Thursday, September 18, 2014

Is Every 18 Year Old High School Graduate Worth $30,000 A Year?

If we made the minimum wage $15 per hour, that works out to about $30,000 a year. Is every 18 year old high school graduate capable of generating $15 per hour in revenue on any job they might get? My guess is that many of them are not and will not get a job when they graduate. So when will they get a job? Who knows. Maybe they will never get their first job and will never enter the world of work.

In fact, the WSJ recently reported that many college graduates barely make what a high school graduate makes:
"The median wage of an American with a bachelor's degree was $48,000 last year, far higher than the $25,052 earned by those with only a high-school diploma. But the lowest-earning quarter of college graduates make $27,000 or less."
So if many college grads cannot make $30,000 per year, how is it possible that each and every high school grad will? They probably can't

Ending slavery made America richer

From Scot Sumner of EconLog.
"Matt Yglesias has a good post that goes right at the "smiley-face" view of early US history--that we were a great country save for the regrettable aberration of slavery. He doesn't pull any punches:
Specifically, white Americans conquered a vast new empire (Alabama, Mississippi, Florida, Arkansas, Louisiana, Missouri, and Texas), populated it with millions of slaves forcibly transported from the Atlantic coast, and developed innovative new torture-based management techniques to enhance the productivity of this coerced labor.
Thus I regret to say that the title of the post sends the wrong message:
American prosperity was built on slavery and torture

In fact, countries with free labor tend to be more prosperous. Indeed Yglesias's post contains a graph (from Thomas Piketty's book) that undercuts the message in the title:
 Screen Shot 2014-09-13 at 11.14.00 PM.png

At first glance it doesn't look like there was much change in the capital stock between 1850 and 1880. But that's very deceptive, as Piketty classifies (or should I say mis-classifies) slaves as "capital." It's true that they were legally considered capital, but in a functional sense they were obviously labor. Slaves don't stop being people just because the government treats them like animals.

Between 1850 and 1880 the market value of slaves falls by just over 100% of GDP. And that decrease is almost precisely offset by a slightly more than 100% increase in capital (industrial and housing.) The total capital stock declines slightly in the Piketty graph, but that's only because of a fall in the value of agricultural land, not capital.

Now here's where mislabeling slaves as capital comes into the equation. At first glance it looks like America's capital stock was unaffected by the abolition of slavery. But the actual capital stock rose by over 100% of GDP---an industrial revolution. If you insist on treating slaves as "capital" it doesn't change the basic story. Because in that case a separate ledger of "labor resources" would have soared after 1865. Former slaves would now be classified as "labor," and hence the labor stock would rise dramatically, even on a per capita basis. Either way, abolishing slavery made America a much more productive, and hence richer country.

Now let me anticipate the "yes buts." Some Americans were made worse off. Obviously slave-owners, and less obviously those who were closely connected to the slave economy (bankers who financed them, cotton mills, etc.) But as Fogel showed (in a study of railroads), when thinking about any economy we tend to mentally overrate the importance of any one sector, especially big sectors. So despite the very real losses to a sizable group of Americans, the economy overall did much better as a result of the abolition of slavery.

Do we know that this was because of the abolition of slavery? There are very few certainties in economics, but consider:

1. Brazil didn't abolish slavery until the 1880s, and did worse than America. It also did worse than countries to the south of Brazil.
2. When the American South abolished Jim Crow, incomes in that region began to converge on those in the North. Indeed even southern whites began to catch up, especially when adjusting for cost of living differences. Freedom increases productivity.
3. Most of the rich countries around the world were places with free labor in the 19th century. Places that had slavery tend to be much poorer.
4. Superficially the South seemed "richer," but only if you don't count slaves. But why not count them? The North was far more dynamic, industrializing rapidly and drawing more immigrants from Europe. Why didn't more whites from Europe move to the South?
5. Countries are richer when workers have more rights---compare North and South Korea.
America still has a long way to go. Blacks (and whites) are legally barred from many professions by occupational licensing laws. It's also worth pointing out that Yglesias is one of the few progressives that frequently criticizes those laws.

