Category: Equitablog

Weak wage growth continues apace

Posted on by Nick Bunker

The U.S. economy added 223,000 jobs in April, after downward revisions brought the prior month to only 85,000 jobs. Over the last three months the economy has on average added about 191,000 jobs. At the same time, wages in the private sector grew in April by 2.2 percent over the last year, far below what is typically considered healthy nominal wage growth.

For workers to maintain or increase their share of income, nominal wages must grow at an annual rate of at least 3.5 percent, assuming the Federal Reserve’s inflation target of 2.0 percent and annual productivity growth of 1.5 percent. In contrast, nominal wages grew by 2.2 percent over the last year and at an annual rate of 2.3 percent over the last three months. Looking at the last three months is typically a way to understand recent trends without being tricked by month to month fluctuations. Last month’s acceleration in the three-month rate, to 2.7 percent, however appears more like noise than an encouraging trend.

Wage growth continues to stagnate for production and non-supervisory workers. Since January wage growth for this group of workers, who comprise about four-fifths of private sector employment, has consistently been below the rate of wage growth for all workers, suggesting a contribution to increasing wage inequality. Nominal production wages grew by only 1.9 percent in April, compared to last year.

Nevertheless wages appear to be growing at healthier rates in the leisure and hospitality sector, which includes restaurants, where annual wage growth was 4.0 percent over the last three months. During that time period wages in the construction industry grew at an annual rate of about 3.7 percent. Financial sector wages grew at 2.6 percent during the last three months, above the 2.3 percent average for the overall private sector.

Essentially no sector performed exceptionally well last month in creating jobs. Professional and business services added about 62,000 jobs. Construction added 45,000 jobs, but this sector also lost jobs in March, so that over the last two months it only added 36,000 jobs. Manufacturing employment remained essentially unchanged, as one would expect given the recent increase in the trade deficit.

The employed share of the population ages 25 through 54 remained at 77.2 percent in April, basically unchanged since an uptick in January of this year. This is not encouraging news for wage growth. Although there are many signals for labor market tightness, a key indicator is the prime-age employment-to-population ratio. When employment rates are higher, employers are compelled to raise wages in order to attract and retain workers.

During the last twenty five years, nominal wage growth has only sustainably exceeded a target of 3.5 percent when the prime-age employment-to-population ratio was at least 79 percent, substantially above the current employment rate.  The employed share of the prime-age population grew by nearly one percentage point in 2014, but currently growth seems to have slowed to about 0.7 over the past year to 0.8 percentage points during the past three months. As a result, we should not expect to see the employment-to-population ratio exceed 79.0 percent until more than two years from now, sometime in mid-2017. And only then can we expect to see healthy nominal wage growth.

With no substantial acceleration of wage growth, there is still significant slack in the US labor market. A 5.4 percent unemployment rate with weak wage growth suggests that there either is a large reserve of potential workers not yet in the labor force, or that the unemployment rate can fall substantially below economists’ usual targets of an unemployment rate consistent with a tight labor market without sparking wage inflation.

Optimal Control, Fiscal Austerity, and Monetary Policy

Posted on by Brad DeLong

I find myself perseverating over the awful macroeconomic policy record of the Conservative-Liberal Democrat government of the past five years in Britain, and the unconvincing excuses of those who claim that the austerity policies it implemented were not a disaster–and that the austerity policies it ran on would not have come close to or actually broken the back of the economy.

Leaving to one side the fact that it is ludicrous that a depression that originates in overbuilding in the desert between Los Angeles and Albuquerque and overleverage in New York has a larger impact shock on the UK than on the US:

Graph Gross Domestic Product by Expenditure in Constant Prices Total Gross Domestic Product for the United Kingdom© FRED St Louis Fed

I am still looking for an explanation of why a UK that was growing as fast as the US in the 2000s before 2008 has been growing since–other than that the greater fiscal austerity (and less pressure from the government for monetary expansion) actually had the same effects on output in a Britain that was at the ZLB as it has had everywhere else:

Graph Gross Domestic Product by Expenditure in Constant Prices Total Gross Domestic Product for the United Kingdom© FRED St Louis Fed

The point that elementary optimal-control considerations mandate that the economy be far from the zero lower bound on safe nominal interest rates before you even begin to think about removing rather than increasing fiscal expansion. As long as the nominal interest rates on long term government debt are very low–as long as monetary policy has shot its interest-rate bolt and is expected remain in that posture for a considerable time–there may be benefits to credibly promising future austerity, but undertaking present austerity simply cannot be the best policy.

