…The biggest threat to your portfolio is you…. What’s threatening your portfolio is the way in which you may react…. Fleeing into the arms of a charlatan who purports to having predicted it. Buying into Black Swan funds and protective products that cap all future upside and cost a fortune.Obsessing over hedges after the fact. Selling out with big (permanent) losses and sitting in cash. Freezing 401(k) contributions or having retirement cash allocated to money market funds. Excessive trading. Planting a flag and being unwilling to publicly change our minds in the face of new evidence. Throwing money at bizarre alternatives…. Conflating political views with investment expectations…. Every one of these things is extremely detrimental to our financial health….
We still cannot pinpoint the events that have marked previous market tops even in hindsight. Consider:
What happened on the day in March of 2000 when the Nasdaq stopped going up? Nothing…. What was the proximate trigger for the crash of ’87? There wasn’t one. Why did the stock market ignore the real estate bust for 18 months until one uneventful day at the end of 2007 when all of a sudden it stopped climbing and reversed? We don’t know…. What happened during the week after Labor Day in September 1929?… Nothing of note besides a bearish speech by Roger Babson…. If we cannot even identify the reason for why a market tops or crashes on a given day with the benefit of looking back, what makes any of us think we can do so in real-time or in advance?… Having a plan in place… is superior to any kind of insurance one can buy after the fact. Plans should be agreed upon and adopted during times of clarity and sanity, never under duress…
Must-Read: Noah Smith: Scott Walker, Labor Market Protectionist
…many immigration opponents… want to reduce the inflow of legal immigrants…. This is a bad idea…. Limiting the inflow of immigrants won’t actually do much to protect American jobs or wages…. In today’s globalized world, Americans are going to be competing with them whether they’re over here or over there. And it’s better to hire them here, and compete with them here…. Over time, we want the U.S. to stay at the center of the world economy…. The U.S. will need more people in order to remain the place where companies want to invest. If you want to see a country that has long gone down the Scott Walker path, take a look at Japan… mostly closed to legal immigration… aging dramatically… its population is shrinking… companies… investing elsewhere…. The U.S. ability to absorb newcomers is unique, and it gives America a chance to escape Japan’s fate. If we listen to Scott Walker and other immigration restrictionists, however, the U.S. will be throwing away one of its biggest advantages. Don’t fall for it.
Things to Read at Lunchtime on April 29, 2015
Must- and Should-Reads:
- : “It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible – or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009…”
- Must-Read: : China’s True Growth Is a Mystery; Economists Weigh the Clues
- : “15.5 million people had major medical coverage in the individual insurance market – both inside and outside of the Marketplaces – as of December 31, 2014. Enrollment was up 4.8 million over the end of 2013, a 46% increase…”
- : Advance Estimate of GDP for the First Quarter of 2015
Over at Equitable Growth—The Equitablog
- : What does weak U.S. economic growth in first quarter mean for the current recovery?
- : How raising the minimum wage ripples through the workforce
Might Like to Be Aware of:
Cries of Despair Induced by This Morning’s Disappointing First-Quarter U.S. GDP Growth Report
Nick Bunker is out of the gate with his take on the surprisingly low 0.2%/year first-quarter US real GDP growth rate:
…during the recovery, we should be standing by the alarms but not quite sounding them yet. Personal consumption expenditures… contributed 1.31 percentage points… a deceleration…. Net exports were the biggest drag… 1.25 percentage points… a dramatic decrease in the level of exports…. Gross fixed investment was also a drag… shaving off 0.4 percentage points….
Real private domestic final purchases… is a good measure of the underlying momentum of the economy and predictive of the next quarter’s growth rate. In the first quarter, it only grew at about 1 percent…
So let’s review:
Over the past four quarters U.S. real GDP has grown at a rate of 3.0%/year:
Over the past eight quarters U.S. real GDP has grown at a rate of 2.5%/year:
Over the past sixteen quarters U.S. real GDP has grown at a rate of 2.3%/year:
Thus there has been no gap-closing at all throughout the recovery in real GDP relative to pre-2007 trends:
The labor market has recovered between 1/2 and 1/3 of the gap between the Lesser Depression nadir and what we used to see as full employment:
But that labor-side gap closing has been offset by the shadow the Lesser Depression casts on future growth via depressed investment and depressed business organization development. And we still do not know whether the gap between current labor-force utilization and full employment remains large, or whether the Lesser Depression has also deeply and permanently damaged the job-worker matching process. The unemployment rate’s rapid decline hints at the second, but only hints.
