Archive for category Current issues
April Jobs Report
Posted by TonyLima in Current issues on May 3, 2013
The media are in a kerfuffle over the April jobs report. Lots of jobs created, the unemployment rate fell, what’s not to like?
There’s a reason economics is called the dismal science. Economists have this nasty habit of pointing out the discrepancies between belief and reality. The April report is no exception.
Just for kicks, I’ve dissected the first four months of employment data from BLS. These numbers are all from the current population survey (CPS) so they are consistently sourced. Results are not promising. The reported unemployment rate fell to 7.5% in March. Using just about any other measure that’s reasonable, 7.8% is a better estimate.[1] BUT, if you look at the measure BLS calls “U-6″ things get really bad. What’s U-6? Here’s what BLS says:
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers
Aren’t you happy you asked? For April, 2013, U-6 was 13.9%, up 0.1% from March.
As always, my methods are transparent. Click here to download the Excel workbook that has all the calculations and numbers cited here (and a whole lot more).
[1] OK, since you asked, I did two other calculations. Between January and April 2013, the labor force decreased by 273,000 people. My first calculation added all those folks back in and assumed they would all have been unemployed. You don’t believe that? Frankly, neither do I. So I calculated the net change in those who are not in the labor force but want a job. That’s not the same as “discouraged workers.” If you care about that, e-mail me and I’ll be happy to send you a two-page extract from the BLS “Handbook of Methods” that describes the process in detail.
Cyprus
Posted by TonyLima in Current issues on March 30, 2013
Queueing at a Cyprus Bank: Too Late, Suckers
Reports today put the Cyprus haircut at 60% of deposit balances in excess of €100,000. This is startling, as rumors were in the vicinity of 40%. What happened?
In reality, I have no idea. But this is a blog so I’m allowed to speculate. €100,000
“But Prof. Lima,” you say, “we thought Cyprus banks were closed. Where did those deposits vanish? And how did anyone get to them?”
Kids, if I knew the answer to that I’d be either retired or in jail. For sure I wouldn’t be writing this blog. But here’s a guess. Cypriot banks have, according to rumors, quite a bit of experience with various methods of moving funds around. And you can be sure that the Cypriot bankers were far more afraid of the Russian mafia than the European Central Bank. I’ll go out on a limb and speculate that the Russians will not be getting much of the haircut. A whole bunch of their deposit balances are no longer there. Leaving the suckers …, er, strike that, the regular customers holding the bag.
Which leads me to remind you of a simple fact. If there’s going to be a run on a bank, it’s best to be near the beginning of the line. Or have a high-speed internet connection directly into the bank’s computers.
If you’d like actual information, the New York Times has a pretty good article.
Betting Against the Obama Administration’s Economic Policies
Posted by TonyLima in Current issues, Economic policy on March 15, 2013
Two Market Indices
The other day I mentioned to an acquaintance — let’s call him Mr. X — that I had earned about 10 percent per year betting against the Obama administration’s economic policies. I’ll reveal my not-so-secret method shortly. But first I wanted to deal with the reply from Mr. X: if I had put my wealth into the stock market at the beginning of 2012 I would have made a killing.
This is, of course, tantamount to waving a red flag at an angry bull. Today I finally had a few minutes to pull some data together. Before looking at the data, however, I’ll point to an obvious flaw in my acquaintance’s logic: forecasting the past is always easy. Did he put his wealth into the stock market at the beginning of 2012? I doubt it very much.
But I did get curious, so I grabbed Mr. Excel and headed over to the St. Louis Fed’s FRED database to get the S&P 500 and Dow-Jones Industrial indexes. Here are the results. (I have not included dividends because I’m lazy.). Since January 1, 2000 the annual rate of return on the S&P has been 0.45% and the return on the Dow 1.62%.
But, of course, that wasn’t the question. What have the same returns been since January 1, 2012? Considerably better. The S&P is up 14% and the Dow 9.91%.
But we all know the real question: how has the market been doing since January, 2008 when President Obama took office? The S&P has averaged 1.82% per year and the Dow slightly better at 2.13%. Neither of those numbers look real inviting.
As always my methodology is transparent. You can download my Excel workbook by clicking here. But a warning: I’m using the FRED Excel plugin for Excel for the Mac 2011. Those using Excel for Windows are advised to proceed with caution.
So what’s my secret? A TIPS fund. TIPS are Treasury Inflation Protected Securities. They are issued by the U.S. government and are fully indexed for inflation. Once I saw the drastic actions the Fed was taking with its balance sheet and the monetary base, I became very frightened. Heck, I still am. I shifted a big chunk of our retirement accounts to a TIPS fund managed by TIAA-CREF. Since I got scared before most other people, I am enjoying the large capital gains on this fund. Here’s the bad news: it’s probably too late for others to take advantage of this opportunity. Sorry folks.
