Category: Equitablog

Medicaid, job lock, and moving up the job ladder

Posted on by Bridget Ansel
New research finds that more generous state Medicaid programs have benefits beyond its residents’ health, and also improve workers’ chances of moving into a higher-paying occupation or industry.

Social safety net programs, such as unemployment insurance and government-provided health insurance, are often appropriately characterized as redistribution. But as their names hint at, they are also forms of social insurance: By boosting the earnings of low-income workers, they insure against the possibility of having a low income. And as that insurance provides a cushion against a fall in income, it can also encourage workers to take on more risk—particularly in moving from one job to another.

One of the many arguments for expanding government-provided health insurance is that workers would be less tied to their current jobs for the sole reason of retaining health insurance. Decoupling the two would get rid of “job lock” and allow workers to move to other jobs. But what kind of jobs would these workers move into? In a new National Bureau of Economic Research working paper, economists Ammar Farooq and Adriana Kugler of Georgetown University find that more generous health insurance improves the chance that a worker moves into a new, higher-paying occupation or industry.

Specifically, the two economists explore how differences in the generosity of Medicaid across states affects mobility across occupations and industries. They use the fact that there were statutory changes in the income and age thresholds among the states during the late 1990s and the early 2000s to tease out the effect on the occupational and industry mobility of workers.

Farooq and Kugler find that more generous Medicaid programs boosted the movement of workers into new occupations and industries. But this movement wasn’t random: The workers were more likely to move into occupations that are not only riskier (as measured by the dispersion of wages in the occupation or industry), but also higher-paying (measured by the median wage) and requiring higher education credentials. These results show that a more generous public health insurance system helps reduce job lock and allows workers to move up the occupation or job ladder.

The two economists additionally use a case study to show that the opposite holds as well: When Tennessee reduced the generosity of its Medicaid program, movement to new occupations and industries declined.

Farooq and Kugler’s result is another piece of evidence that reducing the downside risk for workers can help them take risks that will help them and the overall economy in the long run. This research complements other studies demonstrating the role of employer-provided health insurance in employment lock. There’s also evidence that entrepreneurship, for example, is more likely to happen when a potential entrepreneur doesn’t have tremendous downside risk. The same goes for the benefits of a tighter labor market. If there are more jobs available to workers, they’re more likely to take a risk by quitting their old job and jumping to a new one. And of course this could be why high levels of wealth inequality may affect entrepreneurship and dynamism in the U.S. economy. All trends and possibilities to keep our eyes on.

Must-read: Menzie Chinn: “Estimates of the Elasticity of Employment with Respect to the Minimum Wage”

Posted on by Brad DeLong

Must-Read: Menzie Chinn: Estimates of the Elasticity of Employment with Respect to the Minimum Wage: “Some people would have you believe the impact of a minimum wage hike…

…on employment is known to be large and negative. A cursory acquaintance with the literature helps in immunizing one (if one believes in vaccines and the like) against falling for such assertions. The meta-analysis of Doucouliagos, Hristos, and Tom D. Stanley. ‘Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.’ British Journal of Industrial Relations 47.2 (2009): 406-428. [ungated working paper version] is useful in this regard.

I have drawn the mid-point of the estimate range cited by Professor Neumark (a respected researcher on minimum wages). It is useful to observe that the range he cites (-0.1 to -0.3) is substantially to the left of where the most precisely estimated locate elasticities are located. This suggests caution in attributing too much weight to one single estimate or set of estimates drawn from a single researchers. That researcher might have indeed obtained ‘the holy grail’ of elasticity estimates; but it is useful to recognize the variation in findings nonetheless, if one is to be a social scientist.

Estimates of the Elasticity of Employment with Respect to the Minimum Wage Econbrowser

Must-read: Paul Krugman: “Trade Deficits: These Times are Different”

Posted on by Brad DeLong

Must-Read: There are big reasons to be for “mercantilist” policies:

  1. In a world in which a country suffers from a shortage of risk-bearing capacity or a savings glut, exports are a very valuable source of aggregate demand.
  2. In a world in which there are substantial spillovers from the creation and maintenance of communities of engineering practice, exports in associated industries are a powerful nurturant and imports a powerful retardant of such communities.
  3. To the claim that subsidies to such communities are better, the proper rebuttal is “subsidies to whom?” Export champions reveal themselves to be competent productive organizations, and policies that encourage competent productive organizations are likely to do more to nurture communities of engineering practice than policies that encourage competent lobbying organizations.

The arguments against “mercantilist” policies are two:

  1. The little one: such policies are inefficient, in that the losers lose more than the winners win.
  2. The big one: such policies are not win-win, and economic policy energy is best devoted to things that are win-win–at least in the behind-the-veil-of-ignorance sense of win-win.

