Economics

2017: The Best Year Ever

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I know I said the same thing about 2016. And 2015. Even 2013. But that’s because things continue to get better. Nicholas Kristof writes in The New York Times, “There’s a broad consensus that the world is falling apart, with every headline reminding us that life is getting worse. Except that it isn’t. In fact, by some important metrics, 2016 was the best year in the history of humanity. And 2017 will probably be better still…Polls show that about 9 out of 10 Americans believe that global poverty has worsened or stayed the same.” And yet,

Every day, an average of about a quarter-million people worldwide graduate from extreme poverty, according to World Bank figures. Or if you need more of a blast of good news, consider this: Just since 1990, more than 100 million children’s lives have been saved through vaccinations, breast-feeding promotion, diarrhea treatment and more. If just about the worst thing that can happen is for a parent to lose a child, that’s only half as likely today as in 1990. When I began writing about global poverty in the early 1980s, more than 40 percent of all humans were living in extreme poverty. Now fewer than 10 percent are. By 2030 it looks as if just 3 or 4 percent will be. (Extreme poverty is defined as less than $1.90 per person per day, adjusted for inflation.) For nearly all of human history, extreme poverty has been the default condition of our species, and now, on our watch, we are pretty much wiping it out. That’s a stunning transformation that I believe is the most important thing happening in the world today — whatever the news from Washington.

What’s more is that “global income inequality is…declining. While income inequality has increased within the U.S., it has declined on a global level because China and India have lifted hundreds of millions from poverty.”[ref]Nathaniel and I covered global poverty and inequality in our 2014 SquareTwo article.[/ref] Today “some 40 countries are now on track to eliminate elephantiasis. When you’ve seen the anguish caused by elephantiasis — or leprosy, or Guinea worm, or polio, or river blindness, or blinding trachoma — it’s impossible not to feel giddy at the gains registered against all of them.” In “the 1960s, a majority of humans had always been illiterate; now, 85 percent of adults are literate. And almost nothing makes more difference in a society than being able to read and write.”

For me, this was the clincher in Kristof’s piece:

On a recent trip to Madagascar to report on climate change, I was struck that several mothers I interviewed had never heard of Trump, or of Barack Obama, or even of the United States. Their obsession was more desperate: keeping their children alive. And the astonishing thing was that those children, despite severe malnutrition, were all alive, because of improvements in aid and health care — reflecting trends that are grander than any one man.

He concludes, “The most important thing happening is not a Trump tweet. What’s infinitely more important is that today some 18,000 children who in the past would have died of simple diseases will survive, about 300,000 people will gain electricity and a cool 250,000 will graduate from extreme poverty.”

How’s that for a little pick-me-up?

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Regulation vs. Innovation

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AEI’s James Pethokoukis has a nice little blog post on the negative effects of ill-conceived regulation:

So I very much liked a Mercatus study last year finding US economic growth has been slowed by an average 0.8% per year since 1980 due to the cumulative effects of regulation. Also a favorite of mine: A 2013 study from economists John Dawson of Appalachian State University and John Seater of North Carolina State University, Federal Regulation and Aggregate Economic Growth, that estimates the past 50 years of federal regulations have reduced real GDP by roughly two percentage points a year, or nearly $40 trillion. Both studies show pretty sizable effects from smarter regulation or deregulation.

He points to new articles at Reason and National Affairs demonstrating that the Federal Communications Commission limited tech advancement, including cell phones. As economist Thomas Winslow Hazlett writes in his Reason piece,

Image result for cell phoneWhen AT&T wanted to start developing cellular in 1947, the FCC rejected the idea, believing that spectrum could be best used by other services that were not “in the nature of convenience or luxury.”…  A child conceived at the same time as cellular would have been 37 years old by the time the first commercial cellphone—Gordon Gecko’s $3,995 Motorola DynaTAC 8000X brick—was released onto the market. Once the blockage was cleared, progress popped. Soon, the science fiction vision of the Star Trek communicator was reality.

Check them out.

Marriage and the Economic Well-Being of Children

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Sociologist W. Bradford Wilcox testified before a committee put together by the National Academies of Sciences, Engineering, and Medicine on child poverty in the United States. The following comes from his testimony:[ref]The sources for Wilcox’s claims can be found in the full link.[/ref]

Research by Robert Lerman of the Urban Institute and Isabel Sawhill of the Brookings Institution, among others, suggests the growth of child poverty from the 1970s to the 1990s was driven, in part, by the rise of single-parent families and family instability over this time period. For instance, in 1970, 12% of children lived with a single parent; by 1990, 25% of children lived with a single parent. Their work indicates that more than half of the increase in child poverty over this period can be attributed to the decline of stable marriage as an anchor to family life in America. Since then, the retreat from marriage has slowed, which means that family structure has been less salient in the ebb and flow of child poverty. Nevertheless, this research suggests that child poverty would be markedly lower in the United States if more American parents were stably married.

In fact, the continuing relevance of marriage to economic well-being can be seen in two recent studies, both of which suggest that marriage per se is strongly related to poverty. My own recent research with the Institute for Family Study’s Wendy Wang indicates that Millennials who have formed a family by marrying first are significantly less likely to be poor than Millennials who have formed a family by having a child before or outside of marriage. After controlling for education, race, ethnicity, family-of-origin income, and a measure of intelligence/knowledge (AFQT scores), we find that Millennials who married before having any children are about 60% less likely to be poor than their peers who had a child out of wedlock. In fact, as shown in the figure below, 95% of Millennials who married first are not poor by the time they are in their late twenties or early thirties. So, even for the latest generation of young adults, it looks like marriage continues to matter.

…[C]hildren in single-mother-headed families (who make up the clear majority of single-parent families) are over four times more likely to be poor, compared to children in married-parent families. And because more than one-quarter of American children are in single-parent families, this elevates the child poverty rate above what it would otherwise be if more children were living in married-parent families. Sawhill’s research suggests that if the share of children in female-headed families had remained steady at the 1970 level of 12.0%, then the 2013 child poverty rate would be at 16.4%, rather than a rate of 21.3%. In other words, the current child poverty rate would be cut by almost one-quarter if the nation enjoyed 1970-levels of married parenthood.

What about cohabiting parents?

One recent study finds, for instance, that children born to cohabiting parents are almost twice as likely to see their parents break up, compared to children born to married parents, even after controlling for a number of socioeconomic factors. This means that children in cohabiting families are more likely to end up in single-parent families or complex families without both their biological parents, which increases their risk of being in poverty. All this suggests that cohabitation does not protect children from poverty as much as marriage does.

What are the economic benefits of marriage for children?

  • “children raised by their married parents are much more likely to enjoy access to the economic support of their father over the course of their childhood, compared to children raised by single or cohabiting parents.”
  • “married parents are more likely to enjoy economies of scale, compared to single parents, and to pool their income, compared to other types of families.”
  • “stably married parents who do not have children with other partners do not incur child support obligations or legal expenses related to family dissolution that reduce their household income.”
  • “having stably married parents is worth about an extra $40,000 in annual family income to children while growing up, compared to children being raised by a single parent.”

What are his policy recommendations?

  1. “On the educational front, strengthen vocational education and apprenticeship programs, so as to increase the vocational opportunities of the majority of young adults who will not get a four-year college degree.“
  2. “On the policy front, work to minimize marriage penalties facing lower-income families, perhaps by offering newly married Americans a “honeymoon” period of three years where their eligibility for means-tested programs would not end if they marry—so long as their household income is below a threshold of $55,000.”
  3. “On the cultural front, launch local, state, and federal campaigns on behalf of what Haskins and Sawhill have called the “success sequence,” where young adults are encouraged to get at least a high school degree, work full-time, and marry before having any children—in that order.”
  4. “On the civic front, encourage secular and religious organizations to be more deliberate about targeting Americans without college degrees.”

This shouldn’t surprise anyone that has kept up with my posts. But it’s always nice to have some of the most updated research on the matter.

Zoning Out

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“Arguably,” writes economist Edward Glaeser,

Image result for zoning lawsland use controls have a more widespread impact on the lives of ordinary Americans than any other regulation. These controls, typically imposed by localities, make housing more expensive and restrict the growth of America’s most successful metropolitan areas. These regulations have accreted over time with virtually no cost-benefit analysis. Restricting growth is often locally popular.  Promoting affordability is hardly a financially attractive aim for someone who owns a home.  Yet the maze of local land use controls imposes costs on outsiders, and on the American economy as a whole.

…[The] most productive parts of America are unaffordable. The National Association of Realtors data shows median sales prices over $1,000,000 in the San Jose metropolitan area and over $500,000 in Los Angeles…America’s affordability problem is local, not national, but that doesn’t mean that land use regulations don’t have national implications. Historically, when parts of America experienced outsized economic success, they built enormous amounts of housing. New housing allowed thousands of Americans to participate in the productivity of that locality. Between 1880 and 1910, bustling Chicago’s population grew by an average of 56,000 each year. Today, San Francisco is one of the great capitals of the information age, yet from 1980 to 2010, that city’s population grew by only 4200 people per year.

…Land use controls that limit the growth of such successful cities mean that Americans increasingly live in places that make it easy to build, not in places with higher levels of productivity. Hsieh and Moretti (2015) have estimated that “lowering regulatory constraints” in areas like New York and Silicon Valley would “increase U.S. GDP by 9.5%.” Whether these exact figures are correct, they provide a basis for the claim that America’s most important, and potentially costly, regulations are land use controls.

…Land use controls may be benign even if they restrict growth and increase prices. Their proponents argue that they prevent environmental damage and reduce the downsides of local growth to the community. Theoretically, it is at least conceivable that America’s web of locally-constructed zoning codes have worked out to be a finely tuned system that functions like a perfect Pigouvian tax internalizing all the offsetting externalities of all new construction.

Yet such a view seems untenable. Getting the right national policy requires comparing the social costs of building in one location versus the costs of building elsewhere. Few localities seriously consider the negative impact that restricting buying will have on non-residents of their town. No locality considers the impact that their local rules may induce more building elsewhere.

We’ve written on zoning laws before. As Glaeser concludes, “Reforming local land use controls is one of those rare areas in which the libertarian and the progressive agree. The current system restricts the freedom of the property owner, and also makes life harder for poorer Americans. The politics of zoning reform may be hard, but our land use regulations are badly in need of rethinking.”

Minimum Wage: The Danish Experience

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Ready for the second minimum wage paper in a row today? A new working paper looks at the Danish experience, where the minimum wage increases drastically when individuals turn 18 years old. So what happens when individuals become adults? “Danish minimum wages cause an increase in average wages of 40 percent when workers reach age 18. This increase in wages causes a 33 percent decrease in employment when workers turn 18, almost all of which comes from job loss” (pgs. 30-31).

As economist Alex Tabbarok observes,

In a section of the paper that adds important new evidence to the debate, the authors look at the consequence of losing a job at age 18. One year after separation only 40% of the separated workers are employed but 75% of the non-separated workers are employed. Different interpretations of this are possible. The separated workers will tend to be of lower quality than the non-separated and maybe this is correlated with less desire to have a job. Without discounting that story entirely, however, the straightforward explanation seems to me to be the most likely. Namely, the minimum wage knocks low-skill workers off the job ladder and it’s difficult to get back on until their skills improve.

Seattle Minimum Wage Ordinance: Lost Jobs, Hours, and Income

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A brand new NBER paper finds (quite unsurprisingly, despite what The Washington Post says) that

the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19. A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs.

…Importantly, the lost income associated with the hours reductions exceeds the gain associated with the net wage increase of 3.1%…[W]e compute that the average low-wage employee was paid $1,897 per month. The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker (pgs. 35-36).

According to The Washington Post, economist David Autor described the study as one “that is likely to influence people,” calling it “very credible” and “sufficiently compelling in its design and statistical power that it can change minds.”

Given how past evidence has been ignored, I doubt it.

Minimum Wage and Worker Commutes

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Do minimum wage increases cause low-wage workers to commute out-of-state more? A brand new paper in Regional Science and Urban Economics answers in the affirmative. According to the Cato Institute’s blog,

[Terra McKinnish] seeks to exploit the variation in minimum wage rates between states and the compressing effect of the 2009 federal minimum wage increase to analyze whether a relative increase in a minimum wage within a state led to more commuting into that state to work for under 30s or more commuting out of the state to work.