Yet a great many people in Britain do not seem to understand this. Even the very smart Tony Yates does not seem to understand this:

Simon Wren-Lewis: Reply to Tony Yates: “Tony… has a problem with… [my] first…

…which was about the 2010 ‘crisis’. So his ‘third way’ is really 7/8th my way!… [On] the 2010 crisis. Tony agrees that there were no signs of a crisis in the markets…. [Note] there is rather a big difference between “we saved the economy from a firestorm”, and “we took prudent action because bad things might have happened”. So maybe 15/16th my way. As there was no actual crisis, what were the chances of one happening? Eric Lonergan… makes an additional point… I can too easily forget. Because austerity damages the real economy, it increases domestic credit risks… [and] actually increase government default risk…. Austerity as a precautionary policy can actually make the outcome you are trying to prevent more likely….

If markets had suddenly taken fright on the deficit and stopped buying UK debt… the Bank could have just bought the debt…. Could it control inflation at the same time?… [Yes] if you are at the Zero Lower Bound (ZLB)…. Paul Krugman has written a paper on this, but it becomes irrelevant because of our second disagreement…. Tony sees the MPC as… succeeding… in… balance[ing] between inflation being too high and output being too low. If that is the case, the ZLB was not actually a constraint….

You wait until you are well clear of the Zero Lower Bound (ZLB) before embarking on fiscal tightening. You are about to hit the economy hard, so you want to be pretty sure that someone else will be able to make sure it can absorb that blow. In the case of Osborne in June 2010, we do not know if he even understood the risk…. Tony’s argument about inflation is not an excuse for austerity, but an argument about how much in practice it cost…. 2010 austerity was a first order policy mistake, because it took unnecessary and large risks with the economy…

In retrospect, monetarists–even conservative monetarists–would have been much better off, and all of us would have been much better off, if Social Credit politicians had won in the 1930s, and if “monetary policy” took the form of equal-dollar credits to everyone with a Social Security number, rather than open-market operations aimed at making “bank rate” effective. The Chair of the Federal Reserve or the Governor of the Bank of England could then, every month, announce what the national monthly monetary dividend would be and provide forward guidance as appropriate. And there would be none of this, from Tony Yates: “We cannot use the demand-management tools that would be effective! We need to cut the deficit in a depression and so do first-order harm to the economy because the second-order benefits of not scaring away the Confidence Fairy are surely larger!”

Must-Read: Mark Thoma: Here’s an Economic Agenda for Hillary Clinton

Posted on by Brad DeLong

Must-Read:

Mark Thoma: Here’s an Economic Agenda for Hillary Clinton: “As Hillary Clinton campaigns for the nomination for president…

…what should be on her economic agenda?… Here is a list…. Monetary Policy: The composition of the Federal Reserve Board is an extremely important factor…. Obama allowed vacancies on the Board of Governors to persist for far too long…. Fiscal Policy… maintaining and improving economic security… rebuilding our crumbling infrastructure… getting the budget back in shape. If another economic crisis hits, budget pressures will inevitably mount as tax revenues fall and spending on social insurance rises…. Education Policy: Education is not the full answer to the struggles of working class households and increasing inequality, but it is part of the answer…. Financial Regulation: Changes in financial regulation implemented after the financial crisis do not go far enough…. Climate Change: We cannot wait any longer to begin implementing policies that address greenhouse gas emissions…. International Trade… too many trade agreements put the interests of corporations first…. Inequality… this problem won’t fix itself–there is no inherent mechanism within capitalism to offset the trend toward ever increasing inequality…. None of this is likely to happen unless Democrats miraculously win the presidency, the House, and the Senate, but I can dream, can’t I?…

Must-Read: Chris Blattman: The Wire Got It Backwards

Posted on by Brad DeLong

Morning Must-Read: Chris Blattman: The Wire Got It Backwards: “This article by Emily Badger in WashPo doesn’t say it outright…

…but for lower class black Americans, this country basically looks like a failed state. Some books and articles I recommend: Vesla Weaver’s book, Arrested Citizenship, or her shorter Boston Review article on the criminal justice system. Alice Goffman’s amazing ethnography of a Philadelphia neighborhood, On The Run. Jill Leovy’s Ghettoside, on murder and policing in Watts LA. Mark Kleiman’s When Brute Force Fails, on the behavioral perversities of criminal justice. The Harper High School episodes of This American life. With one exception, these have all been written by white people. And I would bet all fall in the category of reading The New Yorker and find Starbucks lowbrow. While I am myself in that category (well, I’m actually sick of The New Yorker) I would appreciate pointers to the best of the best books and essays by another race and class.