Paul Krugman: Trade Deficits: These Times are Different: “In normal times, the counterpart of a trade deficit is capital inflows…

…which reduce interest rates, and there’s no reason to believe that trade deficits reduce employment on net, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap. And in that kind of world it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest.

One indicator of how the rules differ in these circumstances: Remember all the hand-wringing about our dependence on Chinese financing, and how U.S. interest rates would spike if the Chinese stopped buying our bonds? Well, the Chinese have stopped buying bonds and started selling them…. And US interest rates remain very, very low — still under 2 percent on 10-year bonds.

I’m not saying that Trump has any idea what he’s talking about; he doesn’t. But we are living in a world where, for the time being — and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense. But then Keynes could have told you that.

Must-read: Macro Advisers: Now-Cast: Personal income and outlays way undershot expectations…

Posted on by Brad DeLong

Must-Read: Macro Advisers: Now-Cast: First-quarter real GDP growth at 1.0%/year:

Https macroadvisers bluematrix com sellside EmailDocViewer encrypt 07856b96 a505 4d8c 9910 fdea16842f37 mime pdf co macroadvisers id jbdelong uclink berkeley edu source mail

They will probably be angry at me for posting this, but it is genuine news: personal income and outlays way undershot expectations, and so they have marked down their estimate for first-quarter 2016 real GDP growth from the 1.9%/year it was five days ago to 1.0%/year now.

Certainly makes last December look like a bad time to stop sniffing glue the zero-interest-rate policy, doesn’t it?

The labor share, the ongoing recovery, and structural forces

Posted on by Bridget Ansel
The share of income going to wages increased over the course of 2015 and is now 1.6 percentage points above its post-recession low point in 2012.

Usually when the government announces new data on the growth of the overall U.S. economy, the attention of the press and analysts jumps to the level of economic growth. But last week, their attention turned to the distribution of growth. On Friday morning, the U.S. Bureau of Economic Analysis released data on economic growth for the last quarter of 2015 and the figures on corporate profits for the whole year. The data show that the share of income going to wages increased over the course of 2015 and is now 1.6 percentage points above its post-recession low point in 2012. The labor share of income seems to be on the upswing.

Why is this happening? Dean Baker of the Center for Economic and Policy Research says it’s a sign of a tightening labor market. As the U.S. labor market tightened up, wages rose and the share of income going to wage earners increased as the share going to profits declined. Baker also takes this as an incredibly important cue for monetary policy moving forward: Further tightening by the Federal Reserve would either slow down or stop this trend.

Picking up where Baker left off, Jared Bernstein of the Center on Budget and Policy Priorities points out that the level of the wage share is also an important consideration when the central bank thinks about the health of the labor market. As Bernstein writes, Federal Reserve Chair Janet Yellen has laid out some criteria for how strong wage growth can get before it starts pushing up on inflation. Add the Fed’s inflation target (2 percent) to the pace of labor productivity growth (about 1 percent these days) and you get a non-inflationary wage target of about 3 percent.

But that assumes you want to keep the labor share of income constant. If we want labor to reclaim some of the income it lost during the recession, then wage growth should stay above the 3 percent target for some time. The high levels of income going to profits may also mean that inflation wouldn’t pick up that much if wage growth surpassed productivity growth. That could explain why wage growth doesn’t seem to turn into inflation as strongly as it did in the past.

Along with thinking about the decline in the labor share since the Great Recession, we should also consider its structural decline since 2000. Perhaps the Federal Reserve (or fiscal policymakers if they want) should allow the economy to run hot for a while, shifting income back to wages. But there’s considerable evidence that there are other reasons for a declining labor share besides a weak overall economy. It may be technological change, globalization, or increased concentration of businesses—we’re not sure yet. So letting the economy run hot might trigger much higher inflation than the Federal Reserve would like.

But such a conundrum would probably only happen once the labor share losses from the Great Recession are reversed. And the Federal Reserve seems unlikely to let inflation even peak over 2 percent, so such a shift would swiftly be ended. But in thinking about optimal policy, it’s still worth thinking about and figuring out how much of the decline in the labor share could be solved with a hotter economy.

Must-read: Narayana Kocherlakota: “The Fed’s Credibility Dilemma”

Posted on by Brad DeLong

Must-Read: Narayana Kocherlakota: The Fed’s Credibility Dilemma: “What will happen if inflationary pressures prove stronger than expected…

…over the next year or so. In principle, the Fed can curb inflation by raising its interest-rate target sufficiently rapidly. In practice… it must break either its commitment to move gradually, or to keep inflation close to 2 percent… [and] will lose credibility. Worse, suppose that economic growth turns out to be weaker…. Again… communication becomes an obstacle: By expressing its strong preference for normalization, the Fed has been telling investors that they can safely ignore the possibility of a reduction in rates (at the end of her March 16 press conference, for example, Chair Janet Yellen stressed that officials are not even discussing the possibility of adding stimulus). So to respond appropriately… the Fed would have to renege….

