Category: Equitablog

Low hiring rates do not point to strong U.S. wage growth

Posted on by David Evans

The jobs numbers released today by the U.S. Bureau of Labor Statistics indicate that wage gains in the United States are far below what would be considered healthy wage growth. The vital signs of the labor market in today’s report and in other labor market flows data do not suggest we should be optimistic about sustained wage increases in the near future.

Wages rose in July at just a 2.1 percent rate over the past year, similar to the 2.0 percent annual growth in June. For production and nonsupervisory workers, who comprise about four-fifths of the workforce, the annual rate of wage growth was only 1.8 percent. The U.S. economy did add 215,000 jobs in July, gaining more than 30,000 jobs in each of the retail, health care, and accommodation and food services industries. After prior revisions, the average monthly job gains over the last three months have been about 235,000.

Although this kind of employment growth would be a positive development in a very tight labor market, the current rate of job gains will keep distant the goal of full employment. Even though the overall unemployment rate was 5.3 percent last month, the same as in June, the employed share of the prime-age population, ages 25 to 54, was 77.1 percent last month, basically unchanged from where the rate has been stuck at 77.2 percent for five of the six prior months. This is well below its average of 79.9 percent in 2007 before the start of the Great Recession.

The U.S. economy has not yet generated the robust labor demand that will secure sustainable increases in pay across the wage distribution. Historically, the U.S. labor market has experienced healthy wage growth when the employed share of the prime-age population, ages 25 to 54, has exceeded 79 percent. Weak nominal wage growth (before accounting for inflation) makes it difficult for workers to reduce their debt burdens, which may in turn be slowing the pace of the current recovery by crimping consumption.

Data on labor market flows, not included in today’s report, also show signs that the economy is far from the level of dynamism we expect in a well-functioning labor market. One key indicator is the hiring rate from Job Openings and Labor Turnover Survey, published separately by the Bureau of Labor Statistics. The 215,00 jobs added in July represent net job gains, after accounting for both new hires of workers into jobs and the separations of workers from jobs because they either quit, were laid off, or were fired. The private-sector hiring rate—the number of hires divided by total employment—accelerated in 2014, but now is only at 3.9 percent. Put another way, despite 58 consecutive months of net job creation in the current recovery, the rate of hiring has only recently reached a level about equal to where it bottomed out during the last business cycle between 2001 and 2007. (See Figure 1.)

Figure 1

 

0807-jobs-day

The strength of hiring rates has consequences for the amount of wage growth workers can expect to attain. The last time the U.S. economy experienced nominal pay raises for production workers above 3.5 percent was from 2006 through early 2009. This era of healthy wage growth followed a period from 2004 through early 2007 when the monthly hiring rate was consistently at least 4.2 percent. The hiring rate reached 4.5 percent and higher in 2005 and 2006. To put the current 3.9 percent hiring rate into perspective, in order to reach these prior peak hiring rates, every firm today would have to increase its hiring, on average, by more than 15 percent.

Turning to another source of data on labor market flows, we can look specifically at the rate of job-to-job transitions, the Job-to-Job Flows data produced by the U.S. Census Bureau. Workers are hired either from the pool of the non-employed population or they are hired from another job. These latter, job-to-job hires are important for wage growth because employers are more likely to increase pay when they need to recruit someone away from another job as opposed to hiring an unemployed worker. Quarterly job-to-job hiring rates in the most recent data from the end of 2013 were only 4.9 percent, similar to the low point of 5.0 percent a decade ago in 2003.

Relatively low employment rates, stagnant wages, and low hiring rates are worth considering amid discussions about whether the Federal Reserve should raise interest rates sometime this year. When the Fed raises rates, it will increase the difficulty of firms to expand and hire, and it will reduce consumer purchases of homes and automobiles. Although raising rates soon provides the Fed with the flexibility of lowering interest rates during a future downturn, it is hard to see how the labor market is currently in a position to bear any more downward pressure on employment and wages.

Another Disaster at Political-Economic Policy Analysis by Brad DeLong!

