Must-Read: Jared Bernstein: Models of the Minimum Wage

Must-Read: The economics of the regulation of natural monopolies tells us that such entities reduce utility by artificially restricting what they produce in order to improve their terms-of-trade and profits–and that one tool to deal with this is rate regulation. The Card-Krueger and other evidence on low-wage employment suggests the same rationale for the minimum wage:

Jared Bernstein: Models of the Minimum Wage: “We can introduce some ideas… that comport a bit more with reality…

…In the low-wage labor market… workers/employers are not that responsive in terms of employment to changes in wages (dlog(emp)/dlog(wage)=small number like -0.1 to -0.3, or something…). When you draw inelastic supply and demand curves, you end up predicting a lot less unemployment…. If this model is more accurate, significant estimates of job loss effects are hard to pull out of the data. Which they are…. [The world is] trying to tell us something about low-wage workers and their employers’ tempered responsiveness to increases in the wage floor…. There’s [also] a model… [of a] a monopsony labor market…. The monopsony model may sound arcane—the classic example is the one-company coal town–but it may not be too much of a reach to conclude that the low-wage labor market in a given town or city works kind of like this…. The competitive model as conventionally drawn is misleading. Economic models vastly simplify… can yield some insights…. But at the end of the day… when the theory doesn’t match the evidence, trust the evidence.

Must-Read: Miles Corak: Inequality: A Fact, an Interpretation, and a Policy Recommendation

Must-Read: That Miles Corak describes the three aspects of rising-inequality denial as “a common storyline” is a measure of how completely divorced from reality even so-called policy professionals in the right-of-center echo chamber have become. Sensible technocratic dialogue is thus going to remain very, very difficult for quite a while to come…

Miles Corak: Inequality: A Fact, an Interpretation, and a Policy Recommendation: “A common storyline…. Inequality has not increased…

…even if it has… little… can be done… and even if… policy has punch, the effort… diverts attention from more pressing problems, like poverty…. [But we can] address both inequality and poverty in a smart way…. A more nuanced interpretation… give[s]… another storyline…. Inequality has increased; there is something that can be done about it; and if public policy has punch, the effort directed to fighting inequality contributes to solving other pressing problems, like poverty.

Must-Read: Belle Sawhill: Where Have All the Workers Gone?

Must-Read: I really want to see what happens to these numbers in a high-pressure low-slack economy…

Isabel Sawhill: Where Have All the Workers Gone?: “Among male heads of household between the ages of 25-54…

…[not at work,] 27 percent say it is because they are ill or disabled…. [But] we excluded from the sample anyone on disability…. Another 22 percent said they couldn’t find work–not too surprising in a year when the unemployment rate was still over 7 percent. The remaining half… going to school, taking care of home or family… retired (despite being under 55), or… some other reason for why they weren’t working…. These are all men in their prime working years and that their lack of work leaves them and anyone else in their household at or near the poverty line…. Women heading households are somewhat similar… with far fewer reporting that they are ill or disabled and more of them reporting that they are taking care of home or family…

Must-Read: Andrew Gelman: Asking the Question Is the Most Important Step

Must-Read: Something very, very peculiar is going on with middle-aged American whites in the Bush 43 and Obama years–much more so for women–and it is distinctly odd:

Andrew Gelman: Andrew Gelman: Asking the Question Is the Most Important Step: “I worked super-hard to make the graph… that helped me understand what was going on…

Asking the question is the most important step Statistical Modeling Causal Inference and Social Science

…But, from the social science perspective, what’s far more important is asking the question in the first place, which is what Case and Deaton…. That’s what got the ball rolling. (And, to be fair, they also rolled the ball most of the way.) I’m happy to have refined their analyses and, as noted yesterday, I wasn’t so thrilled by one of Case’s offhand remarks, but let me emphasize that all this discussion is predicated on their effort, on their knowing what to look at, which in turn derives from their justly well-respected research on public health and economic development. That’s the big picture….

