Economics

Cultural Diversity Boosts Economic Growth

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This just keeps getting better and better. I wrote last month on research regarding cultural/ethnic diversity, immigration, and economic growth and institutions. A new study adds support to these findings by showing that cultural fractionalization and polarization positively effect real GDP per capita. The authors explain,

By using data on a large sample of world economies for 1960-2010, we construct two indexes of diversity:

  • Fractionalisation: the likelihood that two individuals randomly selected from the population were born in different countries
  • Polarisation: how far the distribution of the groups in one country is from a bipolar distribution where there are only two groups of equal size.

Causality can run both ways – countries that have a higher growth rate might attract more immigrants from a variety of origins, thereby increasing the degree of diversity. Therefore heterogeneity might be the effect rather than the cause of economic growth. Also immigration policies could be important drivers of immigration and, if unaccounted for, they could lead to incorrect inferences.

To address this we exploit the dyadic nature of our dataset to predict countries’ bilateral migration flows using a set of pre-determined or ‘exogenous’ dyadic variables such as geographic distance. We then use the predicted immigration flows to construct predicted indexes of diversity. This approach allows us to isolate the portion of the correlation between diversity and economic growth that is due to the causal effect of diversity.

We also exploit the time dimension of our dataset to control for unobserved heterogeneity by estimating a dynamic panel data model. This approach would remove any time-invariant country-specific unobserved factors that might possibly drive the relationship between diversity and economic growth.

We find that both indices of cultural heterogeneity – fractionalisation and polarisation – have a positive impact on the growth rate of GDP over long time periods. For, example, between 1960 and 2010, the growth rate of per capita GDP increased by about 0.15 percentage points when the growth rate of fractionalisation variable increased by one percentage point.

The impact is especially good for developing countries:

The literature on immigration emphasises that immigrants represent human resources, particularly appropriate for innovation and technological progress (Bodvarsson and Van den Berg 2013). So, as with the effect of education, the level of heterogeneity in their composition should enhance human capital formation and favour the adoption of new technologies (Nelson and Phelps 1966). Rich countries are closer to the technological frontier, thus the strength of the catch-up effect becomes smaller the more developed the host country is. This implies that developing economies would benefit the most from diversity.

To test this hypothesis, we split countries into two subgroups according to their initial level of development, and find that developing economies are more likely to experience an increase in GDP growth rate following changes in the degree of diversity. The most conservative estimates suggest that a one percentage point increase in the growth rate of fractionalisation (polarisation) boosts per capita output by about 0.1 percentage points in developing countries.

Our evidence suggests that immigration-fuelled diversity is good for economic growth. We recommend more openness to immigration so as to reap the large unrealised benefits from an increased range of skills and ideas in the destination country. Cultural diversity is a phenomenon that is continually changing, and difficult to define. Individuals have many observable characteristics – race, language, religion, nationality, wealth, education – but only some categories have economic salience. Because we don’t yet know which markers of identity are economically important, this subject will be a fertile area of study for the foreseeable future.

Perhaps we could all try being a bit more welcoming.

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2016 NAS Report on Immigration: More of the Same

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The National Academy of Sciences released a new report in September that “provides a comprehensive assessment of economic and demographic trends of U.S. immigration over the past 20 years, its impact on the labor market and wages of native-born workers, and its fiscal impact at the national, state, and local levels.” Here are the highlights from the press release:

