Economics

Geography and Unemployment

by

Does geography contribute to unemployment? “In a paper published in 1965,” reports The Economist,

John Kain, an economist at Harvard University, proposed what came to be known as the “spatial-mismatch hypothesis”. Kain had noticed that while the unemployment rate in America as a whole was below 5%, it was 40% in many black, inner-city communities. He suggested that high and persistent urban joblessness was due to a movement of jobs away from the inner city, coupled with the inability of those living there to move closer to the places where jobs had gone, due to racial discrimination in housing. Employers might also discriminate against those that came from “bad” neighbourhoods. As a result, finding work was tough for many inner-city types, especially if public transport was poor and they did not own a car.

Is there any data to back up this theory?

A new paper,[ref]This is a 2014 article.[/ref] published by the National Bureau of Economic Research…looks at the job searches of nearly 250,000 poor Americans living in nine cities in the Midwest. These places contain pockets of penury: unemployment in inner Chicago, for instance, is twice the average for the remainder of the city. Even more impressive than the size of the sample is the richness of the data. They are longitudinal, not cross-sectional: the authors have repeated observations over a number of years (in this case, six). That helps them to separate cause and effect. Most importantly, the paper looks only at workers who lost their jobs during “mass lay-offs”, in which at least 30% of a company’s workforce was let go. That means the sample is less likely to include people who may live in a certain area, and be looking for work, for reasons other than plain bad luck.

For each worker the authors build an index of accessibility, which measures how far a jobseeker is from the available jobs, adjusted for how many other people are likely to be competing for them. The authors use rush-hour travel times to estimate how long a jobseeker would need to get to a particular job.

If a spatial mismatch exists, then accessibility should influence how long it takes to find a job. That is indeed what the authors find: jobs are often located where poorer people cannot afford to live. Those at the 25th percentile of the authors’ index take 7% longer to find a job that replaces at least 90% of their previous earnings than those at the 75th percentile. Those who commuted a long way to their old job find a new one faster, possibly because they are used to a long trek.

Governments could seek to “help workers either to move to areas with lots of jobs, or at least to commute to them. That would involve scrapping zoning laws that discourage cheaper housing, and improving public transport. The typical American city dweller can reach just 30% of jobs in their city within 90 minutes on public transport. That is a recipe for unemployment.”[ref]AEI’s James Pethokoukis has a good piece expanding on this.[/ref]

The Benefits of Globalization: Trade & Migration

by

We sharply disagree with this dismal view of globalisation.

Image result for free tradeSo write three scholars drawing on their latest research on globalization. “Our recent research,” they continue,

indicates that the gains from trade and migration are tremendous and that the world stands to benefit greatly from their further liberalisation (Desmet et al. 2016). The problem with virtually all quantitative and empirical evaluations of trade and migration is their static nature. They completely ignore the dynamic gains from globalisation. As we will later discuss, these dynamic gains quantitatively dwarf any short-run costs. 

After providing the theory of growth behind trade and migration, the researchers present their jaw-dropping conclusions:

Completely lifting all migration restrictions would increase real world output by 126% in present discounted value terms. Since such a policy may be unrealistic, consider instead a reform that liberalises migration so that 10% of the world population moves at impact. This would yield a present discounted value increase in real world output of 14%. Such a reform would cause some extra congestion in Europe and the US, implying that average welfare would increase by 9%, a smaller but still impressive figure. It is hard to think about any other policy that could readily be applied at the world level for which estimated benefits are as large. Migration is uniquely powerful in generating positive effects. In economic terms, having an open-door policy is a no brainer, not because of some abstract theoretical arguments, but because the measurement of the relevant forces tells us so.

Turning back the clock on trade would have equally dire consequences. Increasing trade costs by 40% would lower real world output by 30% in present discounted value terms. Although globalisation might create losers in the short run, allowing the free flow of goods and people across regions and countries is still one of the best ways we know to ensure our long-run wealth and well-being.

These numbers are astronomical. The potential good that can come from liberalized trade and migration makes the rising nationalism all the more disheartening.

