Friday, September 28, 2012
Wednesday, September 26, 2012
The social safety net became more generous under Presidents George W. Bush and Barack Obama, and as a result massively altered employment patterns in the labor market.
I have explained in previous posts how public moneys have recently been used to help the unemployed, the poor and the financially distressed endure the recession, but at the same time have dramatically eroded incentives for people to maintain their own living standards by seeking, accepting and retaining jobs, as well as incentives for employers to create jobs that are attractive to workers.
My forthcoming book “The Redistribution Recession” (see the introductory chapter online) quantifies those incentives and their changes over time in terms of marginal tax rates, which refer to the extra taxes paid, and subsidies forgone, as a result of working, expressed as a ratio to the income from working.
As a result of more than a dozen significant changes in subsidy program rules, the average middle-class non-elderly household head or spouse saw her or his marginal tax rate increase from about 40 percent in 2007 to 48 percent only two years later. Marginal tax rates came down in late 2010 and 2011 as provisions of the American Recovery and Reinvestment Act expired, but still remain elevated – at least 44 percent.
Americans have different economic and family situations, and subsidy program rules are complex. As a result, the marginal tax rate changes for particular households vary significantly from the average eight-point increase. A few households even saw their marginal tax rates jump beyond 100 percent – meaning they would have more disposable income by working less.
Marital status and skill (that is, what people are capable of earning) are important determinants of the marginal tax rate and its changes over time. Married people saw their marginal tax rates increase less than average, because even when out of work they are likely to be ineligible for a number of antipoverty programs because of amounts earned by their spouse.
Skilled people saw their marginal tax rates increase less because a number of the new subsidies were fixed dollar amounts, and a fixed dollar amount is a lesser fraction of what a skilled person can earn than it is a fraction of what an unskilled person can earn.
Little attention has been paid to marginal tax rates lately, under the Keynesian assumption that the labor market is slack during a recession and that for the time being labor supply has nothing to do with labor-market outcomes. As Paul Krugman put it: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”
One way I tested, and rejected, the Keynesian assumption was to compare work-incentive changes and work-hours changes between 2007 and 2010 across 10 demographic groups differentiated according to their skill (five categories) and marital status (two categories). In the Keynesian view, the two changes would be correlated only by coincidence.
The group-specific incentive changes are measured (most recently in my paper “Recent Marginal Labor Income Tax Rate Changes by Skill and Marital Status“) on the horizontal axis in the chart below as percentage changes in the share of what people keep from what they earn, net of taxes paid and subsidies forgone. For example, work incentives were eroded about 20 percent for unmarried household heads (red squares) in the middle of the skill distribution, while they were eroded about 12 percent among married heads and spouses (black circles) with the same level of skill.
The vertical axis of the chart measures the percentage change in hours worked per person, most of which is due to increased unemployment rates. Each tick on the vertical axis is 2 percent, which makes each tick as large as some recessions.
Among unmarried people, hours worked tended to fall more for the less-skilled groups. I explain this result as a consequence of greater incentive erosion among less-skilled unmarried people compared with more-skilled unmarried people, but others have suggested that less-skilled people experience greater demand changes during recessions or otherwise have behavior that is more sensitive to economic conditions.
Remarkably, the same skill pattern does not hold up among married people. All but the top skill group have essentially the same hours changes and are uniform in terms of their incentive changes. Also remarkable are the huge differences by marital status between hours and changes and incentive changes. For example, the married people in the lowest skill group saw their work hours fall about half of the drop for unmarried people with the same skill, which lines up with the huge difference in their incentive changes.
Keynesians can explain different labor-market experiences by demographic groups to the degree that groups differ in their propensities to work in declining industries, except in this case marital status has very little correlation with industry of employment. All of this makes sense to economists who think that labor supply still matters, because groups facing the same demand for their labor can nonetheless have different labor-market outcomes because of their varied supply situations.
The fact that marginal tax rates rose so differently for various groups means not only that redistributive public policy depressed the labor market but has also sharply, and arbitrarily, altered the composition of the work force in the direction of people who are married and more skilled.
Sunday, September 23, 2012
its www page.
Wednesday, September 19, 2012
That the introduction of iPhone 5 increases consumer spending is no triumph for Keynesian economics, but merely an advertisement for plans by the Bureau of Economic Analysis to improve national accounting.
Suppose there were an island economy with 100 able-bodied adults, all of whom work as fisherman, each catching a fish a day. The 100 fish are eaten by the island people, which makes inflation-adjusted daily consumer spending in the economy – or consumption, as economists call it – equal to 100.
(In order to clarify concepts and measurement practices, I have deliberately kept this model economy simple, with no unemployment, liquidity traps and the like.)
Now suppose that 10 of the fisherman decide to quit fishing to build, nurture and tend to an apple orchard. In the beginning, the orchard produces no apples, so consumer spending drops to 90 fish a day, because only 90 adults are out fishing while the other 10 are developing an orchard.