Devaluing the Bachelor’s Degree Fast Track Edition
Posted by TonyLima in California Economy, Current issues, Education issues on March 13, 2013
In a way, the legislation has a head start: Last year, in an effort to bring down textbook costs, Mr. Steinberg won passage of a law requiring free online textbooks for the 50 most popular introductory college courses, and in the process created a faculty panel — three members each from the University of California, California State University and the community college system — to choose materials.
The new legislation would use that panel to determine which 50 introductory courses were most oversubscribed and which online versions of those courses should be eligible for credit. Those decisions would be based on factors like whether the courses included proctored tests, used open-source texts — those available free online — and had been recommended by the American Council on Education. A student could get credit from a third-party course only if the course was full at the student’s home institution, and if that institution did not offer it online.
Today’s New York Times includes an article about a potentially disastrous bill wending its way through the California state legislature. I’ve written about devaluing the bachelor’s degree before. If this bill passes, that will become devaluing the bachelor’s degree, fast track edition. My lovely wife has made numerous insightful comments about this. Unfortunately I’m very busy this week (and probably next week, too) on a project with a tight deadline. For now you’ll have to settle for this brief note.
In brief, this law would force public colleges and universities in California to accept transfer credit for online courses. The courses would be approved by an already-existing panel →→→→→→
Yes, you read that correctly. Nine — nine — faculty members get to make this decision for the rest of us. If anyone can take the time to find out who those nine people are, I would appreciate it. But there’s one more statement made by State Senator Darrell Steinberg:
“We want to be the first state in the nation to make this promise: No college student in California will be denied the right to move through their education because they couldn’t get a seat in the course they needed,” said Darrell Steinberg, the president pro tem of the Senate, who will introduce the bill. “That’s the motivation for this.”
In other words, students deserve a bachelor’s degree. They have a “right to move through their education.” And here I thought the faculty had something to say about who gets a degree and who doesn’t.
Color me nauseous.
Vaccines, Autism, and Low-Information Voters
Posted by TonyLima in Current issues, Politics on March 4, 2013
Flu Vaccine
[Update March 12, 2013: Sarah A. Hoyt has written an autobiographical tale about the damage public schools are doing to children. Highly recommended.]
“Low-information voter” is the term applied to voters who really don’t bother investigating issues in any depth before they vote. I have argued elsewhere that lack of information is only half the problem. The other half is their apparent inability to process information in any meaningful way. They cannot discern the logic that if A causes B and B causes C then A must cause C.
In this article I’ll offer an example of one of these voters. I’ve transcribed about 15 minutes of a Science Friday episode made over two years ago. The complete transcription is at the end of this article, along with a complete citation and a few observations that are not transcribed directly. I have done my best to accurately transcribe the audio, but there may be errors remaining. If you spot any mistakes, please let me know so I can correct them. (As far as I can tell the audio of this segment is not available for downloading and no transcript seems to exist at ScienceFriday.com.) The subject under discussion was vaccines and autism. This article relates vaccines, autism, and low-information voters.
My Summary
One of the guests on Science Friday January 7, 2011 was Dr. Paul Offit, the author of Deadly Choices: How the Anti-Vaccine Movement Threatens Us All.
Leslie opens with a statement that includes this: “… I think he’s cherry-picking when he cites this one study that has been widely discredited when there are literally dozens of studies whose methodologies have been impeccable and have not been discredited.” She is referring to the discredited work by Andrew Wakefield that seemed to show such a relationship. (A summary of Wakefield’s “research” is in the following section.)
Dr. Offit replied by detailing the problems with Wakefield’s work. He then pointed to fourteen separate studies on three different continents, each including hundreds of thousands of children, that unanimously reported that vaccines don’t cause autism.
Ira Flatow then asked Leslie whether there was any amount of research that would change her mind. She replied yes, with disparaging references to “… the yahoos who just don’t look at scientific processes at all and people who blindly trust what clinicians tell them …” adding that there was “something between” the two groups. She then states that “… the vast number of immunizations that you’re requiring at such a young age really is taking a toll on the immune system. I think that’s just logic.”
Dr. Offit patiently replies that the number of immunological components in all 14 vaccines combined was 160. By contrast, each of the 100 trillion bacteria that our bodies host contain somewhere between 2,000 and 6,000 immunological factors. If the human immune system was really that fragile, the human race would have died out millennia ago. (There is additional talk about the mercury in preservatives, but today’s childhood vaccines no longer contain thimerosal, the preservative that includes ethyl mercury.)