The Problems with Our Press Corps Run Deep: Eugene Stern Explains That Nick Kristof of the New York Times Is Not Smarter than an 8th Grader

Posted on by Brad DeLong

Much of the dysfunction of the American press corps is driven by the ideological commitments of its bosses, the cultural flaws of its journalists’ communities, or the desperate need to scare its readers and viewers and thus keep them reading and viewing so that their eyeballs can be sold to advertisers.

Some of the dysfunction is not. Some of the dysfunction is unmotivated and completely pointless, even on its own terms.

Here we have Eugene Stern warning readers that reading Nick Kristof of The New York Times will not make you better informed:

Eugene Stern: Nick Kristof is not Smarter than an 8th Grader: “Jordan Ellenberg pointed me to this blog post…

…which highlights the problem…. In spite of Kristof’s alarmism, it turns out that American eighth graders actually did quite well on the 2011 TIMSS…. Out of 42 countries tested, the US placed 9th. If you look at the scores by country, you’ll see a large gap between the top 5 (Korea, Singapore, Taiwan, Hong Kong, and Japan) and everyone else. After that gap comes Russia, in 6th place, then another gap, then a group of 9 closely bunched countries… [including] the US…. Our performance isn’t mind-blowing, but it’s not terrible either. So what the hell is Kristof talking about?…

In a list of 88 publicly-released questions… the US placed in the top third… on 45… the middle third on 39, and the bottom third on 4…. US kids did particularly well on statistics, data interpretation, and estimation… For example, 80% of US eighth graders answered this question correctly:

Which of these is the best estimate of (7.21 × 3.86) / 10.09?

(A) (7 × 3) / 10   (B) (7 × 4) / 10   (C) (7 × 3) / 11   (D) (7 × 4) / 11

More American kids knew that the correct answer was (B) than Russians, Finns, Japanese, English, or Israelis. Nice job, kids! And let’s give your teachers some credit too!

But Kristof… has a narrative of American underperformance in mind, and if the overall test results don’t fit his story, he’ll just go and find some results that do!… Kristof literally went and picked the two questions out of 88 on which the US did the worst, and highlighted those in the column. (He gives a third example too, a question in which the US was in the middle of the pack, but the pack did poorly, so the US’s absolute score looks bad.) And, presto!–instead of a story about kids learning stuff and doing decently on a test, we have yet another hysterical screed about Americans “struggling to compete with citizens of other countries.”

Kristof gives no suggestions for what we can actually do better, by the way. But he does offer this helpful advice:

Numeracy isn’t a sign of geekiness, but a basic requirement for intelligent discussions of public policy. Without it, politicians routinely get away with using statistics, as Mark Twain supposedly observed, the way a drunk uses a lamppost: for support rather than illumination.

So do op-ed columnists, apparently.

I really do not know what kind of bad actor Kristof is here. Did he decide to misrepresent the study on his own? Was he fed a set of notes for his column from some lobbyist who misrepresented the study to him, and failed to check whether what he was being told was accurate? I would like to know…

Thinking about inequality before taxes and transfers

Posted on by Nick Bunker

Trying to disentangle the causes and the current state of income inequality in the United States can be a tricky enterprise. Take what economists refer to as the distribution of disposable income, or income after accounting for the effects of taxes and government transfer programs such as unemployment insurance and government pensions. By that measure, the United States has the highest level of income inequality among a group of 19 high-income countries, including Germany, the United Kingdom, and Norway.

But does the United States have such high disposable income inequality because its distribution of market income, or income earned through a job or from holding a financial asset, was much higher or because taxes and government transfer programs were doing less than other countries?

For a while, the evidence indicated that the second answer was correct. Data from LIS, an organization that collects international data on household income, show that the distribution of market income in the United States is in the same neighborhood as other high-income countries. The United States lags behind in efforts to alleviate income inequality through taxes and transfers.