Minimum Wage Abroad

by

Over at the World Bank’s Development Impact blog, doctoral candidate Andrés Ham looks at the effects of minimum wage hikes in developing countries. “Minimum wages in developing countries tend to be set higher, are less likely to be rigorously enforced, and labor markets are often segmented into formal and informal sectors with minimum wage policy only covering formal workers,” he writes.

Given these differences and that most developing countries implement minimum wage policies, understanding their consequences on labor markets is critical for economic growth, developing effective labor policy, and poverty alleviation.
 
My job market paper studies the impact of minimum wage policy on labor market outcomes and poverty in Honduras from 2005-2012 using repeated cross-sections of household survey data. The attributes of Honduran minimum wage policy and its labor market are similar to many developing countries, so the resulting conclusions from this case study may extend beyond its borders.

His results?

I find that a 10 percent increase in minimum wages reduces employment rates by about 1 percent. Because this result lumps formal and informal sectors together, it disguises the real effect: a significant change in labor force composition. The same minimum wage hike lowers the likelihood of employment in the formal sector by about 8 percent and increases the probability of employment in the informal sector just over 5 percent. The data indicate that individuals substitute wage earning jobs for self-employment as a direct consequence of minimum wage hikes. Wages in the formal sector increase but the observed influx of workers towards the informal sector leads to a negative net effect on informal sector wages.

Since informal sector jobs tend to be lower-paid part-time positions, average earnings in this sector often lie below formal sector incomes. Hence, there may be an adverse effect on individual well-being from these observed changes in labor force composition. To approximate the welfare effect of minimum wages, I estimate whether minimum wage increases help workers escape from extreme poverty. I find that a 10 percent increase in minimum wages has a negative but statistically insignificant effect on the risk of extreme poverty for the formal labor force. The same minimum wage hike significantly raises the risk of extreme poverty for the informal workforce by around 4 percent. This result indicates that on balance, higher minimum wages increase poverty.

I also find evidence that more formal workers are being paid less than the minimum wage. This occurs despite formal employers’ legal obligation to comply with minimum wages. Some non-compliance has always been observed in developing countries, mostly in response to imperfect enforcement from regulators (Rani et al. 2013). In Honduras, about one in three formal workers earns sub-minimum wages. As minimum wages increase, so does the level of non-compliance. I estimate that about 36 percent more formal sector workers, who should be receiving minimum wages, are underpaid by their employers.[ref]As Nathaniel pointed out to me, this indicates that Ham’s findings underestimate the negative impact of the minimum wage. If minimum wage laws were strictly complied with, the negative effects would be even greater.[/ref]

Ham concludes, “My findings imply that the costs of minimum wage increases outweigh their benefits in developing countries. The policy implication is that setting high minimum wages has detrimental effects on labor markets, well-being, and compliance.”

Did Mass Immigration Destroy Israel’s Institutions?

by

The pro-institution case for increased immigration continues to get better. A new working paper by Benjamin Powell and others looks to Israel as a natural experiment. From the abstract:

The relaxation of emigration restrictions in the Soviet Union and the State’s subsequent collapse led to a large exogenous shock to Israel’s immigrant flows because Israel allows unrestricted immigration for world-wide Jews. Israel’s population increased by 20 percent in the 1990s due to immigration from the former Soviet Union. These immigrants did not bring social capital that eroded the quality of Israel’s institutional environment. We find that high quality political institutions were maintained while economic institutions improved substantially over the decade. Our case study finds that the immigrants played an active role in this institutional evolution and we also employ a synthetic control to verify that it is likely that the institutions improvement would not have occurred to the same degree without the mass migration.

The authors conclude,

This finding in no way proves that in every case unrestricted migration would not harm destination country institutions. However, as a complement to Clark et. al. (2015) that found in a-cross country empirical analysis that existing stocks and flows immigrants were associated with improvements in economic institutions, it should increase our skepticism of claims that 26 unrestricted migration would necessarily lead to institutional deterioration that would destroy the estimated “trillion dollar bills” that the global economy could gain through much greater migration flows (pgs. 25-26).