Posted on by Brad DeLong

I had thought we were well-past the interwar watershed in economic policy. The interwar watershed had three parts:

  • The winning of the franchise by the working class.
  • The portfolio rebalancing of the non-entrepreneurial wealthy.
  • And the recognition that the gold standard was not unbreakable.

The last of these robbed the gold standard and its cousins of much if not all of its practical policy virtue. The second of these moved the extremely powerful interest group of accumulated wealth away from the hard-money side, for their wealth was no longer overwhelmingly concentrated in nominal bonds and land let out for long terms at fixed nominal rents. The first brought into a politics a very large group for whom high employment was a great good and high inflation at most a minor substantive injury.

We were thus supposed, after the interwar watershed, to be in John Maynard Keynes’s world: the world of practical and pragmatic demand management in order to balance aggregate demand and assist in structural adjustment. As he put it in his 1924 Tract on Monetary Reform:

Thus inflation is unjust and deflation is inexpedient. Of the two, perhaps deflation is, if we rule out exaggerated inflation as in places such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.

The individualistic capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, resumes a stable measuring rod of value, and cannot be efficient–perhaps cannot survive–without one.

For these great causes the most free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which distinguishing characteristics are possessed, in different degrees, by the weather, the birth rate, and the Constitution–matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a revolution to change them…

When the Greek crisis hit in 2010, my reaction was that this could well be a great blessing in disguise: Greece was so small that only trivial commitments at the scale of the eurozone in terms of real money would be necessary to resolve its entire debt, and hold the Greek economy harmless–relative to any alternative policy–while adjustment took place.

The obvious alternative was the standard IMF package: A mix of restructuring and write down coupled with substantial depreciation and a loan to keep imports flowing as long as policy reform was taking place successfully.

The absence of exchange rate depreciation was going to make adjustment very hard for the Greek economy. That absence of depreciation was something Greece was giving up in return for the bargain that was the euro. In return, if the euro bargain was to survive, Brussels and Frankfurt had to be willing to offer things of equivalent value. And it seemed very clear in 2010 what those things of equivalent value were: extra transfers over and above those that would follow from a normal IMF program, in order to to offset the extra harm from the lack of depreciation; and extra help in terms of expanding demand for Greek products from northern Europe. That meant that Brussels and Frankford would push the envelope on eurozone inflation, and within the eurozone the bulk of that inflation would be concentrated in northern Europe, where the fundamental cost disequilibrium vis-à-vis Greece was greatest…

I was, once again, very wrong…

CEO pay ratios and a new source of inequality data

Posted on by Nick Bunker

This past Wednesday the U.S. Securities and Exchange Commission approved a rule included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that requires public companies to calculate and then disclose the ratio of their chief executive officer’s compensation to the compensation of their median worker. The rule has been five years in the making and has been quite controversial. The regulation passed by a vote of 3 to 2. The future impact of the regulation on the actions of corporations and their pay setting is unknown and up for debate. But what we do know is that it’ll produce a lot of new data.

The fact that a rule that just discloses information about pay has taken five years to pass amid controversy says quite a bit about the potential for future policy action on executive pay. As Neil Irwin argues at The Upshot, the riven opinions on the merits of the rule are indicative of the debates about the reasons for swiftly rising executive compared to what workers at the midpoint of the pay scale at public companies are earning.

One side of the debate argues that rising executive compensation is merely a reflection of market dynamics. CEOs are paid so much more because they are increasingly more important in a globalized world with larger companies. Reduce their pay and they’ll go elsewhere. The other side of the debate claims that executive pay is not entirely determined by executive skill and that in some firms executives can set their own pay. Though in both cases, the question is not whether lower executive pay will cause executives to flee, but rather if firms can pay a lower compensation and get the same level of talent as Dean Baker at the Center for Economic and Policy Research points out.

