Should-read: Robert Skidelsky: The advanced economies’ lost decade

Posted on by David Evans

Should-Read: The eminent Robert Skidelsky identifies three groups of economists who gave what ex post was clearly bad advice, and bad advice that mattered about fiscal policy, from 2009 on: Alberto Alesina and company with their “expansionary austerity” doctrines, Ken Rogoff and company with their “short-term-pain-for-long-run-gain” doctrines, and Ricardo Haussman and company with the “no choice but austerity” doctrines. All three groups, however, had reasons for their arguments and were thinking hard—albeit, in my view, not as hard and as deeply as they ought to have and had a responsibility to do—and genuinely believed what they were putting forward. There were also three groups of economists giving bad advice who either did not believe what they were saying or had done no thinking at all: Robert Lucas and company with his “nothing to apply a multiplier to” ideological and unfounded claims that fiscal policy could never be effective; John Taylor, Marvin Goodfriend, and company with their Bernanke’s monetary expansion will produce currency debasement and inflation but will not boost employment; and a whole host of professional Republicans who ought to have been backing up Bernanke’s plans for further monetary stimulus and his call for an end to fiscal austerity headwinds, but were instead very quiet, as Elmer Fudd would say, in part at least not to annoy political masters in the Republican Party. I think the economics profession could have played a useful role in helping to manage the recovery if those three groups unmentioned by Skidelsky had not been present. Those of us whom Skidelsky identifies, correctly, as having gotten the big picture right from 2009-present could have won the argument with Alesina and company, Rogoff and company, and Haussman and company. Indeed, we did. Ricardo Haussman now acknowledges the crucial role played by monetary régime in the determination of fiscal space. Ken Rogoff recognizes that there is no cliff at which growth falls sharply and discontinuously when the debt to annual GDP ratio exceeds 90%. Alberto Alesina recognizes the necessity of proper support from monetary and exchange rate policy if fiscal contraction is not to be expansionary. We could have won those debates, and won them in a timely fashion. But we could not carry the field when faced not just with our good faith but our bad faith opponents: whether actively purveying misinformation, lazily not thinking, or sulking in their tents like Akhilleus on a bad day, they put enough sand into the gears so that my profession failed to do its job as the memory and planning department of the human race. I am kinda surprised they show themselves in polite company: Robert Skidelsky: The Advanced Economies’ Lost Decade: “Policy interventions immediately following the 2008 crash did make a difference…. The 2008 collapse was as steep as that of 1929, but it lasted for a much shorter time…

…The 2008 crisis was met not by belt-tightening, but by globally coordinated monetary and fiscal expansions, particularly on the part of China. As J. Bradford DeLong of the University of California, Berkeley, notes, “The aftermath of the 2007-2008 financial crash was painful, to be sure; but it did not become a repeat of the Great Depression, in terms of falling output and employment.” Within four quarters, “green shoots” of recovery were appearing; that didn’t happen for 13 quarters after the 1929 crash. Yet in 2010… OECD governments rolled back their stimulus policies and introduced austerity policies, or “fiscal consolidation,” designed to eliminate deficits and put debt/GDP ratios on a “declining path”… slowed down the recovery, and probably reduced the advanced economies’ productive capacity as well. In Europe, Stiglitz observed in 2014, the period of austerity had “been an utter and unmitigated disaster.” And in the United States, notes DeLong, “relative performance after the Great Recession [has been] nothing short of appalling.”…

Economists vigorously debated the merits of withdrawing stimulus so early in the recovery. Their arguments, which can be broken down into four identifiable positions, open a window onto the role that macroeconomic theory played in the crisis.

Those in the first camp claimed that fiscal austerity–that is, deficit reduction–would accelerate the recovery in the short run…. Alberto Alesina… much in vogue… assuring European finance ministers that “Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run.”… Robert J. Shiller countered… “austerity programs in Europe and elsewhere appear likely to yield disappointing results.”… Jeffrey Frankel pointed out in May 2013 that Alesina’s co-author on two influential papers, Robert Perotti, had recanted, having identified flaws in their methodology. Following more criticism of his methodology by the International Monetary Fund and the OECD, Alesina himself became considerably more circumspect…. Of course, by then, he had already contributed his mite to the sum of human misery….

Those in the second camp countered that austerity would have short-run costs, but argued that it would be worth the long-run benefits…. Out of the Alesina wreckage emerged… “short-run pain for long-run gain.”… The most influential version of the “short-run pain for long-run gain” argument came from Harvard’s Kenneth Rogoff and Carmen M. Reinhart. In their 2009 book, This Time is Different: Eight Centuries of Financial Folly, Rogoff and Reinhart attributed the “vast range of [financial] crises” throughout modern history to “excessive debt accumulation.”… Rogoff claimed that public debt levels above 90% of GDP imposed “stunning” cumulative costs on growth. The implication was clear: only by immediately reducing the growth of public debt could advanced economies avoid prolonged malaise…. As Oscar Wilde wrote of Wordsworth, “He found in stones the sermons he had already hidden there.”… Former British Chancellor George Osborne, who strongly supported reducing the size of the state, credited Reinhart and Rogoff for influencing his thinking….

