Richmond Fed Economists Question Conventional Wisdom on Wealth Redistribution

This is from an email they sent out.

"Conventional wisdom says that wealth redistribution boosts output by increasing aggregate consumption. But economists at the Richmond Fed suggest in the Bank’s latest Economic Brief that household decisions regarding how much to work may offset decisions regarding how much to consume in determining the effects of wealth redistribution.

The authors conclude that wealth redistribution may have little effect on output and might actually reduce it. They are careful to note, however, that redistribution is not necessarily bad. “Allowing people to retire earlier or enabling secondary earners to drop out of the labor force to, for example, help take care of children or elderly parents, are significant benefits to the recipients of a redistributive program,” they write. “Those benefits might be good reasons in and of themselves to redistribute wealth, even if they have little to do with the more standard rationale and rhetoric surrounding boosting output.”"

Here are excerpts from the study

"The conventional rationale for redistribution is that lower-wealth households have a higher marginal propensity to consume — that is, they are more likely than higher-wealth households to spend an extra dollar received than to save it. This occurs because less wealthy households are generally more likely to be affected by liquidity constraints, that is, a limit on the amount they are able to borrow against future income in order to fund their desired current consumption level. As a result, transfers to lower-wealth households would boost aggregate consumption. This redistribution then has a stimulative effect on output because, in a standard Keynesian framework, an increase in the demand for labor is met with higher employment.²

This view puts household heterogeneity, with respect to both wealth and consumption behavior, front and center in determining the aggregate short-run response to a change in transfers. In recent research, Kartik B. Athreya, Andrew Owens, and Felipe F. Schwartzman show that the effect of a wealth redistribution program likely depends critically on another type of heterogeneity: how the marginal propensity to work varies with wealth.³ If recipients of a redistribution of wealth are likely to drop out of the labor force and contributors are not more likely to increase their hours worked, wealth redistribution programs could have contractionary effects on output and employment, even if there is a short-run increase in consumption. In other words, the stimulative impact of a redistributive policy is a function of how the marginal propensity to work, more than the marginal propensity to consume, varies with household wealth."


"While lower-wealth households generally will increase their consumption as a result of the transfer, they also are able to increase their leisure. This increase in leisure leads to a decrease in labor supply and thus, potentially, to a decline in aggregate output. However, contributors to the transfer — that is, the higher-wealth households — might increase their labor supply and reduce their leisure. This countervailing effect is especially likely to be important to the extent that higher-wealth households are more productive, so that a small increase in their labor supply can make up for large decreases in the labor supply of less-wealthy and less-productive households.

The authors find that labor supply decreases for households in the bottom four quintiles of the wealth distribution, with the largest decreases in the first and second quintiles. Households in the top quintile increase their labor supply, but not enough to offset declines in the other quintiles. Still, although there is a decline in aggregate hours worked, effective hours worked changes only slightly; assuming the wealthy earn higher wages because they are more productive, the increase in labor supply among those in the top quintile offsets the decline in labor supply among the bottom quintiles. This helps to dampen the contraction in output that results from the fall in labor supply."

"Still, under a reasonable and realistic set of assumptions, labor supply plays an important role and is an important complicating factor that requires more investigation. Currently, there is a large body of work on how the marginal propensity to consume varies with wealth but very little research on how the marginal propensity to work varies."

"Although Athreya, Owens, and Schwartzman's results suggest that a redistribution of wealth would have at best little effect on output, and might actually reduce it, they should not necessarily be construed as saying that redistribution is bad."

The Mariel Boatlift Raised the Wages of Low-Skilled Miamians

By Alex Nowrasteh of Cato.

"Harvard economist George Borjas recently published an important paper on how the unexpected surge of 125,000 Cubans (henceforth Marielitos) to Miami in 1980 lowered the wages of native-born male Miamians with less than a high-school degree. Because at least 60 percent of the Marielitos were high school dropouts, Borjas found that the negative wage effects were concentrated on Miamians with the same level of education.  

There are excellent criticisms of Borjas’ paper that show his results hinge on the control cities he chose, his exclusion of women, the age group of the workers, whether Hispanics are included, whether high-school-or-less or no-high-school-at-all are included, and whether datasets with the larger samples are used. For the sake of argument, supposing that Borjas made the correct methodological choices on every single point above, the Mariel Boatlift still raised the wages for low-skilled U.S. workers collectively due to wage complementarities. That’s because native-born Miamians with only a high school degree (no associate degree, no education after high school) experienced significant wage increases immediately after Mariel relative to workers with the same levels of education in the control groups, or placebos, of other cities. Borjas’ supporters ignore this finding but he does not.

In his Mariel paper, Borjas reports the wage of high school dropouts relative to high school graduates in Figure 3(C) and the wage of Miami high school graduates across an all cities permutation in Figure 4(B), but he doesn’t have a dramatic graph like this that shows what happened to the relative wages of high school graduates after Mariel.

Another working paper by Borjas and Monras on the wage effects of refugees also found that “the rate of wage growth for high school graduates, a group whose size was only increased modestly by the Marielitos, is noticeably higher in Miami than outside Miami.”  They go on to write that, “the predominantly low-skill Marielitos … raised the wage of workers with a high school education, and this effect is both numerically and statistically significant. The cross-wage elasticity is about +0.7 [compared to -0.9 for high school dropouts].”  They do not find any employment effects for high school dropouts but they did uncover positive and statistically significant employment gains for those with a high school degree. Furthermore, Figure 7.5 on page 148 of Borjas’ new book We Wanted Workers hints at a wage increase for high school graduates immediately after Mariel.   
        
My intern Cole Blondin and I followed Borjas’ methods to create graphs for the wages of high school graduates before and after the Boatlift. We used the March Current Population survey (March CPS) and combined the May Current Population Survey and the May Outgoing Rotation Group (May CPS-ORG) datasets. The only differences are that we present the figures in dollars rather than logs, we did not use three-year averages to smooth the data, and we did not recreate the synthetic control. One final note, the wage effect of the Marielitos must be compared to placebos because there was only one Miami in 1980 and we can’t actually observe what would have happened to that city had the Marielitos not arrived. We used the same sets of placebo cities as Borjas.

Even under Borjas’ assumptions, native-born male Miamians with a high school degree or less saw a ­net-wage increase after the Mariel Boatlift.
 
March CPS 

Just as Borjas reported, there is a significant drop in the wages for male native-born Miamians with less than a high school degree who were 25 to 59 years old after 1980 relative to workers with the same characteristics in the placebos (Figure 1).  By contrast, the wages for Miamians with only a high school degree also increased after the Mariel Boatlift (Figure 2). The wage changes in both figures are statistically significant relative to the placebos. Miamians with just a high school degree are complementary to high school dropouts. Figure 3 shows the wages for high school dropouts and high school graduates in Miami.  
  
Figure 1

High School Dropouts, March CPS

Figure 2
High School Only Graduates, March CPS

Figure 3

High School Dropout and High School Only Graduate Wages 1977-2002, March CPS

Relative wages for high school dropouts reached their nadir in 1985 and 1986 while the wages for workers with only a high school degree reached their peak in 1984. A mere 19 percent of Miami workers in the March CPS sample had less than a high school degree but 36 percent had only a high school degree which means that more low-skilled American workers experienced a wage gain than a wage decline after Mariel.

We compare the pre- and post-Mariel Miami wages, weighted by the relative size of the native educational cohorts in the March CPS, to produce a rough estimate of Mariel’s net impact on native wages.  For instance, if there are 10 high school dropouts who each lose $1 and 20 high school only graduates who each gained $0.60, then the net wages earned by Americans increased by $2 [(20*$0.60)-(10*$1)]. In such a scenario, total wages rise for Americans who are high school dropouts and high school graduates.