Statisticians such as myself have our place in the research ecosystem, but all the bias correction and modeling and clever graphics in the world won’t help you if you don’t know what to look at. And in this particular example, I had no idea of looking at any of this until I was pointed to Case and Deaton’s work…. None of our contributions could’ve happened without the work by the original authors. It’s not Us vs. Them. It’s never Us vs. Them. It’s Us and Them. Or, perhaps more accurately, THEM followed by a little bit of us. And that’s one reason I want them to respect and understand us, not to fear us and be defensive”

Must-Read: Marshall Steinbaum: The Unseen Threat of Capital Mobility

Must-Read: Marshall Steinbaum: The Unseen Threat of Capital Mobility: “The Hidden Wealth of Nations: The Scourge of Tax Havens

…by Gabriel Zucman, University of Chicago Press, $20 (cloth). Out of Sight: The Long and Disturbing Story of Corporations Outsourcing Catastrophe by Erik Loomis, The New Press, $25.95 (cloth). Two new books link rising inequality to unseen forces: tax havens in economist Gabriel Zucman’s case, and overseas labor and environmental exploitation in historian Erik Loomis’s. The adverse consequences of the free movement of capital suffuse both narratives…. Both authors propose tariffs, capital controls, and international regulatory standards that would either re-erect national boundaries or threaten to do so–proposals that will strike many readers as misguided, out of touch with political reality, or both….

When the Rana Plaza factory collapsed in 2013, Loomis engaged in a memorable online dispute with Matthew Yglesias, who published a piece on the disaster headlined ‘Different Places Have Different Safety Rules and That’s Okay’…. Loomis’s and Zucman’s calls for re-erecting national boundaries and re-empowering democratically accountable regulators are implications of a much more successful model for explaining why inequality has risen so much within developed and developing countries than in Yglesias’ just-so story: capital has gained the upper hand over labor by creating and accessing outside options while eliminating those of its opponents. Both books are the product of careful reconsideration and critique of received wisdom in the fields each covers, and more casual commentators would be wise to take heed of their implications instead of peddling discredited objections to any check on international capital mobility.

Must-Read: Henry Aaron: Can Taxing the Rich Reduce Inequality? You Bet It Can!

Must-Read: Henry Aaron: Can Taxing the Rich Reduce Inequality? You Bet It Can!: “Two recently posted papers by Brookings colleagues purport to show that…

…‘even a large increase in the top marginal rate would barely reduce inequality.’  This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality?  More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives.  Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality.  In brief:

  • A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality.  It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
  • Tax policy significantly reduces inequality.  But transfer payments and other spending reduce it far more.  In combination, taxes and public spending materially offset the inequality generated by market income.
  • The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.”

Must-Read: Tim Harford: The Real Benefits of Migration

Must-Read: Tim Harford: The Real Benefits of Migration: “UK Home Secretary Theresa May gave a speech… designed to polarise…. She succeeded…

…One statement… found the spotlight…. (Translation: immigration costs us nothing but we want to reduce it anyway.) Is May’s summary of the evidence correct? Probably not…. But there was a far bigger lacuna… [that] most commentators… missed it…. Migrants… prosper hugely… yet that prosperity hardly ever figures in debates about immigration. This is odd. I would not expect schools to fare well on a cost-benefit analysis if we ignored any gains to the under-18s. Nor would hospitals look like a good investment if we counted only the advantages to non-patients. Yet it seems that migration may still be mildly beneficial even after disqualifying any benefit to the people most likely to gain–the migrants. That is remarkable….

One might make the case that because migrants are foreign nationals, we are entitled to make their welfare a lower priority. My colleague Martin Wolf is one of the few commentators to bother asserting this openly; most simply seem to assume that foreigners count for nothing…. Being open to migration from poor countries is perhaps the best anti-poverty programme that rich countries can offer…. Whether foreigners should count as sentient beings in a British cost-benefit analysis is something I’ll leave to the philosophers….