America is much freer than it used to be, but there is more work to be done."

Robert Reich makes 36% more than average CEO and gets $40k for a one-hour talk vs. average worker pay of $46k/year

From Mark Perry.

"
reich

Former Labor Secretary Robert Reich is currently a professor of public policy at the University of California-Berkeley and he was paid $242,613 in 2013 according to this University of California database. According to this link provided in an article by the Daily Caller, Professor Reich is scheduled to teach only one undergraduate class this fall semester – Public Policy 260 – that meets only one day a week (Monday) for two hours (12 – 2 p.m.). That works out to about $2,500 for each hour of lecture time that Professor Reich will spend with UC-Berkeley students this semester, or about the same amount as the average adjunct college professor gets paid for teaching an entire one-semester 15-week class ($2,700 according to this AAUP report)!

As the Daily Caller reported yesterday, Professor Reich took time off from his hectic one-course, two-hour a week teaching schedule to berate and excoriate American CEOs and Harvard Business School in a post on the Harvard Business Review blog for allowing “a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.”

As I reported earlier this year on CD in a post about the never-ending claims of “excessive CEO pay” and the alleged 300-to-1 pay gap between CEOs and ordinary workers (modified and updated slightly):
We can get a more accurate and complete picture of CEO compensation in the US by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations,” including the occupational category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400. The multi-million dollar salaries of the CEOs of the 200-350 S&P500 firms reported recently represent only one out of about every 1,000 firms in the country (or 1/10 of 1%) that have a CEO at the head. The larger sample of almost a quarter-million CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”
For the larger sample of CEOs reported by the BLS, their average pay of $178,400 last year was an increase of only 0.88% from the average CEO pay of $176,840 in 2012. In contrast, the BLS reports that the average pay of all workers increased by 1.42% last year to $46,440 from $45,790 in 2012. That’s right, the average worker last year saw an increase in their pay that was more than 60% greater than the increase in pay for the average US CEO. And the “CEO-to-worker pay ratio” for the average CEO compared to the average worker is only about 5-to-1, nowhere close to the pay ratio of 331-to-1 ratio reported by the AFL-CIO using the 350 highest-paid CEOs in the country or the 300-to-1 ratio that Robert Reich claims.
So at the same time that Reich complains about the excessive compensation of a small group of a few hundred highly paid CEOs, he actually makes 36% more than the average CEO in the US for lecturing a few hours a week (see chart above). Even considering additional work preparing lectures and grading papers or exams, it’s probably safe to assume that Professor Reich is putting in 50-60 hours per week like the majority of America’s CEOs for his very generous pay of more than a quarter-of-a-million dollars per year.

In addition to his annual CU-Berkeley salary of $242,613, Professor Reich is also a popular speaker on the nation’s lecture circuit, and he commands a handsome speaking fee of $40,000 for a one-hour talk (including Q&A) plus first class travel for one or two people from California, hotel accommodations for up to two nights, ground transportation, meals and incidentals. That’s the quote I got today from one of Professor Reich’s speaking bureaus for his fee to give a presentation as part of a “university program” — it’s possible that he charges even more for corporate events. So we have the former labor secretary complaining about a pay gap between CEOs and average workers, when he gets almost as much in compensation for a one-hour talk as the average American worker earns working full-time for an entire year (see chart above)! If he gives only six speeches a year, his annual income approaches half-a-million dollars a year, putting him solidly in America’s “top 1%” by income – a group the “class warrior” frequently criticizes (see examples here and here). .