Leslie replies, “I can’t accept what you’re saying. It just sounds like pap to me, it sounds like panacea. A two year old cannot accept this kind of chemical onslaught.” But, of course, two-year-olds have the same 100 trillion bacteria on their skin that all of us have. After a few more interruptions, the following exchange ensues:
Ira Flatow: “… Leslie, it doesn’t look like anything he’s going to tell you is going to change your mind.”
Leslie: “Well, I’m not hearing anything that sounds credible to me as an educated adult.”
Got that? Leslie was presented with a mountain of scientific evidence. She simply refused to believe it. It’s not a lack of information. It’s an inability to process information when it’s presented.
A Longer Summary
The guest on Science Friday was Dr. Paul Offit, the author of Deadly Choices: How the Anti-Vaccine Movement Threatens Us All.
Leslie opens with a statement that includes this: “… I think he’s cherry-picking when he cites this one study that has been widely discredited when there are literally dozens of studies whose methodologies have been impeccable and have not been discredited.” She is referring to the discredited work by Andrew Wakefield that seemed to show such a relationship. Wikipedia describes Mr. Wakefield’s “study” thus:
On 28 January 2010, a five-member statutory tribunal of the GMC found three dozen charges proved, including four counts of dishonesty and 12 counts involving the abuse of developmentally challenged children. The panel ruled that Wakefield had “failed in his duties as a responsible consultant”, acted both against the interests of his patients, and “dishonestly and irresponsibly” in his published research. The Lancet immediately and fully retracted his 1998 publication on the basis of the GMC’s findings, noting that elements of the manuscript had been falsified. Wakefield was struck off the Medical Register in May 2010, with a statement identifying dishonest falsification in The Lancet research, and is barred from practising medicine in the UK.
In January 2011, an editorial accompanying an article by Brian Deer in BMJ identified Wakefield’s work as an “elaborate fraud”. In a follow-up article, Deer said that Wakefield had planned to launch a venture on the back of an MMR vaccination scare that would profit from new medical tests and “litigation driven testing”. In November 2011, yet another report in BMJ revealed original raw data indicating that, contrary to Wakefield’s claims in The Lancet, children in his research did not have inflammatory bowel disease.
Wakefield’s study and public recommendations against the use of the combined MMR vaccine were linked to a steep decline in vaccination rates in the United Kingdom and a corresponding rise in measles cases, resulting in serious illness and fatalities. Wakefield has continued to defend his research and conclusions, saying there was no fraud, hoax or profit motive.
Leslie is willing to admit that the Wakefield paper is invalid. But she refers to the “dozens of studies whose methodologies have been impeccable and have not been discredited.” Of course she never gives a citation for any of them.
Dr. Offit replies with an explanation of the many fraudulent aspects of Wakefield’s paper. He then goes on to say that, “… if you want to answer the question, the way you answer that question is that you look at hundreds of thousands of children who did or didn’t get MMR vaccines to see whether the incidence of autism is greater in the vaccinated group. That’s been done by fourteen different groups of investigators on three different continents and the answers have been very clear and consistent and reproducible. So we can say with comfort that MMR vaccine does not cause autism.”
Ira Flatow then asks Leslie whether there is any amount of research that would change her mind. Leslie replies, “”Oh, absolutely. This is what I’m saying is that he’s presenting a false dichotomy. There is something between the yahoos who just don’t look at scientific processes at all and people who blindly trust what clinicians tell them, of which there are a number, many, many people. You know, getting 26 vaccines, in some cases before the age of two, is a devastating thing for a person’s immune system. I’m 49 and …”
Mr. Flatow attempts to interrupt the incessant flow of words without a great deal of success. When he finally gets her attention he asks her for evidence that the 26 treatments (actually 14 vaccines, some have multiple doses) have detrimental effects. She mentions the preservatives that use mercury (which has been removed from all childhood vaccines in the U.S.), then says “…the vast number of immunizations that you’re requiring at such a young age really is taking a toll on the immune system. I think that’s just logic.”
Dr. Offit replies that the critical issue is the number of immunological components in the 14 vaccines. Today there are 160 such components. And we know a lot about the human immune system. Each of us has about 100 trillion bacteria on our body. And each bacterium has between 2,000 and 6,000 immunological components. If our immune systems were really that fragile, human life would have been wiped out millennia ago.
Leslie replies, “I can’t accept what you’re saying. It just sounds like pap to me, it sounds like panacea. A two year old cannot accept this kind of chemical onslaught.” In other words, actual scientific data and facts — information — are irrelevant. Ira Flatow tells Leslie that it doesn’t look like anything Dr. Offit says will change her mind. She replies, “Well, I’m not hearing anything that sounds credible to me as an educated adult.”
