Weekend reading: “The stock market is not the economy” edition

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope that by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Equitable Growth released a working paper looking at why displaced workers experience long-term earnings losses. Equitable Growth grantees Marta Lachowska and Stephen Woodbury, along with Alexandre Mas find that unemployed workers who find new jobs experience reduced earnings in the short term—explained almost entirely by lost work hours—and also over the long term even as they work more hours because they do not regain their prior wage levels.

Nisha Chikale digs into the key findings of Lachowska, Mas, and Woodbury—that hours and wages both contribute to earnings declines for displaced workers, but the types of firms where they eventually found jobs matters as well.

The U.S. stock market is on a roll, but what does this mean for the broader U.S. economy? Nick Bunker explains why, absent reforms to broaden stock ownership and to help reconnect business investment and profit growth, policymakers shouldn’t get overly excited about a booming stock market.

The U.S. Bureau of Labor Statistics released its latest U.S. labor market report for January this morning. Check out five key graphs from the new data compiled by Equitable Growth staff.

Links from around the web

One of the major mysteries of the post-Great Recession economic recovery has been the lack of wage growth even amid declining unemployment. Ben Casselman explores economic trends such as declining unionization, restraints on competition, and a lagging minimum wage that may be suppressing wages. [the new york times]

For many struggling communities across the country, Amazon.com Inc. coming to town seems like a “rare and wonderful” opportunity. Cities and states have offered up huge tax breaks and other development incentives to woo the company’s second headquarters to their neighborhoods. But, as Alana Semuels writes, San Bernardino, which opened a massive Amazon distribution center in 2012, learned the hard way that “Amazon can exacerbate the economic problems that city leaders had hoped it would solve.” [the atlantic]

The U.S. Department of Labor announced this week that pay in the private sector is up 2.8 percent, the  largest increase since 2015. As the labor market tightens, economists expects wages to continue rising. Yet due to increasing industry consolidation and market concentration, Kimberly Adams explains that “even a worker shortage may not be enough to push wages up quickly.” [marketplace]

The U.S. retail industry overall is floundering as bricks-and-mortar stores all across the United States have been forced to close their doors. Over the past five years, however, discount retail outlets have opened a new store every four-and-a-half hours, and now boast a collective  market value of $28 billion. “Dollar General thrives where low-income families struggle,” explains the company’s chief executive, adding that “the economy is continuing to create more of our core customers.’” [the economist]

A former staple among South Florida retirees may be on its way out. Jaya Saxena explains that amid a declining U.S. middle class and rising inequality, early bird value meal specials may be headed for extinction. [eater]

Friday figure

Equitable Growth’s Jobs Day Graphs: January 2018 Report Edition

Earlier this morning, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of January. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

Prime employment has leveled off at about 79%, a high for the recovery but lower than rates before the recession.

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2.

After falling to an all-time low in December, African-American unemployment ticked up sharply in January.

3.

Nominal wage growth ticked up in January while inflation fell slightly in December.

4.

Employment was up sharply in the Education, Leisure and Hospitality, and Construction industries.

5.

After reaching highs for the recovery late last year, fewer workers are now entering employment from outside the labor force.

Firms matter: Where you work is important to what you earn

The Department of Labor building in Washington, DC. New research reviews unemployment data from Washington state to show that where you work is important to what you earn.

Decades of research show that workers who involuntarily lose their jobs suffer long and enduring reduced earnings. Recent evidence on the effects of job loss in the aftermath of recessions in the United States illustrates the persistence of these earnings losses: Workers who are laid off or displaced from their jobs during economic downturns have persistently lower earnings than their peers long after they’ve found new jobs.

Why do these displaced workers earn less in the long term? Is it because they work fewer hours, find new jobs with lower hourly wages, or get new jobs at a lower paying firm? New research by Marta Lachowska of the W.E. Upjohn Institute, Alexandre Mas of Princeton University, and Stephen Woodbury of Michigan State University uses Washington state unemployment insurance records coming out of the Great Recession and the subsequent economic recovery through 2014 to find out. The short answer is that yes, hours and wages both contribute to earnings declines for displaced workers, but the types of firms where they eventually found jobs matters as well.