As I said in a previous post, I think it’s actually great that Robert Reich gets a market-based fee for his speeches, and I applaud him for commanding $40,000 per one-hour speech that allows him to enjoy a very comfortable life in the “top 1%.” But it then seems deeply hypocritical when he complains that airlines are “deeply exploitative” when they use market-based, surge pricing (see post at the link above) or when he complains that the pay for several hundred CEOs relative to the average worker’s pay is excessive. In all cases – Robert Reich’s $242,613 UC-Berkeley salary, his $40,000 speaking fees, CEO pay, airline pricing, and the average worker pay – those salaries, prices and fees are not determined independent of the market, but in each case primarily determined by market forces. Therefore, it seems deeply inconsistent for Reich to complain about the market forces that determine CEO pay, airline surge pricing and average worker pay, but then take advantage of those same market forces to earn a $242,613 salary for teaching one class per semester and charge $40,000 for a one-hour talk and enjoy life in the “top 1%.” And in any discussion of CEO pay we should remember that the average CEO in America earned only $176,400 last year (not multi-millions of dollars), received an increase in salary less than the average worker, and earned only about 5 times more than the average worker (not 300X more).

HT: Steve Bartin, see his post today about Robert Reich here."

Tuesday, September 16, 2014

The Case for Open Borders

From Alex Tabarrok of Marginal Revolution
"Dylan Matthews summarizes the The Case for Open Borders drawing on an excellent interview with Bryan Caplan. Here is one bit from the interview:
Letting someone get a job is not a kind of charity. It’s not a welfare program. It’s just the government leaving people alone to go and make something out of their lives. When most people are on earth are dealt such a bad hand, to try to stop them from bettering their condition seems a very cruel thing to do to someone.

My elevator pitch has no economics in it, because the economics is actually too subtle to really explain in an elevator pitch. If I had a little bit more time, I would say, “What do you think the effects for men have been of more women in the workforce?”

Are there some men who are worse off? Sure. But would we really be a richer society if we kept half the population stuck at home? Isn’t it better to take people who have useful skills and let them do something with it, than to just keep them locked up someplace where their skills go to waste?
Isn’t that not just better for them, but better for people in general, if we allow people to use their skills to contribute to the world instead of keeping them shut up someplace where they just twiddle their thumbs or do subsistence agriculture or whatever?
On the economics, David Roodman has a characteristically careful and comprehensive review written for Givewell of the evidence on the effect of immigration on native wages. He writes, “the available evidence paints a fairly consistent and plausible picture”:
  • There is almost no evidence of anything close to one-to-one crowding out by new immigrant arrivals to the job market in industrial countries. Most studies find that 10% growth in the immigrant “stock” changes natives’ earnings by between –2% and +2% (@Longhi, Nijkamp, and Poot 2005@, Fig 1; @Peri 2014@, Pg 1). Although serious questions can be raised about the reliability of most studies, the scarcity of evidence for great pessimism stands as a fact (emphasis added, AT)….
  • One factor dampening the economic side effects of immigration is that immigrants are consumers as well as producers. They increase domestic demand for goods and services, perhaps even more quickly than they increase domestic production (@Hercowitz and Yashiv 2002@), since they must consume as soon as they arrive. They expand the economic pie even as they compete for a slice. This is not to suggest that the market mechanism is perfect—adjustment to new arrivals is not instantaneous and may be incomplete—but the mechanism does operate.
  • A second dampener is that in industrial economies, the capital supply tends to expand along with the workforce. More workers leads to more offices and more factories. Were receiving economies not flexible in this way, they would not be rich. This mechanism too may not be complete or immediate, but it is substantial in the long run: since the industrial revolution, population has doubled many times in the US and other now-wealthy nations, and the capital stock has kept pace, so that today there is more capital per worker than 200 years ago.
  • A third dampener is that while workers who are similar compete, ones who are different complement. An expansion in the diligent manual labor available to the home renovation business can spur that industry to grow, which will increase its demand for other kinds of workers, from skilled general contractors who can manage complex projects for English-speaking clients to scientists who develop new materials for home building. Symmetrically, an influx of high-skill workers can increase demand for low-skill ones. More computer programmers means more tech businesses, which means more need for janitors and security guards. Again, the effect is certain, though its speed and size are not.
  • …one way to cushion the impact of low-skill migration on low-skill workers already present is to increase skilled immigration in tandem.
Plaudits are due to Givewell. While others are focused on giving cows, Givewell is going after the really big gains."