Jordan Weissmann at Slate is skeptical than increased information about compensation inequality within firms will do anything to reduce executive pay. He’s skeptical that consumers will change their purchasing decisions based on the new information or that investors and board members will care either. On that second front, perhaps the “amoral” investors don’t care because they haven’t seen any indication that inequality within individual firms affects business outcomes in anyway. The new data might be fuel for research that shows whether it does.

Consider research that shows workers are more productive when they know their relative place within a firm’s pay structure. Then again, other research shows no effect. The new data created by the rule could help economists and market analysts evaluate that question.

And then there’s the on-going debate about the relative roles of rising inequality within firms and inequality between firms. This new data on within-firm inequality won’t be able to answer questions about the rise of income inequality in the past. But it may be useful in research detailing the existing state of income inequality and its progression going forward.

Whether or not the simple disclosure of pay ratios will affect executive pay policy in the short term is up for debate. But in the meantime, the disclosure of new widely available data on within-firm pay might help move the debate forward.

Must-Read: Todd van der Werff: 2015 Is the Year the Old Internet Finally Died

Posted on by Brad DeLong

Must-Read: Death of the net! Film at 11…

Todd van der Werff: 2015 Is the Year the Old Internet Finally Died: “A very basic fear–the idea that the internet as we knew it…

…of five or 10 or 20 years ago, is going away…. And none of us… can stop it…. Take a look at your browser tabs if you’re reading this on a computer…. Longform pieces are the pinnacle to which lots and lots of us writers and the websites we work for aspire…. [But] because longform takes time… for writers to produce and readers to read… as both Buzzfeed and Gawker realized early on, well-done longform could be the steak, but it couldn’t be the meal…. The internet has made it clear that the kinds of things that people want to read are sort of an endless collection of what’s cool. And that might be a longform story, or it might be the quick, clicky little things that repackage the best flotsam and jetsam out there…. The theory always went that BuzzFeed couldn’t be all cat GIFs, because it would very quickly wear out its welcome…. [But] social media has, essentially, turned every content provider into a syndicator…. The best syndicators were always those who could take the most crowd-pleasing stuff and get it before as many eyeballs as possible… comic strips… advice columns… ultimately disposable…. If you work in online media, that’s terrifying….

The internet of 10 years ago… was a world… of blogs and sites with strong, central identities… built almost entirely around voice…. Mobile has ultimately downplayed the importance of words…. And the rise of social has flipped the old writer/reader balance… you share an article because… it says something about you, whether that fact is that you’re angry about a political issue, or that you like cute bunnies, or that you love Back to the Future…. The old internet was, ultimately, a world of communities… the idea that if you created a place where people could gather based around shared interests, they ultimately would. It was the ideal of the original internet made real, an actual, virtual web…. Now, however, our articles increasingly seem to be individual insects trapped in someone else’s web…

Relevant:

Must-Read: Hamilton Project: Diane Whitmore Schanzenbach

Posted on by Brad DeLong

Must-Read: Welcome to Diane!

Hamilton Project: Diane Whitmore Schanzenbach: “Diane Whitmore Schanzenbach is the [new] director of The Hamilton Project…

…and a senior fellow at the Brookings Institution…. Diane studies issues related to child poverty, including education policy, child health, and food consumption. She graduated magna cum laude from Wellesley College in 1995 with a bachelor’s degree in economics and religion, and received a doctorate in economics in 2002 from Princeton University…

Must-Read: Olivier Blanchard: Reconstructing Macroeconomics

Posted on by Brad DeLong

Must-Read: In which Olivier Blanchard says that, currently, DSGE models have “much too much in them to be fully understood”. There is a rationale for studying a model that we do not understand–if and only if it makes predictions that fit the world. If one has such a model that makes reliable predictions, studying it is a not-implausible road to understanding the world, because maybe, just maybe, an understanding of the model will carry an understanding of the world along with it as a bonus. And there is a rationale for taking models we understand and seeing where and how they fit the world in order to help us iterate toward a better model that fits better.

But is there a case for investigating models we (a) do not understand that (b) do not fit the world? Even if we were to reach the point of understanding the model and how it works, what would that gain us?