Educated, perhaps, but completely unable or unwilling to appreciate science, the scientific method, or logic (despite her statement to the contrary).
Conclusion
It’s not just an information problem. It’s an information processing problem. Until we can figure out a way to get these folks to think, the country will remain in a lot of trouble.
The Justice Department Supports the US Postal Service Monopoly
Posted by TonyLima in Current issues on March 4, 2013
The Justice Department supports the US Postal Service monopoly. That’s my conclusion after reading an editorial in today’s Wall Street Journal. Apparently the Feds are going after FedEx and UPS for — get this — shipping prescription drugs that have been purchased illegally. This is astounding even from this Justice Department featuring Eric Holder, the worst Attorney General since John Mitchell. Somehow, UPS and FedEx are supposed to (a) figure out which packages contain prescription drugs, then (b) determine which were purchased illegally. At best, this is another shakedown by Justice.
U.S. Attorney General Eric Holder
Former Attorney General John Mitchell
At worst, Mr. Holder and his pals are supporting the U.S. Postal Service’s quasi-monopoly. Or perhaps you didn’t notice that USPS was missing from the list of entities being persecuted. In case you don’t believe USPS ships drugs, I happen to have a rather persuasive example. I am a member of the Kaiser-Permanente health plan. I have the option of having my prescription refills delivered to me. The carrier is USPS.
Yet, somehow, Jon Corzine is still free and looking for his next financial fraud scheme. I have almost lost my ability to be surprised by anything Mr. Holder and his partners in crime dream up.
Some of you may not know about the USPS monopoly. Despite their claims of not being part of the U.S. government, USPS still has one significant monopoly power. Under U.S. law only USPS is allowed to put anything into your mailbox. Or mine. Or anyone else’s.
Ah the French
Posted by TonyLima in Current issues, Economic policy on February 21, 2013
Dear Mr. Montebourg: I have just returned to the United States from Australia where I have been for the past few weeks on business; therefore, my apologies for answering your letter dated 31 January 2013. I appreciate your thinking that your Ministry is protecting industrial activities and jobs in France. I and Titan have a 40-year history of buying closed factories and companies, losing millions of dollars and turning them around to create a good business, paying good wages. Goodyear tried for over four years to save part of the Amiens jobs that are some of the highest paid, but the French unions and French government did nothing but talk. I have visited the factory a couple of times. The French workforce gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three, and work for three. I told this to the French union workers to their faces. They told me that’s the French way! The Chinese are shipping tires into France – really all over Europe – and yet you do nothing. In five years, Michelin won’t be able to produce tire in France. France will lose its industrial business because government is more government. Sir, your letter states you want Titan to start a discussion. How stupid do you think we are? Titan is the one with money and talent to produce tires. What does the crazy union have? It has the French government. The French farmer wants cheap tire. He does not care if the tires are from China or India and governments are subsidizing them. Your government doesn’t care either. “We’re French!” The U.S. government is not much better than the French. Titan had to pay millions to Washington lawyers to sue the Chinese tire companies because of their subsidizing. Titan won. The government collects the duties. We don’t get the duties, the government does. Titan is going to buy a Chinese tire company or an Indian one, pay less than one Euro per hour and ship all the tires France needs. You can keep the so-called workers. Titan has no interest in the Amien North factory. Best regards,
Maurice M. Taylor, Jr.
Chairman and CEO
French Labor Strike
Today’s New York Times brings a story that will warm the hearts of believers in free markets everywhere. At least one U.S. capitalist understands capitalism. That gentleman is Maurice Taylor Jr., the head of Titan International, a U.S.-based tire manufacturer. He has been in “negotiations” over the last four years aimed at keeping the Goodyear plant in Amiens, France, open. As of today that deal appears off the table. Ah, the French. They would rather cut off an arm than seek treatment for the infection.
France: Home of the 35 Hour Work Week
France is the home of the original 35 hour work week. This law, 13 years old this month, limits workers to 35 hours per week at no change in weekly pay. Economists recognize this as a negative supply shock that leads to higher unemployment and short-term inflation. The law is based on the long-discredited “bundle of work” economic hypothesis. If there is only a certain amount of work that can be done in an economy, then limiting workers’ hours will spread the work among more employees. On its face, that is an attractive model. But it assumes the amount of work is limited. In fact, the quantity of labor in any economy is directly related to the country’s gross domestic product — which, as almost everyone knows, fluctuates. The quantity of labor demanded is not fixed, but varies in response to a number of variables.