The Case for Open Borders

by on September 15, 2014 at 7:20 am in Uncategorized | Permalink
Dylan Matthews summarizes the The Case for Open Borders drawing on an excellent interview with Bryan Caplan. Here is one bit from the interview:
Letting someone get a job is not a kind of charity. It’s not a welfare program. It’s just the government leaving people alone to go and make something out of their lives. When most people are on earth are dealt such a bad hand, to try to stop them from bettering their condition seems a very cruel thing to do to someone.
My elevator pitch has no economics in it, because the economics is actually too subtle to really explain in an elevator pitch. If I had a little bit more time, I would say, “What do you think the effects for men have been of more women in the workforce?”
Are there some men who are worse off? Sure. But would we really be a richer society if we kept half the population stuck at home? Isn’t it better to take people who have useful skills and let them do something with it, than to just keep them locked up someplace where their skills go to waste?
Isn’t that not just better for them, but better for people in general, if we allow people to use their skills to contribute to the world instead of keeping them shut up someplace where they just twiddle their thumbs or do subsistence agriculture or whatever?
On the economics, David Roodman has a characteristically careful and comprehensive review written for Givewell of the evidence on the effect of immigration on native wages. He writes, “the available evidence paints a fairly consistent and plausible picture”:
  • There is almost no evidence of anything close to one-to-one crowding out by new immigrant arrivals to the job market in industrial countries. Most studies find that 10% growth in the immigrant “stock” changes natives’ earnings by between –2% and +2% (@Longhi, Nijkamp, and Poot 2005@, Fig 1; @Peri 2014@, Pg 1). Although serious questions can be raised about the reliability of most studies, the scarcity of evidence for great pessimism stands as a fact (emphasis added, AT)….
  • One factor dampening the economic side effects of immigration is that immigrants are consumers as well as producers. They increase domestic demand for goods and services, perhaps even more quickly than they increase domestic production (@Hercowitz and Yashiv 2002@), since they must consume as soon as they arrive. They expand the economic pie even as they compete for a slice. This is not to suggest that the market mechanism is perfect—adjustment to new arrivals is not instantaneous and may be incomplete—but the mechanism does operate.
  • A second dampener is that in industrial economies, the capital supply tends to expand along with the workforce. More workers leads to more offices and more factories. Were receiving economies not flexible in this way, they would not be rich. This mechanism too may not be complete or immediate, but it is substantial in the long run: since the industrial revolution, population has doubled many times in the US and other now-wealthy nations, and the capital stock has kept pace, so that today there is more capital per worker than 200 years ago.
  • A third dampener is that while workers who are similar compete, ones who are different complement. An expansion in the diligent manual labor available to the home renovation business can spur that industry to grow, which will increase its demand for other kinds of workers, from skilled general contractors who can manage complex projects for English-speaking clients to scientists who develop new materials for home building. Symmetrically, an influx of high-skill workers can increase demand for low-skill ones. More computer programmers means more tech businesses, which means more need for janitors and security guards. Again, the effect is certain, though its speed and size are not.
  • …one way to cushion the impact of low-skill migration on low-skill workers already present is to increase skilled immigration in tandem.
Plaudits are due to Givewell. While others are focused on giving cows, Givewell is going after the really big gains.
- See more at: http://marginalrevolution.com/marginalrevolution/2014/09/the-case-for-open-borders.html#sthash.bf9Fr4af.dpuf

The Case for Open Borders

by on September 15, 2014 at 7:20 am in Uncategorized | Permalink
Dylan Matthews summarizes the The Case for Open Borders drawing on an excellent interview with Bryan Caplan. Here is one bit from the interview:
Letting someone get a job is not a kind of charity. It’s not a welfare program. It’s just the government leaving people alone to go and make something out of their lives. When most people are on earth are dealt such a bad hand, to try to stop them from bettering their condition seems a very cruel thing to do to someone.
My elevator pitch has no economics in it, because the economics is actually too subtle to really explain in an elevator pitch. If I had a little bit more time, I would say, “What do you think the effects for men have been of more women in the workforce?”
Are there some men who are worse off? Sure. But would we really be a richer society if we kept half the population stuck at home? Isn’t it better to take people who have useful skills and let them do something with it, than to just keep them locked up someplace where their skills go to waste?
Isn’t that not just better for them, but better for people in general, if we allow people to use their skills to contribute to the world instead of keeping them shut up someplace where they just twiddle their thumbs or do subsistence agriculture or whatever?
On the economics, David Roodman has a characteristically careful and comprehensive review written for Givewell of the evidence on the effect of immigration on native wages. He writes, “the available evidence paints a fairly consistent and plausible picture”:
  • There is almost no evidence of anything close to one-to-one crowding out by new immigrant arrivals to the job market in industrial countries. Most studies find that 10% growth in the immigrant “stock” changes natives’ earnings by between –2% and +2% (@Longhi, Nijkamp, and Poot 2005@, Fig 1; @Peri 2014@, Pg 1). Although serious questions can be raised about the reliability of most studies, the scarcity of evidence for great pessimism stands as a fact (emphasis added, AT)….
  • One factor dampening the economic side effects of immigration is that immigrants are consumers as well as producers. They increase domestic demand for goods and services, perhaps even more quickly than they increase domestic production (@Hercowitz and Yashiv 2002@), since they must consume as soon as they arrive. They expand the economic pie even as they compete for a slice. This is not to suggest that the market mechanism is perfect—adjustment to new arrivals is not instantaneous and may be incomplete—but the mechanism does operate.
  • A second dampener is that in industrial economies, the capital supply tends to expand along with the workforce. More workers leads to more offices and more factories. Were receiving economies not flexible in this way, they would not be rich. This mechanism too may not be complete or immediate, but it is substantial in the long run: since the industrial revolution, population has doubled many times in the US and other now-wealthy nations, and the capital stock has kept pace, so that today there is more capital per worker than 200 years ago.
  • A third dampener is that while workers who are similar compete, ones who are different complement. An expansion in the diligent manual labor available to the home renovation business can spur that industry to grow, which will increase its demand for other kinds of workers, from skilled general contractors who can manage complex projects for English-speaking clients to scientists who develop new materials for home building. Symmetrically, an influx of high-skill workers can increase demand for low-skill ones. More computer programmers means more tech businesses, which means more need for janitors and security guards. Again, the effect is certain, though its speed and size are not.
  • …one way to cushion the impact of low-skill migration on low-skill workers already present is to increase skilled immigration in tandem.
Plaudits are due to Givewell. While others are focused on giving cows, Givewell is going after the really big gains.
- See more at: http://marginalrevolution.com/marginalrevolution/2014/09/the-case-for-open-borders.html#sthash.bf9Fr4af.dpuf

More on the ‘imaginary hobgoblin’ of ‘rising income inequality’ with new data from today’s Census report

From Mark Perry.
"
gini

We hear all the time about “rising income inequality” in America (there are about 1 million Google search results for that term), about “the rich getting richer and the poor getting poorer,” the “stagnant or disappearing middle class,” all of recent income gains going to the rich,” the lack of income mobility and other narratives of pessimism. And yet, nobody seems to have shared those negative narratives with the Census Bureau, which released new data today on “Income and Poverty in the US: 2013,” because some of those data tell a slightly different story.

1. The top chart above shows the shares of total income earned by the top 20% and top 5% of US households from 1993 to 2013 (from Table A-2). In 1993, 49% of total income went to the top quintile of US households, and 20 years later in 2013, the share of income going to the top 20% has increased to only 51%. Likewise, in 1993 the share of total income going to the top 5% of US households was 21%, that share had increased to only 22.2%. Interestingly, the 22.5% share last year was slightly lower than the 22.4% of income that went to the top 5% in 2001. Over the last two decades, the income share of the top 20% (top 5%) has been remarkably stable at about 50-51% (21-22%) and there has been no statistical evidence of “rising income inequality” according to this measure.