Climate Change and Economic Growth

by

Philosopher Joseph Heath has an enlightening working paper on the economics and ethics of climate change. Heath is emphatic that his goal is

not to make a case for the importance of economic growth, but merely to expose an inconsistency in the views held by many environmental ethicists. Part of my reason for doing so is to narrow the gap somewhat, between the discussion about climate change that occurs in philosophical circles and the one that is occurring in policy circles, about the appropriate public response to the crisis. One of the major differences is that the policy debate is conducted under the assumption of ongoing economic growth, as well as an appreciation of the importance of growth for raising living standards in underdeveloped countries. The philosophical discussion, on the other hand, is dominated by the view that ongoing economic growth is either impossible or undesirable, leading to widespread acceptance of the steady-state view. This view is, however, a complete non-starter as far as the policy debate is concerned, because it is too easily satisfied. As a result, its widespread acceptance among philosophers (and environmentalists) has led to their large-scale self-marginalization (pg. 31).

Drawing on the economic research of economists Nicholas Stern and William Nordhaus, Heath proceeds to point out how misleading language often distorts and exaggerates the negative impact of climate change:

Stern adopts a similar mode of expression when he suggests that “in the baseline-climate scenario with all three categories of economic impact, the mean cost to India and South-East Asia is around 6% of regional GDP by 2100, compared to a global average of 2.6%.” The casual reader could be forgiven for thinking that the reference, when he speaks of “loss in GDP per capita,” is to present GDP. What he is talking about, however, is actually the loss of a certain percentage of expected future GDP. In some cases, he states this more clearly: “The cost of climate change in India and South East Asia could be as high as 9- 13% loss in GDP by 2100 compared with what could have been achieved in a world without climate change.” The last clause is of course crucial – under this scenario, GDP will not be 9-13% lower than it is right now, but rather lower than it might have been, in 2100, had there not been any climate change…In other words, what Stern is saying is that climate change stands poised to depress the rate of growth. This type of ambiguity has unfortunately become common in the literature. An important recent paper in Nature by Marshall Burke, Solomon M. Hsiang and Edward Miguel, estimating the anticipated costs of climate change, presents its conclusions in the same misleading way. The abstract of the paper states that “unmitigated climate change is expected to reshape the global economy by reducing average global incomes by roughly 23% by 2100.” The paper itself, however, states the finding in a slightly different way: “climate change reduces projected global output by 23% in 2100, relative to a world without climate change.” Again, that last qualifying clause is crucial, yet it was the unqualified version of the claim found in the abstract that made its way into the headlines, when the study was published (pgs. 15-16).

Heath acknowledges that

these potential losses are enormous, and they call for a strong policy response in the present. At the same time, what these economists are describing is not a “broken world,” in which “each generation is worse off than the last.” On the contrary, they are describing a world in which the average person is vastly better off than the average person is now – just not as well off as he or she might have been, had we been less profligate in our greenhouse gas emissions. It is important, in this context to recall that annual rate of real per capita GDP growth in India, at the time of writing is 6.3%, and so what Stern is describing is, at worst, the loss of approximately two years worth of growth. At the present rate of growth, living standards of the average person in India are doubling every 12 years. There are fluctuations from year to year, but the mean expectation of several studies, calculated by William Nordhaus, suggests that the GDP of India will be about 40 times larger in 2100 than it was in the year 2000 (which implies an average real growth rate of 3.8%). The 9-13% loss, due to climate change, is calculated against the 40-times-larger 2100 GDP, not the present one (pg. 16-17).

The full paper has more details and additional arguments. But this is the kind of serious cost/benefit analysis we need to be having about climate change.

Illiberal Reformers: An Interview with Thomas Leonard

by

This is part of the DR Book Collection.

A few years ago, I took an interest in the history of the Progressive Era. This interest was peaked by conservative author Jonah Goldberg’s polemic Liberal Fascism and moved to more academic research during my undergrad. I studied the history the labor unions and the words and ideas of major progressive icons. One scholar whose work I came into contact with and continued to follow over the years was Princeton economist Thomas Leonard. I’ve known for the last few years that Leonard was working on a book that explored the relationship between progressive reformers’ economic agendas and their enthusiastic support of eugenics. Finally, his Illiberal Reformers: Race, Eugenics, and American Economics in the Progressive Era was published this year through Princeton University Press.