Titan, the Amiens Plant, and the French Government
Some facts are in order. The Amiens plant employs 1,173 French workers. Four years ago the French government asked Titan to try to save the plant. Rather than describe the course of the negotiations, I’ll simply quote Mr. Taylor’s letter to the French industry minister, Arnaud Montebourg (text from BusinessInsider, typographical and grammatical errors inin the BusinessInsider version). See pullquote →
Comparing the U.S. and France
Using OECD data, I assembled two economic indicators: the growth rate of real GDP per capita and the unemployment rate. Both variables covered the period 1990-2011 (the latest annual data available in the OECD online database). Here are the averages:
| Country | Average Unemployment Rate (1990 – 2011) | Average growth, real GDP per capita (1995 – 2011) |
| France | 9.01% | 1.00% |
| U.S. | 5.84% | 1.39% |
Pay close attention to that last column. The difference in the growth rate is 0.39% per year. Doesn’t sound like much, does it? First, you should know that real GDP is the same as the purchasing power of income (per capita). Let’s consider these growth rates over 30 years (usually the definition of one generation). If the annual income in year 1 was 20,000 (dollars or euros), after 30 years French income will be $26,992.89 versus $30,258.12 in the U.S. The U.S. economic standard of living will grow faster than that of France.
Let’s look at some graphs of the same variables. There’s something disturbing about one of them. I’ll point it out below.
Did you spot it? Since 2008 (the beginning of the Obama administration) the U.S. unemployment rate has risen to French levels. You may draw your own conclusions. I’ve written about this issue many times before. You can read my thoughts by clicking here and here and here.
As always, my data sources and methods are transparent. Click here to download an Excel 2007 file containing all data and calculations.
Conclusion
Mr. Taylor has stated his case very well. France is traveling the same road that Greece, Spain, and some other European countries followed years before. When the French economy begins to collapse I doubt very much that the German government will bail them out.
More Data on the Minimum Wage
Posted by TonyLima in Current issues, Economic basics on February 16, 2013
The damage from a minimum wage hike depends on the overall labor market. If the job market is buoyant, as it is in the fracking boomtown of Williston, N.D., fast-food workers may already make more than $9 an hour. But when the jobless rate is high, as it still is in California and New York, the increase punishes minority youth in particular.
That is what happened during the last series of wage hikes to $7.25 from $5.15 that started in July 2007 as the economy was headed toward recession. The last increase hit in July 2009 just after the recession ended, and as the nearby chart shows, the jobless rate jumped for teens and black teens especially. For black teens, the rate has remained close to 40% and was still 37.8% in January.
A study by economists William Even of Miami University and David Macpherson of Trinity University concludes that in the 21 states where the full 40% wage increase took effect, “the consequences of the minimum wage for black young adults without a diploma were actually worse than the consequences of the Great Recession.”
The Neumark-Wascher Meta-Analysis
The first paper, by David Neumark and William Wascher (National Bureau of Economic Research, Inc, NBER Working Papers: 12663, 2006) summarizes the results of 102 empirical studies of the impact of the minimum wage on employment. These studies were all done after 1990. To economists that means the studies were done carefully and correctly using the appropriate statistical techniques. Of the 33 studies the authors selected as being the “most credible” 85 percent found a significant negative impact of a higher minimum wage on employment. Raise the minimum wage and unemployment increases. (Using all 102 studies, “only eight give a relatively consistent indication of positive employment effects.” (Neumark and Wascher, p. 121). In other words, about 92% of the studies found a negative or ambiguous impact on employment. The authors also state that about 2/3 of the 102 studies find unambiguous negative impacts on employment when the minimum wage rises.
Prof. Neumark has written extensively on this subject, including an intriguing article on the interaction between the minimum wage and the earned income tax credit (EITC). In “Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?” (Industrial and Labor Relations Review, July 2011, v. 64, iss. 4, pp. 712-46). Summarizing their results, they find that the EITC is a far more effective tool for raising income without negative impacts on employment. They also found that a higher minimum wage has virtually no impact on poverty.
The Wall Street Journal article also cites two other studies. Here’s a pullquote from the Wall Street Journal editorial →.
The Even-Macpherson Micro Study
Even and Macpherson (“Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases.” Employment Policies Institute, May, 2011. This is the summary page. Scroll to the bottom to find the links to a longer summary and the full text.) look at a sample of about 600,000 males between 16 and 24 years old without a high school diploma. They examine the impact on three groups: whites, Hispanic, and black. Their results are pretty incredible. Rather than try to summarize a long, detailed and very specific study, let me just quote from the Executive Summary:
In this new study, labor economists William Even (Miami University) and David Macpherson (Trinity University) overcome this problem by amassing a dataset from the years 1994 to 2010 that includes over 600,000 data observations—including a robust sample of minority young adults unprecedented in previous studies on the minimum wage.
