Archive for the Category Labor markets

 
 

Why I’m rooting for divided government

Here’s Vox.com:

Hillary Clinton had mostly tried to avoid the $15-an-hour issue until this debate, offering sympathy for grassroots local Fight for 15 movements while supporting a more modest $12-an-hour minimum nationally. But tonight that came to an end, and she suggested she really does support a $15-an-hour minimum across America:

BLITZER: — if a Democratic Congress put a $15 minimum wage bill on your desk, would you sign it?

CLINTON: Well, of course I would … I think setting the goal to get to $12 is the way to go, encouraging others to get to $15. But, of course, if we have a Democratic Congress, we will go to $15.

Of course, she denied this was a flip-flop, despite Sanders’s efforts to get her to do so. But in a way, Sanders making a point out of the position change was just pouring salt in the wound. He — along with the grassroots Fight for 15 movement — had successfully convinced the living embodiment of establishment Democratic politics to sign into law a $15-an-hour national minimum wage.

How am I voting today? Here’s a hint:

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PPP demystified

It is clear from the comment section to the previous post that there is a lot of confusion about PPP.  Let me try to illustrate the basic ideas with an example, since my words don’t seem to be making an impact.

Assume that Saudi Arabia has a nominal GDP of $1000 billion, of which $600 billion is non-oil output and $400 billion is oil output.  Let’s assume that the domestic and international prices of oil are the same for Saudi Arabia, but that other goods are 3.5 times as expensive in the US as in Saudi Arabia.  In that case the Saudi GDP in PPP terms would be:

3.5 X $600b + $400b = $2500b

You might think about there being a “multiplier” of 3.5 for non-oil output, and a multiplier of 1.0 for oil.  The overall multiplier is 2.5 = $2500b/$1000b.

Now suppose you want to find the non-oil GDP in PPP terms (which I assumed was $2100b), how do you do that?

You started with the total output (from the IMF or World Bank) in PPP terms, which is assumed to be $2500b.  Then you subtract the output from the oil sector, using international prices.  In this case I assumed the domestic and international prices were identical.  Now suppose the domestic price of oil in Saudi Arabia were less than the international price.  In that case you’d want to subtract out oil at the international price, not the domestic price.  Do all PPP prices or all nominal prices; don’t mix the two.

Some commenters wanted to subtract the oil sector from nominal Saudi GDP.  But I’m not interested in nominal Saudi non-oil output; I want PPP non-oil output.  And if you apply the overall 2.5 multiplier to the non-oil sector, you get the wrong answer, as the actual multiplier is 3.5 for the non-oil sector (by assumption), and 2.5 for the total economy.

This is from a recent article in the Economist:

Cheap oil is forcing Gulf monarchs, who have hitherto bought their people’s acquiescence with cushy jobs and handouts, to trim the public payroll. And since Gulf monarchies cannot find enough jobs for their own people, the safety valve of emigration to work in the Gulf has closed to other Arabs. The largest Gulf state, Saudi Arabia, needs to create about 226,000 new jobs every year, according to Jadwa Investments, a Saudi research firm. But in 2015 employment rose only by 49,000.

Gulf states have set quotas for the employment of nationals, but many companies complain that local graduates lack the skills and work ethic required. “I know of firms that pay Saudis to satisfy the law, but tell them to stay at home,” says one businessman.

Now of course the foreign workers in Saudi Arabia are a different story.  But many of them are low skilled construction workers, maids, etc.  So I still find it kind of amazing that Saudi resident workers seem to be more productive than German workers, even if you exclude the entire oil production industry from the Saudi data. But that’s just me.

Or maybe (more likely) the IMF/World Bank/CIA PPP estimates are all inaccurate.

Also note that having lots of money doesn’t magically solve productivity problems. Countries in the “middle income trap” are often saving enough so that they ought to be catching up to the developed world.  The fact that they are not doing so suggests that productivity problems are much deeper than a lack of money.

If I had to argue against my anti-Saudi prejudice, here’s what I’d say:

Some places are unsentimental and very smart.  They realize that they can have living standards far above New York City through international labor arbitrage. They understand that NYC does not have “nice things” like good subways and good roads and good airports, because they insist on using union workers and local firms that are not skilled at building subways.  So the subways cost three times more than even in Europe.  These unsentimental smart places like Singapore and Dubai realize that they can bring in the best foreign firms and very cheap construction labor from Asia, and build great infrastructure for low prices.  If you then price the output of the infrastructure at America prices, it looks really impressive. So maybe the Saudi’s really are highly productive, because they do this sort of labor arbitrage.  They sell oil at American prices, and hire Bangladeshi construction workers at 5% of American wages.  Sounds good to me!