All this makes me conclude that talking about, let alone undertaking, monetary and fiscal policy normalization in the U.S. right now seems to me to simply be not fully sane. The balance of risks and opportunities is such that we ought to be talking about how to alter fiscal, monetary, and credit policies in order to sharply increase demand and put people back to work–and then to back off such policies if the inflation numbers tell us that the Lesser Depression did so much damage to potential output growth that we are, right now, in fact close to the economy’s current sustainable productive potential.
Must-Read: Mark Magnier: China’s True Growth Is a Mystery; Economists Weigh the Clues
…raised fresh doubt about the trustworthiness of China’s own statistics…. Citibank… could be below 6%…. Capital Economics pegging the quarter at 4.9%…. Lombard Street Research at 3.8%…. China’s… figures are suspiciously smooth… methodology often appears inconsistent or contradictory…. Economists point to the discrepancy between headline GDP growth and industrial production… weaker recent readings for electricity consumption, investment, industrial profits, manufacturing output and real-estate investment, among others…
What does weak U.S. economic growth in first quarter mean for the current recovery?
The U.S. Bureau of Economic Analysis this morning released data showing the annual growth rate of gross domestic product was 0.2 percent during the first three months of 2015. This topline result certainly isn’t encouraging, with an expected growth of 1 percent. But given the volatility in the numbers and the trends in GDP growth during the recovery, we should be standing by the alarms but not quite sounding them yet.
Personal consumption expenditures led the way, increasing at a 1.9 percent rate during the first quarter. This sector of the economy contributed 1.31 percentage points toward the overall growth rate. While these numbers are positive, they are a deceleration from the last quarter of 2014. During the last three months of 2014, personal consumption expenditures grew by 4.4 percent. This past quarter, the strongest subsector of personal consumption expenditures was consumption of services, which grew at a 2.8 percent rate and contributed 1.26 percentage points to the overall GDP growth rate, or approximately 96 percent of the overall contribution of personal consumption expenditures.
Net exports were the biggest drag on growth during the quarter. The difference between exports and imports reduced the overall GDP growth rate by 1.25 percentage points. The decline in net exports was driven mostly by a dramatic decrease in the level of exports rather than a dramatic increase in imports. During the quarter, the inflation-adjustment amount of exports of goods and services declined by 7.2 percent while imports increased by 1.8 percent.
This decline is attributable entirely to a massive decline in the exports of goods (a decrease of 13.3 percent) while the exports of service actually increased (7.3 percent). This drop-off in exports shouldn’t be surprising given the strong appreciation in the dollar in recent months. A rising dollar makes U.S. goods more expensive and all things equal reduces exports. In the battle between cheap oil and a dear dollar, it looks like the dollar is winning.
Gross fixed investment was also a drag on growth during the first quarter, shaving off 0.4 percentage points from the overall growth rate. Investment in nonresidential structures, such as office buildings was a biggest drag, lopping off 0.44 percentage points. Government expenditures was also a slight drag as it took off 0.15 percentage points, with the declining centering in the state and local governments.
Should we be very concerned by the weak first quarter economic growth number for 2015? It’s just too early to tell. The numbers released today are the advanced estimates that will be revised twice before we have a final estimate. Those revisions could show a much stronger first quarter. Or a much weaker one. We just don’t know. Furthermore, there’s some evidence that the seasonal adjustments for GDP growth might be understating overall growth as economist Justin Wolfers writes in the New York Times.
At the same time, the data do show some troubling signs. Real private domestic final purchases, defined as the sum of consumption and fixed investment, is a good measure of the underlying momentum of the economy and predictive of the next quarter’s growth rate. In the first quarter, it only grew at about 1 percent compared to 4.3 percent during the fourth quarter.
So we can’t say definitely yet whether we need to be concerned about growth dipping downward. But perhaps we should get prepared to consider that possibility.