  • Effects on wages: “When measured over a period of 10 years or more, the impact of immigration on the wages of native workers overall is very small.”
  • Effects on employment levels: “There is little evidence that immigration significantly affects the overall employment levels of native-born workers.”
  • Effects of high-skilled immigrants: “Several studies have found a positive impact of skilled immigration on the wages and employment of both college- and non-college-educated natives. Such findings are consistent with the view that skilled immigrants are often complementary to native-born workers; that spillovers of wage-enhancing knowledge and skills occur as a result of interactions among workers; and that skilled immigrants innovate sufficiently to raise overall productivity.”
  • The role of immigrants in consumer demand: “Immigrants’ contributions to the labor force reduce the prices of some goods and services, which benefits consumers in a range of sectors, including child care, food preparation, house cleaning and repair, and construction. Moreover, new arrivals and their descendants are a source of demand in key sectors such as housing, which benefits residential real estate markets.”
  • Impacts on economic growth: “Immigration is integral to the nation’s economic growth. The inflow of labor supply has helped the United States avoid the problems facing other economies that have stagnated as a result of unfavorable demographics, particularly the effects of an aging workforce and reduced consumption by older residents. In addition, the infusion of human capital by high-skilled immigrants has boosted the nation’s capacity for innovation, entrepreneurship, and technological change.”
  • Fiscal impact of first-generation immigrants (1994-2013): “Annual cross-sectional data reveal that, compared with the native-born, first-generation immigrants contributed less in taxes during working ages because they were, on average, less educated and earned less. However, this pattern reverses at around age 60, when the native-born (except for the children of immigrants) were consistently more expensive to government on a per-capita basis because of their greater use of social security benefits.”
  • Fiscal impact of the children of immigration (1994-2013): “Reflecting their slightly higher educational achievement, as well as their higher wages and salaries, the second generation contributed more in taxes on a per capita basis during working ages than did their parents or other native-born Americans.”

I’ve written about the economic literature of immigration before and the NAS findings are pretty consistent with the ones I shared previously. This report could’ve used more exposure, especially given the outcome of Tuesday’s election.

Unfortunately, I doubt it would’ve mattered.

The Welfare State & Social Capital

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Samuel Hammond, the Poverty and Welfare Policy Analyst at the Niskanen Center, has an interesting post at LearnLiberty.org on the welfare state. He describes the role religion has played in social assistance, explaining that “philanthropy had to be earned through reciprocal relationships rooted in trust and goodwill. Churches relied on their member’s contributions and self-sacrifice to measure their strength of commitment to Christian ideals and bond the community together.” But then he points out how religion’s social assistance “began to unravel in the early 20th century”:

First, the social spending of the New Deal crowded out significant amounts of church-based welfare. By one estimate, New Deal spending caused church charitable spending to fall by 30 percent.

Then came President Lyndon Johnson’s “Great Society” and “War on Poverty,” and with it the creation of Medicaid and the expansion of food stamps and other income supplements targeted at the poor. Spending on Medicaid and Social Security rose exponentially after 1990, following a landmark Supreme Court decision that greatly expanded eligibility and a misconceived federal budget that promised to match state spending on low-income hospitals dollar for dollar, essentially turning Medicaid into a money pump.

Data shows that commitment to religious community in the United States has been steadily decreasing, and in a way that seems correlated to spending on public welfare. Since 1990, America’s non-religious population has grown from about 5 percent to over 20 percent and is climbing. A comparison of U.S. state rankings reveals a striking negative relationship between the generosity of the welfare system and the size of the self-identified “very religious” population.

So does the welfare state lead to a decline in social capital? When we look at the data from Europe, the “evidence by–and–large contradicts the U.S. narrative. Indeed, empirical studies tend to talk of welfare being “trust enabling”. Consider Sweden, which has one of most comprehensive welfare states in the world but also ranks near the top in measures of social capital.” So why the difference?:

The key factor appears to be the high level of decentralization in many social programs. For example, inSweden delivering healthcare is the responsibility of County Councils, while welfare, disability, and programs for the elderly are controlled by municipalities. Swedes also have very high rates of union membership. Yet instead of being confrontational with the employer, the norm is mutual advantage. In turn, unions are entrusted to manage stuff that in the U.S. would be cynically regulated, like unemployment insurance and parental leave. 

Economists extol the virtue of this kind of decentralization, known as subsidiarity, for reasons of asymmetric information. That’s just jargon for the truism that, in tight communities, everybody knows everybody. I was astonished to learn, for instance, that 75% of Swedes report attending “study circles,” 10% on a regular basis. These are regular meetings of a dozen or so people organized by larger voluntary associations that “range from the study of foreign languages to cooking to the European Union question.”

Elsewhere, Hammond proposes three ideas for decentralizing the U.S. welfare state:

  1. Medicaid wavers: “The first is the 1915(c) Home & Community-Based Waiver, which allows states to provide long term care under Medicaid through community based settings. An example might be an individual with severe intellectual or developmental disabilities. Traditionally, under Medicaid the individual will receive long term care through an agency and may even become institutionalized. Using the HCBS waiver, the eligible individual can self-direct their care from top to bottom, appoint a friend or family member as caretaker, and take control over their living environment. In some cases, the individual may even become the de facto employer, with the aid of a fiscal intermediary to handle payroll and other tasks beyond their capacities. So not only does the waiver redirect program delivery in a way that re-engages family and community, it also greatly enhances individual autonomy and self-determination.”
  2. Prevention programs: “A second, more recent example, is the Department of Health and Human Services’ initiative to channel Medicare spending on diabetes prevention through local YMCAs. The program launched as part of an innovation grant under the Affordable Care Act and is still being independently evaluated, but initial findings are promising. It’s a perfect case study in why community matters. By bringing pre-diabetic participants under one local roof, any direct educational benefits are reinforced by the peer-effects of other participants who may begin to form a loose network, check in on how well each is holding to their new diets, and so on. The best part is that, in theory, peer networks can persist long after the initial intervention. That means if this particular program were ended its effects may continue to reproduce overtime. The “cultural channel” for social policy is thus underrated by many progressives who automatically associate the enforcement of social norms through shame and stigma with conformity or oppression. Yet such social structures also serve as robust mechanisms for enhancing an individual’s self-control.”
  3. Universal basic income: “[Charles] Murray argues that [a lump sum transfer] only works if all or most other transfer programs are eliminated. It is in essence a strategy for eliminating the “hidden information” problem of poverty. With a basic income deposited monthly, it is no longer credible for someone who gambles their stipend away to claim total desperation, since their income stream is common knowledge. The remaining alternative is to appeal to friends and family. With the incentives set just right, the economies of scale and insurance benefits of pooling resources could lead to a dramatic community revival; however, Murray’s theory has yet to be put to the test.”[ref]See my previous posts on UBI along with economist Tyler Cowen’s latest Bloomberg article.[/ref]

This is why conservatives and libertarians need to “declare peace on the safety net” and seek out innovative ways to make it more effective and efficient.

O Canada: Bastion of Western Liberty?

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Over the years, I’ve heard people of a certain political persuasion argue that the United States should be more like their northern neighbor Canada. And over the years, I’ve enthusiastically agreed, but mostly for different reasons. A recent article in The Economist captures a few of those reasons:

Donald Trump, the grievance-mongering Republican nominee, would build a wall on Mexico’s border and rip up trade agreements. Hillary Clinton, the probable winner on November 8th, would be much better on immigration, but she has renounced her former support for ambitious trade deals. Britain, worried about immigrants and globalisation, has voted to march out of the European Union. Angela Merkel flung open Germany’s doors to refugees, then suffered a series of political setbacks. Marine Le Pen, a right-wing populist, is the favourite to win the first round of France’s presidential election next year.

In this depressing company of wall-builders, door-slammers and drawbridge-raisers, Canada stands out as a heartening exception. It happily admits more than 300,000 immigrants a year, nearly 1% of its population—a higher proportion than any other big, rich country—and has done so for two decades. Its charismatic prime minister, Justin Trudeau, who has been in office a year, has welcomed some 33,000 Syrian refugees, far more than America has. Bucking the protectionist mood, Canada remains an eager free-trader. It was dismayed by the EU’s struggle to overcome a veto by Walloons on signing a “comprehensive” trade agreement that took seven years to negotiate (see Charlemagne). Under Mr Trudeau, Canada is trying to make amends for its shameful treatment of indigenous peoples, and is likely to become the first Western country to legalise recreational cannabis on a national level. 

The article acknowledges that Canada’s geographic location, history, and the like are important factors for its political decisions above, but it nonetheless makes an effort to find against the populist rhetoric within its own borders:

Canada not only welcomes newcomers but works hard to integrate them. Its charter of rights and freedoms proclaims the country’s “multicultural heritage”. Not every country will fuse diversity and national identity in the same way that Canada does. Indeed, French-speaking Quebec has its own way of interpreting multiculturalism, which gives priority to the province’s distinct culture. But other countries can learn from the spirit of experimentation that Canada brings to helping immigrants find employment and housing. Its system of private sponsorship, in which groups of citizens take responsibility for supporting refugees during their first year, not only helps them adapt but encourages society at large to make them welcome. The UN High Commissioner for Refugees has called on other countries to copy it.

Canada has been managing its public finances conservatively for the past 20 years or so. Now in charge of a sluggish economy, Mr Trudeau can afford to give growth a modest lift by spending extra money on infrastructure. His government has given a tax cut to the middle class and raised rates for the highest earners to help pay for it. These economic policies deserve to “go viral”, the head of the IMF has said. Canada has a further economic lesson to impart in how it protects people hurt by globalisation. Compared with America, its publicly financed health system lessens the terror of losing a job; it also provides more financial support and training to people who do. And its policy of “equalisation” gives provincial and local governments the means to maintain public services at a uniform level across the country.[ref]Large welfare systems have pros and cons when it comes to economic growth, innovation, and entrepreneurship.[/ref]

Perhaps most important, this mixture of policies—liberal on trade and immigration, activist in shoring up growth and protecting globalisation’s losers—is a reminder that the centrist formula still works, if politicians are willing to champion it. 

Of course, it’s important to point out that Canada “remains a poorer, less productive and less innovative economy than America’s.”[ref]However, scares over a “stagnating middle-class” in Canada are just as overblown as they are here in America.[/ref] Trade among provinces is still problematic and the “peace, order and good government” that is “enshrined in its constitution” may be “inadequate without an infusion of American individualism.” But when Canada outpaces the U.S. in economic freedom,[ref]Pg. 8.[/ref] it may be worth looking at the things they get right.

Poor Economics: TED Talk by Esther Duflo

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This is part of the DR Book Collection.

Image result for poor economicsIf readers couldn’t tell, economics and the condition of the global poor are topics dear to my heart. Overall, I believe that globalization–particularly free trade and liberal immigration–benefits the least well off. But this largely looks at the problem from a broad, institutional standpoint. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by economists Abhijit Banerjee and Esther Duflo looks at the nitty-gritty details of the world’s poorest, providing the on-the-ground data necessary for constructing successful anti-poverty policies. The authors find five key factors that keep the poor trapped in poverty:

  1. Information deficiency: the poor often lack information, such as the benefits of immunization or early education.
  2. Lack of access: the poor lack access to things taken for granted by the non-poor: clean water, financial institutions, etc. They therefore bear the responsibility for all of these aspects.
  3. Missing markets: the conditions for favorable markets to emerge are often lacking, thus depriving the poor of their benefits.
  4. The Three ‘I’s: it’s not conspiratorial elites, but the ignorance, ideology and inertia of policymakers that lead to failing policies.
  5. Self-fulfilling prophecies: low expectations of both politicians and the poor themselves provide no incentive to improve and thus create self-fulfilling prophecies.

The book was eye-opening to say the least. You can see a TED talk by Esther Duflo below.

Fixed-Pie Fallacies and Tax Loopholes

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Closing tax “loopholes” has been a major talking point of both presidential candidates as of late. But this kind of language distorts the conversation from the get go. As columnist David Harsanyi explains,

Basically, all of life is a giant loophole until [politicians] come up with a way to regulate or tax it. In its economic usage, “loophole”—probably more of a dysphemism—creates the false impression that people are getting away with breaking the law. It’s a way to skip the entire debate portion of the conversation and get right to the accusation.

So when Hillary Clinton promises to close the loophole of corporate inversion, what she means to say is that Democrats disapprove of this completely legal thing that corporations do to shield their money from the highest corporate tax rate in the developed world. Loopholes are like giveaways, monies that D.C. has yet to double and triple tax.

…But Bernie Sanders, bless him, just skips the entire perception game and just comes out with it by tweeting: “The offshore tax haven network isn’t something that we need to reform or refine. It’s a form of legalized tax fraud that must end.”

“Legalized tax fraud” is a revealing statement about the progressive belief system. For progressives, taxation is moral. So when you fail to pay an imaginary tax that doesn’t exist but Democrats think should, you are by default engaged in fraud. The law has just to catch up with sin.