When I read Dems (and Trump) talk about the need to build infrastructure in order to create “jobs”, I’m reminded of Milton Friedman’s famous joke.  If you want jobs, use spoons.  If you want NYC to have nice infrastructure, use Bangladeshi workers.

PS.  I just saw this, from the WSJ:

The Wall Street Journal reached out to 45 economists who have served on the White House Council of Economic Advisers, under both Republican and Democratic presidents, to ask about this year’s presidential election. Most Democratic appointees said they supported Hillary Clinton, while no Republican appointees openly supported Donald Trump.

I know, the experts have “screwed things up” so why not give outsiders an opportunity?  Yes, instead of being screwed up as we are in America, we can have a policy-making apparatus run by non-experts, and get screwed up in the way that non-expert dominated places are screwed up, as in North Korea, or Venezuela, or Zimbabwe.

When you are a country that is already in the 97 to 99 percentile of the global economy, in terms of overall economic success, I’m not sure you want to just kick out all the experts and try something completely new.  Your upside if it works might be Singapore or Switzerland.  But your downside risk . . . ?

I wrote this back in 2011:

Now let’s start down through Dante’s seven circles of Hell:

1.  The US is much richer than Mexico.  So much so that millions of Mexicans will risk the horrors of human trafficking into the US to get crummy jobs picking tomatoes all day in the hot sun.

2.  China in 2011 is still considerably poorer than Mexico.  The Chinese take much greater risks to get here.

3.  China today is so much richer than China in 1997 that it’s like a different planet.  The changes (even in rural areas) are massive.

4.  The China of 1997 seemed like paradise compared to the China of the 1970s.  Throughout Hessler’s book, people keep talking about how horrible things were during that decade and how prosperous they are now (1997 in Sichuan!)

5.  The China of the 1970s was nowhere near as bad as during 1959-61, when 30 million starved to death.

It’s a loooooong way down to the lower percentiles.

PPS.  Yes, I know, there were nine circles.  I have a bad memory.

Clinton is confused about demand

People keep asking me to write something criticizing Hillary.  OK, consider the following from Bloomberg:

Just last month, Hillary Clinton began including an idea in her speeches that suggests a shift in thinking for the Democratic Party: Wage growth may not just be good for the people who get a raise. It may be good for economic growth.

“It’s really simple,” she said at a rally in June in Ohio. “Higher wages leads to more demand, which leads to more jobs, which leads to higher wages.”

This is voodoo economics on steriods.  Most economics textbooks are written by left of center economists, and yet I don’t recall reading this sort of argument in any of them.  For good reason.

Even if wage growth led to more demand (it doesn’t), the Fed would simply raise interest rates enough to prevent demand from rising.  I was especially disappointed to see some famous economists endorse her message:

“I think it’s a very marginal way of promoting economic growth,” says Robert Gordon, economist at Northwestern University who specializes in the subject. Like Summers, he prefers a massive investment in infrastructure. But he does agree that a shift in business income away from profits and toward salaries would create growth. Workers are more likely to buy things from their paychecks than businesses are to invest out of their profits.

For Gordon, “the question is, how do you get this increase in wage income?” He believes the best way for a president to raise wages is to let the Federal Reserve do it, by keeping unemployment low.

[Alan] Krueger agrees that the Fed has been able to improve wages, but says there’s more that politicians can do. A labor economist, Krueger has long been a proponent of a limited increase in the minimum wage. “I think the time could be right for a more virtuous growth model,” he said, “which is driven by stronger wage growth…more consumption, more demand, creating more jobs.”

Artificial attempts to raise wages merely serve to reduce AS.  The Fed controls AD.  That’s what the economics textbooks say, and they are right.

More immigration please (Making America Great Again)

This post is not about open borders; it’s about the need for dramatically higher rates of immigration.  Let’s consider three objections:

1.  The impact on US workers.

What impact?  Why should more immigration cost jobs?  The unemployment rate Canada is 7.1% and Australia’s unemployment is 5.7%.  The US has 9 times as many people as Canada, and 14 times as many as Australia.  That’s a huge difference in the number of immigrants we’ve let in, and yet our unemployment rate is only 5.0%.  If we went to having 10 or 11 times as many people as Canada, would we suddenly have lots more unemployment?  I don’t see why.

Another argument is that immigration has disproportionately hurt the wages of low skilled workers.  Hmmm, that must be why so many conservatives object—a sudden concern with the welfare of the poor.  In fairness, this argument may have a bit of merit, which is why we might want to consider adjusting the mix of immigrants so that the average skill level of immigrants is comparable to the current US population.