But a new reevaluation of that data actually shows the United States should look more toward the market distribution of income. Janet Gornick and Branko Milanovic of the LIS Center looked at the data again, but made one important adjustment. They only looked at the distribution of income (both market and disposable) for households with workers under the age of 60. In the United States, older workers stay in the labor force longer and draw much more of their income from labor earnings than older workers in other high-income countries. A 62 year old in the United States has to work longer and earn more labor income than a pensioner living in a European country who can rely upon government programs. Older households in European countries end up looking much poorer in terms of market income and that in turn makes the overall market income inequality in those countries looks much higher.

As a result, when Gornick and Milanovic restrict their analysis to households with people under the age of 60, the United States becomes a starker leader in the inequality in terms of market incomes. What’s more, the two researchers find that the inequality reduction due to tax and transfer redistribution in the United States is in line with the rest of the high-income countries.

What does this mean going forward? As Paul Krugman points out, the policy implications are quite strong. Policymakers in the United States should focus more on policies concerned with the market distribution of income, or what Yale political scientist Jacob Hacker has called “predistribution.” Some of these potential polices were outlined in a column by Eduardo Porter in The New York Times earlier this week. He cites several ideas, including those floated in a new book by Oxford University economist Anthony B. Atkinson. They include higher minimum wages, stronger labor unions, and a focus on antitrust policy.

But Atkinson also suggests raising tax rates on those at the very top of the income ladder. The goal of these rate increases wouldn’t simply be higher levels of government revenue, but rather to reduce the incentives for corporate executives to bargain for higher compensation. Economists Thomas Piketty at the Paris School of Economics, Emmanuel Saez at the University of California-Berkeley, and Stephanie Stantcheva at Harvard University have made a similar argument.

While there is a distinction between market income and disposable income, we have to remember that tax-and-transfer programs also have an effect on market incomes. And not just at the top of the income ladder as Atkinson and Piketty, Saez, and Stantcheva point out. The more generous retirement programs in European economies are responsible for fewer oldsters remaining in the workforce and that, as discussed above, shapes the market income distribution.

The paper by Gornick and Milanovic and other evidence points us toward thinking more about the distribution of market income than redistribution, but we must recognize that policies aimed at the latter can affect the former as well.

Things to Read at Nighttime on May 6, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Over at Equitable Growth—The Equitablog

And Over Here:

Must-Read: David Glasner: John Taylor’s Cluelessness about Strategy, Tactics and Discretion

Posted on by Brad DeLong

Must-Read: The very sharp David Glasner compresses into a nutshell one of what seem to me to be a large number of incoherences from John Taylor, in this case from Taylor’s recent attack on Bernanke. More and more it seems to me that John Taylor’s arguments sound like economics to outsiders, but do not pass elementary tests of coherence to other economists:

David Glasner: John Taylor’s Cluelessness about Strategy, Tactics and Discretion: “Let’s be very specific. The Fed, for better or for worse…

…I think for worse — has made a strategic decision to set a 2% inflation target. Taylor does not say whether he supports the 2% target; his criticism is that the Fed is not setting the instrument – the Fed Funds rate – that it uses to hit the 2% target in accordance with the Taylor rule. He regards the failure to set the Fed Funds rate in accordance with the Taylor rule as a departure from a rules-based policy. But the Fed has been continually undershot its 2% inflation target for the past three years. So the question naturally arises: if the Fed had raised the Fed Funds rate to the level prescribed by the Taylor rule, would the Fed have succeeded in hitting its inflation target?

If Taylor thinks that a higher Fed Funds rate than has prevailed since 2012 would have led to higher inflation than we experienced, then there is something very wrong with the Taylor rule, because, under the Taylor rule, the Fed Funds rate is positively related to the difference between the actual inflation rate and the target rate. If a Fed Funds rate higher than the rate set for the past three years would have led, as the Taylor rule implies, to lower inflation than we experienced, following the Taylor rule would have meant disregarding the Fed’s own inflation target. How is that consistent with a rules-based policy?…

Must-Read: Barry Ritholtz: The QE Era

Posted on by Brad DeLong

Must-Read: Here we have a fairly powerful visual argument that:

  1. American financial markets did not expect QE to do much.
  2. Nevertheless, QE had substantial effects: whenever the Federal Reserve went on a long-bond buying spree, those who had sold the bonds took a nontrivial share of their cash and piled into stocks.
  3. That is the way it is supposed to work for QE to be effective.

Barry Ritholtz: The QE Era:

Inbox

But did the piling into stocks and the resulting rise in stock prices induce anyone to go short equities and purchase currently-produced goods and services on any significant scale? The theory of Tobin’s Q says that it must have. But is the theory of Tobin’s Q true?