Not from the Onion:

LA unions call for exemption from $15 minimum wage they fought for

Los Angeles city council will hear a proposal on Tuesday to exempt union members from a $15 an hour minimum wage that the unions themselves have spent years fighting for.

The proposal for the exemption was first introduced last year, after the Los Angeles city council passed a bill that would see the city’s minimum wage increase to $15 by 2020. After drawing criticism last year, the proposed amendment was put on hold but is now up for consideration once again.

Union leaders argue the amendment would give businesses and unions the freedom to negotiate better agreements, which might include lower wages but could make up the difference in other benefits such as healthcare. They argue that such exemptions might make businesses more open to unionization.

Case closed?

HT:  Anand

Russ Roberts has a very good interview with David Autor, one of the authors of a recent paper on the impact of Chinese imports on the US manufacturing sector. Autor actually says that China’s been a net positive, but some of the commenters I’ve read seem to have gotten the opposite impression.

I hoped that the interview would clarify things, but I’m just as confused about Autor’s argument as before.  Indeed I still can’t tell whether he is making an aggregate demand argument or an aggregate supply argument.  The Autor, Dorn and Hanson (ADH) paper looked at the period from 1990 to 2007, so we can immediately take the AD hypothesis right off the table.  Monetary offset obviously applies, indeed the Fed did a great job during this period.  So it has to be an AS problem, presumably due to the difficulty of reallocating labor from one industry to another.

Unfortunately, the points made by Autor in the interview only seem to make sense if you assume it was an AD problem.  For instance, he mentions the US trade deficit:

And then the fourth factor–and this one is really, is difficult also to explain the origins. But the U.S. trade deficit is a big part of this. And the reason is–well, first of all the United States has a merchandise trade deficit as a share of share of GDP (Gross Domestic Product), as large as 3 or 4 percentage points during the 2000s. So, quite large. And a trade deficit, you can think of as, it’s like we’re borrowing. So it’s like if we were making a bunch of stuff for ourselves: we are making shoes and leather goods and furniture; and then all of a sudden China comes along and says, ‘Hey, I can make these more cheaply than you.’ And we say, ‘Okay, great. We’ll buy some.’ And they say, ‘And you know what? I’ll just lend them to you. You can pay me back later.’ And if we had had to say, if there had been a deal–and again, I’m personifying: there is not any country saying, this is not part of an explicitly crafted deal. But if there had been a situation where we would have said, ‘Okay, we are going to get those goods from you, but we are going to produce something else in exchange,’ then we would have had labor reallocating from one manufacturing activity to another, presumably. So, we say, okay, we’ll buy these furniture from you but we will sell you these electronics or these aircraft parts or something. But not doing that, it’s like we took a set of activities that we were engaged in, that employed, millions of people actually to do them, and we just stopped doing them. And instead just got the goods on loan from another country. Now, in the long run, we have to pay that back. And to pay that back, presumably we have to either make more stuff for export, which will create a lot of employment. Or we have to devalue the U.S. currency, which will lower our standards of living but will also have the effect of making those debts easier to service. But the trade deficit does loom large. Because it means in the short term, it’s like an inward shift in labor demand: stock that we were paying ourselves to make, we just got elsewhere without having to pay for them. And so that was pretty contractionary for demand for the type of workers–I’m sorry, these manufacturing labor-intensive goods that we started getting from China instead of producing domestically.

First of all, even if you think that trade deficits cause unemployment, the US trade deficit today is no bigger than 30 years ago (as a share of GDP.)  So it can’t be the trade deficit causing all this unemployment during the China boom; the deficit has not increased in recent decades.  So let’s go back to the reallocation problem. Maybe Autor is saying that the jobs lost to workers in some industries were not offset by growth in other industries.  OK, that’s possible, but that argument would be equally true if there were no trade deficit, indeed if we had a huge trade surplus. Even if Boeing had ramped up production enough to absorb all those unemployed workers from shoe factories, the workers would probably lack the needed skills, and be living far from the available jobs.  Different workers would have gotten those Boeing jobs.

But Autor then seems to suggest the reallocation problem doesn’t apply to countries like Germany, which ran a trade surplus:

And certainly the things we are talking about: what did we do with these cheap interest rates and low-cost loans? You could say that it was a squandered opportunity, right? That didn’t have to be the case. Many other countries responded to China’s rising productivity by importing Chinese goods from China but then selling China other goods. So, Germany did that. Germany runs a trade surplus with China, and most of Europe is relatively more in balance. So, the reason I bring up the trade deficit is not because there is something intrinsically wrong with trade deficits: they are an opportunity. Basically someone is lending you something or making an investment in you, and you can use that as you like. However, it did mean the manufacturing jobs that might have occurred if we were running a trade balance–workers would have been reallocated from one type of manufacturing potentially to another–that didn’t occur. So that’s part of the reason there wasn’t faster reabsorption. A second question you are asking me is: Has the U.S. labor market become less flexible, so that these shocks matter differently? Why aren’t we just getting back on our feet the way we should or the way we perceived ourselves to have done in the past?