By taking advantage of the “natural experiment” created by the substantial interstate variation in the minimum wage between 1994 and 2010, and carefully controlling for labor market and demographic differences, the authors provide conclusive answers to the crucial policy question of whether wage mandates have a disparate impact on minority groups.
Drs. Even and Macpherson focus on 16-to-24 year-old males without a high school diploma, a group that previous studies suggest are particularly susceptible to wage mandates. Among white males in this group, the authors find that each 10 percent increase in a federal or state minimum wage decreased employment by 2.5 percent; for Hispanic males, the figure is 1.2 percent. But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.
The effect is similar for hours worked: each 10 percent increase reduced hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and by 6.6 percent for black males.
But the picture grows even more troubling when the authors focus just on the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009. Approximately 13,200 black young adults in these states lost their job as a direct result of the recession; 18,500 lost their job as a result of the federal wage mandate—nearly 40 percent more than the recession. In other words, the consequences of the minimum wage for this subgroup were more harmful than the consequences of the recession.
The substantial disemployment effects that emerge from the data raise an important question: Why do black males suffer more harm from wage mandates than their white or Hispanic counterparts?
The authors find that they’re more likely to be employed in eating and drinking places–nearly one out of three black young adults without a high school diploma works in the industry. Businesses in this industry generally have narrow profit margins and are more likely to be adversely impacted by a wage mandate. There’s also substantial variation in regional location, as black young adults are overwhelmingly located in the South and in urban areas.
Conclusion
Those who believe that increases in the minimum wage do not reduce employment are simply in denial. Economists have a mountain of evidence in support of this proposition. You are free to believe what you like, but please don’t call yourself an economist if you choose to deny the facts.
The Minimum Wage
Posted by TonyLima in Current issues, Economic basics on February 14, 2013
Copyright 2013 by Tony Lima. Permission is granted to quote entire paragraphs of text without editing. If you wish to edit a paragraph, I must approve your editing before you publish it.
Introduction
This brief survey article will look at the various impacts of changes in the minimum wage. All abstracts and citations are from EBSCO, specifically the EconLit database.
Economists recognize three main impacts of the minimum wage. The two I will be concerned with here are impacts on employment and impacts on income distribution. The third effect, the impact on total income, I’ll deal with in a cursory fashion.
Impacts on Employment
The most recent paper is by Jeremy R. Magruder (Journal of Development Economics, January 2013, v. 100, iss. 1, pp. 48-62), Using a two-sector model of the labor market in Indonesia, Magruder finds that an increase in the minimum wage increases employment in the formal sector and decreases employment in the informal sector. (The formal sector is covered by the minimum wage. The informal sector operates outside the law. Workers in this group are either avoiding taxes or willing to work for less than the minimum wage with wages usually paid in cash.) The net impact on unemployment is uncertain. The following paragraph is from the conclusion of the paper (pp. 61-62):
This big push discussion recalls much older economic thought which has been widely discredited within the profession. Few economists today argue as 1920s and 1930s economists did, that increasing wages and local demand could be a motor for economic growth. One reason is the limited (and potentially negative) effect these policies had on depression-era America. There are of course many differences between 1990s Indonesia and 1930s America. One, as a less-developed country receiving substantial foreign investment, Indonesia may have had new access to potential, unadopted, and profitable technologies that simply needed a market. A second is that much of the 1990s were a time of growth in Indonesia, when sticky wages may have limited wage growth (the opposite of conditions in the depression). Finally, Harrison and Scorse (2010) show that anti-sweatshop activism also raised labor standards in foreign firms without an accompanying drop in employment. This indicates that wages may have indeed been below marginal products in the 1990s, reducing coordination and creating an opening for policy. Of course, the analysis employed in this paper cannot determine whether any of these conditions were important for these results. Further research, both empirical and theoretical is needed in considering the role of labor standards throughout the business cycle in modern less developed countries.
Translation: Indonesia’s economy was in exceptional circumstances during this period. It’s a mistake to generalize this to developed economies. Abstract:
Big push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium. Using data from 1990s Indonesia, where minimum wages increased in a varied way, I develop a difference in spatial differences estimator which weakens the common trend assumption of difference in differences. Estimation reveals strong trends in support of a big push: formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries suggested by the model (while employment in tradable and non-industrializable industries also conforms to model predictions).