How real a problem is… brain drain?…. Where developing countries do train large numbers of skilled workers–as with the Philippines, a world centre for nursing and midwifery–they also manage to keep a reasonable number of them at home. And… migrant remittances… [are] three times as much as is sent in official development assistance. Migrant networks can help make trade flow smoothly too. Then there is the simple matter of respecting individual liberties…. If we have gained anything from the harrowing images of desperate refugees, it is an appreciation that they are human. Economic migrants are human too… not pheasants to poach; nor brains to drain.

Must-Read: Michael Clemens: The South Pacific Secret to Breaking the Poverty Cycle

Must-Read: Michael Clemens: The South Pacific Secret to Breaking the Poverty Cycle: “The average Tongan household that participated was earning just NZ$1,400 per year…

…before these jobs. The average worker who participated earned NZ$12,000 for just a few months of work. It multiplied low-income workers’ earnings by a factor of 10. Almost no other antipoverty project you’ve ever heard of can claim that. Imagine what that did to poverty…. This project was ‘among the most effective development policies evaluated to date.’ And it did that not by taking money away from New Zealanders, but by adding value to the New Zealand economy. What’s working against poverty? International labor mobility….

The last time the United Nations set global goals to fight poverty, back in 2000, it completely ignored the power of labor mobility. The Millennium Development Goals, bizarrely, mentioned migration exclusively in negative and harmful terms…. This time… [they] at least mention migration…. But they decline to mention any possibility of actually facilitating migration…. The authors… still think that mobility doesn’t matter much for global poverty. That just does not make sense in a world where remittances to poor countries are several times as large as foreign aid. It does not make sense in a world where barriers to mobility cost the world trillions of dollars every year. What’s working against poverty is international mobility. And it will keep working to help meet the Global Goals for fighting poverty–largely in spite of them.

Must-Read: Jason Furman and Peter Orszag: A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Must-Read: Jason Furman and Peter Orszag: A Firm-Level Perspective on the Role of Rents in the Rise in Inequality: “In Joe [Stiglitz]’s honor, we thought it appropriate to collaborate on a paper…

…that explores two of his core interests: the rise in inequality and how the assumption of a perfectly competitive marketplace is often misguided. Joe has been a leading advocate of the hypothesis that the rising prevalence of economic rents—-payments to factors of production above what is required to keep them in the market—and the shift of those rents away from labor and towards capital has played a critical role in the rise in inequality (Stiglitz 2012). The aggregate data are directionally consistent…. But this aggregate story does not fully explain the timing and magnitude of the increase in inequality…. This paper… argue[s] that there has been a trend of increased dispersion of returns to capital across firms, with an increasingly large fraction of firms getting returns over 10, 20 or 30 percent annually–a trend that somewhat precedes the shift in the profit share.

Longstanding evidence (e.g. Krueger and Summers 1988) has documented substantial inter-industry differentials in pay–a mid-level analyst may have the same marginal product wherever he or she works but is paid more at a high-return company than at a low-return company. Newer evidence (Barth et al. 2014 and Song et al. 2015) suggests that much of the rise in earnings inequality represents the increased dispersion of earnings between firms rather than within firms. This is consistent with the combination of a rising dispersion of returns at the firm level and the inter-industry pay differential model, as well as with the notion that firms are wage setters rather than wage takers in a less-than-perfectly-competitive marketplace…

Must-Read: Ben Casselman: It’s Getting Harder To Move Beyond a Minimum-Wage Job

Must-Read: Ben Casselman: It’s Getting Harder To Move Beyond a Minimum-Wage Job: “Minimum-wage jobs are meant to be the first rung on a career ladder…

…But a growing number of Americans are getting stuck…. Anthony Kemp is one of them. In 2006, he took a job as a cook at a Kentucky Fried Chicken in Oak Park, Illinois. The job paid the state minimum wage, $6.50 an hour at the time, but Kemp figured he could work his way up. ‘Normally, a good cook would make $14, $15, $17 an hour,’ Kemp said. ‘I thought that of course I’d make a better wage.’ He never did; nine years later, the only raises Kemp, 44, has seen have been the ones required by state law. He earns $8.25, the state’s current minimum wage…