Ironically, the Fed’s perceived commitment not to cut interest rates could actually make it reluctant to raise them…. To maintain flexibility… they might choose not to raise rates in the first place. That way they’ll run a smaller risk of being forced to go back on their normalization commitment. So what, if any, plans should the Fed communicate?… They should be much clearer about their willingness to make large and rapid changes in monetary policy… stress that they are ready to do ‘whatever it takes’ to keep employment up and inflation near target…

Must-read: Wolfgang Munchau: “The Errors Behind Europe’s Many Crises”

Posted on by Brad DeLong

Must-Read: Wolfgang Munchau: The Errors Behind Europe’s Many Crises: “The EU was wrong to construct a single currency without a proper banking union…

…wrong to create a passport-free travel zone without a common border police force and immigration policy. [And] I would add EU enlargement… the haste with which it was pursued. The cardinal mistake of our time was the decision to muddle through the eurozone crisis. Europe’s political leadership failed to generate the public support for what was needed: creating a political and economic union. Instead, the European Council did the minimum necessary…. There are four channels through which that policy contributed to the broader instability….

First… the EU has the capacity only to deal with one big crisis at a time…. Second… the conflation, real or imaginary, of two more crises. The Greek economy continues to contract… refugees have been trapped in Greece… since Macedonia closed the border…. There are the fake connections. Poland has used last week’s Brussels bombings as a pretext for questioning a commitment to accept 7,000 refugees… an interaction between the terrorist attacks and the prospect of British exit…. Third… the output of several eurozone countries has yet to return to pre-crisis levels. Security… was among the areas most affected by austerity…. The widening income gap between rich and poor — and north and south….

Fourth… a generalised loss of trust and political capital…. Populist parties on the left and the right are exploiting the union’s failures…. The combination of these four channels frustrates perfectly good ideas for further projects aimed at European integration–those that would benefit everybody, such as central agencies to co-ordinate the fight against terrorism and to deal with the influx of refugees. If the EU had not messed up the previous crises, people would look at a European immigration policy or an antiterrorism task force with a more open mind. But would you trust with your own security somebody who cannot even contain a medium-sized financial crisis?…

Economic history has shown… that efforts to muddle through financial crises never work…. For the EU it was a catastrophic policy error… an economic depression… destroyed public confidence in the EU and in the very idea of European integration.

Must-read: Martin Wolf: “Helicopter drops might not be far away”

Posted on by Brad DeLong

Must-Read: The central banks of the North Atlantic seem to be rapidly digging themselves into a hole in which, if there is an adverse demand shock, their only options will be (a) dither, and (b) seize the power to do a degree of fiscal policy via helicopter money by some expedient or other…

Martin Wolf: Helicopter drops might not be far away: “The world economy is slowing, both structurally and cyclically…

…How might policy respond? With desperate improvisations, no doubt. Negative interest rates… fiscal expansion. Indeed, this is what the OECD, long an enthusiast for fiscal austerity, recommends…. With fiscal expansion might go direct monetary support, including the most radical policy of all: the ‘helicopter drops’ of money recommended by the late Milton Friedman… the policy foreseen by Ray Dalio, founder of Bridgewater, a hedge fund….

Why might the world be driven to such expedients? The short answer is that the global economy is slowing durably…. Behind this is a simple reality: the global savings glut — the tendency for desired savings to rise more than desired investment — is growing and so the ‘chronic demand deficiency syndrome’ is worsening…. The long-term real interest rate on safe securities has been declining for at least two decades….

It is this background — slowing growth of supply, rising imbalances between desired savings and investment, the end of unsustainable credit booms and, not least, a legacy of huge debt overhangs and weakened financial systems — that explains the current predicament. It explains, too, why economies that cannot generate adequate demand at home are compelled towards beggar-my-neighbour, export-led growth via weakening exchange rates….

The OECD argues, persuasively, that co-ordinated expansion of public investment, combined with appropriate structural reforms, could expand output and even lower the ratio of public debt to gross domestic product. This is particularly plausible nowadays, because the major governments are able to borrow at zero or even negative real interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic (see chart). If the fiscal authorities are unwilling to behave so sensibly — and the signs, alas, are that they are not — central banks are the only players… send money… to every adult citizen. Would this add to demand? Absolutely….

The easy way to contain any long-term monetary effects would be to raise reserve requirements. These could then become a desirable feature of our unstable banking systems…. The economic forces that have brought the world economy to zero real interest rates and, increasingly, negative central bank rates are, if anything, now strengthening…. Policymakers must prepare for a new ‘new normal’ in which policy becomes more uncomfortable, more unconventional, or both…