Things to Read on the Morning of April 28, 2015
Must- and Should-Reads:
- Must-Read: : The Political Roots of Widening Inequality
- (2009): “VP Joe Biden stood up in front of a bunch of Hollywood execs and promised to appoint a copyright czar, and furthermore, that this would be the ‘right’ person to protect their interests. I would have voted Dem in the last election, if I got a vote, but make no mistakes: the Dems are the party of stupid copyright laws. From Hollywood Howard Berman on down, they’ve got a terrible track record on technology and copyright policy…”
- Must-Read: : The Euro Area’s Debt Hangover
- Must-Read: : Debating the Confidence Fairy
- Must-Read: : Most developed countries’ central banks
- : The Trans-Pacific Partnership Is Unlikely to Be a Good Deal for American Workers
Here at Equitable Growth—The Equitablog
- : The problem of too much stuff sloshing around the global economy
- : New John Bates Clark winner Roland Fryer takes policy-relevant research very seriously
- : Breaking down the decline in the U.S. labor share of income
- : Determining the optimal U.S. tax rate for higher earners
- : Monopsony and market power in the labor market
Might Like to Be Aware of:
- : Nobody Famous
- : “These permanently-hypothetical embraces of political violence are just a way to separate oneself from the squishes in a way that’s particularly flattering to a certain self-conception. It’s t-shirt radicalism. At its worst, it comes wrapped in the kind of goonish drama-club machismo that I most often find in liberals when they support ‘humanitarian intervention,’ pleased that they finally get to be the ones calling for more bloodshed. Consider the stakes. Consider how much skin you yourself have in the game. At some point, the self-impressed peacocking on social media stops being about the protesters in Baltimore and starts being all about you. Maybe you should slow down and consider the vulgarity of that situation…”
How raising the minimum wage ripples through the workforce
States and cities across the United States are increasing minimum wages within their jurisdictions, sparking other policymakers around the nation and on Capitol Hill to consider whether these changes affect the wages of all workers—not just those at the very bottom of the hourly pay scale who immediately benefit from a higher minimum wage. This question is especially timely this year, as 19 states have already increased the minimum hourly wage. And many cities are also boosting low-income workers’ pay, among them Oakland, CA, which increased its minimum wage to $12.25 an hour, and Seattle, WA, which now requires large employers to pay at least $11.00 an hour.
So how will these boosts in pay across the nation affect workers? In addition to minimum wage workers who receive a direct increase, which portions of the workforce receive indirect raises from a minimum wage increase? When our nation’s capital, Washington, DC, raises its minimum wage in July to $10.50, how will that affect the wages of workers who already earn $11.50?
This question is important for gathering a more complete understanding of the effects of raising the minimum wage beyond the lowest-paid workers. This issue brief explores the available economic research on these ripple effects, finding that increases in the minimum wage do raise the wages of those earning above the minimum wage. These ripple effects are critical to reducing wage inequality between those earning low- and middle-class wages.
Boosting Wages
Coronavirus Recession
Boosting Wages
Although the minimum wages enhances the bargaining power of many low-wage workers, an increased minimum wage’s effectiveness in doing so dissipates as it spreads across the wage spectrum, essentially disappearing for middle-class wage earners. At the same time, assessing the exact impact of raising the minimum wage on specific earners may require higher-quality hourly wage data on all workers than is currently available in standard household surveys in the United States.
View full PDF here alongside all endnotes
What are minimum wage ripple effects and how do they occur?
In a recent study, Arindrajit Dube of the University of Massachusetts-Amherst, Laura Giuliano of the University of Miami, and Jonathan Leonard of the University of California-Berkeley find substantial evidence of a ripple effect in a large U.S. retailer’s pay policies. In 1996 and 1997, the federal government raised the minimum wage of $4.25 an hour in two steps to $4.75 and $5.15. The authors find that the large retail company, which was promised anonymity in order to provide data for study, raised its wages by 30 to 40 percent across its entire hourly workforce even though only 5 to 10 percent of this national firm’s employees earned less than the minimum wage.
There are good reasons to expect to see this same kind of ripple effect of raising the minimum wage more broadly in the U.S. labor market. In particular, economic theory suggests that increasing the minimum wage will raise the wages of other workers when employers need to compete for workers, as in some search-and-matching models of the labor market. Imagine all firms occupy rungs on a ladder, ranked by how well they pay their workers. After a minimum wage increase, the lowest paying firms raise their wage to the new minimum. This leads the next rungs of higher-paying firms to raise wages as well—to increase their ability to recruit and retain workers who would have better options elsewhere due to the minimum wage increase. The minimum wage then filters its way up the labor market, with ripple effects declining in influence further up the ladder.