We compared the post-Mariel period of 1981 to 1986 to the pre-Mariel period of 1976-1979. The total wage gain for high school graduates outweighs the total losses for high school dropouts in the “All Cities” placebo (the placebo that produced Borjas’ stunning graph). The Card and Low-Skill placebos also returned slightly net wage losses while the employment placebo returned a deeply negative result (Table 1).  The average for all the placebos from the March CPS data was -5.85.
    
Table 1

Net Wage Effects, March CPS

March CPS Differences in Differences Changes (1976-1979, 1981-1986)
	Card Cities	Employment Cities	Low-Skill Cities	All Cities
No HS, Wage Changes Times Pop	-9.7804	-21.2793	-10.0078	-9.41663
HS Only, Wage Changes Times Pop	5.471363	4.892769	6.571003	10.13576
Net effect	-4.30904	-16.3865	-3.4368	0.71913

May CPS-ORG

Professor Borjas also used the May CPS-ORG data to test whether Mariel lowered the wages of similarly-skilled Miamians. The May CPS-ORG dataset returned a much smaller wage decrease for high school dropouts in Borjas’ paper. This is important by itself because the May CPS-ORG dataset is superior for two widely-reported reasons: First, the May CPS-ORG contains fewer errors because it asks respondents about their wages last week rather than last year (which is the case for the March CPS). Second, it has a larger sample size than the CPS in every year from 1979 onward.  

Regardless, we confirmed Professor Borjas’ findings that the wages of male high school dropouts in the relevant age range fell after the Mariel Boatlift, although they fell less than in the March CPS data (Figure 4). We also found that the wages for high school graduates in the May CPS-ORG dataset increased relative to the placebo cities after the Mariel Boatlift (Figure 5).

Figure 4

High School Dropouts, May CPS-ORG

Figure 5
High School Only Graduates, May CPS-ORG

The wage gains for high school graduates outweigh the losses of male high school dropouts in Miami for each placebo group—using the March CPS weight of the population by education (Table 2). The Card Cities, Low-Skill Cities, and All Cities placebos all returned very positive results.  The Employment Cities placebo was the only one that returned a slightly negative result. The average net gain for high school graduates and dropouts across the placebos is a positive +17.43. 

Table 2

Net Wage Effects, May CPS-ORG

May CPS-ORG Differences in Differences Changes (1976-1979, 1981-1986)
	Card Cities	Employment Cities	Low-Skill Cities	All Cities
No HS, Wage Changes Times Pop	-2.20452	-8.33419	-1.67613	-1.91032
HS Only, Wage Changes Times Pop	28.30903	7.618387	25.00548	22.89419
Net effect	26.10452	-0.71581	23.32935	20.98387

To further check our results, we also weighted the wage changes by the May CPS-ORG survey’s estimate of Miami’s education level. The May CPS-ORG survey found that the share of Miami’s native population without a high school education is higher and the percentage with only a high school degree is lower than in the March CPS. Using the May CPS-ORG education weights returns a reduced net positive wage impact for the Card, Low-Skill, and All Cities groups while the Employment Cities group is more negative. Using the May CPS-ORG education estimates, the average is still a positive +10.09.    

Evaluating the Complementary Effects from the March CPS and May CPS-ORG

We ran Borjas’ four different sets of placebo cities on two educational groups of male workers in two different datasets—the March CPS and the May CPS-ORG. There were eight final estimates of the net effects, four in the March CPS and four in the May CPS-ORG.  Four of the eight showed a positive net-wage impact – three in the May CPS-ORG and one in the March CPS.  Four of the eight also showed a negative net-wage impact—three in the March CPS and one in the May CPS-ORG. For each placebo, the positive net-wage gains in the May CPS-ORG results were far larger than the estimated loss in either the May CPS-ORG or the March CPS.

Conclusion

The Mariel Boatlift provides a wonderful natural experiment to test how a sudden, exogenous surge of immigrants affects wages. Professor Borjas’ examination of how Marielitos substituted for native-born Miamians with the same level of education is an important component of that story. However, most have ignored the important complementary effects of the Marielitos on the wages of workers with only a high school degree. A full understanding of Professor Borjas’ contributions to this subject requires acknowledging these complementary effects. To borrow the language used by Professor Borjas, the Marielitos’ redistributed wages from dropouts to workers with only a high school degree with a net positive effect on all low-skill workers." 