A third camp, comprising Keynesians, argued unambiguously against austerity…. The Keynesian argument was straightforward. Because the slump had been caused by an increase in private-sector saving, the recovery would have to be driven by government dissaving–deficit spending–to offset the negative impact on aggregate demand. As Mark Blyth of Brown University noted in 2013, the attempt by European governments at the time to increase their savings was having a ruinous effect…. The alternative to austerity–fiscal expansion–would… produce faster economic growth and thus reduce the debt ratio in the medium term…. Fiscal consolidation… reduces the economy’s future productive capacity. When workers experience long-term unemployment… they can fall into a vicious cycle in which they become even less employable with the passage of time. The problem, notes Nouriel Roubini… is that “if workers remain unemployed for too long, they lose their skills and human capital.”… Hysteresis, which helps to explain the decline in the growth rate shown in Figure 1, can also result from a large-scale switch to inferior employment…. I find the Keynesian perspective more intuitively appealing than the Rogoffian one. It stands to reason that long spells of unemployment or inferior employment will undermine a country’s output potential. But to argue that an “abnormal” level of national debt does the same, one must also demonstrate that state spending–whether tax- or bond-financed–hurts long-term growth by reducing the economy’s efficiency. And such a claim relies heavily on ideology….

And the fourth camp maintained that, regardless of whether austerity was right, it was unavoidable, given the situation many countries had created for themselves…. In 2010, the Princeton University historian Harold James pointed out that a country’s creditors can sometimes force it to undergo “fiscal consolidation.” This is particularly true for countries with a fixed exchange rate…. In the early years of the crisis, Greece stood out as an awful warning to others. Ricardo Hausmann of Harvard University notes that, “by 2007, Greece was spending more than 14% of GDP in excess of what it was producing,” with the gap being “mostly fiscal and used for consumption, not investment.” Still, Laura Tyson of the University of California, Berkeley, contends that Europe’s bondholders, led by Germany, conflated Greek public profligacy with private greed and myopia. Expanding on this point, Simon Johnson of MIT observed that while debtor countries suffered dearly for over-borrowing, banks faced almost no penalties for over-lending. Many discussions about the feasibility of different fiscal policies revolve around the mysterious idea of “fiscal space.”…

In the US, the UK, and the eurozone (after March 2015), economic policymakers sought to offset fiscal contraction with monetary expansion, chiefly by purchasing massive quantities of government bonds. The consensus view is that QE was modestly successful, but fell far short of fulfilling monetary policymakers’ goals. Central bankers had assumed, incorrectly, that if they simply printed money, it would automatically enter the spending stream. This faulty theory of money was driven by pure ideology, as the Nobel laureate economist Robert E. Lucas, Jr., unwittingly intimated in a December 2008 Wall Street Journal commentary. Unlike fiscal expansion, Lucas observed, monetary expansion “entails no new government enterprises, no government equity in private enterprises, no price fixing or other controls on the operation of individual business, and no government role in the allocation of capital across different activities.” In his view, these are all “important virtues”–which is to say, a faulty theory is better than one that entails any increased role for the state.   

All told, I believe the policies since the financial crisis have extended the damage of the slump itself. Looking ahead, we will have to confront not just the problem of waste or missed opportunities, but of regression. We are restarting economic life with dimmer long-term prospects than we otherwise would have had…

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Should-read: Nick Bunker: JOLTS and the Beveridge Curve

Posted on by David Evans

Should-Read: Smart young whippersnapper Nick Bunker continues his monthly plotting of the Beveridge Curve. I always find myself once again wishing he would plot the prime-age employment-to-population ratio graph instead of or alongside the graph with the unemployment rate on the horizontal axis. There are weird things going on with prime-age labor force participation. They deserve to be highlighted: Nick Bunker: JOLTS and the Beveridge Curve

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Work requirements for U.S. public assistance programs don’t work

Posted on by David Evans

Work requirements for low-income Americans are back on the table in Congress and within the Trump administration. This is the case despite evidence-based research that shows work requirements are ill-conceived or counterproductive to helping low-income Americans supplement their monthly purchases of food, pay rent and utilities, and cover needed visits to the doctor.

The U.S. House of Representatives is considering taking up a new farm bill soon that includes work requirements for Americans who qualify for the Supplemental Nutrition Assistance Program. Not to be outdone, the Trump administration issued an executive order on April 10 to increase work requirements for those who rely on an array of public assistance to cope with low pay due to prevailing U.S. labor market conditions. This action follows earlier statements by the administration signaling its intent to include work requirements for Medicaid, the joint federal-state program for the poor, the disabled, and those low-income Americans who need public health insurance.

Simply put, the evidence does not back up the arguments for work requirements for these programs and actually may be counterproductive. First and foremost is the false notion that the beneficiaries of these programs are able to work but choose not to. Research from the Kaiser Family Foundation finds that of the 40 percent of nonelderly poor Americans with access to Medicaid who are not working, the reasons are because they are disabled (14 percent), providing childcare or eldercare (12 percent), attending school (6 percent), and for other reasons such as not being able to find work or being retired (7 percent). Yet the rhetoric about these recipients’ disinclination to work remains pervasive among conservatives in Congress and in the Trump administration.

Analysis from the Center on Budget and Policy Priorities finds that imposing work requirements simply doesn’t work. One reason is because increased red tape may lead to eligible recipients losing their benefits even though they are eligible for them. People with volatile work hours or who hold multiple jobs may have a hard time collecting and submitting sufficient documentation to demonstrate they are working regularly. As CBPP points out, completing work-requirement red tape is even harder for self-employed workers, which should be cause for concern as gig-based employment becomes more prevalent.

Going deeper behind these arguments, the idea that work requirements are useful standards for providing assistance to low-income Americans already struggling to make ends meet is rooted in an overly simplistic and faulty understanding of how the U.S. labor market functions, which in turn is reinforced by negative and racialized stereotypes of the beneficiaries of these programs. These misconceptions are partly based on the premise in Econ 101 that work provides no inherent benefit other than remuneration through wages, salary, and benefits, which in turn supports the faulty premise that workers must be incentivized to work above what economists refer to as the “reservation wage” (economics parlance for the lowest wage a worker would accept to take a job). Otherwise, this argument goes, workers would choose to stay home enjoying their leisure time—even though work is often linked with self-worth, providing more than purely monetary benefits. The value of public benefits would theoretically increase the reservation wage, so generous benefits would further disincentivize beneficiaries to find employment at the going wage. But people generally want to work, despite the concept that working is entirely a “bad” in economic theory.