…McKinnish employs difference-in-differences techniques to try to find the answer, using commuting records of people earning both low and modest hourly rates to control for other factors which could influence commuting, such as the health of the economy.

Upon doing all this, three key findings arise from her work:

  1. Prior to the 2009 federal minimum wage increase, there is no evidence that low-wage workers commuted at higher rates (relative to moderate-wage workers) to neighboring states with a higher minimum wage.

  2. After the federal minimum wage increase, low-wage workers modestly increased out-of-state commuting out of states most affected by the federal minimum wage increase.

  3. Moderate-wage workers reduced the rate at which they commuted out of states most affected by the federal increase following the rise in the rate (consistent with the idea that increasing minimum wages leads to employers replacing low productivity workers with higher productivity ones).

In short, “this study is further evidence to support the Econ 101 view of minimum wages.” Or, as the paper itself highlights, these “[r]esults are consistent with a disemployment effect of minimum wage increases.”

Big Data on Minimum Wage

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Image result for minimum wage

A brand new working paper looks at 2 million hourly wage workers from over 300 companies in order to determine the effects of minimum wage changes. As reported,

For the first time, a group of researchers at Washington University in St. Louis used a big-data approach to determine the effects of minimum-wage changes on business. Two professors and two doctoral candidates from the Olin Business School processed wage data on more than 2 million hourly workers from across the country over a six-year period. The results? There are winners and losers.

…“We found existing minimum-wage employees benefit from minimum-wage increases,” [co-author Radhakrishnan] Gopalan said. “Their wages go up, and they are no more likely to lose their jobs as compared to their counterparts in adjacent states. But following state minimum-wage hikes, companies are reluctant to hire new low-wage employees. In the one year following the wage hike, they increase the proportion of higher-wage (read: higher-skilled) employees and reduce the proportion of low-wage employees.”

…“For an area experiencing fast growth, having a high minimum wage will be a bad deal for the new entrants as they might have a tougher time finding a job. On the other hand, if you’re in an area whose population is not growing very fast, then raising the minimum wage will definitely benefit your existing low-wage employees, and the number of new employees who are hurt will be a minimum. Optimal policy will also depend on the industry composition of the establishments in the local economy.”

This fits with previous research. It also fits comfortably into what the evidence shows worldwide.

The Trade-Offs of Paid Leave

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With Trump’s budget proposing paid family leave, it’s worth considering the economics behind it. Economist and author Charles Wheelan explains in his fantastic book Naked Economics,

Economists study how we acquire information, what we do with it, and how we make ecisions when all we get to see is a book’s cover. Indeed, the Swedish Academy of Sciences recognized this point in 2001 by awarding the Nobel Prize in Economics to George Akerlof, Michael Spence, and Joseph Stiglitz for their seminal work on the economics of information. Their work explores the problems that arise when rational people are forced to make decisions based on incomplete information, or when one party to a transaction knows more than another.

…Consider a small law firm interviewing two job candidates, one male and one female. Both candidates are…eminently qualified for the position. If the “best” candidate for the job is the one who will earn the most money for the firm…then I will argue that the rational choice is to the hire the man…Women still bear the bulk of child-rearing responsibilities. Demographics suggest that both candidates are likely to start families in the near future. Yet only the female candidate will take paid maternity leave. More important, she may not return to work after having the child, which leaves the firm with the cost of finding, hiring, and training another lawyer.

Is any of this certain? No…The female candidate is punished because the firm has no information on her specific circumstances but good data on broad social trends. Is this fair? No. (And it’s not legal either.) Yet the firm’s logic makes sense (pg. 105-106).[ref]He goes on to point out that professional women that take the paid maternity leave and run impose a cost on other women by making firms more likely to discriminate against women. His solution?: “a generous, but refundable maternity package. Keep it if you want to come back to work, return it if you don’t” (pg. 107).[/ref]

Obviously, Wheelan is not endorsing discrimination, but simply laying out the economic factors that incentivize it. Over at The Week, AEI’s James Pethokoukis lays out some of the evidence for the theory above:

Even the best ideas have downsides, and it’s up to policymakers to deal with them. Paid leave is no different.

A 2017 study, by UC Santa Barbara economist Jenna Stearns, of maternity leave policy in Great Britain found that access increases the probability of women returning to work, while job protection benefits result in higher overall maternal employment rates and longer job tenure. Sounds good! But there’s a tradeoff: Expanding job protected leave benefits led to “fewer women holding management positions and other jobs with the potential for promotion.”

Likewise, a 2013 study by Cornell University’s Francine Blau and Lawrence Kahn found family-friendly policies indeed make it easier to balance work and family. But they also “leave women less likely to be considered for high-level positions. One’s evaluation of such policies must take both of these effects into account.”

Few economists would be surprised at these analyses. In a classic 1983 paper on mandated benefits like paid leave, former Obama economist Lawrence Summers explained businesses would offset higher benefits with lower pay or hiring workers with lower potential benefit costs. You know, tradeoffs.

Paid parental leave obviously has real upsides. But we can’t ignore the downsides either: Lower pay, stingier promotions, and a potential employer favoritism toward the childless.

The trade-offs may very well be worth it. But we need to at least be aware of what they are.

The Long-Term Impact of Immigrants

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“Immigration is one of the most controversial policy issues in the US and Europe today,” write the authors of a new economics paper.

The debate mostly focuses on the short-run effects of immigration: Do immigrants take jobs away from natives? Do immigrants increase pressure on public goods? Do immigrants increase crime and reduce social capital? Many researchers have attempted to address these questions by providing empirical evidence on the short-run, immediate effects of immigration (e.g. Kerr and Kerr 2016, Peri 2012, Peri and Sparber 2009, Card 2009, 2012). While understanding the short run is important, policymakers should also consider the long-run consequences if the welfare of our children and grandchildren are to matter. And yet, we know very little about the long-run impact of immigration.

In order to study this long-run impact, the researchers

examine migration into the US during America’s Age of Mass Migration (from 1850–1920) and estimate the causal effect of immigrants on economic and social outcomes approximately 100 years later (Nunn et al. 2017). This period of immigration is notable for many reasons. First, this was the period in US history with the highest levels of immigration. Second, the immigrants that arrived during this time were different from previous waves of immigrants. While earlier immigrants were primarily from western Europe, the new wave also included large numbers of immigrants from southern, northern, and eastern Europe who spoke different languages and had different religious practices (Hatton and Williamson 2005: 51, Daniels 2002: 121–137, Abramitzky and Boustan 2015).

In order to measure the effects, the authors developed “an instrumental variable (IV) strategy that exploits two facts about immigration during this period. The first is that after arriving into the US, immigrants tended to use the newly constructed railway to travel inland to their eventual place of residence (Faulkner 1960, Foerster 1969). Therefore, a county’s connection to the railway network affected the number of immigrants that settled in the county. The second fact is that the aggregate inflow of immigrants coming to the US during this period fluctuated greatly from decade to decade.”

Their findings?

We find that higher historical immigration (from 1860–1920) resulted in significantly higher incomes, less poverty, less unemployment, more urbanisation, and higher educational attainment today. The estimates, in addition to being statistically significant, are also economically meaningful. For example, according to the estimates for per capita income, moving a county with no historical immigration (i.e. during 1860–1920) to the 50th percentile of the sample (which is 0.049) results in a 20% increase in average per capita income today.

We also try to shed light on the mechanisms. We find that immigration resulted in an immediate increase in industrialisation.  Immigrants contributed to the establishment of more manufacturing facilities and to the development of larger facilities. We also found that immigrants contributed to increased agricultural productivity in the medium-run and to increased innovation, as measured by patenting rates of both immigrants and the native-born. These findings are consistent with a long-standing narrative in the historical literature suggesting that immigrants benefitted the economy by providing an ample supply of unskilled labour, which was crucial for early industrialisation. A smaller number of immigrants brought with them knowledge, skills, and know-how that were beneficial for industry and increased productivity in agriculture. Thus, by providing a sizeable workforce and a (smaller) number of skilled workers, immigration led to early industrial development and long-run prosperity, which continues to persist until today.