U.S. automakers doing fine without president-elect Trump’s meddling

By Daniel Griswold of Mercatus. Excerpt:

"Our incoming president has been a harsh critic of the North American Free Trade Agreement, but the irony of his targeting U.S. automakers is that, by virtually every meaningful measure, they are thriving in the zero-tariff North American market created by NAFTA. Consider:

· In 2016, more than 12 million cars and light trucks were assembled in the United States. That exceeds the average annual assembly of 10.7 million vehicles during the past 30 years.

· Real automotive manufacturing output, including parts and final assembly, reached record levels in 2016. Output has more than doubled since NAFTA went into effect in 1994.

· U.S. auto factories are operating at 85 percent of capacity, according to the Federal Reserve. That is well above the 80 percent that is considered normal and a full 10 percent above the industry average since 1986.

· Motor vehicle exports from the United States reached a record 2.6 million in 2015.

· Ford and GM are enjoying record profits from their domestic as well as international sales.

Total employment is down in U.S. auto factories compared to decades past, but this is due not to declining production but to impressive advances in productivity fueled by automation. And rising productivity means U.S. automakers can pay their workers more and still remain competitive in global markets."

Some Cases Of Negative Consequences Of Higher Minimum Wages Around The Country

Leaving for Las Vegas: California's minimum wage law leaves businesses no choice By Houman Salem, founder and CEO of ARGYLE Haus of Apparel in San Fernando. Excerpt:

"When the $15 minimum wage is fully phased in, my company would be losing in excess of $200,000 a year (and far more if my workforce grows as anticipated). That may be a drop in the bucket for large corporations, but a small business cannot absorb such losses. I could try to charge more to offset that cost, but my customers —the companies that are looking for someone to produce their clothing line — wouldn’t pay it. The result would be layoffs.

 When Los Angeles County’s minimum wage ordinance was approved in July, I began looking at Ventura County, Orange County and other parts of the state. Then, when California embraced a $15 wage target, I realized that my company couldn’t continue to operate in the state. After considering Texas and North Carolina, I’ve settled on moving the business to Las Vegas, where I’m looking for the right facility.  About half of our employees will make the move with us.

Nevada’s minimum wage is only $8.25 right now, so I can keep my current pay structure or possibly increase wages. Even in the event that Nevada raises its minimum wage, I’ll still be better off with reduced regulations, no state taxes, and significantly less expensive worker compensation insurance. I have had the opportunity to meet with Las Vegas city officials (including the mayor) and I am confident that we are entering a very business-friendly environment."

Cultured Cafe in Arizona has just closed, citing min wage increase.


As minimum wage rises, some employers cut back. From The Boston Globe. Excerpt:

"For some small business owners in Massachusetts, however, the effect of the wage increases has been significant.

The owner of two family entertainment centers in Massachusetts said she has reduced her staff to 20 people, down from 50, over the past two years, to counteract rising payroll costs.

The employer, who asked not to be named because she feared repercussions from workers’ advocates, said she and her husband have cut their hours of operation, replaced their DJ with canned music, and are working more themselves to stay afloat. They have also stopped hiring teenagers in favor of more experienced workers.

At Winthrop Marketplace, Marc Wallerce estimates that his payroll will have risen $100,000 over the course of the three wage increases, which includes insurance and workers’ compensation costs tied to salaries. His older workers all make well over $11 an hour, so the raises have mostly been going to the students he employs at the grocery store.

Wallerce said he has not cut back on his nearly 60-person staff, as he initially feared he might have to do, nor has he scaled back bonuses. Still, the bottom line is smaller than it used to be.
“Are we feeling the pinch? Absolutely. Every day,” he said.

On Sundays and holidays, the pinch is even tighter, when retailers in Massachusetts have to pay their workers time-and-a-half.