Suppose lots of Germans lost jobs to Chinese imports.  How were those made up elsewhere? Maybe they found jobs in other companies.  But the contrast drawn between Germany and the US makes no sense on either theoretical or empirical grounds:

1.  It’s no easier for an unemployed worker from a shoe factory to get a job in a capital goods manufacturing firm like Boeing or Intel, than it is to a get a job in construction or services.  So what if the German economy saw the drop in manufacturing jobs in one sector offset by gains in another manufacturing sector? I could argue that the US economy saw the offsetting job gains in construction and services.   The German trade surplus has no bearing on the question of whether there are net job losses in the US.

2. On empirical grounds, Germany (and Europe more generally) is a really weird point of comparison.  During the period studied by ADH, the US economy did far better than Germany and Europe at job creation, and we had a much lower unemployment rate.  So even if you think my theory is wrong (and it’s simply standard economic theory) the empirical evidence provides no support for the claim that Germany did a better job at reallocation of labor.

Keep in mind that ADH did a cross-sectional study.  What they showed is that places like Silicon Valley did a lot better than areas concentrating on low-skilled, labor-intensive industry.  But it’s not at a clear the extent to which that reflects unusually bad performance of the lagging areas, or unusually good performance of the boom areas in the US.  To answer that question, ADH would have to tell us the impact on overall US employment, and that’s almost impossible, especially with their empirical methods.  Thus, how would they even begin to estimate the net impact of China trade on total US employment vs. total German employment? Among other things, you’d need a monetary policy reaction function.  If monetary policy offset applied (which seems almost certain) then you’d have to look for changes in the natural rate of unemployment.  Most estimates suggest that the natural rate of unemployment has fallen over the past 30 years.  So then the argument would have to be that China prevented the natural rate of unemployment from falling even faster.  Or maybe the labor force participation rate was depressed—that did decline during 1990-2007, but only by about 0.5%

You may not think that net job changes matter, and that the ADH story is just about reallocation.  But it does matter. Roughly 30 million jobs are created and destroyed each year in America.  It matters a lot whether the 1.5 million jobs they believe were lost to Chinese imports were offset (as I believe) by 1.5 million new jobs created elsewhere.

Even if I am right, the China trade surely created lots of losers, as does all disruptive new technologies.  Because China is so big and so fast growing, it was more disruptive than most other shocks.  Yet it was still small compared to the shock of technological change, which first hit agriculture, and then later manufacturing.  Yes, China may have sped up technological job loss, by switching our manufacturing to less labor intensive industries. But even if China did not exist, manufacturing employment in American would be plunging lower, decade after decade, due to technological change.

I suspect that ADH misinterpreted the implications of US trade deficits, and overestimated the disruptive impact of China’s exports.  There is no question that China had major regional impacts in the US, and their study does a good job of showing this.  But the discussion of trade deficits ends up garbling their message, and makes it easier for people like me to take potshots.  This comment by Autor is right on the mark:

I think the thing we agree on, and really the point of our paper: it’s not about the net job losses. It’s really about the degree of concentrated loss. Right? Even if the gains are positive in all likelihood on net, it was very devastating the way that people were not expecting to specific subsets, specific regions that went from being relatively robust manufacturing centers to being rather blinded[?], or at least to a subset of people losing career employment and not being able to find good alternatives. And that’s what we’re trying to draw attention to. The other part, the calculus, which is the net gains are very likely positive. However, the distributional costs, which we’ve always known about in theory but hadn’t seen a lot in practice, we now saw that very, very clearly. And I can talk more about how we did that if that’s helpful, as well.  [Emphasis added.]

Of course the headline number is the 271,000 payroll jobs created last month.  But the real reason the Fed is likely to raise rates in December (barring some unforeseen shock in the November jobs report, or international crisis) is the wage number:

With the October figures, year-over-year wage growth has risen to 2.5% (actually 2.48%). It does look like we are finally getting some faster wage growth.

Of course you also see lots of zigzagging.  Nonetheless, I think the October data makes it likely that the underlying trend has finally moved above the roughly 2% rut we’d been in since 2009.  Perhaps 2.4% is a reasonable guesstimate.  That’s still less than the pre-recession wage trend line (around 3.5%), but I don’t expect us to get back to that rate of growth in wages.  My hunch is that 2.5% to 3.0% will be the new normal, over the next 5 years.

Right now I’m a bit puzzled by the TIPS spreads.  They’ve moved up slightly in recent weeks, but the 5-year spread (1.32%) still seems somewhat inconsistent with the underlying trend wage data, which suggests 1.5% to 2.0% inflation.

I seem to recall that Yellen is very interested in the wage data, which is why I think the Fed will raise rates in December. Rising wage growth suggests we are back at the natural rate of unemployment.  The rising wage growth also makes it slightly more likely that the Fed is on target for 2% trend inflation, although the TIPS spread suggest otherwise.  I can’t reconcile those two numbers, unless the TIPS market is pricing in another recession in the next 5 or 10 years, during which time inflation would slow once again.

If there is no recession in the next 5 years, then the current TIPS spread of 1.32% seems implausibly low, given rising trend wage growth.  Perhaps some of the mystery is explained by a liquidity premium on conventional bonds, depressing TIPS prices and raising yields closer to conventional bond yields.  Or maybe October’s wage growth was a fluke.

To conclude in my typical wishy-washy way, I still don’t see a compelling case for a rate increase in December, but I also don’t see much evidence that it would do significant harm to the economy.  The recent data makes it a close call.  The Fed’s real problem now is not next month’s fed funds target, it’s that it lacks a long run strategy for monetary policy.  It still has not learned how to operate in a low NGDP growth environment—and better come up with a plan before the next recession.

PS.  No, the U6 unemployment rate (9.8%) is not horrible.  It was 9.7% in October 2004, 15 months before the housing boom peaked.  In was 9.7% in July 1996, almost half way through the Clinton boom.  It’s not a great number, but it’s not horrible.

In other news, China’s bear market in stocks is officially over, as shares have risen more than 20% from August lows.  There are lots of reports that the consumer sector in China is red hot:

More than 1m Chinese will go on a cruise holiday this year “” nearly five times as many as in 2012 “” a statistic that has whipped the global industry into a record expansion of ship orders and a collective decision to sail the world’s largest and most luxurious mega-vessels eastward.

The government also announced that the Hong Kong and Shenzhen markets will be linked later this year.  The RGDP growth target for 2015 to 2020 was just announced at 6.5%.  Apocalypse later?

This is from a paper by Gauti Eggertsson, a very distinguished New Keynesian economist:

Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed.

Elsewhere he showed that in a deep depression, the NK model suggested that artificial attempts to raise wages, such as FDR’s NIRA, could be expansionary.

Several economists have recently suggested that the NK model has NeoFisherian implications. If the Fed were to raise its fed funds target, the policy shift would be inflationary.

Nick Rowe shows that the NK model implies that a slowdown in the rate of government spending growth is expansionary.

To summarize:

1.  The NK model implies that higher taxes on wages can be expansionary.

2.  The NK model implies that higher capital gains taxes can be expansionary

3.  The NK model implies that raising the aggregate wage level by government fiat can be expansionary.

4.  The NK model implies that an increase in the fed funds target can be expansionary.

5.  The NK model implies that fiscal austerity can be expansionary, if done by slowing the growth in government spending.

These are claims made by NK supporters, NK opponents, and people in the middle. And what they all have in common is that they suggest that the NK model has preposterous implications.  These claims about the world aren’t just wrong, they are borderline absurd.  I’ve studied macroeconomics all my life, both the Great Depression and the post-1970 period.  I’ve seen hundreds of natural (policy) experiments, and watched how both markets and the broader economy reacted to those natural experiments.  And if these claims are true then I might as well stop being an economist, because it would mean I understand nothing about the world, absolutely nothing.

Perhaps merely to keep my sanity, I prefer to find another model, which doesn’t yield one preposterous result after another.  Here’s the best I can do:

The Musical Chairs model:

1.  In the short run, employment fluctuations are driven by variations in the NGDP/Wage ratio.

2.  Monetary policy drives NGDP, by influencing the supply and demand for base money.

3.  Nominal wages are sticky in the short run, and hence NGDP shocks cause variations in employment in the same direction.

4.  In the long run, wages are flexible and adjust to changes in NGDP. Unemployment returns to the natural rate (currently about 5% in the US.)

This models seems to fit the stylized facts quite well:

In my model, artificial attempts to raise wages are contractionary, because they reduce NGDP/W.

In my model, higher wage taxes are contractionary, because they reduce NGDP/W (“W” is actually hourly labor costs for firms, including employer-side taxes and benefits.)

In my model, capital gains taxes have little impact on employment.

In my model, increases in the fed funds target are achieved via decreases in the base. This reduces NGDP, and thus NGDP/W, and therefore is contractionary.

In my model, a decrease in the growth rate of government spending doesn’t effect employment.

So in all five cases where the NK model has loony implications, my model has implications that are more consistent with what we know about how the world actually works.

Oh, and one other thing, the NK model has enormous academic prestige, whereas my model is ignored, or dismissed as non-rigorous.