Alternatively, workers may care about how they are paid relative to other workers at in their own workplace. After a minimum wage increase, will a supervisor be content with a wage similar to her now more highly paid staff? To the extent that employees are concerned about relative wages within a business, firms may raise wages in accordance with their institutional norms.
Whether ripple effects are largely market-mediated across firms or are instead based on relative pay concerns within the firm are open questions that get to the heart of wage-setting mechanisms in the labor market. The research by Dube, Giuliano, and Leonard on the large U.S. retailer suggests that within-firm pay concerns may matter a great deal because they affect how employees search for jobs. The retail industry famously boasts a high rate of employee turnover, and the authors find that workers quit their job significantly less often after minimum wage increases. This effect, however, largely occurs through relative pay concerns, such as when a worker receives a pay raise relative to her peers, she is far less likely to quit than if she had not received that relative increase in pay.
In addition to this one case study, economists find general evidence of these kinds of ripple effects from raising the U.S. minimum wage. The best estimates, though, appear in research conducted by economists David Autor of the Massachusetts Institute of Technology, Alan Manning of the London School of Economics, and Christopher Smith of the Federal Reserve Board. They study all state and federal minimum wage increases from 1979 through 2012, and measure the effect of the raises at each point of the wage distribution.
The authors find that the sharpest wage increases due to raising the minimum wage occur for workers at the bottom five percent of the wage scale, where U.S. minimum-wage workers are most likely to be concentrated. A ten percent increase in the minimum wage raises that 5th percentile wage by about 2.9 percent. The study also finds evidence of ripple effects as the minimum wage increases wages for workers who make more than the minimum—and that these ripple effects dissipate the further one moves up the wage ladder. The same ten percent minimum wage increase raises the wages of workers at the 10th percentile of wages by about 1.6 percent and raises the wages of those in the 20th percentile by a statistically significant 0.7 percent. After the 25th percentile, wage effects are typically very small and statistically indistinguishable from zero. (See Figure 1.)
Figure 1
How do ripple effects affect wage inequality?
A ripple effect for the bottom 20 percent of workers has important implications for wage inequality among workers in the United States. Over the 1979-2012 period studied by Autor, Manning, and Smith, the real (inflation-adjusted) value of the minimum wage fell and wage inequality increased, with those workers at the bottom 10 percent of the wage scale falling relative to the median wage by more than 22 percent. The authors estimate that the declining minimum wage during that period was responsible for nearly 39 percent of the increase in wage inequality between the typical worker at the middle of the wage spectrum and the worker at the bottom ten percent. Without ripple effects, the minimum wage may not have affected inequality at all because most minimum wage workers fall below the tenth percentile wage during the study period. (See Figure 2.)
Figure 2
Because women are generally paid less than men and therefore fall closer to the bottom of the wage spectrum, the minimum wage has larger effects on female wage inequality. For wage inequality among women, Autor, Manning, and Smith find that the minimum wage had particularly strong consequences. Between 1979 and 2012, the declining minimum wage was responsible for 48 percent of the increase in female wage inequality between the bottom and middle of the wage distribution. (See Figure 2.) This finding highlights that raising minimum wages in general disproportionately affects women. A female employee is more than 60 percent more likely to be a minimum wage worker than a male employee.
As significant as these ripple effects seem on their own and for the causes of wage inequality, Autor, Manning, and Smith themselves raise an important concern about these estimates: could the results simply be a product of survey measurement error? The authors rely on the best available source for U.S. wage data, the Current Population Survey of households, but misreported wage data in this survey poses a problem for distinguishing true ripple effects from fiction.
To understand why misreported data may skewer the findings about ripple effects, consider the current minimum wage of $7.25, which is roughly at the 4th percentile of wage earners. If the wage data contain substantial measurement errors, then some of these workers earning the minimum wage may misreport higher wages, perhaps reporting wages up to the 10th percentile. In that case, even if there were no ripple effects, raising the minimum wage above $7.25 will appear in the data as though it increased wages at the 10th percentile, even if that didn’t happen in reality.