The book meticulously demonstrates that the progressive impulse toward inflating the administrative state was driven largely by self-promotion (i.e, the professionalization of economists), racist ideologies (i.e., the fear of race suicide),[ref]Even seemingly good things like national parks had racist overtones.[/ref] and an unwavering faith in science. Not only should the “undesirables” of the gene pool be sterilized, but they should be crowded out of the labor force as well. Those considered “unfit” for the labor market included blacks, immigrants, and women. In order to artificially raise the cost of employing the “unfit,” progressives sought to implement minimum wage (often argued to be a “tariff” on immigrant labor), maximum hours, and working standard legislation.

There is far more in Leonard’s book, which not only provides keen insights into progressive economics, but provides an excellent historical overview of race and eugenics in the Progressive Era. Check out his interview on the podcast Free Thoughts below.

Historians vs. Economists: The History of Slavery

by
Image result for 12 years a slave
Chiwetel Ejiofor as Solomon Northup in 2013’s ’12 Years a Slave’

A new article over at The Chronicle of Higher Education provides an excellent review of a controversy that has been brewing over the last couple years that should be of interest to those who care about history and economics. The controversy surrounds the new history of slavery and capitalism, marked by books like Johnson’s River of Dark Dreams, Beckert’s Empire of Cotton, and especially Baptist’s The Half Has Never Been Told. The main claim among these historians is that slavery was essential to American capitalism and the emergence of the Industrial Revolution. Economists and other social scientists are not convinced. “Most economic historians,” the article states,

have argued that “cotton textiles were not essential to the Industrial Revolution,” and that cotton production did not necessarily depend on slavery, according to [Dartmouth economist] Douglas A. Irwin…Summarizing economists’ thinking…Irwin points out that cotton was grown elsewhere in the world without slaves. Cotton production continued to rise in the United States even after slavery was abolished. “In this view, the economic rise of the West was not dependent on slavery,” Irwin says, “but came about as a result of an economic process described by Adam Smith in his book The Wealth of Nations — a process that depended on free enterprise, exchange, and the division of labor.”

Economists see the problem with the new histories on slavery as

stem[ming] in part from how the discipline of history has developed. In the ’60s and ’70s, historians and economists battled over economic history. But as historians turned toward culture, and economists became more quantitative, economic history increasingly became just a subfield of economics. For a variety of reasons, including the 2008 crisis, historians are turning their attention back to financial matters. But they “did not build up their tools in order to understand the material world,” says Rhode. “And they carry along certain ideological positions which they hold fervently and are not willing to test.” Historians, he says, “can’t be making stuff up.”

Historians, however, see economic history as too reductive:

“The problem is the economists left history for statistical model building,” says Eric Foner, a historian of 19th-century America at Columbia University. “History for them is just a source of numbers, a source of data to throw into their equations.” Foner considers counterfactuals absurd. A historian’s job is not to speculate about alternative universes, he says. It’s to figure out what happened and why. And, in the history that actually took place, cotton was extremely important in the Industrial Revolution.

Some economists who attack the new slavery studies are “champion nitpickers,” adds Foner…”They’re barking up the wrong tree. They’re so obsessed with detail that they don’t really confront the broader dynamics of the interpretations. Yes, I’m sure there are good, legitimate criticisms of the handling of economic data. But in some ways I think it’s almost irrelevant to the fundamental thrust of these works.”

The article is an excellent introduction to an important controversy in historical scholarship. Check it out.

Intact Immigrant Families

by

 

zillfigure1updated

Take a hard look at the graph above. I’ve discussed marriage and family structure a lot here at Difficult Run. The social science is pretty clear: marriage matters for children’s well-being. Concerns over immigration often revolve around culture: do immigrants assimilate well? What kind of foreign cultural elements are they bringing with them? I’ve addressed cultural diversity before. And according to the data above, intact families are yet another positive contribution made by immigrants. According to researcher Nicholas Zill,

Indeed, the latest data from the Census Bureau on the family living arrangements of U.S. children show that 75 percent of immigrant children live in married-couple families, compared to 61 percent of children of U.S.-born parents. The figure is the same for immigrant children who were born in this country as for those who were foreign-born.4 Children of immigrants are less likely than native children to be living with divorced, separated, or never-married mothers: 14 percent lived with their mothers only, compared to 26 percent of children of U.S.-born parents.

Furthermore, immigrant parents stay together despite the fact that many are living below or close to the poverty line. Half of U.S.-born children of recent immigrants are in families that are poor or near poor, with nearly a quarter living in families below the poverty line. The circumstances of foreign-born immigrant children are worse: 57 percent are in families that are poor or near poor, with 29 percent living in families below poverty. The comparable figures for native children are 38 percent in poor or near-poor families, with 18 percent below the poverty line.

Zill concludes that “we should…recognize the strong work ethic and robust family values that many immigrant families exemplify. Far from undermining our traditions, they may be showing us the way to “make America great again.””[ref]Especially since family structure matters more in rich countries.[/ref]

Minimum Wage and Employment: Is the Evidence “Well-Established”?

by

GMU economist Don Boudreaux wrote an open letter to Bloomberg‘s Barry Ritholtz on his blog Cafe Hayek. It was in response to Ritholtz’s recent article on the minimum wage, which claims that “modest increases in minimum wages don’t lead to job losses.” This, in Ritholtz’s view, is “well-established” in the literature. Ritholtz certainly has studies that can backup his position. For example, a brand new study by the Council of Economic Advisers found “that employment in the [generally low-wage] leisure and hospitality industry follows virtually identical trends in states that did and did not raise their minimum wage.” It goes on to note that “[t]his finding is consistent with a well-established empirical literature in which minimum wage increases are often found to have no discernible impact on employment (Card and Krueger 2016, Belman and Wolfson 2014).”[ref]The report has been criticized by some economists, being described as “substantially to the left of where the economics mainstream has been for at least six decades.”[/ref] But Boudreaux points out that the empirical literature does find modest negative impacts on low-wage employment. He writes,

Here’s a list only of some of the more prominent, recent scholarly empirical studies whose authors that find that even modest hikes in minimum wages destroy some jobs:

– Jeffrey Clemens and Michael Wither, “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers” (2014) (finding that “minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point”);[ref]The 2016 version can be found here.[/ref]

– Jeffrey Clemens, “The Minimum Wage and the Great Recession: Evidence from the Current Population Survey” (2015) (finding that minimum-wage increases during the Great Recession “reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points”);

– Jonathan Meer and Jeremy West, “Effects of the Minimum Wage on Employment Dynamics” (2013) (finding that “the minimum wage reduces job growth over a period of several years.  These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers”);

– David Neumark, J.M. Ian Salas, and William Wascher, “More on recent evidence on the effects of minimum wages in the United States” (2014) (finding that “the best evidence still points to job loss from minimum wages for very low-skilled workers – in particular, for teens”);

– Yusuf Soner Baskaya and Yona Rubinstein, “Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings across the U.S. States” (2012) (finding that “[m]inimum wage increases boost teenage wage rates and reduce teenage employment”).

Indeed, you can read a whole book on the matter by David Neumark and William Wascher, Minimum Wages (2008), published by the MIT Press, that concludes that minimum wages do indeed destroy some jobs.

You can dispute the accuracy of all of the above findings, but you cannot dispute that these findings, along with many others that reach similar conclusions, are part of the scholarly record – a record that belies your assertion that it is “well-established” that modest minimum-wage hikes destroy no jobs.

Interestingly enough, Ritholtz cites a University of Washington study on the Seattle minimum wage law and asserts that it “found little or no evidence of job losses[.]” Yet, the study quite clearly states that the minimum wage law led to “a 1.2 percentage point decrease in the employment rate for these low-wage workers. That is, we conclude that Seattle experienced improving employment for low-wage workers, but the minimum wage law somewhat held employment back from what it would have been in the absence of the law” (pg. 12). It later summarizes,

While the intended effect of the Minimum Wage Ordinance (i.e., raising low-wage workers’ wages) appears to have been successful, there appears to have been some negative impacts on these worker’s rates of employment and hours worked. As noted previously, the rate of employment of these workers increased by 2.6 percentage points. However, the comparison regions all experienced even better employment rate increases (3.8% for Synthetic Seattle, 3.9% for Synthetic Seattle Excluding King County, 3.5% for SKP and 2.9% for King County Excluding Seattle and SeaTac). Thus, it appears that the Minimum Wage Ordinance modestly held back Seattle’s employment of low-wage workers relative to the level we could have expected (pg. 22).