2.  The groups we are letting in are inferior to the native population.

The largest group of immigrants now come from Asia.  In America, average household income is $49,800.  For Asian Americans it’s $66,000.  Some argue that this is misleading, as only certain Asian groups do well, like Japanese and Chinese Americans.  Actually, both those groups have median family incomes of below $66,000.  Filipinos (the Hispanics of East Asia) and Indians do far better.

Much faster population growth would lead to much more housing construction, as well as infrastructure construction.  More need for Trump Towers, for rich Asians (are you listening Donald?)  More jobs for blue collar workers.  The zero bound on interest rates would probably go away, making recessions less likely.

3.  The groups we are letting in support big government.

How do we know this?  Again, Asians are now the biggest immigrant group (in flow terms, not stock), and in almost all Asian countries the government’s share of GDP is smaller than in the US, often far smaller.  In fairness, that’s partly because developing countries normally have low G/GDP ratios.  But what makes Asia unique is that even the wealthy East Asian countries have low G/GDP ratios.  In most US states, the top income tax rate is higher than in Communist China.

And why do we assume their views are carved in stone?  Didn’t lots of the white immigrant groups switch from Democrat to Republican during the 1970s and 1980s?  Things change.  I know “red Chinese” who have become “red-voting Americans.”

I’m not saying that our current system is perfect, far from it.  I’d like much higher rates of immigration (3 million a year is a good start) and a better balance of skilled and unskilled, so that the people at the bottom in America are not bearing the brunt of the competition for jobs.  As a practical matter, my proposal would skew the immigrant mix even more towards Asia.  However, I’m perfectly happy with immigrants from other areas as well; ethnicity should not be the criterion we use to decide who gets in.  And certainly not religion.

PS.  Here’s the IMF data on government spending as a share of GDP, for 2014 (we don’t get many immigrants from Japan):

Japan  39.8%

USA  35.6%

China  29.3%

Malaysia  26.5%

S. Korea  20.7%

Taiwan 18.3%

Singapore 18.1%

Hong Kong  17.3%

PPS.  If we allowed immigration at levels equal to 1% of the US population, it would allow the US to surpass China in total popuation in about 100 years, when their population is expected to have fallen back to 750 million.  We would again become the world’s largest economy.  Let’s make America’s economy a great big one again.

India?  No chance of passing them; in 2116 India will have vastly more people than either the US or China.  And a bigger GDP.

Cal minimum wage hurts Asians, whites and blacks, “helps” Hispanics

The Los Angeles Times has an article describing how the new minimum wage law is contributing to exactly the sort of industry outflow that I predicted:

After years of net losses, moving production out of Los Angeles is necessary for the survival of American Apparel, industry experts said. The company initially considered staying in California and moving to the city of Vernon, according to a person familiar with the discussions who was not authorized to speak publicly. After the state raised the minimum wage, executives began looking at manufacturers in the South, the person said.

Sensing opportunity, garment makers from Las Vegas, El Paso, Texas, and Las Cruces, N.M., have already come to the Southland to tout the benefits of moving production to their regions, said Sohn, the economist.

To be fair, the minimum wage is not the only factor, high real estate costs in LA (also due to foolish government regulations) are also a problem.  I predict that the gap between the population growth rate gap between Texas and California will accelerate further.  Unfortunately, I expect the GOP to sign off on an increase in the national minimum wage after the 2016 elections, which will narrow the gap.  So some of those apparel jobs will go right past Texas, all the way to Mexico.  (That’s assuming the GOP still exists in 2017, hopefully the party will be as defunct as the Whigs.)

People who study the minimum wage often miss the indirect costs, such as reduced benefits.  Another example is queuing costs.  In the economic development literature there are models where the urban formal sector pays wages far higher than those earned in the rural and informal sectors.  So peasants flock to the cities, and hang around waiting for one of those good jobs to open up.  Being unemployed 1/2 the time at $5/hour, is better than working full time at $2.50 hour.  Because labor markets in the US are fluid, the theory of “compensating differentials” insures that hotel maids in LA can’t really be “better off” than hotel maids in Houston or Phoenix, even if they earn more.  If the LA government tries to make them better off, enough people will migrate to equalize total utility of being in the hotel maid profession, between Texas and California, if only through queuing costs.

As usual I’ve buried the lede.  Here is a breakdown of who “benefits” from the minimum wage in California, by race:

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Note that the California population is 42.3% white, 37.6% Hispanic, 14.9% Asian, and 7.8% black.  If you don’t benefit, then you are hurt by the higher prices.  Looks like African Americans come out on the short end of the stick, just as when the minimum wage was first enacted in the 1930s, to protect white jobs.