That means 16-year-olds will now be making at least $16.50 an hour on Sundays. Massachusetts is one of only two states with this Sunday requirement, and one of 11 that don’t have lower wages for teenagers, according to the Retailers Association of Massachusetts.

The increase to $11 an hour is particularly difficult to absorb for business owners outside the Interstate 495 loop around Boston, where the economy is not as strong, said Bill Vernon, Massachusetts director of the National Federation of Independent Business. And an increase to $15 an hour could be disastrous.

“I just think $15 is just something the Massachusetts economy, even inside 495, can’t handle,” he said. “It will help some people, but it will cost jobs. . . . And it’s the young, unskilled workers who are going to get hurt by this.”"

AQ Closing After Five Years In SoMa. Excerpt"

"One more New Year's surprise in restaurant closing news: AQ is shutting down this month after five years in business and many accolades, both local and national. Thrillist broke the news in this piece, the third in a series about what writer Kevin Alexander describes as a nationwide restaurant bubble in which he asserts "America's Golden Age of Restaurants is coming to an end."

AQ was a great story of restaurant success in one of the country's most vibrant and competitive eating towns. Owner Matt Semmelhack, a first time restaurateur, partnered with a talented chef, Mark Liberman, and debuted the restaurant in late 2011 to immediate raves from Michael Bauer and many others, and a James Beard Award nomination for Best New Restaurant. The primary gimmick, which was quick to charm the restaurant's fans, was that the restaurant would change with each season, with the decor, menu, and the staff's uniforms all changing four times a year — with the menu actually shifting many more times than that in incremental ways, based on ingredient availability.

But Semmelhack tells a story that's now becoming all too familiar for restaurant owners — not only in San Francisco, however San Francisco stands apart for having the multiple burdens of a high minimum wage, high rents, and typically astronomical opening costs. Add to that the increased health care mandate for employers, and even a successful restaurant can see their profit margin shrink rapidly."

5 victims of the $15 minimum wage. From Acton:

"For Abbot’s Cellar, a newly founded restaurant in San Francisco, the recent wage hike made their start-up model unfeasible, even despite tremendous initial success."

"Running a diner is not easy,” says Larry, owner of Del Rio Diner in Brooklyn, NY. “Everyone thinks it is, but it’s not.” The neighborhood diner has a 40-year history in the community with a strong and loyal customer base, but amid mounting food costs and a tough economic environment, New York’s mandatory wage increase was “the straw that broke the camel’s back,”"

"Almost Perfect Bookstore once called itself “one of the largest new and used book stores on the West Coast.” Now, thanks to the $15 minimum wage, the 25-years-old store in Sacramento is closing, with the owner shifting to an online-only presence. “The reason that this particular business…is going out of business is because I can no longer afford to pay the ever-increasing minimum wage,” says owner Kelly Uimer."

"Sterling’s Family Childcare offers childcare for children in Oakland, CA, 98 percent of which come from low-income families. Due to the recent California law, the owner has had to lay off one longstanding employee, cut employee hours, and turn away children who required transportation."

And ARGYLEHaus of Apparel, mentioned above.

The Trump administration should show local officials the research proving that minimum wages cost jobs

See The ‘Fight for $15’: Coming to a City Hall Near You.

"Take Los Angeles, where a measure signed in 2015 by Mayor Eric Garcetti will take the city’s minimum wage to $15 by 2020. Two years ago when the mayor began pushing his original proposal of $13.25, one of his deputies sent an email to Ken Jacobs, a sympathetic researcher at the University of California-Berkeley. “We need to demonstrate clearly how this will help labor and the economy in general,” the mayor’s office wrote. (My organization, the Employment Policies Institute, obtained these emails via a public-records request.) The Berkeley team responded by writing a favorable report predicting that price increases would be “negligible” and effects on employment were “not likely to be significant.”