Olivier Blanchard: Reconstructing Macroeconomics: Suppose you are writing two textbooks, one undergrad, one grad…

…In the undergraduate textbook, it seems to me that when teaching the IS-LM, we have the same interest rate on the IS and the same interest rate on the LM. Basically, the policy rate that the central bank chooses by the LM curve goes into the IS curve when corrected for expected inflation. I think what we have learned is that these [two interest rates] can be incredibly different. So I would have an r and an rb, and have a machine in the middle–the banking system which would, depending on its health, determine the spread. It seems to me that if I want to communicate one message, that message is what I would communicate to undergrads. At the graduate… DSGE model… two mechanisms… are central. The first is leverage…. The second is liquidity…. I am hoping that someday we will put it together and have a simple way of thinking about leverage and a simple way of thinking about liquidity…. We are at the stage at which the DSGE models have much too much in them to be fully understood…

Must-Read: Matt Yglesias: Sounds like a lot of money

Posted on by Brad DeLong

Must-Read: Matthew Yglesias puts his finger on a strong antinomy between right-wing economics and right-wing sociology. Right-wing (and some other) sociology puts a great deal of blame on the breakdown of social connections that lead people to act benevolently toward others who are not kin–for example, Banfield’s blaming of southern Italian poverty on “immoral familism”: “a dynamic of low trust, excessive localism, and extreme reliance on family networks”. Right-wing economics requires that in making their economic decisions people and businesses focus only on how they themselves profit. But, as Matt points out, the corporation that is acting immorally if it maximizes anything other than its stock price bears more than a passing similarity to the bureaucrat who regards himself as acting immorally if he does not embezzle and transfer funds to his family.

A market economy is based on human gift-exchange psychology. And is remains, in large part, based on value-for-value gift-exchange rather than on the mutual pursuit of advantage in a network of con games. And wherever it does turn into a con game, it tends to break down:

Matthew Yglesias: Sounds like a lot of money: “Robert ‘Making Democracy Work: Civic Traditions in Modern Italy’ Putnam…

…isn’t a conservative. When I asked Tyler Cowen how he explains Southern Europe he pointed to Edward Banfield’s ‘Moral Basis of a Backward Society’. Francis Fukuyama has also treated the subject well in his recent books ‘The Origins of Political Order’ and ‘Political Order and Political Decay’…. Southern Europeans are stuck in a dynamic of low trust, excessive localism, and extreme reliance on family networks. There is a lack of impartiality in institutions and an ethic that ‘doing what’s right for my family’ rather than ‘following the law’ is the right thing to do. A country that gives you the mafia rather than a correctly functioning legal system and police services is also not going to give you highly effective schools or job training programs. What nobody seems to think is that Greece is poorer than Denmark or Spain is poorer than Germany or Italy is poorer than France because those countries spend more money on their welfare states. It’s convenient that people don’t think that because it’s not true….

The… relevance of Southern Europe to the United States is the current high social prestige enjoyed by the twin ideas that the social responsibility of a corporation is to be profitable and that the primary moral and legal obligation of a corporate manager is to enrich shareholders. These ideas combine to create a toxic moral climate…. In a healthy society, a business leader might invest time and resources in rent-seeking, but he wouldn’t brag about doing so and certainly he might choose to take the honorable path and not do it. But the current paradigm in the implicit US political philosophy is that he has a moral obligation to divert resources away from R&D and toward lobbying… find ways to trick customers into overpaying… violate regulations if the Net Present Value of paying the fines when you are caught exceeds the cost of compliance… [thus] replicat[ing] Banfield’s amoral familism, but with shareholders replacing the nuclear family as the local of ethical thinking. This is all further exacerbated by the ideas of Public-Choice Economics which tend to move from (correctly) asserting that government institutions’ performance is often undermined to some extent by the self-interest of government officials to a kind of perverse fatalism which suggests that wholly selfish and inept behavior is all that is possible from public institutions.

