from the record low level of government bond yields…
…but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain. Debt levels this high… are a drag on growth… households have more difficulty maintaining consumption when income falls; firms may be unable to keep up production and investment when revenue dips; and governments are in no position to smooth expenditure when revenue falls…. Beyond that, high levels of debt reduce the effectiveness of central bank stimulus…. Granted, zero (or even negative) interest rates postpone the day of reckoning, potentially for years. But as growth returns, we expect interest rates to rise and the burden of servicing the debt will rise with it. So, the time will ultimately come when waiting is no longer an option…