I am quite certain that my model will not win out in the long run; it’s too crude. (Even I could do better.)  But I’m equally certain that the NK model can’t survive in its current form.  It’s time to blow it up, and start over with a completely different framework. Preferably a model that doesn’t focus on inflation, interest rates and output, but rather NGDP, nominal wages, and employment.

PS.  I have a new post at Econlog; metaphors run wild.

Tyler Cowen links to a recent paper by Aedín Doris, Donal O’Neill, and Olive Sweetman, studying wage flexibility in Ireland.  This is from the paper:

The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. We find a substantial degree of downward wage flexibility in Ireland in the pre-crisis period. Furthermore, we observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than trebled, rising from 17% in 2006 to 56% at the height of the crisis. Given the large number of workers receiving pay cuts it seems unlikely that wage rigidity played an important role in unemployment dynamics in Ireland over this period.

Tyler comments:

One question is what then caused so much Irish unemployment.

That one is easy—sticky nominal hourly wages combined with falling NGDP.  The authors of the study could have saved themselves a lot of time by simply looking at the aggregate wage data (nominal hourly wages).  Here are the 12-month rates of change, and also the change in NGDP over the same period:

Period ending   Wage Growth   NGDP Growth

2008:2                +3.6%             -5.7%

2009:2                +2.3%             -7.9%

2010:2                 -2.4%             -2.7%

2011:2                 -0.9%              +5.3%

2012:2                +1.0%              +2.9%

2013:2                +0.5%              -2.7%

2014:2                -0.6%              +4.7%

2015:2                +0.9%             +12.3%

[Warning:  Eurostat is a nightmare to use, and I am a bit doubtful about the second quarter 2015 data–can anyone confirm?]

This fits the sticky wage model very well.  Notice that NGDP plunged by 15.5% between 2007 and 2010.  Wages actually rose over that three-year period.  Unemployment soared, and indeed I’m surprised it didn’t soar even more, given the stickiness of wages.  (Perhaps output fell the most sharply in capital-intensive manufacturing and construction?)  Also notice there was a double dip in NGDP in 2012-13.  And finally, notice that in both the original deep recession, and the later smaller double dip, the very small wage declines occurred with a long lag—just what the sticky wage model predicts.

Tyler continues:

A second question is why Ireland seems to have higher than normal nominal wage flexibility.

Could it be a greater than average willingness to endure living standard cuts without complaining?  The Irish after all didn’t protest austerity as much as did most of the other Europeans in a comparable position.  Maybe that means their wages can be cut without incurring the same morale costs.

Or could it have something to do with the “dual” nature of the Irish economy, namely that you either work for a multinational or you don’t?  If you work for a multinational, maybe they can lower your wages and still you will work hard to keep that job.

Any takers on these questions?

There sure is a taker!  This one is also easy to answer; Ireland doesn’t have higher than normal wage flexibility. If you look at any other country with big NGDP plunges (Portugal, Greece, Spain, Estonia, etc.), you’d also observe declining wages occurring with a lag after the big NGDP plunge.

And indeed this also occurs in the US.  We saw huge falls in NGDP in 1920-21 and 1929-33, and 1937-38, and in all three cases we saw lots of wage reductions.  Indeed in the case of 1920-21 the wage cuts were far steeper and more rapid than in Ireland, and hence the subsequent fall in unemployment was also much more rapid.  Wage flexibility helps to stabilize an economy (contra Keynes/Krugman.)

But what about the recent recession in the US?  OK, but NGDP fell by only 3% vs. 15.5% in Ireland.  So naturally the slowdown in wage growth in the US was far smaller than in Ireland.  Not enough to make it slightly negative, just less positive. If our NGDP had fallen by 15.5%, then nominal wages would certainly have also declined here.  But just as certainly they would not have declined enough to prevent a big rise in unemployment.

The more I look at the data from different times and places, the more I like the sticky wage/NGDP shock model (AKA musical chairs model.)  I think Tyler focuses too much on the fact that wages do eventually respond, and that when there are big NGDP shocks wages do fall in absolute terms.  But the term “sticky wages” was created for the express purpose of distinguishing the model from “rigid wages.”  Wages are not rigid.  They change over time.  But they adjust far to slowly to prevent big swings in unemployment. Indeed even in 1920-21, the poster child of wage flexibility, beloved by Austrians everywhere, the unemployment rate soared over a period of about a year, before falling rapidly as wages adjusted.  Even then wages weren’t instantaneously flexible, and hence wage stickiness plus a huge NGDP decline caused a severe recession in 1921.

BTW, the authors finding that 56% of workers took pay cuts at the height of the crisis is exactly what you’d expect from the aggregate data, showing that aggregate hourly wages declined slightly in 2010. Looking at disaggregated wage data doesn’t really tell us anything important that we didn’t already know about Ireland.  It’s represents another success of the sticky wage/NGDP shock model.