Must-Read: Lars E.O. Svennson: Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others

Posted on by Brad DeLong

Must-Read: Lars E.O. Svennson (2003): Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others: “Existing proposals to escape from a liquidity trap and deflation…

…including my Foolproof Way,’ are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank’s commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.

The declining impact of U.S. income taxes on wealth inequality

Posted on by Nick Bunker

A growing number of papers measuring U.S. wealth inequality and its continuing growth were published over the past year. One of those key papers, by economists Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, finds that the share of wealth held by the top 0.1 percent of families in the United States grew from about 7 percent in the late 1970s to 22 percent in 2012. Yet it’s important to note that Saez and Zucman’s results and similar estimates look at the distribution of wealth before accounting for the impact of taxation. A new paper looks at the post-tax distribution of wealth and finds that the federal income tax system is doing significantly less to reduce wealth inequality than in the past. And there are signs that the federal tax system in recent years might actually be increasing wealth inequality.

The paper by economists Adam Looney at the Brookings Institution and Kevin B. Moore at the U.S. Federal Reserve looks at trends in wealth inequality from 1989 to 2013 using data from the Fed’s Survey of Consumer Finances. This survey is particularly useful for measuring for wealth inequality because the survey oversamples families at the very top of the income and wealth ladders.

What Looney and Moore are looking at specifically is the mechanical impact of total income taxes on wealth inequality. Two trends emerged during the period of 1989 to 2013 that affected the relationship between taxes and wealth inequality. The first is the increasing ownership of tax-deferred assets among U.S. families. These assets include 401(k) retirement plans and the capital gains on a financial asset that hasn’t been sold yet (also known as unrealized capital gains). Families up and down the wealth ladder have increased their holding of these kinds of assets, but those at the top are by far more likely to hold a lot more of them. Almost every family in the top 1 percent has unrealized capital gains compared to 25 percent of the bottom 90 percent of families.

These unrealized capital gains are obviously unequally distributed—the difference between pre-tax wealth inequality and post-tax wealth inequality. These tax-deferred capital gains will be realized and taxed eventually, yet at the same time that more assets have been deferred from taxation the two authors find that federal income tax rates have been on the decline, both on ordinary income (essentially wages and salaries) and on capital gains.

Looney and Moore show how these rate cuts, particularly for realized capital gains, resulted in significant declines in the effective tax rates for these kinds of assets. While rates declined for every taxpayer, they declined the most for families in the top 1 percent. In 1989, the rate was quite similar for all wealth levels, but starting in 1998 the rates started to diverge, with the rate for the top 1 percent declining the most. The authors point to the large decline in the capital gains tax rate—from 28 percent to 15 percent during this time period—as the main driver of this decline in top tax rates.

The result of an effective tax cut that favors those at the top is, unsurprisingly, a decreasing reduction in wealth inequality. One way Looney and Moore show this is by comparing the share of pre-tax wealth owned by different sections of the population to the share of post-tax wealth they own. For the top 1 percent, the after-tax share is lower than the pre-tax share from 1989 to 2007, but the difference is declining over this period of time. But by 2010, the post-tax share of the top 1 percent is actually larger than the pre-tax share.

In short, the federal income tax code seems to be increasing wealth inequality.

One possible concern is how the timing of the Great Recession in 2007-2009 affects the two authors’ finding that the tax code shifted from doing less to reduce wealth inequality to outright increasing inequality right after 2007. Maybe the change is due to the huge collapse in housing prices, which resulted in a big hit to unrealized capital gains and the actual value of housing wealth for households in the bottom 90 percent of the wealth spectrum. Looney and Moore don’t include deferred housing capital gains in their analysis due to complications in how those gains have been taxed over the years. So it’s possible that this omission makes tax liabilities for the bottom 90 percent of households high as a share of total wealth, reducing their post-tax wealth, and thus increasing wealth inequality.

Looney and Moore’s analysis is, as they note, the first attempt to analyze trends in post-tax wealth inequality. So their paper is just the beginning of the investigation into this area. But if their results hold up they would have strong implications for how we think about the tax code and wealth inequality.

Things to Read at Nighttime on August 5, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of: