Posts tagged laborio
Posts tagged laborio
For practical policy debates, the most important ethical principle is that the pain and suffering—and the joy—of each human being is of equal importance, without regard to who that person is. Treating some human beings and their concerns as being of lesser importance is the root of much evil in the world.
For those who cannot manage to approach the well-being of all human beings on an equal footing (and of course, this includes almost all of us in our personal dealings), let me recommend this:
At least for public policy purposes,
on the way to treating the concerns of all human beings as of equal value,
let us treat the concerns of those human beings we treat as least important
as being at least one-hundredth as important
as the concerns of those we treat as most important.
Update: I have added a Twitter discussion sparked by this post at the end of the storified tweets from earlier. In that discussion, I call the rule just above, treating foreigners as at least one-hundredth as important as citizens, the tin rule.
Here is the full text of my 14th Quartz column, “Off the Rails: What the heck is happening to the US Economy? How to get the recovery back on track,” now brought home to supplysideliberal.com. It was first published on February 1, 2013. Links to all my other columns can be found here.
If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:
© February 1, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.
GDP fell in the last quarter of 2012. It was only a fraction of a percent, but it means the recovery is on hiatus. Why? Negative inventory adjustments tend to be short-lived, so let me leave that aside, although it definitely made last quarter’s statistics look worse. Of the longer-lived forces, on the positive side,
On the negative side,
Net exports and government purchases are the big worries going forward as well.
How much the rest of the world buys from the US depends on how other economies are faring. And most of the rest of the world is hurting economically. The Japanese are so fed up with their economic situation that they are on their sixth prime minister in the six and a half years since Junichiro Koizumi left office in 2006. The European debt crisis is in a lull right now, but could still resume full force at any time. In addition to all of its other problems, the United Kingdom is facing a mysterious decline in productivity, explained in Martin Wolf’s Financial Times article “Puzzle of Falling UK Labour Productivity” and the Bank of England analysis by Abigail Hughes and Jumana Saleheen.
The decline in US government spending comes from the struggle of state and local governments with their budgets and at the federal level from the ongoing struggle between the Democrats and Republicans about the long-run future of taxing and spending. Last quarter saw a remarkable decline in military spending that Josh Mitchell explains this way in today’s Wall Street Journal (paywall).
The biggest cuts came in military spending, which tumbled at a rate of 22.2%, the largest drop since 1972. …
Military analysts said the decline likely was a result of pressure on the Pentagon from a number of areas.
Among them: reductions in spending on the war in Afghanistan as it winds down, a downturn in planned military spending, a constraint placed on the Pentagon budget because the federal government is operating on short-term resolutions that limit spending growth, as well as concern that further cuts may be in the pipeline.
The problem is that, absent a big increase in economic growth, balancing the federal budget in the long run requires big increases in taxes or big reductions in spending. But, although opinions differ on which option is worse, tax increases and spending cuts themselves are enemies of economic growth. So the traditional options for balancing the federal budget in the long run all have the potential to make things much worse.
Our problems are so big they need new solutions. In our current situation, the fact that a proposal is “untried” is a plus, since none of the economic approaches we have tried lately have worked very well. In the last few months I have focused my Quartz columns on explaining how the US and the world can get out of the economic mess we are in with new solutions. A recap:
Franklin Roosevelt famously said:
The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.
We are at such a moment again. The usual remedies have failed. It is time to try something new. Any one of these proposals could make a major difference. In combination, they would transform the world.
Here is a slightly tidied up version of what I had to say about his proposal when I appeared on Huffpost Live:
The United States is like a college that has everyone wanting to get in. We ought to be able to do something with that. Let me give you just one idea. I love Adam Ozimek’s idea of region-based visas. If you let states and cities and towns apply for visas for people, then you require people to buy a house and get a job in that area, then we can let the different areas decide how many immigrants to bring in. Some places don’t think they can handle immigrants, and some places think they can. I’ll tell you what will happen: those places that let in lots of immigrants will have the dynamic local economies, and pretty soon people will see just how much immigrants bring to the economy. But you don’t have to believe me. Just allow these region-based visas, and then the states and localities that are willing to try it will show the way, and show how much immigrants add to our economy.
Postscript: See my earlier post about that appearance on HuffPost Live, “Miles on Huffpost Live: The Wrong Debate and How to Change It” for the rest of what I said. In particular, I was able to make a pitch for electronic money. Here is the video itself, including also commentary by Robert Kuttner, Dan Gross, Zach Carter and Stephanie Kelton.
(Note: on this topic, see also “Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics.”)