Time passes, and a bountiful 100-apple harvest occurs. Because the apples taste good, the island fishermen obtain all 100 apples from 10 orchard owners in exchange for fish. The apple harvest has by itself boosted consumption in the economy, which suddenly jumped from 90 fish a day to 90 fish a day plus 100 apples.
It would be ridiculous to proclaim that the apple harvest and its effect on consumer spending prove that the economy is plagued by a liquidity trap, or to insist that the immediate effect of the harvest on consumer spending is independent of the quality of the apples. By construction, this model economy has no Keynesian features, yet nonetheless a harvest has a large effect on measured consumption.
Consider now the American economy, in which Apple has just released its iPhone 5, and some economists say they believe that the release itself will noticeably increase aggregate consumer spending. Paul Krugman has gone even further, to assert that the increase is a proof for Keynesian economics and that the “short-run benefits from the new phone have almost nothing to do with how good it is.”
Even if Keynesian economics were completely wrong, economists would expect the iPhone 5 release to cause consumer spending and gross domestic product to be greater than it was before the release, to a degree related to the phone’s overall value to consumers. Note that, as in my island economy, the development of Apple products reduces consumption before the release, because the people working on the coming products are not available to produce consumer goods during that time.
Much of the development work on the iPhone 5 did not, before its release, count as investment or G.D.P. (G.D.P. is the sum of public and private consumption and public and private investment). The national accounts treat research and development activities as intermediate inputs, which means that they are subtracted from revenue for the purpose of determining a corporation’s contribution to national production.
This same is true for, say, Apple’s legal expenses in developing patents (many of which are discussed on the Mactech Web site) and license terms for their new product.
These development activities appear as G.D.P. only when the product is completed and sold. If the product is not valuable, it will not sell and will not count for much, although national consumption could still rise if upon project completion the developers move out of development and into the production of consumer goods.
(Research and development employees usually receive wages during the development phase, but their prerelease compensation comes out of corporate profits).
For the purposes of understanding the timing of economic activity, the national accounts’ treatment of research and development is a weakness, because it recognizes the developers’ activity at the wrong time – only after the product is released. Economists at the Bureau of Economic Analysis (the agency producing our nation’s accounts) are aware of this weakness, how it has become acute with the rise of the technology sector and steps they might take to improve the accounts. They are doing the best they can with the data and economic research results that are available.
Measured consumption rises in the quarter when people buy their new iPhones, not when they actually use them (in my island model, the consumption would be measured when the apples are bought, not when they are eaten). IPhones are durable goods that are used for years after Apple sells them as new, including by second and third owners.
Curiously, the timing of measured iPhone consumption would be markedly different if Apple or cellular carriers had chosen to rent the phones rather than sell them, because the measured consumption would occur each month when users paid their rental fees (the Bureau of Economic Analysis is aware of this weakness and rectifies it in sectors where it is most acute, like the housing sector).
The iPhone 5 release is no occasion to cheer for wasteful government spending, but perhaps does help make the case for a larger budget at the Bureau of Economic Analysis, so that it can continue its progress on measuring the amount and timing of economic activity.
Wednesday, September 12, 2012
A couple of important measures of labor-market inequality have played out since 2008 much the way they did previously.
One measure of changing inequality in the labor market, commonly used by economists, is the annualized 90-10 change: the annualized growth rate of wages at the 90th percentile of the distribution of wages for men working full time minus the growth rate of wages at the 10th percentile of the same distribution.
Because the 90th percentile wage is the wage below which 90 percent of working men earn, the annualized 90-10 change can be interpreted as the degree to which the wages of high-earning men grow more, or fall less, than the wages of low-earning men. The measure can in principle be negative, in which case the wages of less-skilled people would be partly catching up with the wages of skilled people.
I measured these changes using the Census Bureau’s Current Population Survey Merged Outgoing Rotation Group sample. (Analysis of wage patterns is often performed with the Census Bureau surveys, although most of them lack information on employee fringe benefits over and above wages and salaries.) The left part of the chart below shows the annualized 90-10 change over three time periods.
The first time period is 2000-8, the years of George W. Bush presidency, and the years before the 2009 depths of the “Great Recession.” Wages grew faster for high-skill people during these years: about 0.5 percentage points a year extra (roughly a cumulative four extra percentage points for the entire period).
Wages also grew faster for high-skill people between 2008 and 2010 (the last year for which I have data). The average growth differential between them and low-skill people was a whopping 2.6 percentage points a year.
One interpretation of these results is that the rewards for accumulating skill have been increasing over time, especially in the last two years. The more common and less euphemistic interpretation is that the rich have been getting richer, especially recently.
Perhaps the Great Recession of 2008-9 and slow recovery is to blame for all of this. For this reason, I looked separately at the recession period 2000-2. That recession (0.6 extra percentage points a year) looks a lot like the longer 2000-8 period (0.5 extra percentage points a year).
Another indicator of inequality is wage equality between the genders. The right part of chart shows changes in gender wage equality. The gender measures are positive if and when wages grow faster for women than for men and negative if and when male wages grow faster. The former is usually viewed as progress, because for centuries women have been earning less than men.
During the George W. Bush presidency (and a number of the presidencies before him), wages grew more for women than for men, about seven-tenths of one percentage a year more on an annual basis. During the first two years of the Obama presidency (or, if you want, during the Great Recession), the gender wage gap closed even more rapidly (1.3 percentage points a year), though less rapidly than it did in during the previous recession (1.6 percentage points a year).
President Obama is sometimes likened to Lyndon B. Johnson or Jimmy Carter, but theirs were not years when high-skill people were gaining ground at a faster pace than low-skill people and not years when women’s wages were catching up to men’s. When it comes to measures of labor-market inequality, the last few years so far look at lot like the years before 2008.
Wednesday, September 5, 2012
Unemployment insurance and other types of social insurance subsidize job separations and thereby result in too many layoffs and too few people employed.
A variety of programs help workers after they leave a job and do not start a new one, depending on the circumstances of the job separation.
Unemployment insurance is often available when the worker was laid off and continues to look for work. Disability insurance is available when a worker’s health makes it too difficult to remain on the job. Social Security’s old-age insurance program provides income for elderly people after they leave their jobs.
Layoffs, disability events and retirements have some differences, of course, which is why each type of job separation has a separate insurance program. But in each case, a working relationship between an employer and an employee has been terminated, and the worker has not started a new one with, say, different working conditions or a different rate of pay.
In their analyses of disability and old-age insurance, economists have found that insurance reduces the cost of job separations and thereby increases their numbers, because the insurance helps replace the income and production that is lost when the worker stops working.
The prospect of the insurance payments gives employers less reason to change the nature of a job to encourage a disabled or elderly employee to remain at work and gives employees less reason to accept changes in working conditions or pay that would make it easier for employers to retain them.
David Autor of the Massachusetts Institute of Technology has studied the United States federal disability-insurance program and finds that it “provides no incentive to employers to implement cost-effective accommodations that would enable disabled employees to remain on the job.”
The Congressional Budget Office explains further about disability insurance that “because the D.I. program is funded through a flat-rate payroll tax on employers and employees, employers do not bear the costs associated with a disabled worker who stops working and becomes a beneficiary in the D.I. program.”
Note that disability benefits are paid to employees, not employers. Nevertheless Professor Autor and other economists conclude that the benefits affect employer behavior because the employment relationship is exactly that: a relationship between employer and employee.
If an employee has better, or less bad, options outside the relationship, then the employer will find the employee more expensive to keep. Disability and other forms of social insurance increase the income employees can receive outside the job and thereby make employees more expensive from an employer’s point of view.
The economists Jonathan Gruber and David Wise have found that Social Security provisions “provide enormous incentive to leave the labor force early.” Just like disability insurance, Social Security provisions can shift some of the burden of job separations from the private sector to the public insurance programs and thereby give the private sector too little incentive to prevent or delay the separations.
Employers sometimes experience reductions in demand from their customers, as auto manufacturers and home builders did early in the recent recession. One way they react is to lay off part of their work forces. But they could also adapt to less demand by work-sharing, reducing prices charged their customers (or increasing those prices less than the general rate of inflation) or reducing wages.
Smart employers recognize that one of these adjustments — layoffs — brings forth help from the government through its safety-net programs (on behalf of employees); the other adjustments do not. If the safety net were less generous, there would be fewer layoffs during a recession, because employers would adjust less with layoffs and more in other ways.
(State unemployment insurance programs are, and have been, “experience rated” in the sense that employers sometimes find their payroll taxes increased for each employee they dismiss. However, the experience rating is imperfect; some employers are already at the maximum tax rate and further layoffs would not increase it. More important, the effect of experience rating on employer costs of layoffs was present even before the recession. What’s new since 2008 are the federal extended and emergency unemployment programs that are not experience-rated, thereby adding to the benefits an unemployed person can expect to receive without adding to the taxes levied on his former employer).
Thus, even if it were true that the unemployed completely ignored the safety net’s generosity in their decisions to seek and accept jobs, the safety net would still increase unemployment during a recession by increasing layoffs.
Yet economists have recently forgotten this important connection between unemployment insurance and the number of people employed. The C.B.O. has looked at the economic effects of unemployment insurance and noted that extending unemployment benefits would “reduce the intensity of some workers’ efforts to search for a new job because the higher benefits would lessen the hardship of being unemployed.” But the C.B.O. concluded that “the net impact on the unemployment rate from some workers’ reduced efforts to find a job would be slight.”
Although it looks at incentives to avoid job separations in its consideration of disability insurance, the C.B.O. makes no mention of the same incentives in its analysis of unemployment insurance and consequently is premature in its rejection of the basic economic proposition that paying people for not working will reduce the number of people who work.