Yet there is much evidence to the contrary. Start with the first two cities to implement minimum wages, which were studied by Aaron Yelowitz of the University of Kentucky, with research support from my organization. In a 2005 paper, Mr. Yelowitz wrote that after the Santa Fe wage bump, the likelihood of unemployment among less-educated workers jumped by more than eight percentage points. A 2012 study by Mr. Yelowitz of San Francisco showed that each $1 increase in the city’s compensation floor increased the likelihood of unemployment among younger workers by 4.5 percentage points. In other words, the increased minimum wage had precisely the result that Econ 101 would predict."

"Having run a food-service company, Mr. Puzder understands, better than most, the effect of a mandated labor cost. In an interview with Hugh Hewitt this past April, he pointed to a summary, published by the Federal Reserve Bank of San Francisco, of the best minimum-wage research. That report showed clear negative effects on employment: for instance, a drop of 1%-2% among workers ages 16 to 19 for each 10% rise in the minimum wage."

"Critics may complain that these reports have their own biases, but the methodology used by the Congressional Budget Office was hardly one-sided. Although its economists estimated that raising the federal minimum to $10.10 would cost about a half-million jobs, they also said such a move would lift nearly one million people out of poverty."

School Choice Saves Money

A study from Wisconsin adds up some of the economic evidence.

WSJ editorial.

"That’s when the Wisconsin Institute for Law and Liberty, a nonprofit that advocates for limited government and education reform, decided to look at the relative cost and benefits of choice schools. And, what do you know, it found that students participating in Milwaukee’s voucher program will provide the city, state and students nearly $500 million in economic benefits through 2035 thanks to higher graduation and lower crime rates.

Using data from a crime and graduation study by Corey DeAngelis and Patrick Wolf at the University of Arkansas, the Milwaukee study finds that through 2035 Wisconsin will receive a $473 million benefit from higher graduation rates by choice students. More education translates into higher incomes, more tax revenue and a lower likelihood of reliance on government welfare or other payments. Meanwhile, greater economic opportunity also prevents young adults from turning to crime, which the study estimates will save Wisconsin $1.7 million from fewer misdemeanors and $24 million from fewer felonies over the same 20 years."

NYT Misleads About School Choice Yet Again

By Jason Bedrick of Cato.

"Once again, the editors at the New York Times have allowed their bias against school choice to get in the way of reporting facts.

On Friday, the NYT ran a blog by Professor Susan Dynarski with the incredibly misleading headline (which, in fairness, she likely didn’t write): “Free Market for Education? Economists Generally Don’t Buy It.”

Based on that description, you might think that a survey of economists found that most economists think a market in education wouldn’t work, or at least that there were more economists who thought it wouldn’t work than thought it would. Well, not quite. Dynarski writes:

But economists are far less optimistic about what an unfettered market can achieve in education. Only a third of economists on the Chicago panel agreed that students would be better off if they all had access to vouchers to use at any private (or public) school of their choice.

Follow the link to the 2011 IGM survey and you’ll find that 36% of surveyed economists agreed that school choice programs would be beneficial–but only 19% disagreed and 37% expressed uncertainty.



Scott Alexander of the Slate Star Codex blog writes:

A more accurate way to summarize this graph is “About twice as many economists believe a voucher system would improve education as believe that it wouldn’t.”
By leaving it at “only a third of economists support vouchers”, the article implies that there is an economic consensus against the policy. Heck, it more than implies it – its title is “Free Market For Education: Economists Generally Don’t Buy It”. But its own source suggests that, of economists who have an opinion, a large majority are pro-voucher. […]
I think this is really poor journalistic practice and implies the opinion of the nation’s economists to be the opposite of what it really is. I hope the Times prints a correction.

Actually, it’s even worse than that. Oddly, Dynarski did not include the results from the more recent 2012 IGM survey, in which the level of support for school choice was higher (44%) and opposition was lower (5%), a nearly 9:1 ratio of support to opposition. When weighted for confidence, 54% thought school choice was beneficial only 6% disagreed.



We should give Professor Dynarski the benefit of the doubt and assume that she didn’t know about the more recent results (though they pop right up on Google and the IGM search feature), but the NYT deserves no such benefit for its continuing pattern of misleading readers about the evidence for school choice."