Another simplistic neoclassical economics theory posits that wages offered to workers are “market clearing,” meaning that the going wages for different types of jobs are determined by competitive market forces. If that were true, then supplemental nutrition assistance and other such programs would reduce employment, since those kinds of assistance could theoretically lead to an imbalance between what employers can offer to pay and what workers are able to accept. This line of reasoning leads to the highly questionable assertion that the federal social safety net is an impediment to the free functioning of the U.S. labor market, with negative outcomes for low-income families who would be eligible for these benefits.

This simplistic economic model does not take into account the actual constraints facing many workers in the U.S. labor market. First of all, so-called search frictions make it hard to find a job and empower employers to set wage rates that often underpay their low-wage workers. Search frictions play into increasing evidence of monopsony, where low-wage workers are not able to freely move between jobs and from nonemployment to employment, giving employers wage-setting power in the labor market. An issue brief by Equitable Growth’s Nick Bunker, released today, shows that despite low unemployment rates and a declining vacancy yield (the ratio of hires-to-vacant jobs), there may also be reduced “matching efficiency” of employers and employees, demonstrated by less movement among employed workers to other jobs.

Such evidence of employer monopsony is seen in two common outcomes in today’s labor market. First, employers are unwilling to offer higher wages to recruit already-employed workers. And second, when this happens, other employers can take advantage of these conditions and offer low pay, since their low wages on offer do not cause them to lose all their workers because those workers have few suitable outside options, a key determinant of monopsony.

Matching efficiency may be particularly difficult to achieve for workers facing additional constraints in the labor market. Women, who along with their children are the primary beneficiaries of many social safety net programs, also are likely to have primary care responsibilities for their families. These care responsibilities must be balanced with their job opportunities. This means many women may be constrained in what schedules they are able to work and how far they can commute for work. Low-income people of color face similar scheduling and commuting problems that are compounded by continuing hiring discrimination due to the legacy of racism.

In short, imposing work requirements on low-income Americans does not reflect the structurally imperfect labor market in which workers interact with their current or potential employers and with broader social problems that inhibit finding work with sustainable wages.

Then there’s the question of harming these workers’ own future economic prospects by imposing work requirements. Research by Adriana Kugler and Ammar Farooq at Georgetown University finds that increasing the generosity of Medicaid eligibility standards so that more people were eligible reduced “job lock.” Kugler and Farooq find that states moving from the 10th percentile to the 90th percentile of thresholds for Medicaid qualification experienced increased job mobility, with increased occupational mobility of 7.6 percent and increased industrial mobility of 7.8 percent, with even greater effects on women.

Furthermore, the two researchers find that higher Medicaid benefits also increased the likelihood of recipients moving into occupations with a wider wage spread, meaning a higher likelihood of earning more money, and boosted transitions to jobs with higher median wages. Similarly, research from experts at the Georgetown Center on Health Insurance Reforms and the Urban Institute find that the expansion of health care coverage through the Affordable Care Act improved the incentives for entrepreneurship.

This line of evidence shows that (very often temporary) food, rent, energy, and medical assistance for low-income Americans provides the foundation for these workers to invest in and advance their careers for greater future economic security. This in turn means they may eventually earn enough money on their own to no longer need such assistance and instead contribute to these programs as federal income-tax payers.

In contrast, when work requirements have been imposed in the past, the faulty premise underlying the concept led to worse outcomes for those who have been subjected to this standard in order to receive temporary welfare assistance. Kansas provides a typical example. After Gov. Sam Brownback (R) and the Republican-controlled state legislature enacted strict, difficult-to-implement eligibility requirements for the Temporary Assistance for Needy Families program several years ago, flaws in the program design resulted in worse outcomes for recipients. Analysis by the Center for Budget and Policy Priorities using state-collected data on employment and earnings finds that work was common among temporary welfare recipients but was often unsteady, making adhering to punitive eligibility requirements difficult. This led to families losing their benefits even when they were eligible and needed the temporary assistance.

The Trump administration earlier this week touted the Kansas work requirements as successful because of reduced claims and lower program costs, but this meant worse economic outcomes, not better economic opportunities, for beneficiaries. The Center for Budget and Policy Priorities finds that, “for the parents exiting due to work sanctions, after four years more than one-third of them had no earnings, nearly 7 in 10 had no earnings or earnings below the deep-poverty level, and more than 8 in 10 had no earnings or earnings below the poverty level.”

The premise that low-income people are choosing not to work because of the “generosity” of benefits is not true, as shown by the natural experiment in Kansas and other compelling, evidence-based research. This research challenges the underlying premise behind work requirements and further makes the case that the U.S. labor market does not function as a free market. Extending work requirements through the forthcoming Farm Bill in Congress and through executive action by the Trump administration would have the same punitive and counterproductive effects on a national scale.

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Issue brief: Employers may be behind the problems with U.S. hiring

Posted on by David Evans
JobNewsUSA job fair in Miami Lakes, Fla.

Hiring is difficult these days. But how concerned should policymakers be? Employers in the United States are finding it more and more difficult to fill vacant jobs, as the ratio of hires-to-vacant jobs was 0.9 in January 2018, significantly lower than the average of 1.3 during the previous economic expansion of 2001 to 2007—a difference of more than 1 million newly hired workers. This decline started as the recovery from the Great Recession began—see Figure 1—but is the decline in the ratio (known as the vacancy yield) a sign of a very tight labor market, or are there other forces in the labor market that are causing a decline in the matching of open jobs to willing workers?

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Employers may be behind the problems with U.S. hiring

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Figure 1

A look at the data on vacant jobs and hiring shows more nuanced developments. The decline of the vacancy yield has been driven by the recovering labor market because the yield is declining as unemployment falls as well. But the vacancy yield has fallen much faster than previous experience would have predicted. Employers are increasingly reticent to hire workers already with a job—a development that is much different from the prevailing explanation that unemployed workers or workers outside of the labor force could not get hired again. In fact, the hiring of workers without jobs is in line with the current strength of the labor market.

The future path of the vacancy yield may continue to decline because the labor market ratio of unemployed workers-to-vacant jobs consistent with strong and sustainable wage growth appears to have declined. To simplify things a bit, employers could be finding it harder to hire new workers because the labor market is getting tighter; workers may be less willing to take jobs; employers may be less willing to increase wages to hire workers; or it could be some combination of the three.

If the decline in the vacancy yield is due entirely to a tightening labor market, then employer complaints about hiring would be mostly a complaint about a labor market heading toward full employment. Employers have a relatively easier time hiring workers when the labor market is weak. They have to spend fewer resources searching, as there are so many workers actively looking for work who will come to the employers. A larger supply of unemployed workers also reduces the bargaining power for each worker, pushing down the starting wage, all things being equal. Both factors make the cost of hiring a worker when the labor market is slack relatively cheap.

Graphing the vacancy yield against a measure of labor market tightness such as the ratio of unemployed workers-to-job openings would be a quick check of the validity of this cyclical development. A higher ratio indicates a weak labor market with many more unemployed workers per available job, and a lower ratio signals a tighter labor market. Figure 2 uses data from the Job Openings and Labor Turnover Survey, or JOLTS, from January 2001 to December 2017 to show that the decline in the job vacancy yield doesn’t appear to simply be the result of a tightening labor market.

Figure 2

The data show that the vacancy yield has declined as the labor market tightened, but the decline has been much stronger than just the health of the labor market would have predicted. If the relationship between the vacancy yield and the unemployment ratio from 2001 to 2007 still held, then there would have been roughly 1.1 hires per vacancy in January 2018. Instead, there were only 0.9. That might seem like a small difference, but with 6.3 million job vacancies in January 2018, an increase of 0.2 hires per vacancy would have resulted in 1.2 million more workers hired.

The difficulty in filling jobs is not simply a cyclical phenomenon but may be caused by a change in the “matching efficiency” of employers and employees. Something has changed the rate, given the health of the economy, at which vacant jobs and workers match to create a new hire. One way to see if there’s been a structural change in unemployed workers getting jobs is looking at the Beveridge Curve, which details what the unemployment rate will be for a given amount of job vacancies posted by employers.

Consider the unemployment rate as a measure of labor supply and the vacancy rate as a measure of labor demand. The data on job vacancies come from the Job Openings and Labor Turnover Survey, a U.S. Bureau of Labor Statistics dataset. When the vacancy rate declines—employers are posting fewer jobs—the unemployment rate will increase, as more workers are losing jobs and fewer unemployed workers flow into employment. When employers post more jobs and the vacancy rate increases, the unemployment rate will decline, as more workers flow out of unemployment. The result is that the Beveridge Curve is a downwardly sloping line when the unemployment rate is on the horizontal axis, and the vacancy rate is on the vertical axis. (See Figure 3.)

Figure 3

The current relationship between unemployment and job vacancies appears to be consistent with the curve before the Great Recession of 2007–2009, despite a winding road back. Therefore, a decline in the hiring of unemployed workers is not a candidate for explaining the shift in the vacancy yield.

But if the Beveridge Curve indicates that unemployed workers can just as readily get hired for jobs as in the past, then what explains the structural decline in the vacancy yield? The key distinction here is that newly hired workers who were previously unemployed are only a subset of all hiring. Not all hiring is the result of unemployed workers gaining jobs. New hires also include workers who previously had a job and jobless workers from outside the labor force who don’t register as officially unemployed. The decline in hiring might be broad-based across all these types of new hires or concentrated in one group. Understanding where new hiring declined the most may be helpful in diagnosing the cause.

Unfortunately, the data on hiring in JOLTS do not let economists look at workers’ previous employment situation before they were hired for their new job. Yet there are ways to disaggregate hires using other datasets in order to see what kinds of workers are finding new jobs. In a working paper, economists Peter Diamond at the Massachusetts Institute of Technology and Ayşegül Şahin at the Federal Reserve Bank of New York use data from the Current Population Survey to break out newly hired workers according to whether they were previously unemployed, employed, or previously not in the labor force.1

Their results are quite stark. New hires not previously in the labor force during the current recovery are in line with previous recoveries. New hires from the ranks of the unemployed are a bit out of line with previous recoveries, but their data cover only up to the first quarter of 2016. But using the same dataset as Diamond and Sahin, Figure 4 shows that new hires from unemployment are roughly in line with previous recoveries.

Figure 4

But the set of newly hired workers that’s clearly declined is new hires from employment, or job-to-job moves. As the U.S. labor market has tightened, employers are making fewer hires from workers already employed at other firms than during the past recovery. This decline is not just a product of the current recovery. The response of job-to-job hires to labor market tightness during the 2001–2007 recovery was weaker than during the economic recovery before it (from 1991 to 2001), according to Diamond and Sahin’s data. In other words, the structural decline in job-to-job moves is an almost 17-year trend.

What’s behind the decline in the matching efficiency of new hires for already-employed workers? If employers really want to fill vacant jobs with already-employed workers, then the onus is on them—employers need to increase wages in a bid to poach new employees from among the already employed. That development would be evident in the data on wages and wage growth for workers if wages and wage growth were increasing quite a bit as employers fill vacancies. Yet the data on the wage growth experienced by job switchers show the exact opposite.

The Wage Growth Tracker from the Federal Reserve Bank of Atlanta shows the long-term decline in median wage growth for workers who switch jobs. Median wage growth increases as the labor market tightens, but the peak during each subsequent recovery has been lower than the previous high.2 (See Figure 5.)

Figure 5

This trend indicates that employers are failing to increase wages or boost wage growth to fill vacancies, which, in turn, is indicative of a decline in matching efficiency on the employer side. Employers may seemingly want to hire but aren’t willing or able to pay the wages to do so. In contrast to complaints about the quality of available workers—the so-called skills gap3—the decline in matching of already-employed workers appears to be driven by changes on the employer side of the bargaining table. Exactly why companies are less willing or able to raise wages in order to poach workers deserves attention from both researchers and policymakers. Jobs aren’t getting filled, and the tightening labor market isn’t entirely behind this situation.

How much lower will the vacancy yield fall?

Given the structural forces pushing down the vacancy yield and an unemployment-to-vacancy ratio near historic lows, has the vacancy yield gotten as low as it can? Put another way: Is the historically low vacancy yield an indication that the U.S. labor market is at full employment? At first blush, there is reason to be skeptical of that claim, given the restrained rate of wage growth in recent years. Other indicators such as the prime-age employment (ages 25 to 54) rate point toward continued labor market slack.4 But returning to the Beveridge Curve, there is some more evidence that the labor market can continue to tighten.

The Beveridge Curve appears to be back in line with its pre-recession trend, which would mean that the unemployment rate for a given job vacancy rate hasn’t changed. Yet there’s also the possibility that the vacancy rate for a given unemployment rate has changed. This relationship is described by the job creation curve, which captures employers’ decisions to post a job vacancy for a given amount of labor supply. When the labor market is weak and there are many unemployed workers, the cost of filling a job is quite low and employers post more vacancies. When the labor market is tight and finding workers is difficult, the cost of filling a job is higher and fewer vacancies will be posted. The job creation curve is therefore upward sloping when the unemployment rate is on the horizontal axis, and the vacancy rate is on the vertical axis. (See Figure 6)

Figure 6

Another way to describe the job creation curve is that employers post more vacancies when they have more bargaining power and post fewer vacancies when they have less power. The economy moves along that line over the course of a business cycle, but structural shifts in the bargaining power of employers or employees could shift the whole line. An increase in worker bargaining power, for example, would shift it down and to the right, while more powerful employers would shift the curve up and to the left.

Economists Andrew Figura and David Ratner at the Federal Reserve Board argue that a structural tilt in bargaining power toward employers has shifted the job creation curve.5 They look at the relationship between the labor share of income—a proxy for employee bargaining power—and the ratio of job vacancies-to-unemployed workers. If the decline in the labor share of income is due to increased employer power, then industries and states that experienced larger declines in labor’s share of income will see a larger increase in the number of vacancies per unemployed worker.

Figura and Ratner find just such relationships in the data and argue this implies the job creation curve has shifted such that today, employers will post more vacancies for a given unemployment rate. With an unchanged Beveridge Curve, a shift in the job creation curve would mean a lower equilibrium unemployment rate, a higher equilibrium job vacancy rate, and a lower equilibrium unemployment-to-vacancy ratio. All three developments would be consistent with a U.S. labor market that has room to run.

If the U.S. labor market is really at this new equilibrium, then the current job vacancy rate might be low by historical levels but still not low enough to be consistent with full employment. The labor market looks to move further down and to the left on Figure 2, which would lead to a continued decline in the vacancy yield. It’s unclear how much further it could go—and it won’t become apparent until wage growth starts to pick up significantly.

Conclusion

The decline in the rate at which vacant jobs posted by employers are turning into hiring of new workers is one part encouraging and one part concerning. The declining vacancy yield is consistent with a tightening labor market. Furthermore, unemployed workers and workers outside of the labor force don’t appear less likely to be hired given the state of the labor market. Yet employers seem less willing to raise wages in order to poach other companies’ employees.

For policymakers, these results have three implications. The first is that the historically low vacancy yield does not necessarily mean the labor market is at full employment. Employers seem more willing to post job vacancies than in the past, meaning the yield can fall much lower without significantly pushing up wage growth. Increasing employer complaints about the difficulty of hiring may be the price of getting the labor market all the way to full employment and strong wage growth.

Secondly, a tighter labor market may not boost the bargaining power of workers as much as in the past. A higher vacancy yield for a given level of labor market tightness tilts the bargaining table toward employers. Policymakers interested in boosting workers’ bargaining power should be aware that structural reforms need to be made in addition to hitting the cyclical goal of full employment.

Finally, employer complaints about being unable to find workers to fill jobs should be taken with a grain of salt. The fact that workers are flowing out of unemployment at rates consistent with past experience in combination with relatively tepid wage growth is an indication that a viable labor supply is available, just perhaps not at the price employers would like to pay in wages. A deeper understanding of the origins of employers’ hesitation to boost wages to poach talent should inform policymakers’ efforts to increase hiring among already-employed workers.

The evolution of charter school quality in Texas

Posted on by Emilie Openchowski
A KIPP charter school student holds up a practice test during class in Houston.

Charter schools are an increasingly popular alternative to traditional public schools for families across the United States. Charter schools were initially hailed as sources of educational innovation and as facilitators of school choice because they brought market mechanisms into educational markets. But after the rapid expansion of the charter sector over the past two decades, these schools remain controversial. The reason stems in part from the mixed empirical evidence of the effectiveness of charters at raising student achievement. On the one hand, lottery studies focused on specific oversubscribed urban schools generally find positive effects among students who attend charter schools. But on the other, studies using a broader set of schools tend to find smaller or even negative impacts on student achievement.