Although measurement error in the U.S. survey data may complicate estimates of the size of the ripple effects of raising the minimum wage, better quality data suggests these ripples do exist. The recent study of a U.S. retailer by Dube, Giuliano, and Leonard, which used high-quality payroll data, is one case in point. Similarly, using employer-reported data in the United Kingdom that may be more accurate than U.S. household survey data, Richard Dickens of the University of Sussex and Alan Manning and Tim Butcher of the UK Low Pay Commission find that although the minimum wage only affected the bottom 5 percent of the wage distribution, ripple effects extended to the 25th percentile.
Conclusion
Both the theoretical and empirical research point to economically meaningful ripple effects from raising the minimum wage, although even the best measurements of the exact size of these effects in the United States are not completely certain. The evidence also seems clear that in the short run, minimum wages do not appear to have ripple effects for those workers earning middle-class wages or higher. In particular, the kinds of changes in the minimum wage that the United States experienced over the past three decades do not seem to affect the median wage or the wages of those at the top. Minimum wages, then, are an important piece of the policy toolkit affecting wage inequality and boosting stagnant wages at the bottom of the wage ladder. Improving middle-class wages will require other strategies.
—Ben Zipperer is a research economist at the Washington Center for Equitable Growth
New John Bates Clark winner takes policy-relevant research very seriously
What makes a U.S. primary or secondary school successful? Traditionally, education policy has focused on factors such as teachers’ advanced degrees and training, the class size, aRnd spending per pupil. Yet research by Harvard University economics professor Roland G. Fryer, Jr., has challenged our notions of what makes our nation’s schools most effective. Fryer, this year’s recipient of the prestigious John Bates Clark medal, given to the most promising American economist under 40, is the first African American to win the coveted prize.
Fryer’s research is characterized by rigorous empirical testing of theoretical hypotheses such as whether smaller class size and increased spending per pupil are correlated with improved school effectiveness and better student outcomes. His research and subsequent award are part of a larger trend of the economics world embracing empirical work as opposed to just theoretical modeling.
Fryer and his colleague, Will Dobbie of Princeton University, looked at 39 New York City charter schools. Because these schools are not subject to the uniform standards that public schools must follow, the two researchers were able to compare a diverse range of educational strategies. Some schools, for example, focused on immersing their students in the arts in order to inspire success. Other schools were defined by a more militant “no-excuses” environment characterized by frequent testing, long school days, and harsh discipline for even the smallest infractions—what has been called the “broken windows” educational policy.
Fryer and Dobbie’s research found that a strictly controlled environment seemed to work best in fostering success among charter school students. Out of the 500 variables they studied, they found that five policies employed by “no-excuses” charter schools accounted for almost 45 percent of the variation in the school effectiveness. Fryer wondered whether these five “tenets” of student achievement—frequent teacher feedback, the use of data to guide instruction, frequent and high-quality tutoring, extended school day and year, and a culture of high expectations—could be successfully scaled up and broadly adopted by public schools.
So, in 2010, he began working with Houston school superintendent Terry Geier to implement a program based on Fryer and Dobbie’s five tenets. The program, deemed “Apollo 20,” after Houston’s historic role in the U.S. space program, targeted 20 of the city’s worst performing schools, including four that were slated to close before Fryer stepped in. The program was controversial because it involved firing most of the principals at the selected schools and due to its high costs, which were covered mostly by public funds.
According to a follow up report done by Fryer himself, the results have been mixed. While students made significant gains in math, reading remained stagnant, highlighting the problem of trying to replicate charter school success stories on a larger scale. Regardless, other cities have taken note. Select schools in Denver and Chicago have since adopted similar programs. Fryer has recently acknowledged the differences between public and charter schools and has suggested tweaks to the Apollo program that might make it more effective.
Fryer’s empirical work follows in the footsteps of other recent John Bates Clark medal winners, such as Emmanuel Saez at the University of California-Berkeley and Raj Chetty at Harvard University. They and other prominent economists, among them Amir Sufi at the University of Chicago, are more focused on the kind of data-driven research that results in effective policy interventions rather than on theoretical models that may or may not translate into actual policy directives for the real world.
Fryer, however, has gone to greater lengths than most economists to implement the findings of his research. And, as we saw with the Apollo project, he also uses this empirically driven approach to find holes in his own research—and is open to addressing approaches that do not work. As an expert on the racial achievement gap who himself grew up in a troubled home, Fryer has a boots-on-the-ground approach to combatting inequality through a dual approach of research and application. In doing so, he is a role model for the ways in which the academic world can provide evidence-based solutions to make the world more efficient and prosperous.