Tag: Rents

Must-read: Suresh Naidu and Noam Yuchtman: “Labor Market Institutions in the Gilded Age”

Posted on by Brad DeLong

Must-Read: Suresh Naidu and Noam Yuchtman: Labor Market Institutions in the Gilded Age: “Although 19th century labor markets were unencumbered by regulatory legislation…

…there existed frictions and rents… [that] played an active role in determining labor market outcomes and the distribution of income…. When firms experienced positive output price shocks, their employees earned wage premia…. The existence of rents in the labor contract suggests a role for bargaining and conflict between employees and employers. Workers in the late 19th century
attempted to strike to increase their wages; we present data on the frequency of strikes in the 19th century as well as some evidence suggesting that strikes were correlated with workers’ wages. Employers were supported by institutions of their own: we describe the important role played by the U.S. government in limiting the efficacy of union strikes in the 19th century…. We present new evidence documenting the rise of judicial injunctions that ended strikes, pointing to the important role played by the judicial branch of the U.S. government in structuring (Northern) American labor market institutions prior to the rise of legislative regulation.

Must-read: James Kwak: “Profits in Finance”

Posted on by Brad DeLong

Must-Read: It used to be that we collectively paid Wall Street 1% per year of asset value–which was then some 3 years’ worth of GDP–to manage our investment and payments systems. Now we pay it more like 2% per year of asset value, which is now some 4 years’ worth of GDP. My guess is that, at a behavioral finance level, people “see” commissions but do not see either fees or price pressure effects.

Plus there is the cowboy-finance-creates-unmanageable-systemic-risk factor, plus the corporate-investment-banks-have-no-real-risk-managers factor. We are paying a very heavy price indeed for having disrupted our peculiarly regulated and oligopoly-ridden post-Great Depression New Deal financial system:

James Kwak: Profits in Finance: “Expense ratios on actively managed mutual funds have remained stubbornly high…

…Even though more people switch into index funds every year, their overall market share is still low—about $2 trillion out of a total of $18 trillion in U.S. mutual funds and ETFs. Actively managed stock mutual funds still have a weighted-average expense ratio of 86 basis points. Why do people pay 86 basis points for a product that is likely to trail the market, when they could pay 5 basis points for one that will track the market (with a $10,000 minimum investment)? It’s probably because they think the more expensive fund is better. This is a natural thing to believe. In most sectors of the economy, price does correlate with quality, albeit imperfectly…. And this is one area where I think marketing does have a major impact, both in the form of ordinary advertising and in the form of the propaganda you get with your 401(k) plan…. The persistence of high fees is partly due to the difficulty of convincing people that markets are nearly efficient and that most benchmark-beating returns are some product of (a) taking on more risk than the benchmark, (b) survivor bias, and (c) dumb luck.

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

Posted on by Brad DeLong

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…