Megan McArdle has lamented the “regrettable tendency” of legislators “to view their citizens, and particularly their corporate citizens, as a species of tax cattle.” She points out that the first-time-homebuyer tax credit is morally no different than tax-exempt municipal bonds or your 401(k). She points out that if we were to, say, get rid of tax-free bonds, “[i]t would be more expensive for local governments to borrow money. Rich people are paying for that tax benefit by accepting a lower interest rate on municipal bonds than they would if they had to pay taxes on that money. The net effect is a federal subsidy for local spending. If we remove the deduction, local governments will find their budgets pinched[.]” She also points to charitable deductions and corporate tax rate shopping at the local and international level. “Unless,” she writes, “you want the kind of government enjoyed by the majority of the people of the world — and to ship most of your money to those places, while getting little in return — then stop complaining that other countries exist, and that their existence makes it hard to keep the local tax cattle properly penned in.”

When groups like Americans for Tax Fairness complain about tax “loopholes” and demand that we should “end tax breaks for corporations that ship jobs and profits offshore,” they are ignoring the points above as well as the following evidence. Harvard’s Mihir Desai has done extensive work on this subject. “When American firms grow abroad,” he writes in The Wall Street Journal,

Image result for fixed pie economicsthey also grow domestically, as demonstrated by research I conducted with C. Fritz Foley of Harvard and James R. Hines Jr. of the University of Michigan (published in the American Economic Journal: Economic Policy, 2009).

The data do not support the crude, fixed-pie intuition that firms either invest abroad or at home. Ten percent growth in American firms’ foreign investment is associated with 3% growth in their domestic investment. And when firms grow abroad, their domestic exports and R&D activities grow especially…Vilifying or penalizing American businesses for their global operations will only lead them to consider leaving the U.S.—or consider being bought by foreign companies. Such moves would hurt America by removing valuable headquarter jobs.

The fixed-pie fallacy breeds protectionism. And protectionism manifests itself in many forms.

Prison Time and the Rise of the NILFs

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“About 7 million American men of prime working age (25 through 54) are not in the labor force, according to the Bureau of Labor Statistics,” writes Bloomberg View columnist Justin Fox.

That means they don’t have a paid job and haven’t been actively looking for one.

This figure does not include those in jail or prison. It does include students and men staying home to take care of children or other family members — but, as Nicholas Eberstadt estimates in his important new book, “Men Without Work,” these two categories seem to account for less than 15 percent of what he calls the NILFs (for not in labor force). And the NILF share of the U.S. prime-age male population has been growing and growing.

Why? The usual suspects like technology, trade and a lack of motivation (“immigrants and married men are under-represented in the NILF ranks”) are listed along with the novel suggestion that value of leisure time has increased. “The percentage of NILFs has risen since the 1970s all over the developed world, which definitely fits with the technology-displacing-jobs explanation. But the trajectory has been much steeper in the U.S. than in other rich countries.” Why? In short, prison time:

Image result for no work prison[T]he great incarceration wave that began in the 1970s has produced millions of ex-convicts who are ill-prepared for jobs or are discriminated against by employers even when they are prepared. Eberstadt cites an unpublished study that estimates that 12 percent of the adult male civilian non-institutional population (that is, men not in jail) in the U.S. has been convicted of a felony, and figures the percentage must be even higher for prime-age men given that the “incarceration explosion” didn’t start till the 1970s.

This is on the one hand tragic: Millions of American men who were imprisoned in the 1970s through 1990s have been thrust into a labor market that really doesn’t want them. On the other hand, it is at least potentially fixable. Job displacement by technology is probably unstoppable, but how we punish crime is a public-policy choice. Incarceration rates have already been falling with the big declines in crime since the early 1990s, and the past few years have seen the growth of a bipartisan consensus (interrupted by the current presidential campaign, to be sure) that the U.S. throws too many people in prison for too long and doesn’t do nearly enough to rehabilitate them. Prison and sentencing reform might actually be the country’s best shot at thwarting that “linear trend” that would put a quarter of prime-age men out of work by 2050.

The scarlet-F strikes again.

Mobile Phones, Broadband, and the Poor

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The Telecommunication Development Sector (ITU-D) released their 2016 ICT Facts and Figures with the following chart:

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Technology analyst Benedict Evans tweeted the chart with the tongue-in-cheek caption “The evils of capitalism.” He followed up with, “That 5bn people have a phone & 2.5bn already have a smartphone is a huge achievement of, mostly, free markets and permissionless innovation…It’s been clear for a decade that access to communications transforms prospects for the poorest. A phone *does* put food in your belly.”

People are sometimes skeptical of this last claim, but they shouldn’t be. For example, a 2016 World Bank report found that “[a]lmost every study, despite the methodology and whether it was cross-country or single country, found a positive economic impact from fixed broadband” (pg. 11). A 2016 report from the McKinsey Global Institute found “that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent, or a total of $3.7 trillion, by 2025. This is the equivalent of adding to the world an economy the size of Germany, or one that’s larger than all the economies of Africa. This additional GDP could create up to 95 million new jobs across all sectors of the economy.” A 2012 report prepared by Deloitte for the GSM Association found that “[o]n average, across the sample of 14 countries considered, if countries doubled their consumption of mobile data per 3G connection between 2005 and 2010, they would have experienced a growth rate of GDP 0.5 percentage points higher each year” (pg. 7). A 2014 report from the Gates Foundation notes that “mobile data has been used by researchers, mobile operators and governments to help plan emergency response after natural disasters, enhance access to financial services for the poor, track the spread of infectious disease, and understand migration patterns of vulnerable populations. Indeed the full range of ways that mobile data can be used to improve the lives of poor people is only beginning to be explored” (pg. 4). A 2015 study found “evidence that the use of mobile money increases the use of formal savings accounts and allows for more effective risk sharing. In recent research, we show another important channel through which mobile money can enhance economic development. Namely, by allowing easier access to larger amounts of trade credit, mobile money allows firms higher production, with important macroeconomic repercussions.” The situation of Kerala fisherman also demonstrates the impact of mobile phones. As The Economist reports,

Dividing the coast into three regions, [economist Robert] Jensen found that the proportion of fishermen who ventured beyond their home markets to sell their catches jumped from zero to around 35% as soon as [phone] coverage became available in each region. At that point, no fish were wasted and the variation in prices fell dramatically. By the end of the study coverage was available in all three regions. Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast.

This more efficient market benefited everyone. Fishermen’s profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off. All of this, says Mr Jensen, shows the importance of the free flow of information to ensure that markets work efficiently. “Information makes markets work, and markets improve welfare,” he concludes.

A 2008 World Bank study found that the mobile sector and use of mobile phones (1) boost GDP, (2) create jobs, (3) increase productivity, (4) increase tax revenue, (5) enable entrepreneurship and job search, (6) reduce information asymmetries, (7) correct market inefficiencies, (8) reduce transportation costs, (9) create consumer surplus, (10) aid disaster relief, (11) disseminate educational and health information, and (12) promote social capital and social cohesion. Other sources point to access to money and banking, improved governance, and disseminated agricultural, health, and educational information.

These various studies and reports confirm what economist Andreas Bergh found about globalization: larger information flows reduce poverty. If we want to help the poor, we need to integrate them into the global economy.

Infographic: Mobile Phones Tackling Poverty

The Consequences of Minimum Wage: Youth Edition

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Time for yet another study on the minimum wage, this time by economist Charlene Marie Kalenkoski from March of this year. Do minimum wage laws have negative effects on youth employment and income?

Wait for it…

…

Yes. Yes they do.

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Kalenkoski writes,

Policymakers often propose a minimum wage as a means of raising incomes and lifting workers out of poverty. However, improvements in some young workers’ incomes as a result of a minimum wage come at a cost to others. Minimum wages reduce employment opportunities for youths and create unemployment. Workers miss out on on-the-job training opportunities that would have been paid for by reduced wages upfront but would have resulted in higher wages later. Youths who cannot find jobs must be supported by their families or by the social welfare system. Delayed entry into the labor market reduces the lifetime income stream of young unskilled workers (pg. 1).

A few selections on employment:

There is a substantial body of empirical evidence on the effects of a minimum wage on youth employment. Most of the studies have found negative effects on youth employment. A 1992 study of youth employment in the US found that a 10% increase in the minimum wage led to a 1–2% decline in the employment of teenagers and a 1.5–2% decline in the employment of young adults. A 2014 study of youth employment in the US showed a decline of 1.5% for teenagers. Thus, the estimated negative effect of minimum wages on employment in the US has been fairly consistent over time. However, these estimates are national averages, which obscure regional effects. A 10% increase in the minimum wage has been found to reduce regional employment by as much as 7%. One study that looked at teenage unemployment rates in the US instead of employment found that minimum wages indeed increase teen unemployment rates, as the standard economic model predicts (pg. 3).

Minimum wages reduce US teenage employment

And income:

How might the imposition of a minimum wage affect whether grocery store employers offer on-the-job training? If the minimum wage were set at W1 in Figure 3, for example, grocery store employers would be unable to offer on-the-job training to their grocery bagger employees. Workers would find themselves on the horizontal age-earnings profile at W1 and would thus earn less income over a lifetime than they might have had they been able to receive on-the-job training (pgs. 6-7).

On-the-job training changes the relationship between age and earnings

Kalenkoski concludes,

Rather than using a minimum wage to increase youths’ current incomes, policymakers should consider policies that improve the labor market opportunities of youths but do not increase the cost to employers of hiring young workers. Policies that would achieve both goals include providing cash welfare payments to youth if their earned income falls below some guaranteed level and providing in-kind support, such as food or housing assistance. Such policies create their own distortions (for example, causing some benefit recipients to choose not to work) but would not reduce the total number of jobs available or create unemployment (pg. 9).

Check out the full publication.

The Importance of Consumer Credit

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I recently reread a 2014 Forbes article by GMU law professor Todd Zywicki and former Fed economist Thomas Durkin based on their Oxford-published Consumer Credit and the American Economy and thought it was worth sharing. The authors explain that despite the claims of people like Elizabeth Warren,

economists have long understood why consumers borrow. Although there are exceptions to any rule, for most it bears little resemblance to Senator Warren’s picture of hapless victims goaded into debt by rapacious credit card issuers. Instead, consumers borrow for essentially the same reasons that businesses borrow: for capital investments and to smooth disruptions in income and expenses. And paternalistic regulations that make credit more expensive and less available typically makes people poorer.

Zywicki and Durkin use the example of a washing machine:

A washing machine is no frivolous bauble; its value is in not having to schlep to the laundromat every Saturday with a pocket full of quarters. While a washing machine costs much more on the front end to acquire, it generates a stream of benefits over years. In that sense, it is no different from a construction company that borrows money to purchase a backhoe to dig a ditch instead of hiring ten guys with shovels. 

The “hand-wringing about how other people use consumer debt is as old as debt itself. For example, the New York Times warned in the 70s that American consumers were “borrowing trouble”—the 1870s, that is.” They point out that

40 years ago if you needed $400 for a car repair, you would visit your bank, credit union, or a local personal finance company for a loan to be repaid over 12-24 months. If you bought a refrigerator or new bedroom set, you would finance it through the appliance store or department store and repay it “on time.” Today, you likely would just put it on your credit card. In fact, even despite the astonishing surge of student loan debt over the past two decades (it now exceeds credit card debt), the non-mortgage debt repayment obligation as a share of income is actually lower today for the typical household, including the typical low-income household, than in 1980 (see chart below).

Finally,

while well-designed regulation can improve competition and consumer choice, economic history demonstrates that heavy-handed regulations that restrict product offerings frequently harm their intended beneficiaries. For example, who uses payday lending? Those who don’t have access to credit cards or would max out their cards if they used them. So what happens when well-intentioned regulators take away payday lending? Many payday lending customers shift to other alternatives, such as bank overdraft protection or pawnbrokers, which are often even more expensive. Eliminating options for low-income consumers (especially those options that they are actually using) doesn’t eliminate their need for credit.

The whole article is worth reading. Check it out.