The problem with both sets of studies is that they generally evaluate schools at one point in time, which tells educators and policymakers alike relatively little about the overall performance of the charter school sector. Evaluating the market-oriented reforms that were originally explicit in the charter movement requires examining the dynamics of their educational achievement over time. In our working paper “The Evolution of Charter School Quality,” my co-authors and I study these charter school sectoral dynamics using longitudinal microdata on students and schools made available by Texas Schools Project, a research institution interested in educational policy questions. These data allow us to characterize the full distribution of school quality as measured by school-level value added for both charter schools and traditional public schools.

Figure 1 below presents the 25th, 50th, and 75th percentiles of the distribution of school effectiveness in mathematics for charter schools relative to the corresponding percentiles for their traditional public school counterparts. The figure highlights the steady improvement of charter schools relative to traditional public schools in Texas between 2001 and 2014. Using our preferred model (see our working paper), we observed substantial improvement in charter school value—roughly 0.25 standard deviations in math and 0.22 standard deviations in reading at the mean.

Figure 1
The improving relative performance of charter schools versus traditional public school in Texas
Charter school educational quality over time relative to traditional public schools in mathematics, 2001–2014
<em>Note: Figures show the difference between the 25th, 50th, and 75th percentiles of the charter and traditional public school quality distributions based on statewide value-added models.<br />Source: Authors’ calculations from Texas Schools Project microdata</em>

My co-authors and I next examine how the dynamics of charter schools’ entry, exit, and persistence in the educational marketplace in Texas drives the evolution of school quality. We observe three features of these dynamics that are consistent with market forces. First, the schools that closed either voluntarily or by the Texas Education Agency were, on average, the worst performers. Among schools that were open over the entire period, there was improvement in mathematics relative to their traditional public school counterparts. (See Table 1.)

Table 1
Charter schools that closed were typically the worst performers
Average value-added, enrollment, and length of operations of charter schools in mathematics for 2001 and 2011, by status of school operations
<em>Source: Authors’ calculations from Texas Schools Project microdata.</em>

Finally, among the charter schools that were new entrants, their performance, on average, was much closer to those that persisted in the marketplace compared to those that closed. This last finding probably reflects that during the period we study, most new charter schools in Texas were due to expansion within so-called charter management organizations, or CMOs, which oversee the rollout of new schools and overall operations of the system. These results suggest that relatively successful CMOs may be, in many cases, figuring out what works in their schools and replicating it.

We then look deeper into three possible sources of this observed improvement considered in the educational literature on school:

  • Reductions in school turnover
  • Increases in the share of charter schools that adhere to a “no excuses” educational philosophy
  • Pre-enrollment differences among charter school enrollees

In the paper, we first present evidence that the number of new schools accelerated in the latter part of our observation period, yet the fraction of students attending new schools declined steadily over the period. This suggests that charter schools are maturing as a sector over time.

Second, and consistent with existing literature that points to the relative success of the “no excuses” style curriculum in a number of settings, we find that the improvement of charter schools in Texas has coincided with such schools capturing an increasing share of the charter school market. Several important studies report evidence of the strong performance among charter schools that set high expectations, required uniforms, or more broadly adopt a “no excuses” philosophy, among them a 2012 study published by Mathematica Policy Research, a 2013 study by Joshua Angrist and Parag Pathak at the Massachusetts Institute of Technology and Christopher Walters at the University of California, Berkeley, and another study that same year by Will Dobbie of Princeton University and Roland Fryer of Harvard University.

Third, we present evidence of changes over time in the composition of who attends charter schools. Our results suggest that, in comparison to demographically similar students who attended the traditional public schools from which these charter school students were selected, these new charter-school students are increasingly positively selected on the basis of their pre-charter achievement scores, as well as a lower likelihood of having a disciplinary infraction in the previous year. Moreover, in comparing students who remained at the charter school with students who left after a year, we find evidence again that those students who remained exhibited higher pre-charter enrollment scores.

Importantly, regression evidence reported in the paper shows that including controls for increasing positive selection of charter school student entrants and reductions in student turnover does not mitigate the robust positive relationship between charter school effectiveness and adopting a “no excuses” curriculum. In short, the curriculum and disciplinary structure of the school seem to be a key part of improving charter school quality.

Notwithstanding the suggestiveness of these findings, these potential sources of improvement explain only a fraction of the improvement in the effectiveness of charter schools. The findings suggest the value of taking a longer-term perspective when evaluating the impact of a major educational reform such as the introduction of charter schools, especially when the success of the reform ostensibly depends on parental decisions and market forces. But the findings also point to the necessity of further research on the role of principals and other aspects of school operations, as well as the behavior of families with children attending charter schools in leading to better educational outcomes for those students.

—Marcus Casey is an assistant professor of economics at the University of Illinois at Chicago and the David M. Rubenstein Fellow at the Brookings Institution.

Should-Read: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower

Posted on by Brad DeLong

Should-Read: From four years ago. Interesting that in Dan’s view Beltway types have neither the speed of analysis of the money people nor the depth of knowledge of the academics, and in fact have no strengths at all—unless you want to claim that its major additional weakness, groupthink, is also a strength. The major weaknesses of the other two are nicely phrased: money types tending to oversimplify, and academics to overcomplicate: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower: “Three tribes that dominate the discussion of foreign affairs—academics, Beltway types and money folks… Continue reading “Should-Read: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower“ →

Factsheet: Gender wage inequality in the United States and what to do about it

Posted on by David Evans

Over the past 40 years, women in the United States increased their work hours, and their rising incomes became a significant part of overall household financial stability. More working women also contributed mightily to stronger economic growth. These additional earnings have made the financial difference for families across races and up and down the income spectrum while also boosting economic growth.

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Fact sheet: Gender wage inequality in the United States

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Yet despite all of these gains, women are still severely limited by gender pay inequality, which for a number of reasons keeps women’s average earnings at nearly 20 percent less than men’s average earnings. Here are the topline numbers from the Washington Center for Equitable Growth’s new report, “Gender wage inequality: What we know and how we can fix it.”

  • Women make up half of the U.S. population (50.8 percent)6 and are close to half of all currently employed workers (46.7 percent).7
  • The average earnings of all women who work full time, year round is 80.5 percent (routinely reported as 81 percent) of men who work full time, year round.8 This adds up to total wage differences of more than $799 billion annually.
  • The wage gap is worse for black women and Latinas. (See Table 1.)

    • Table 1

  • Women’s earnings are critical to families’ financial well-being. Women are more likely than men to be single heads of households raising children. And as wages have stagnated, the families that have experienced real, inflation-adjusted income growth since the 1970s are likely to be married couples where the wife works.9
  • Women’s earnings also support economic growth. Research finds that if women had not increased their work hours since 1979, GDP in 2012 would have been 11 percent lower than it would have been otherwise, resulting in $1.7 trillion less in output.10

What are the causes of gender pay inequality, and what can we do about them?

Work experience

Women have less work experience than men, which explains 14 percent of gender wage inequality—resulting in $112.7 billion in lost wages annually. Gender differences in work experience are largely because women are more likely than men to cut back their work hours or drop out of the labor force altogether due to family and other outside obligations.11 Women are also more likely than men to be part-time workers, who receive lower hourly wages and fewer benefits compared to those doing the same job full-time regardless of gender.12

Policies that make it easier for women and men to be both workers and family caregivers such as paid family and medical leave and public support for universal childcare can help increase women’s work experience by allowing them to remain connected to the labor force.

Industry and occupation

Just more than half of gender pay inequality—50.5 percent—can be explained due to gender differences in the industries (17.6 percent) and occupations (32.9 percent) where men and women work, amounting to a combined estimate of about $404 billion dollars in wage differences. Wages tend to be lower in occupations that are women-dominated compared to men-dominated occupations of similar skill and education level.13 In fact, evidence suggests that an influx of women into a given occupation lowers overall wages.14

Policies such as raising the federal minimum wage can mitigate some of the effects of occupational segregation across the country by raising pay in women-dominated, low-wage professions. In addition, solutions that address the shortage of women in high-wage jobs such as those in the science, technology, engineering, and mathematics fields can help to raise women’s incomes.

Race

Racial wage inequality compounds the effects of gender wage inequality for women of color and, according to models employed in the new Equitable Growth report, explains 4.3 percent of gender wage inequality. The effect of race persists even when controlling for other workers’ characteristics such as education, work experience, and occupation.

Policies that address the legacy of institutional and interpersonal racism in the United States can lessen the racial disparity in wages. In addition, policies that allow workers access to additional hours or to workplace schedules that accommodate additional employment can decrease underemployment, which is higher for workers of color than for white workers.

Region

Regional differences in pay are to be expected, given that the cost of living varies across states. In the absence of inequality, those effects should be evenly spread across men and women. But research finds that regional differences affect women’s wages relative to men’s wages by 0.3 percent, amounting to an estimated $2.4 billion dollars in wage differences.

Because regional differences have a statistically significant relationship to gender wage inequality, national laws are necessary to level the playing field for all workers. State-based equal pay laws and raising state minimum wage levels can and do play an important role in mitigating regional gender inequality, but nationwide policies to address continuing gender pay inequality are necessary.

Discrimination and gender stereotyping

A portion of gender pay inequality—38 percent—is unexplained by observable data, and results in an estimated $304 billion in lost wages annually. Most researchers attribute this portion to factors such as discrimination and socially constructed gender norms such as the fact that women are often encouraged to pursue or are seen as more “suitable” for different kinds of jobs than men.15 Evidence also strongly suggests that the other explanatory factors mentioned in the paper are directly or indirectly influenced by discrimination and gender stereotyping, which affects the choices men and women make about their careers or the (often incorrect) factors that employers use to evaluate productivity.16

To combat discrimination in the workplace, policymakers can turn to solutions that increase pay transparency, allow for more collection of data around gender and wages, and increase enforcement of anti-discrimination laws. These steps can be taken at the federal, state, and municipal levels of government.

Factors that diminish pay inequality

Education

Women’s increased educational attainment has helped narrow differences between women and men by 5.9 percent. Since the 1980s, women have been outpacing men in educational attainment. Yet women and men in the same college major or graduate school programs have persistent differences in the sub-specialties within majors and graduate degree programs and have divergent career paths following graduation.

Policies to make education more affordable can further increase the number of women who pursue postsecondary education. In addition, policies to accommodate the needs of student parents, most of whom are women, can support increased educational attainment among women.

Unionization

Unions elevate wage floors and promote more equitable earnings for all workers, which in turn diminish gender inequality by 1.3 percent. While unions have an impact on workers who are not part of a collective bargaining agreement because of changing norms around rates of pay, women with union contracts had wages that were 9.2 percent higher than those without in 2016, the most recent year for which complete data are available. Workers of color also experienced wage boosts through unionization.

Strengthening the rights of workers to collectively bargain can help to further increase wages for women in the workplace. In addition, policies that increase the bargaining power of workers in women-dominated industries such as domestic work can help to increase women’s wages.17

Conclusion

Sarah Jane Glynn, the author of the new report, concludes “Gender wage inequality: what we know and how we can fix it” with several telling observations. “Unequal pay between women and men drags down the growth of the U.S. economy and threatens the economic security and retirement security of working families,” she writes. “Building a strong economy that works for everyone is not possible unless gender pay discrimination is fully addressed. Adequately addressing gender wage inequality will require taking an all-inclusive approach, simultaneously focusing on discrimination alongside factors such as occupational segregation and the United States’ lack of work-family policies.

Should-Read: Katrine Jakobsen et al.: Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

Posted on by Brad DeLong

Should-Read: Katrine Jakobsen et al.: Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark: “Denmark… the effects of wealth taxes… on wealth accumulation…

…Denmark used to impose one of the world’s highest marginal tax ates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasi-experiment for understanding behavioral responses among the wealthiest segments of
the population.

We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation…

Should-Read: Noah Smith: Rational Markets Theory Keeps Running Into Irrational Humans

Posted on by Brad DeLong

Should-Read: Noah Smith: Rational Markets Theory Keeps Running Into Irrational Humans: “To many young people, the idea of efficient financial markets—the idea that…

…in the words of economist Eugene Fama, “At any point in time, the actual price of a security will be a good estimate of its intrinsic value”—probably seems like a joke. The financial crisis of 2008, the bursting of the housing bubble, and gyrations in markets from gold to Bitcoin to Chinese stocks have put paid, at least for now, to the idea that prices are guided by the steady hand of rationality. The theory won Fama an economics Nobel Prize in 2013, but he shared it with Robert Shiller, whose research poked significant holes in the idea decades ago. But believe it or not, there was a time when efficient markets theory occupied a place of honor in the worldview of economists and financial professionals alike….

In “ETF Arbitrage and Return Predictability,” economists David Brown, Shaun Davies and Matthew Ringgenberg take advantage of the way exchange-traded funds are structured. An ETF typically has a designated set of traders called “authorized participants” (APs) who are able to carry out arbitrage between the fund and its underlying assets, whether stocks, bonds or commodities. When the price changes, APs respond by buying and selling the underlying assets, and by either creating or redeeming shares of the ETF, until the two values come back into line. They are, by design, rational arbitrageurs. Generally, an ETF’s APs do a good job of keeping the fund’s value close to the value of the assets it owns. Many studies confirm this. But Brown et al. find that APs’ arbitrage coincides with a deviation of asset values from their fundamentals. When traders other than the APs push around the price, the changes in the prices of the assets tend to reverse themselves over the subsequent months. Anyone watching the APs’ arbitrage trades—which are public record, since they involve the creation and destruction of ETF shares—can then bet that the recent rise or fall in the price of the assets underlying the ETF will be reversed. And make a lot of money. Under efficient markets theory, that’s not supposed to happen….

Efficient markets theory never really fits the facts, but it never quite dies, either.

Should-Read: Paul Krugman: Unicorns of the Intellectual Right

Posted on by Brad DeLong

Should-Read: Paul Krugman: Unicorns of the Intellectual Right: “Economics… a field with a relatively strong conservative presence…. [But] trying to find influential conservative economic intellectuals is basically a hopeless task…

…While there are many conservative economists with appointments at top universities, publications in top journals, and so on, they have no influence on conservative policymaking. What the right wants are charlatans and cranks, in (conservative) Greg Mankiw’s famous phrase. If they use actual economists, they use them the way a drunkard uses a lamppost: for support, not illumination. The appointment of Larry Kudlow to head the National Economic Council epitomizes the phenomenon…. Kudlow… is basically a TV personality, whose shtick is preaching the magic of tax cuts, and nothing–not the Kansas debacle, not the Clinton boom, not the strong job creation that followed Obama’s 2013 tax hike–will change his mind. And it’s not just that he’s incurious and inflexible: selling snake oil is his business model, and he can’t change without losing everything. And that’s the kind of guy Republicans want…. If you get a conservative economist who isn’t a charlatan and crank, you are more or less by definition getting someone with no influence on policymakers. But that’s not the only problem….

Conservative economic thought is… [also] in an advanced state of both intellectual and moral decadence…. I’ve written a lot about the intellectual decadence…. Anti-Keynesians refused to reconsider their views when their own models failed the reality test while Keynesian models, with some modification, performed pretty well. By the time the Great Recession struck, the right-leaning side of the profession had entered a Dark Age, having retrogressed to the point where famous economists trotted out 30s-era fallacies as deep insights….

There has been a moral collapse–a willingness to put political loyalty over professional standards. We saw that most recently in the way leading conservative economists raced to endorse ludicrous claims for the efficacy of the Trump tax cuts, then tried to climb down without admitting what they had done. We saw it in the false claims that Obama had presided over a massive expansion of government programs and refusal to admit that he hadn’t, the warnings that Fed policy would cause huge inflation followed by refusal to admit having been wrong, and on and on…. I suspect… it’s… a desperate attempt to retain some influence on a party that prefers the likes of Kudlow or Stephen Moore. People like John Taylor just keep hoping that if they toe the party line enough, they can still get on the inside. But so far this keeps not happening…. And no, you don’t see the same thing on the other side….

Am I saying that there are no conservative economists who have maintained their principles? Not at all. But they have no influence, zero, on GOP thinking. So in economics, a news organization trying to represent conservative thought either has to publish people with no constituency or go with the charlatans who actually matter. And I think that’s true across the board. The left has genuine public intellectuals with actual ideas and at least some real influence; the right does not. News organizations don’t seem to have figured out how to deal with this reality, except by pretending that it doesn’t exist. And that’s why we keep having these Williamson-like debacles.