Tuesday, July 28, 2015

Caroline Baum's rebuttal of Krugman on the minimum wage

See Letter to the NYT, etc. from Money Illusion. Excerpt: 
"Over at Econlog I have a post on Krugman’s recent minimum wage column. Caroline Baum (you’ve probably seen her columns at Bloomberg, and elsewhere) responded to the column with a letter to the NYT.  They didn’t print it, so I thought it would be a good idea to post it here.  The rest of the column is her letter.  I request that commenters be more polite than usual.  I don’t mind obnoxious comments, but let’s please treat her as a guest—if you disagree, do so respectfully:
To the Editor:
In his July 15 op-ed, “Liberals and Wages,” Paul Krugman states definitively: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” In support of his no-evidence conclusion, he cites a widely discredited 1994 study by economists David Card and Alan B. Krueger.
So flawed was the study – it relied on telephone surveys of fast food restaurants in neighboring counties in New Jersey and Pennsylvania after New Jersey raised its minimum wage – that Card and Krueger were forced to redo it. Using official employment data the second time around instead of a telephone survey, they re-published their findings in 2000, claiming similar results to the first study.
Economists who have reviewed the body of literature on the effect of an increase in the minimum wage have criticized both the methodology and the results of the second Card/Krueger study. David Neumark and William Wascher, both widely respected for their work in the field, cite the vastly different patterns of teenage employment in the two states that pre-dated the study, disqualifying Pennsylvania as a good “control” group. They also find that the depressing effect of a minimum wage hike on employment occurs with a lag, not within Card/Krueger’s short-term time frame. (Neumark and Wascher’s study can be found here: http://www.nber.org/papers/w12663.pdf.)
What’s more, unlike a randomized controlled trial for a new drug, Card and Krueger have no way of measuring what would have happened to fast-food employment in New Jersey absent a minimum wage increase.
It is disingenuous for Mr. Krugman to ignore the wide body of evidence demonstrating that an increase in the minimum wage deprives entry-level workers of an opportunity to enter the workforce. Instead he relies on the findings of an outlier study that contradicts basic economic theory. An increase in the price of any good or service, including labor, results in a decrease in demand for it.
No one will argue with Mr. Krugman’s point that paying workers a higher wage and providing good benefits increases employee loyalty. Businesses choose to do it all the time. Henry Ford didn’t double his workers wages to $5 a day in 1914 because he wanted them to buy Model T’s. He paid his workers more because he wanted to reduce turnover on the assembly line, which proved to be a hard, unappealing line of work.
When the government mandates a floor on wages, many low-margin businesses can’t absorb the higher costs and raise their prices. Even high-margin businesses pass the cost along to their customers.
The New York Times does a disservice to its readers when it allows a Nobel prize winning economist to dissemble to make a political point. Progressive economists may argue in favor of a minimum wage on compassionate grounds, but they all understand the economics of supply and demand. The non-partisan Congressional Budget Office reported last year that raising the federal minimum wage to $10.10 an hour from the current $7.25 would eliminate 500,000 jobs nationwide. (Currently 29 states have minimum wages higher than $7.25.)
And yes, a higher minimum wage is great for those who keep their jobs. But it’s an impediment to those starting out in the workforce.
Mr. Krugman is entitled to his own opinion; after all he writes opinion pieces. But he is not entitled to his own facts. As an opinion writer myself for three decades, my work is always fact-checked for accuracy. Perhaps the Times should make accuracy in support of opinions a priority.
Caroline Baum
West Tisbury, Mass."

The Fed caused the Great Recession with a tight money policy

See Don’t waste time looking for Ratex alternatives by Scott Sumner. Excerpt:
"Noah Smith has a new post discussing the current fad of looking for alternatives to the rational expectations model.  The motivation seems to be that we need to explain the collapse of bubble expectations and the rise in the propensity to save (although not actual saving?) during the 2008 recession.  I understand why people want to do this, but it would be a very big mistake.

I’ve always thought that it was patently obvious that the Fed caused the Great Recession with a tight money policy that allowed NGDP expectations to collapse in late 2008. But other people apparently don’t see it as being at all obvious.  They look for alternative explanations.  And yet when you ask them why, they tend to give these really lame “concrete steppes” explanations, such as, “The Fed didn’t raise interest rates on the eve of the Great Recession, so how can you claim that tight money caused the recession?”  Or they show themselves to be completely ignorant of actual Fed policy, and claim that the fed funds target was at zero when NGDP expectations collapsed in 2008.  It wasn’t.

Fortunately, neither of those apply to the ECB, which had positive target interest rates throughout 2007-2012, and which took “concrete steppes” in both 2008 and 2011, tightening money and triggering not one but two plunges in NGDP growth, which led to two recessions.  If there has ever been a more perfect example of the monetary policy/AS/AD model that we teach in our textbooks, I’d like to see it. (OK, maybe 1929-32.) And yet last time I did one of these rants almost no economists were blaming the ECB’s tight money policy for the double dip recession."

Uber: The Best Option for Workers and Consumers

By John McDonald of CEI. Excerpts:
"The reason that Uber has grown 400 percent from 2013 to 2014 is not just because it provides consumers with cheaper and easier alternate to the traditional taxicab, but it also offers drivers a flexible and easy way to earn some extra income. Indeed, most Uber drivers use the ride share service as a part-time job for supplemental income; only 19 percent of Uber drivers spend more than 35 hours on the road.

One of Uber’s most attractive aspects of is the flexible hours and the freedom it provides. Uber drivers can work whenever they want using their own car. Some taxi drivers rent a car from the taxi company for a fee of $75 to $100 per day. On average, Uber drivers make $19.04 per hour, while taxi drivers make a measly median wage of $10.97 per hour.

Another key advantage is that Uber has the ability to maintain the quality of customers the drivers will serve. Each Uber customer has a personal profile on the Uber app and drivers rate their customers, just like riders rate their drivers. Uber drivers have a better workplace environment because of this feature."

"for most Uber drivers, the service provides a secondary income, meaning that many have health insurance through a full-time job (86 percent of full-time jobs in the private sector provide health insurance). Even for those for whom Uber is a primary source of income, it’s a freely chosen alternative;"

"a 2014 CEI study shows that unionization actually lowers workers’ wages by about 15 percent."

Monday, July 27, 2015

Why the gap between worker pay and productivity might be a myth

From James Pethokoukis of AEI.
"Versions of the above [I moved it below-CM] chart are pretty common in news stories about inequality and middle class stagnation. While US output continues to rise decade after decade, the benefits don’t go to workers despite their obviously rising productivity. (And capital grabs more and more of national income.) There’s a big gap between the blue line (wages) and the green line (output).


But Robert Lawrence of the Peterson Institute argues this chart better reflects the productivity-worker income relationship:


According to this chart, wage and productivity growth have pretty much risen together. (And the share of national income going to labor has been steady until recently. More on that later.) Why the difference between the two charts? Lawrence made several modifications: (a) adjusted for an overly narrow definition of workers; (b) added in benefits to wages, (c) used an inflation measure that better accounts for what workers purchase; and (d) used a more relevant productivity measure. Lawrence:
Between 1970 and 2003 the growth in hourly real product compensation matched the growth in hourly real net output per worker. In 2003, therefore, the share of net compensation paid to labor was the same as in 1970. If the rise in average net output per hour is a good measure of the marginal product of labor, for this 33-year period, the data are compatible with the assumption that workers have actually seen their wages rise as rapidly as their marginal product. Since labor’s share in income fluctuates over the business cycle, and was therefore unusually high in 2000 for cyclical reasons, we cannot be confident about dating when the decline in labor’s share in income began. But it is clear that labor’s share has been unusually low since 2008, and real wages and compensation for workers of all skill levels has been slow.
The explanation for the sluggish rise in real wages over the long run—1970 through 2000—may lie not with something that weakened labor’s bargaining power but instead in changes in the relative prices of the goods and services that workers consume and those that they produce. In particular, in thinking about policies to raise middle-class incomes, we should be concerned about (a) the rising relative prices of goods and services that workers consume such as housing and education; (b) the rising costs of benefits, especially health care, and (c) the slow productivity growth in services as compared with the rapid productivity growth in investment goods. In the period after 2000, the declining share of labor (and rising share of profits) does warrant further explanation (in a recent working paper, I argue this growing gap reflects a particular type of technical change), but prior to that, simplistic comparisons of “real” output per worker and “real” wages are likely to lead analysts to draw the wrong conclusions.
This an uncomfortable analysis for analysts who argue that workers have been getting shafted for decades — and that the big reason why is the decline of union power. Instead, as I mentioned in the previous post, we need to focus first and foremost more on faster productivity and output growth. Then look at how these gains are being distributed."

The problem of regulation in Greece

See Krugman on Greece by David Henderson of EconLog. Excerpt:
"Krugman does make a good point that those regulations were bad 10 years ago but the Greek economy was not doing as badly 10 years ago. But they had the Euro ten years ago too. I agree with Krugman that the Euro is a huge culprit, but Krugman minimizes the problem of regulation. Transparency International ranks Greece, by the Corruption Perceptions Index, at 69th out of 175 countries rated. Germany's? 12th. Canada? 10th. (Low numbers are good.) Economic Freedom of the World puts Greece at 84th. Germany? 28th. Canada? 7th. (Again, low numbers are good.) Narrowing it down to regulation, Economic Freedom of the World puts Greece at 144th, Germany at 31st, and Canada at 10th. Athens, we have a problem."

Sunday, July 26, 2015

Stockholm Warns Seattle About The Problems Rent Control Can Cause

From Marginal Revolution.
"Here’s an interesting letter from “Stockholm” to Seattle
Dear Seattle,
I am writing to you because I heard that you are looking at rent control.
Seattle, you need to ask your citizens this: How would citizens like it if they walked into a rental agency and the agent told them to register and come back in 10 years?

I’m not joking. The image above is a scan of a booklet sent to a rental applicant by Stockholm City Council’s rental housing service. See those numbers on the map? That’s the waiting time for an apartment in years. Yes, years. Look at the inner city – people are waiting for 10-20 years to get a rental apartment, and around 7-8 years in my suburbs. (Red keys = new apartments, green keys = existing apartments).

Stockholm City Council now has an official housing queue, where 1 day waiting = 1 point. To get an apartment you need both money for the rent and enough points to be the first in line. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989!

In addition to Soviet-level shortages, the letter writer discusses a number of other effects of rent controls in Stockholm including rental units converted to condominiums and a division of renters into original recipients who are guaranteed low rates and who thus never move and the newly arrived who have to sublet at higher rates or share crowded space. All of these, of course, are classic consequences of rent controls.

Addendum: More details on Sweden’s rent-setting system can be found here, statistics (in Swedish) on rental availability in Stockhom are here and a useful analysis of the Swedish housing crisis with more details on various policies (e.g. new construction is exempt for 15 years but there isn’t nearly enough) is here. Jenkins wrote a comprehensive review of the literature on rent controls in 2009 that echoed what Navarro said in 1985 “the economics profession has reached a rare consensus: Rent control creates many more problems than it solves.”

Hat tip to Bjorn and Niclas who confirmed to me the situation in Stockholm and to Peter for the original link."

Maybe The Market Does Help Promote Racial Equality And Worker Safety

By David Henderson of EconLog. Excerpt:
"Now I don't trust the free market to preserve racial equality either. You can't preserve what has never existed. But what I do trust the free market to do is to undercut racial discrimination--by making those who discriminate pay for discrimination even if a government can't catch them. There's a large economics literature on this. And I do trust free markets more than I trust government. After all, governments in the South, in South Africa, and in Nazi Germany, to name three, had pro-discrimination laws. Here's what Linda Gorman writes in "Discrimination" in The Concise Encyclopedia of Economics:

Many people believe that only government intervention prevents rampant discrimination in the private sector. Economic theory predicts the opposite: market mechanisms impose inescapable penalties on profits whenever for-profit enterprises discriminate against individuals on any basis other than productivity. Though bigoted managers may hold sway for a time, in the long run the profit penalty makes profit-seeking enterprises tenacious champions of fair treatment.
And worker safety? Read W. Kip Viscusi's piece "Job Safety" in the Concise Encyclopedia. Here's the opening paragraph:

Many people believe that employers do not care about workplace safety. If the government were not regulating job safety, they contend, workplaces would be unsafe. In fact, employers have many incentives to make workplaces safe. Since the time of Adam Smith, economists have observed that workers demand "compensating differentials" (i.e., wage premiums) for the risks they face. The extra pay for job hazards, in effect, establishes the price employers must pay for an unsafe workplace. Wage premiums paid to U.S. workers for risking injury are huge; they amount to about $245 billion annually (in 2004 dollars), more than 2 percent of the gross domestic product and 5 percent of total wages paid. These wage premiums give firms an incentive to invest in job safety because an employer who makes the workplace safer can reduce the wages he pays."