In light of the current debate about raising the minimum wage, I wanted to bring to your attention University of Michigan graduate student Isaac Sorkin’s work on the minimum wage. He begins his paper “Minimum Wages and the Dynamics of Labor Demand” by raising the issue of long-run versus short-run:
Typical analyses of the employment effects of minimum wages find effects too small to easily reconcile with the short-run elasticities implied by the textbook approach. However, if many firms do not fully adjust their labor demand in the short run, then the short-run employment responses would be much smaller in magnitude than the textbook approach implies, and in line with empirical work.
Later in the introduction, Isaac explains:
The main contribution of this paper is that it revives, formalizes and quantifies an old argument about the employment response to minimum wage increases that has been curiously neglected in the modern literature. In the famous Lester (1946), Machlup (1946), and Stigler (1946) debate about minimum wages, … Lester’s argument is that in response to temporary changes in wages, employers are unlikely to make the fundamental changes in how they do business necessary to reduce labor demand simply because it is not worth it to them to pay the adjustment cost. Thus, this paper follows in that tradition by arguing that the presence of adjustment costs on labor demand provides a cohesive explanation for the small short and long-run employment effects found in the minimum wage literature.
The relevant quotation from Lester is this:
Most industrial plants are designed and equipped for a certain output, requiring a certain work force. Often effective operation of the plant involves a work force of a given size…Under such circumstances, management does not and cannot think in terms of adding or subtracting increments of labor except perhaps when it is a question of expanding the plant and equipment, changing the equipment, or redesigning the plant…
From much of the literature the reader receives the impression that methods of manufacture readily adjust to changes in the relative cost of productive factors. But the decision to shift a manufacturing plant to a method of production requiring less or more labor per unit of output because of a variation in wages is not one that the management would make frequently or lightly.
Richard A. Lester (1946, pg. 72-73).
If the long-run effect of minimum wages is substantial, why then don’t we see this effect? Isaac argues it is because there have been very few long-run changes in the minimum wage in the United States, so evidence on their effects is scant. The minimum wages is set in nominal terms, so it declines with inflation, is raised, declines with inflation, is raised, etc. This yields a sawtooth pattern of the real (inflation-adjusted) minimum wage in which almost all changes in the real minimum wage are temporary. And Isaac argues that temporary changes in the minimum wage have muted effects. In Isaac’s words:
… if adjustment is slow (because it is costly), then labor demand today is a forward-looking decision and depends critically both on the realized path, and the expectations, of minimum wages. In the US, minimum wages are mostly set in nominal terms and so a given increase is not very persistent. As a result, labor demand would never fully adjust to a given minimum wage increase and the long-run consequences of a given minimum wage increase for employment might be quite small.
Isaac backs up his story about how machinery adapted to be used by a given number of workers can influence labor demand by discussing detailed micro-data of the reaction to an important set of minimum wage increases in 1938 and 1939 (pp. 4-6).
The implementation of the Fair Labor Standards Act of 1938 in the case of the seamless hosiery industry provides a nice example of this mechanism since the Bureau of Labor Statistics collected data on both employment and the kind of capital in January of 1938 and August of 1940, which is tabulated in US Department of Labor (1941)….
The minimum wage was implemented in two stages: it was set to 25 cents an hour in October 1938 and then raised to 32.5 cents in September 1939. The minimum wage was binding in the seamless hosiery industry….
The fundamental technological choice facing the seamless hosiery industry was whether to use machines where the top of the stocking was knit on a different machine than the stocking itself, or machines where the top was knit on the same machine as the stocking. The most labor-intensive process used the hand-transfer machine, where the top of the stocking was knit on a separate machine and then carried by hand to the knitting machine. A converted hand-transfer machine included an attachment to the hand-transfer machine that “in effect converts transfer machines into automatic machines” (US Department of Labor (1941, pg. 75)), while an automatic machine performed both steps in an integrated fashion. The hand-transfer machines were roughly four times more labor-intensive than the automatic machines (Hinrichs (1940, pg. 25, n. 15))….
… five points. First, as Seltzer (1997) emphasizes, the earnings and employment numbers are consistent with the minimum wage decreasing employment. Average hourly earnings rose three times faster in the low-wage plants than the high-wage plants. And employment fell in the low- wage plants and not in the high-wage plants.
Second, the plants paying higher wages in 1938 had a significantly different mix of machines than plants paying lower wages. In particular, half of the machines in the low-wage plants were the most labor-intensive, while only a quarter of the machines in the high-wage plants were the most labor-intensive. This is consistent with long-run differences in wages leading to differences in technology choice.
Third, in the two and a half year window around the implementation of minimum wages, both high and low-wage plants shifted toward more capital-intensive machines, with much stronger shifts at the lower wage plants.
Fourth, the sharp increases in usage of more capital-intensive machines implies that the quantity of capital in use adjusts at least somewhat in the short run.