Unlike other state’s records for unemployment insurance, Washington’s includes data not only on hourly wages but also on hours worked. The Employment Security Department of Washington state collects data on the hours, earnings, industries, and employers of all insured workers in order to determine eligibility and replacement wages if one becomes unemployed. This unique dataset enables the three authors of the new report to decompose total earnings losses over time in order to assess how much of that loss is due to changes in hours versus changes in wage rates versus changes in employer-specific wage premiums. These wage premiums-also known as rents-represent a measure of the advantage attained by working for a specific firm.

The authors find that long-term earnings losses for displaced workers are initially explained by both fewer hours and lower hourly wages when these workers rejoin the labor market. They also find that hours worked recover faster than higher wages earned for these newly employed workers. So, while a displaced worker’s earnings penalty is initially explained mainly by fewer work hours, five years after the initial involuntary job loss, displaced workers’ lower wages explain more of the gap between their current and prior earnings levels.

Why, then, are these displaced workers experiencing lower wage levels? The analysis finds that individual firms’ characteristics are an important explanation for the gap in hourly wages between displaced workers and comparable workers who were not affected by layoffs. Simply put, even after holding a host of job- and skill-related worker characteristics constant, the three researchers find that displaced workers are more likely to find new work in firms that simply pay less well or are a less favorable match for their skills than their former employer.

Their research shows that approximately 25 percent of the reduction in hourly wages, on average, can be attributed to working at a lower-paying firm. The researchers find that workers whose former employers paid wage premiums in the top 20 percent can attribute about 83 percent of their lower hourly wages to lost premiums from their previously high-paying employers.

The difference in pay between comparable workers at two different firms, referred to as employer-specific rents, depends on how the two companies decide to share their respective profits with their workers. These rents that workers receive when working for a high-paying firm (and lose after being displaced and re-employed at a lower paying firm) provide some explanation for lower earnings. In short, firms matter.

Lachowska, Mas, and Woodbury’s work supports the notion that for displaced workers “where you work” is important to “what you earn.” Other recent research on “interfirm inequality” shows that even for workers who were not laid off, differences in average wages across firms can help explain why similar workers may earn such different salaries. Firms also influence workers’ future earnings potential and their likelihood of ascending the job ladder.

Researchers are increasingly recognizing the important explanatory role that firms play in the evolution of wage inequality and in the changing landscape of the U.S. labor market. Wages are no longer simply a function of education or skill level. What U.S. workers earn is in part dependent on the kind of firm for which they work. These findings point policymakers to important considerations when contemplating new approaches for helping workers recover from bouts of unemployment or transition from one employer to another amid a rapidly changing labor market.

Who benefits from the booming U.S. stock market?

A stock exchange display. Despite a currently booming stock market, benefits may not flow directly to most Americans.

The U.S. stock market is on a roll. The S&P 500, a broad index tracking companies publicly listed in the United States, experienced 25 percent growth over the past year. The more familiar Dow Jones Industrial Average climbed to historic highs over the same period. But what does this mean for the broader U.S. economy? A rising equity market may be a sign of rising confidence in the economy, but it’s not clear how much tangible benefit will flow to most Americans.

First, the direct benefits to most households will be limited because not that many households own stock. Slightly less than 52 percent of U.S. families hold stock, either directly or indirectly, according to the Survey of Consumer Finances. (A family can own stocks indirectly through retirement plans or pensions.) The distribution of this ownership, however, is quite skewed. The bottom 40 percent of families by income own stock at a much lower rate, with only 11.6 percent of households in the bottom 20 percent owning stock, while only 32.5 percent of the next 20 percent did as of 2016. (See Figure 1.)

Figure 1

Even when lower-income households do own stock, the differences in amount owned is quite large. The median value of stocks owned by the roughly 12 percent of the bottom 20 percent of families was $6,000 in 2016. Compare that to the median value of $363,400 for the 94.7 percent of the top 10 percent of families who own stocks. A rising stock market is going benefit those who own more stocks. In the United States, that’s already-wealthy households.

Higher stock prices, however, also may have an indirect benefit to most U.S. workers. A rising stock market could signal to companies that they should invest more because these firms’ rising financial valuations are above the value of the firm’s capital. This kind of thinking lies behind what’s known as “Tobin’s Q,” the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value). If the ratio is greater than 1-a financial value higher than its book value-then Tobin’s Q suggests that a company should invest more in its operations and its workforce. A rising stock market could lead to more investment, which would also lead to higher wages for workers.

The problem with expecting Tobin’s Q to play out as theorized is that the financial value of U.S. firms has been outpacing the value of their tangible capital for some time now. Research by economists German Gutierrez and Thomas Philippon of New York University details how business investment growth in the United States has become detached from profit growth. So this indirect channel seems unlikely to lead to significantly broader long-term prosperity for most Americans. In fact, there’s evidence in Gutierrez and Philippon’s research to suggest that profits are increasingly leading to share buybacks and dividends, which boost prices for existing shareholders. Some of these payouts may get reinvested in other firms, but if the disconnect between valuation and investment continues, then those reinvested returns won’t do much to boost investment.

Putting aside the usefulness of indices of the U.S. stock market for understanding the overall health of the U.S. economy, these same measures also might be less useful for understanding the health of U.S. business income and values. The number of publicly listed firms in the United States peaked in 1996. Business income is increasingly shifting toward privately held firms such as partnerships and other so-called pass through businesses. Looking at the S&P 500 or the Dow Jones Industrial Average will tell you something about publicly held companies, but that information is less applicable to all companies operating in the U.S. economy than it was in the past.

To be clear, a rising U.S. stock market is certainly better than a falling one. Policymakers should be aware of who benefits from the rising market-those who are already doing so well. But absent reforms to broaden stock ownership and to help reconnect business investment and profit growth, policymakers shouldn’t get overly excited about a booming stock market.

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Should-Read: Adam Smith (1776): Publicly Funded Education

Should-Read: Adam Smith (1776): Publicly Funded Education: “In the progress of the division of labour, the employment of the far greater part of those who live by labour…

…that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier.

It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it….

In a civilized state… though there is little variety in the occupations of the greater part of individuals, there is an almost infinite variety in those of the whole society. These varied occupations present an almost infinite variety of objects to the contemplation of those few, who, being attached to no particular occupation themselves, have leisure and inclination to examine the occupations of other people. The contemplation of so great a variety of objects necessarily exercises their minds in endless comparisons and combinations, and renders their understandings, in an extraordinary degree, both acute and comprehensive.

Unless those few, however, happen to be placed in some very particular situations, their great abilities, though honourable to themselves, may contribute very little to the good government or happiness of their society. Notwithstanding the great abilities of those few, all the nobler parts of the human character may be, in a great measure, obliterated and extinguished in the great body of the people.

The education of the common people requires, perhaps, in a civilized and commercial society the attention of the public more than that of people of some rank and fortune. People of some rank and fortune are generally eighteen or nineteen years of age before they enter upon that particular business, profession, or trade, by which they propose to distinguish themselves in the world. They have before that full time to acquire, or at least to fit themselves for afterwards acquiring, every accomplishment which can recommend them to the public esteem, or render them worthy of it. Their parents or guardians are generally sufficiently anxious that they should be so accomplished, and are, in most cases, willing enough to lay out the expence which is necessary for that purpose.

If they are not always properly educated, it is seldom from the want of expence laid out upon their education, but from the improper application of that expence. It is seldom from the want of masters, but from the negligence and incapacity of the masters who are to be had, and from the difficulty, or rather from the impossibility, which there is in the present state of things of finding any better. The employments, too, in which people of some rank or fortune spend the greater part of their lives are not, like those of the common people, simple and uniform. They are almost all of them extremely complicated, and such as exercise the head more than the hands. The understandings of those who are engaged in such employments can seldom grow torpid for want of exercise. The employments of people of some rank and fortune, besides, are seldom such as harass them from morning to night. They generally have a good deal of leisure, during which they may perfect themselves in every branch either of useful or ornamental knowledge of which they may have laid the foundation, or for which they may have acquired some taste in the earlier part of life.