2. The bottom chart above shows annual Gini indexes of income inequality (a statistical measure of income dispersion that quantifies income inequality on a range from 0% for complete equality to 100% for complete inequality) for US households from 1993 to 2013 (also from Table A-2). Like the first two measures above, the Gini index measure of income dispersion reveals that there has been no significant trend of “rising income inequality” for US household income in recent decades – the Gini index in 1993 was 0. 454 and in 2013 it was 0.476, a slight decrease from 0.470 in 2010 and 2011 and 0.477 in 2012, and has shown remarkable stability for the last several decades.

MP: Whether we look at Census Bureau data on the share of total income going to the top fifth and top 5% of American households, or Census data on Gini coefficients for U.S. household income, there is absolutely no statistical support for the commonly held view by the public, academia and the mainstream media that income inequality has been rising in recent years or decades. A more accurate description of income inequality over the last several decades would be to say that it “flat-lined” starting in about 1993.
So why are we even having this national debate about solutions to the “non-problem” of rising income inequality that doesn’t even exist by these Census Bureau measures? Maybe it’s another example of what H.L. Mencken called an “imaginary hobgoblin“:
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

Monday, September 15, 2014

Understanding Thomas Piketty and His Critics

From Curtis S. Dubay and Salim Furth of The Heritage Foundation. Abstract and excerpts:

"Abstract
Thomas Piketty’s Capital in the Twenty-First Century is a treatise on how wealth inequality evolves in capitalistic economies. Piketty uses data stretching back to the 18th century to describe the historical evolution of wealth and inequality, proposes a model that matches the data, and uses that model to predict rising wealth inequality in the 21st century. He recommends punitive taxes on high incomes and wealth to prevent the scenario that he predicts. However, the best critiques of Piketty have shown that most of the links in his argument are broken. Piketty’s model does not match his data as well as he claims. His prediction of permanently rising wealth inequality rests on two implausible modeling assumptions. And his recommendation of punitive taxes is based on the glib assumption that capital accumulation is unimportant for wage growth, an assumption at odds with the data and even with his own model. As a result, almost nothing in Capital in the Twenty-First Century can be applied usefully to policymaking"

"Piketty’s Errors 

Piketty’s argument is an elegant explanation of how the rich stay rich under capitalism. The mechanism is clear: Wealth usually grows faster than wages, and capital can effectively replace labor, so the rich grow perpetually richer unless some outside force—a world war or a confiscatory tax—intervenes. However, when subjected to rigorous review, Piketty’s tidy argument quickly falls apart.

Accounting for Housing Prices. Piketty argues that since wealth-to-income ratios generally move in the same direction as capital’s share of income, capital will be able to effectively replace labor in the future. Yet this argument relies on conflating home prices with capital investment and ignoring Piketty’s own evidence from the 19th century.



















Housing is a substantial portion of wealth (roughly half) in the countries that Piketty studied.[18] The rise of housing neatly explains why wealth-to-income ratios have risen since 1950, but wealth inequality has remained low: Much of the new wealth is the homes owned by middle-class families.
A study by fellow French economists used an alternate method of measuring the investment value of housing and found that the capital–income ratio has actually been stable since the 1970s, contrary to Piketty’s major claim.[19] According to Piketty’s explanation, the rise of wealth should take the form of reinvested profits earned by the very rich. Instead, the increase in capital is largely taking place in real estate and depends on using a particular method of accounting for price and rent changes.

Matthew Rognlie, in a thorough and technical critique of Piketty’s model, concludes that Piketty’s “justification … —the simultaneous long-term rise in the capital/income ratio and the net capital share of income—vanishes once we remove housing.”[20]
 
Piketty’s claim thus fails to explain the dynamics of wealth in the late 20th century, and his model also fails to explain his own data in the 19th century. Figures 6.1 and 6.2 in his book show that wealth’s share of income in France and Britain grew rapidly in the first half of the 19th century and fell rapidly in the second half.[21] According to Piketty’s claim, this major historical rise and fall of wealth should echo similar changes in the wealth-to-income ratio. Instead, wealth-to-income ratios in France and Britain remained steady throughout the 18th century.[22]
 
In the 21st century, as in the 19th century, movements in wealth’s share of income may occur for many reasons, but Piketty’s model explains very few of those changes.

The Misspecified Savings Function. As in the classic Solow model, Piketty’s wealthy save a fixed fraction of their income. This is a simplification of reality, but perhaps an acceptable one. However, Piketty first takes out the fraction of income that is lost due to depreciation, a fraction that becomes larger as the wealth-to-income ratio grows (as he says it will). Economists Per Krusell and Tony Smith corrected Piketty’s poor choice and found that his prediction of rapidly growing wealth depended heavily on the misspecification.[23]
 
Again, Piketty’s own research should have shown him that his savings function was wrong. He records that the wealthy “in the interwar years did not reduce expenses sufficiently rapidly to compensate for the shocks to their fortunes … so they eventually had to eat into their capital to finance current expenditures.”[24] If the wealthy of the 20th century did not save slavishly to keep up the value of their estates, why expect the wealthy of the 21st century to do so?

Wealth and Workers Are Poor Substitutes. A final problem with Piketty’s model is that he takes an extreme view of the substitutability of capital and labor. Discussed at greater length in the Appendix, the value that Piketty chooses “is far outside the range of values that most economists studying this issue believe empirically plausible.”[25] Chart 1 tabulates scholarly attempts to measure the relevant parameter (the elasticity of substitution between labor and capital) and compares them to the value that Piketty chooses in order to reach his desired result.

Rognlie shows that using a value close to consensus, instead of Piketty’s outlying value, would actually reverse the model’s prediction of how capital accumulation affects the return on capital.
Intuitively, this makes sense when one remembers that half of all wealth is residential structures, and commercial and industrial buildings account for a significant share as well. Stefan Homburg uses publicly available data for France to show that machinery and equipment constitute a small and shrinking share of wealth.[26] While ATMs and robots might displace human labor, a house would be a worthless substitute.

Once this error is corrected, Piketty’s model fails to predict rising wealth inequality or a rising wealth-to-income ratio.

Piketty’s Disastrous Solution

Although Piketty’s case for a future of perpetually rising inequality based on inherited wealth is weak, any future, even such an unlikely one, is possible. Hence, it is necessary to understand why Piketty’s proposed cure would be worse than the purported disease.

While inherited wealth is central in Piketty’s world, he is disgusted by the high incomes of “supermanagers,” especially in the U.S. (He defines supermanagers as executives in large businesses and managers of financial institutions.) Their high annual salaries allow these top 0.1 percent of earners to become nouveaux riches after a few years of elite earnings."

The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment

From Mark Perry.

"
minwage

Posts on CD about the minimum wage always generate a higher than average number of comments, and Friday’s CD post (“Do Demand Curves Slope Down or Not?“) was no exception – there have been 46 comments so far. Most of the minimum wage debate centers on the issue of whether minimum wage increases have any effects on employment levels. Specifically, does the empirical evidence point to any significantly negative effects on employment levels following minimum wage hikes, as clearly predicted by economy theory? Some empirical evidence like the much-cited 1994 study by Card and Krueger found “no indication that the rise in the minimum wage reduced employment” at fast-food restaurants in New Jersey following a minimum wage increase to $5.05 per hour compared to nearby fast-food restaurants in Pennsylvania where the minimum wage remained constant at $4.25.

Let me attempt to reconcile the apparent inconsistency between: a) economic theory, which clearly predicts a negative relationship between the minimum wage and the quantity of unskilled workers demanded by employers, and b) some of the empirical evidence that finds no negative employment effects following minimum wage hikes. Here’s the key point: The negative relationship predicted by economic theory is not: a) between minimum wage hikes and the number of unskilled workers employed, but b) between minimum wage hikes and the number of unskilled work hours demanded by employers. 