Another relatively new work is by David Lee and Emmanuel Saez (Journal of Public Economics, October 2012, v. 96, iss. 9-10, pp. 739-49), The authors make some heroic assumptions to show that there is an optimal minimum wage. But at the beginning they acknowledge that a higher minimum wage increases unemployment. They then to on to assume that government values redistribution toward low wage workers and unemployment hits the lowest surplus workers first. The first assumption implies a social welfare function for the government. In other words, the government is making rational decisions to transfer income. The “lowest surplus” workers are, roughly, those with the smallest difference between the lowest wage they would accept to work and the minimum wage. This assumption seems reasonable. But the authors never deal with the incentive effects of redistribution policies. Higher-income individuals are likely to act to reduce their tax payments when confronted with redistribution. That, in turn, will reduce overall social welfare. Abstract:
This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results. First, we show that a binding minimum wage–while leading to unemployment–is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. Importantly, this result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient. A Pareto improving policy consists of reducing the pre-tax minimum wage while keeping constant the post-tax minimum wage by increasing transfers to low-skilled workers, and financing this reform by increasing taxes on higher paid workers. Those results imply that the minimum wage and subsidies for low-skilled workers are complementary policies.
John T. Addison, McKinley L. Blackburn, and Chad D. Cotti looked at county-level employment data in the U.S. restaurant-and-bar sector (British Journal of Industrial Relations, September 2012, v. 50, iss. 3, pp. 412-35). They found that what matters is not the level of the minimum wage, but the minimum wage relative to other states or localities. This is, of course, consistent with the well-known proposition that relative prices and wages are important while absolute price and wage levels are not. Abstract:
We use US county-level data on employment and earnings in the restaurant-and-bar sector to evaluate the impact of minimum-wage changes in low-wage labour markets. Our estimated models are consistent with a simple competitive model in which supply-and-demand factors affect both the equilibrium outcome and the probability of the minimum wage being binding. Our evidence does not suggest that minimum wages reduce employment once controls for trends in county-level sectoral employment are incorporated. Rather, employment appears to exhibit an independent downward trend in states that have increased their minimum wages relative to states that have not, thereby predisposing estimates towards reporting negative outcomes.
Impacts on Income Distribution
The most recent study is by Mark B. Stewart (Oxford Economic Papers, October 2012, v. 64, iss. 4, pp. 616-34). In “Wage Inequality, Minimum Wage Effects, and Spillovers” the paper finds that changes in the minimum wage in the U.K. have no discernable impact on the upper half of the wage distribution. Abstract:
This paper investigates possible spillover effects of the UK minimum wage. The halt in the growth in inequality in the lower half of the wage distribution (as measured by the 50:10 percentile ratio) since the mid-1990s, in contrast to the continued inequality growth in the upper half of the distribution, suggests the possibility of a minimum wage effect and spillover effects on wages above the minimum. This paper analyses individual wage changes, using both a difference-in-differences estimator and a specification involving comparisons across minimum wage upratings, and concludes that there have not been minimum wage spillovers. Since the UK minimum wage has always been below the 10th percentile, this lack of spillovers implies that minimum wage changes have not had an effect on the 50:10 percentile ratio measure of inequality in the lower half of the wage distribution.
Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.
Michele Campolieti, Morley Gunderson and Byron Lee (Journal of Labor Research, September 2012, v. 33, iss. 3, pp. 287-302) find that raising the minimum wage has little impact on employment among the poor. Specifically, the poor get about 30% of the earnings gain (non-poor get the other 70%) and the poor bear the brunt of job losses. As the authors so eloquently put it,
Abstract:
We estimate the effect of minimum wages on poverty for Canada using data from the Survey of Labour and Income Dynamics (SLID) for 1997 to 2007 and find that minimum wages do not have a statistically significant effect on poverty and this finding is robust across a number of specifications. Our simulation results, based on the March 2008 Labour Force Survey (LFS), find that only about 30% of the net earnings gain from minimum wage increases goes to the poor while about 70% “spill over” into the hands of the non-poor. Furthermore, we find that job losses are disproportionately concentrated on the poor. Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.
Impact on Total Income
Total income is the product of the number of hours worked per year and the wage rate per hour. If the number of hours worked does not change, any increase in the wage must cause total income to rise. However, demand curves slope downward. We can be certain that the number of hours worked will fall. Thus the wage rises and hours worked fall. What will happen to total income (wage x hours)?
The answer depends on the elasticity of labor demand with respect to the wage rate. I’m willing to accept without debate that for low-income workers demand is inelastic. That means total income will rise for those workers who keep their jobs. As economists have repeatedly observed, the true minimum wage is zero which is what workers who lose their jobs earn. And some workers will certainly become unemployed.
Here’s a parenthetical note about why demand for labor matters and supply of labor does not. I have assumed the minimum wage is above the equilibrium wage. That means total employment is determined exclusively by demand. The difference between the quantity supplied of labor and quantity demanded is unemployment and underemployment. But the supply curve only determines willingness to work at the minimum wage, having no impact on the actual number of worker hours hired.