It is otherwise with the common people. They have little time to spare for education. Their parents can scarce afford to maintain them even in infancy. As soon as they are able to work they must apply to some trade by which they can earn their subsistence. That trade, too, is generally so simple and uniform as to give little exercise to the understanding, while, at the same time, their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else.

But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.

The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business. In Scotland the establishment of such parish schools has taught almost the whole common people to read, and a very great proportion of them to write and account. In England the establishment of charity schools has had an effect of the same kind, though not so universally, because the establishment is not so universal.

If in those little schools the books, by which the children are taught to read, were a little more instructive than they commonly are, and if, instead of a little smattering of Latin, which the children of the common people are sometimes taught there, and which can scarce ever be of any use to them, they were instructed in the elementary parts of geometry and mechanics, the literary education of this rank of people would perhaps be as complete as it can be.*137 There is scarce a common trade which does not afford some opportunities of applying to it the principles of geometry and mechanics, and which would not therefore gradually exercise and improve the common people in those principles, the necessary introduction to the most sublime as well as to the most useful sciences.

The public can encourage the acquisition of those most essential parts of education by giving small premiums, and little badges of distinction, to the children of the common people who excel in them. The public can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate.

It was in this manner, by facilitating the acquisition of their military and gymnastic exercises, by encouraging it, and even by imposing upon the whole body of the people the necessity of learning those exercises, that the Greek and Roman republics maintained the martial spirit of their respective citizens…

Should-read: Martin Feldstein The heightened risks of a U.S. downturn

Should-Read: Bernanke and Yellen’s failure to push the envelope further to attain an inflation rate higher than 2% has created enormous risks, given our dysfunctional government’s right-wing ideologically-driven inability to get its fiscal act together. I note that a little opposition to tax cuts that consumed our fiscal space without credible prospects of boosting growth would have been welcome and constructive from Marty Feldstein. But that ship has sailed. And here he is talking sense: Martin Feldstein: The Heightened Risks of a US Downturn: “The Fed traditionally responds to a downturn by sharply reducing the short-term federal funds rate…

…At only 1.4% now, the Fed has little scope for a significant rate reduction…. The responsibility for stimulating the economy in the next downturn will therefore fall to fiscal policy–changes in taxes and government spending. A new temporary tax cut would not work…. An economic downturn in the next few years would be a good time to enact make the cuts permanent. The other way to reverse an economic downturn would be to increase government spending. There is now widespread bipartisan support for increased spending on infrastructure…. The US Congress and the White House should begin now to develop an inventory of infrastructure projects…. If there is no downturn during the next several years, it would still be desirable to start some of those projects….

The high level of the national debt–about 77% of GDP now and heading to 97% at the end of the next ten years–would create strong resistance to either tax cuts or increased spending. But a significant economic downturn with limited scope for Fed action would leave Congress with little choice…

Should-Read: Zac Auter: U.S. Uninsured Rate Rises to 12.3% in Third Quarter

Should-Read: As Alfred says: “Some men just want to watch the world burn”. It is not as though any conservative technocratic ideas about how to make health financing fairer and more efficient are being deployed—that is not the object of this political game being played by the Republicans in Washington: Zac Auter: U.S. Uninsured Rate Rises to 12.3% in Third Quarter:

US Adults without Health Insurance

Should-Read: Brink Lindsey and Steven M. Teles: The Regulatory Subsidy for Extreme Leverage: A Reply to Mike Konczal

Should-Read: Definitely an ongoing debate to follow: Brink Lindsey and Steven M. Teles: The Regulatory Subsidy for Extreme Leverage: A Reply to Mike Konczal: “We do not argue—although Konczal suggests we do—that the problem with financial regulation is a dearth of ‘economic liberty’…

…that can be remedied by “getting government out of the way.” The modern state and modern finance have been inextricably connected since the origins of both. Accordingly, our analytical starting point is to take as given an active government role in overseeing the financial sector. The question, therefore, is entirely one of choosing which institutional arrangements the state uses to facilitate and structure financial markets, with a view to the different effects of various possible arrangements on stability, growth, and inequality. Our contention is that the United States has adopted—typically at the behest of the financial industry— institutional arrangements that generate high system instability while redistributing income and wealth upwards. Nothing in our argument should be understood to suggest that the problem is “too much regulation” and the answer is “deregulation,” for the simple reason that, at the margin where policy change occurs, those terms are basically meaningless. Reducing regulation on the one hand (say, by reducing limits on leverage) may just increase the role of the state (through bailouts) on the other…

Should-Read: Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?