Image result for you're fired gif arnold

What about hours worked?

Hours worked shows a similar pattern. Among workers earning less than $11 per hour at baseline in Seattle, hours worked increased by 12.2 relative to business as usual. So, again, Seattle’s employment situation for low-wage workers improved after the Minimum Wage Ordinance was passed. Hours worked increased, however, by more in the comparison regions (16.4 for Synthetic Seattle, 13.0 for Synthetic Seattle Excluding King County, 21.5 for SKP and 22.5 for King County Excluding Seattle and SeaTac). Thus, on balance, it appears that the Minimum Wage Ordinance modestly lowered hours worked (e.g., 4.1 hours per quarter relative to Synthetic Seattle, or 19 minutes per week) (pg.22).

The study concludes that “[t]he effects of disemployment appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged.” In short, “for those who kept their job, the Ordinance appears to have improved wages and earnings, but decreased their likelihood of being employed in Seattle relative other parts of the state of Washington” (pg. 33).

I’ve written about the current state of minimum wage research before. I think there are good reasons to be skeptical about its ability to truly help reduce poverty. And as previous research has noted, the debate is more “about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs.”

Let’s try to keep the debate on track.

McKinsey & Co.: Five Pillars of Growth

by

Image result for globalization

The McKinsey Global Institute has a new briefing paper entitled “The US Economy: An Agenda for Inclusive Growth.” The paper seeks ways to help America “regain its dynamism and restore the sense that everyone is advancing together.” The paper lists “five areas where targeted investment and policy action could create substantial economic impact.” This impact would include a rise in “GDP growth to 3 or even 3.5 percent.” These include:

  1. Digitization: “The US economy is rapidly digitizing, but its progress is highly uneven. Focusing on the gap between lagging sectors and those on the digital frontier is a key part of the productivity puzzle. Government can play a role by promoting digital investment, digitizing public services and procurement, clarifying regulatory standards to encourage digital innovation, and taking a nimble and experimental regulatory approach to keep pace with technological change.”
  2. Globalization and trade: “The current debate around trade misses the point that globalization is becoming more digital—a shift that plays to US strengths. Today, less than 1 percent of US firms sell abroad. There are ways to expand participation by helping small businesses export on global e-commerce platforms and playing a matchmaking role to connect individual cities and smaller companies with foreign investors. But it is also time to confront the needs of communities that have experienced trade shocks. The workers who are caught up in industry transitions need more than retraining; their communities need reinvestment.”
  3. America’s cities: “Eighty percent of the US population lives in cities or the surrounding metro areas. But investment in urban transport infrastructure has not kept up with their needs, creating congestion that harms both productivity and the quality of life. A shortage of affordable housing and commercial space has worsened the squeeze on households and small businesses. Addressing urban issues would improve mobility, create new investment opportunities, and benefit companies. The overall economy would stand to gain, since cities are the engines of productivity.”
  4. Skills: “The United States needs to build a more dynamic and efficient labor market. Colleges and universities have to adapt and address the growing cost burdens. Additionally, we could make occupational licenses more portable, create more short-term training and credential pathways, expand “earn while you learn” apprenticeships, and make better use of online talent platforms to improve matching and design quicker, more effective education pathways.”
  5. A resource revolution: “Competition among fuel sources and efficiency improvements are combining to produce an unheralded energy revolution. Technology innovations are driving increased efficiency both in demand and supply, and renewables are becoming more price competitive. America’s widely diversified energy portfolio has hugely benefited the economy. The most important thing the ongoing resource revolution needs is room to play out. Technology is moving quickly, and a responsive regulatory approach would speed the allocation of capital to the most promising opportunities. The primary policy agenda here involves reducing friction and market distortions.”

Definitely a list worth considering.