The two charts above help to illustrate that difference:

In the top chart, we see a negative relationship between an increase in the minimum wage and the number of hours of unskilled work demanded by employers in the 12-month period following the increase in the hourly price of unskilled labor (to capture the effects on future hiring). Like an increase in the cost of any other labor input or other input like food, energy, raw materials, machinery, equipment rental, or building rent, employers facing a 39% increase in the cost of unskilled labor (from $7.25 to $10.10 an hour) would have no other choice than to reduce the number of unskilled work hours – it would simply be a necessary strategy for survival. As I pointed out recently, a minimum wage increase to $10.10 per hour would be the equivalent to an annual tax of more than $6,000 per full-time worker earning the minimum wage.

The various strategies employers might use to reduce their demand for unskilled work hours over the 12-month period following a 39% minimum wage hike might include: a) reducing the number of hours worked per week by entry-level unskilled workers, e.g. cutting their hours from 40 to 30 per week, or from 30 to 20, etc., b) reducing the number of unskilled workers currently employed through layoffs, c) reducing the number of unskilled workers that employers might have previously been planning on adding to staffing levels in the future, d) substituting skilled workers for the now relatively more expensive unskilled workers, and e) investing in technologies that would substitute automation, mechanization, robotics, and self-serve options for unskilled workers. Although the effect of a 39% minimum wage hike on employment levels might be uncertain, the negative effect on the number of hours of unskilled labor demanded by employers would be much more certain and predictable according to the Law of Demand. 

The bottom chart shows graphically how it would be possible that an increase in the minimum wage might not adversely affect the number of unskilled workers employed by looking at the relationship between the average weekly compensation for unskilled workers (and not the hourly monetary wage) and the number of unskilled workers.

Suppose that employers realistically respond to a 39% increase in the minimum wage by: a) cutting hours for minimum wage employees and b) reducing or eliminating  non-monetary forms of compensation that might include free or reduced cost food, merchandise, uniforms or parking, bonuses/profit-sharing, educational reimbursement, paid holidays and company parties/picnics, health care benefits, etc. Following a reduction in hours and non-monetary benefits, the average compensation per minimum wage employee might be unchanged, as could be the number of workers employed at the minimum wage. That is, if the employer can completely offset the monetary increase in the minimum wage by a reduction in hours and fringe benefits, there will be no need to reduce overall staffing levels. In that case, empirical evidence may find no negative relationship between increases in the minimum wage and employment levels, even when there’s a predictable and negative effect on the number of hours of unskilled work demanded by employers.
Bottom Line: It’s more accurate to say that the Law of Demand predicts: a) a negative relationship between higher wages and the number of hours of unskilled work demanded by employers, rather than b) a negative relationship between higher wages and the number of unskilled workers employed. Therefore, it’s possible that a minimum wage hike won’t always negatively affect employment levels for entry-level unskilled workers, but will affect the number of hours demanded by employers for unskilled labor. That’s how we can reconcile the apparent inconsistency between economic theory and some of the empirical evidence…..

Update: Here’s another thought. Some studies find no significant employment effects when comparing employment levels of unskilled workers before and after an increase in the minimum wage. But that doesn’t capture the possible increases in the number of unskilled workers employed that might have taken place without an increase like 39% in the minimum wage from $7.25 to $10.10. For example, suppose that employers had been planning to expand their operations over the next several years and had planned to increase staffing levels of unskilled workers by 1-5%.

Following the minimum wage hike, they cancel plans to expand their operations and instead maintain current staffing levels by reducing hours and benefits. Therefore, we might find that a 39% increase in the price of hiring unskilled workers had no significantly negative effect on current employment levels, even when there could be a significantly negative effect on the number of unskilled workers hired in the future! The 1-5% planned future increase in hiring unskilled workers never happens; but those jobs that weren’t created aren’t visible and aren’t accounted for when we try to calculate the negative effects of the minimum wage."