Should-Read: A remarkable fact—especially since a number of companies end their listing periods on CRSP when they are acquired. That you are more likely to not to have better performance over the lifetime of a company by simply putting your money in Treasury bills is striking evidence of skewness—and the extraordinary benefits to diversification. It also means that, in a world with lots of undiversified portfolios, successful wealth is unlikely to be significant evidence of portfolio-choosing skill: those who were lucky enough to get in on the ground floor of Xerox or Apple will turn out to have outperformed and to be richer than those who knew what they were doing: Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?: “Most common stocks do not outperform Treasury Bills…

…Fifty-eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform…

Should-Read: William Easterly: Review: Going Beyond the Limits of the Earth With ‘The Wizard and the Prophet’

Should-Read: Actually, I do not believe that the work of wizards like Norman Borlaug “encouraged [the] complacency about environmental problems that threaten us today”. That is a fake rap, Bill—the complacency has other, much more self-interested and selfish roots than the writings or deeds of those working to raise productivity: William Easterly: Review: Going Beyond the Limits of the Earth With ‘The Wizard and the Prophet’: “Even though the explosion of population and living standards that Vogt feared did occur, the famines he expected never did…

…Global population is three times higher than when Vogt was writing, while global living standards (per capita GDP) are about four times higher…. What happened? Part of the answer is that Norman Borlaug happened….Like many breakthrough innovations, those of the Green Revolution were in part the result of serendipity. The Rockefeller project in Mexico sought to boost maize production—and failed…. But one small and obscure part of the project worked: a program to control a destructive fungus on wheat called stem rust… develop[ment of] wheat varieties that were not only resistant to stem rust but could (along with fertilizer, pesticides and irrigation) dramatically raise yields. Borlaug’s initial success in Mexico led to later triumphs in India and Pakistan, where there were some similarities in climate….

The author’s portrayals of Vogt and Borlaug make the former much harder to love. Vogt sometimes seemed to care more about cormorant babies than human ones. He criticized “unchecked spawning” and “untrammeled copulation” of “backward populations.” He wrote that people in India breed with “the irresponsibility of codfish.” He suggested in 1952 that “industrial development should be withheld” from poor countries as a form of birth control. Population scares led to programs in which, Mr. Mann says, “millions of women were sterilized, often coercively, sometimes illegally, frequently in unsafe conditions, in Mexico, Bolivia, Peru, Indonesia, Bangladesh, and, especially India.” India sterilized 8 million men and women in 1975 alone….

To Mr. Mann, Vogt’s major contribution was to sound the needed warning about environmental problems that today include “over-fishing, deforestation, soil degradation, contaminated groundwater, declining populations of mammals and birds, and, most alarming, the possibility of very rapid climate change.” But the author notes Vogt’s big mistake: He blamed all this on growth. In fact, Mr. Mann writes, “the contribution of population growth to [these environmental problems] is secondary, and the relationship to economic growth is equivocal.” The author notes that Vogt “denounced social scientists as fools,” but Mr. Mann concludes “he should have listened to them.”… You can… simply tax polluters or regulate the pollution…. As finite resources get scarcer… their price will increase… people will economize…. It is not that hard, in the arid American Southwest, to replace water-thirsty grass lawns with dryland plantings….

The author [also] suggests that Borlaug and the Wizards should also have listened to social scientists more. A political system that has been captured by the elites may let those elites get away with land and sea degradation… as happened in India and Pakistan after the Green Revolution….The excessive alarmism of Prophets helped inspire the modern environmental movement, but implicitly opposed the rise in living standards of billions of poor people. Wizards, by contrast, helped defy the limits to growth to make the escape from poverty possible, but they may have encouraged complacency about environmental problems that threaten us today…