Conclusion
These are but a few of the studies. Anyone can do what I’ve done here. Find a library that subscribes to the EconLit database. Log in and search for “minimum wage.” And have fun.
I will end by noting that there are a few studies that purport to show that raising the minimum wage increases employment. These studies are usually produced by “Marxist economists” identifiable by either their university affiliation (the University of Massachusetts, Amherst is one example) or their citations. These studies generally torture the data until it is no longer recognizable, then perform statistical tests on what amounts to no data at all. You are welcome to believe those studies, but, if you make that choice, please do not call yourself an economist.
Feds Will Sue Standard and Poors
Posted by TonyLima in Current issues, Economic policy on February 5, 2013
The possible penalties of more than $5 billion are equal to the losses suffered by federally insured financial institutions that bought collateralized debt obligations and other securities that were tainted by S&P’s alleged conflicts of interest and other illegal behavior, Mr. Holder said.
S&P and other firms have long fought lawsuits targeting the quality of their ratings by citing the First Amendment to the U.S. Constitution, which protects freedom of speech, and contending that the ratings are an opinion. In its suit, the Justice Department lawsuit tries to get around that argument by dusting off a 1989 law from the savings-and-loan crisis that imposes a relatively lower burden of proof.
In a statement Monday, S&P said the U.S. government’s use of that law, the Financial Institutions Reform, Recovery, and Enforcement Act, is a “questionable legal strategy.” The firm said it would “vigorously defend our Company against such meritless litigation.”
…
In its statement Tuesday, S&P said its ratings reflected its best judgments about the RMBS and the CDOs in question.
“Unfortunately, S&P, like everyone else, didn’t predict the speed and severity of the coming crisis and how credit quality would ultimately be affected,” it said.
S&P also said “20/20 hindsight is no basis to take legal action against the good-faith opinions of professionals,” noting that its ratings were “based on the same subprime mortgage data available to the rest of the market—including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”
[Update 4:00 pm left coast time: I added a new section featuring quotes from Twitter. Folks over there are having too much fun with this.]
The news broke yesterday (February 4). The Feds will sue Standard and Poors. The alleged reason is that S&P rated mortgage-backed securities AAA when in fact they should have been rated much lower. For details see the excerpt from the Wall Street Journal article over there on the right (no pun intended).
Now there’s no doubt the AAA ratings were too high. But there are several remaining questions. First, why is the Justice Department not going after Fitch and Moody’s? Both also rated these securities well above what they should have been. Second, many of us are skeptical of the government’s motives in this case. You may recall that S&P was the first agency to downgrade the rating on U.S. government debt (from AAA to AA+). The announcement of the downgrade was August 5, 2011. It only makes sense to wait until after the election to file this lawsuit. Third, 20-20 hindsight is always 100 percent accurate. If it was so easy to see these securities were rated too highly, where were the government regulators?
Stockholders lose $3.8 billion
S&P is being sued for $5 billion. In the last two days, their parent company, McGraw-Hill, has seen the stock price fall by 23,29% (from $58.34 to $44.75). The company’s market cap has dropped from $16.2 billion to $12.4 billion, wiping out $3.8 billion in shareholder wealth. Here’s what that looks like:
McGraw-Hill stock price
(Data is from the Wall Street Journal website accessed February 5, 2013 at 3:45 pm GMT -8. Click here to download the Excel workbook containing the numbers and calculations.)
Meanwhile On Twitter and In the Blogosphere
In case you think I’m just a conspiracy nut, I am not alone. A lawyer for S&P refused to rule out a political motivation behind the lawsuit. And even the Federal Reserve didn’t see the crash coming as the recently-released minutes from their 2007 meetings. Should Justice also sue the Fed? The slideshow below shows some of the more entertaining comments from Twitter.
This is why singling out RBS, or UBS, or S&P, will never have the fearsome deterrent effect that the DOJ really wants. In fact, by going after the firms piecemeal, the DOJ may actually be encouraging future wrongdoers rather than turning them away from crime.
You see, the DOJ is going after one or two firms for actions that were widespread across the industry. Fixing interest rates was the work of thousands of people. It’s safe to say that S&P was not the only ratings firm that fretted that it would lose fees if it started downgrading bonds. In fact, S&P, according to the emails provided by the DOJ, frequently worried that it was not keeping up with Moody’s.
Conclusion
Someone on Twitter said, “S&P announced U.S. government debt is now rated AAAA+++.” The next time someone asks you why the U.S. economy is not recovering faster, point to actions like this. Why take any risk when the government can come in years later and hammer your market value?
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