Finally, the speed of substitution toward more capital-intensive machines was slow.Two years after the change in relative labor costs, the use of the most labor-intensive machines declined by less than a quarter. Even among the plants paying on average below the minimum wage before its implementation, the use of the most labor-intensive machines declined by less than a third.
This evidence is consistent with a model in which conditional on installation of a machine the capital-labor ratio is fixed. Because the capital cost is sunk, the machines that continue to function remain in use, even if they do not have the optimal capital-labor ratio. To allow for the fact that there was a reduction in use of these labor-intensive machines even two year after the wage increase, some machines have to stop working at any given point in time. To capture the rapid increase in the use of capital-intensive machines, the model has to feature free entry into operating machines. The next section develops such a model and analyzes its implications for labor demand.
Yesterday I was on HuffPost Live for the first time. I had a chance to make the case for electronic money and for Adam Ozimek’s idea of region-based visas. Here is the link again: “The Wrong Debate.”
There were a couple of things I wanted to make sure to get in, so I wrote a couple of notes beforehand. Here are those two notes:
Of course, these lines mutated when I was actually on the spot, but I did get a change to say them in my first two at-bats.
I knew the question about immigration policy (my third bit) was coming, so I didn’t need to mention it in the first instance. And I was confident I could say what I wanted to about that more extemporaneously, since I was just coming off of Immigration Tweet Day.
Here are the tweets I was able to storify for Immigration Tweet Day. I tried to storify just the original tweet, rather than all the retweets, but I suspect that in various ways there is some duplication.
Immigration Tweet Day was everything I could hope for. I was especially pleased to see the strong moral dimension to many of the arguments. Like Abraham Lincoln, who was very careful in how he handled the Emancipation Proclamation, I hope we will have a clear moral compass about immigration, working to change hearts and minds, but also be smart about political strategy.
I appreciate the contribution the minority who were against open immigration made to the discussion. It really sharpened the arguments.
Think of a Neoclassical model with inelastic labor supply (including inelastic retirement timing). I am going to focus on the effects that occur in the period of time before capital has had much chance to adjust. To keep the numbers simple, let’s imagine there are 100 million workers in the economy. Production is Cobb-Douglas (see my post “The Shape of Production: Charles Cobb’s and Paul Douglas’s Boon to Economics”), with the following shares:
What are the economic effects of allowing 1 million new workers: enough additional immigration to increase the population by 1%?
Case 1: All of the New Immigration is Unskilled. If all of the new immigration is unskilled, the amount of unskilled labor increases by 2% (from 50 million to 51 million). This increases output by .25 * 2% = .5 %. Unskilled labor gets 1/4 of this bigger pie. With a .5% bigger pie and 2% more people to share it among, unskilled workers get a 1.5% reduction in their wage. The skilled workers get the same share of a bigger pie, with no dilution, so they each get a .5 % increase in their wage. Capital also gets .5% more. This helps people in saving for retirement.
Case 2: All of the New Immigration is Skilled. Now the pie is .5 * 2% = 1% bigger (from 50 million to 51 million). With a 1% bigger pie and 2% more people to share it among, each skilled worker now gets 1% less. Unskilled workers get the same share of a bigger pie, with no dilution, so they each get a 1% increase in their wage. Capital also gets 1% more, which helps people in saving for retirement.
Case 3: 60% of the New Immigration is Skilled, 40% Unskilled. In this case, the amount of skilled labor increases by 1.2% (from 50,000,000 to 50,600,000), while the amount of unskilled labor increases by .8% (from 50,000,000 to 50,400,000). This increases output by (.5 * 1.2%) + (.25 * .8%) = .6% + .2% = .8%. Capital gets .8% more, which helps people in saving for retirement. Since there are .8% more unskilled workers to divide their share of the pie among, the unskilled wage is unaffected. The effect on the skilled wage is .8% - 1.2% = -.4% in this simple model.
Everything left out of this bare bones model suggests that in a richer model, output will ultimately grow more. If the skilled workers are willing to bet that the combination of higher returns to capital and the effects of capital accumulation, extra technological progress, the benefits of increasing returns to scale and diversity, and the share of the national debt and of unfunded government liabilities that immigrants will shoulder would make up for the -.4% reduction in wages they see in the bare bones model, the unskilled workers have no reason to object (except perhaps for cultural reasons), since even in the bare bones model, their wage is unaffected, and all other factors then push in the direction of doing better economically.
I suspect that something like the bare bones model of immigration lurks in the back of many brains, and is encoded as saying that immigration is good for capitalists, but not for workers. Therefore, to successfully argue their case, advocates of immigration must confront this bare bones model head on, explain what is missing, and convincingly argue what the quantitative effects of those missing pieces are.
Tweets here and below: