Social Science

Stuff I Say at School – Part II: Self-Interested Politicians

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This is part of the Stuff I Say at School series.

The Assignment

After listening to [Benjamin] Ginsberg‘s lecture, do you agree with his assessment that politics is all about interests and power?

The Stuff I Said

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Kevin Simler and Robin Hanson’s recent book The Elephant in the Brain demonstrates that these underlying desires for power and status inform many of our decisions and behaviors in everyday life. Politicians certainly do not transcend these selfish motives by virtue of their office. I would actually add a subcategory to “status”: moral grandstanding. We want to paint ourselves as “good people” by signaling to others our superior moral quality. This allows us to enjoy the social capital that comes along with the improved reputation. We not only gain status, but we can also think of ourselves as do-gooders; crusaders who fight the good fight. Unsurprisingly, evidence suggests that we have inflated views  of our own moral character and that acts of moral outrage are largely self-serving. What’s unfortunate is that social media may be exacerbating moral outrage by making signaling both easier and less costly to the individual.

I think the rise of populism in both America and Europe is a timely example of interests at play. While various elements contribute to the populist mindset, economic insecurity is the water it swims in. And this insecurity has been exploited by politicians of more extreme ideologies across multiple countries. For example, the Great Recession eroded European trust in mainstream political parties: a one percentage point increase in unemployment was associated with a 2 to 4 percentage point increase in the populist vote. A 2016 study looked at the political results of financial crises in Europe from 1870 to 2014 and found that far-right parties were the typical outcome. In America, President Trump made “Make America Great Again” his rallying cry, feeding off the public’s distrust of “the Establishment” during the post-crisis years. In doing so, he advocated protectionism and tighter borders. Oddly enough, you find comparable populist sentiments on the Left: Bernie Sanders has been very anti-trade and iffy on liberalized immigration (open borders is “a Koch Brothers proposal“), all in the name of helping the American worker. One of his former campaign organizers–the newly-elected Congresswoman Ocasio-Cortez–has also expressed similar concerns over trade deals (especially NAFTA). This is why The Economist sees less of a left/right divide today and more of an open/close divide. Skepticism of trade and immigration wrapped in “power to the people” sentiments may be invigorating in rhetoric, but it’s asinine in practice. And it’s doing nothing more than riding the wave of voter anxiety. What’s worse, it’s hiding these politicians’ accumulation of power, attainment of status, and moral self-aggrandizement behind what Ginsberg so aptly calls “the veneer of public spiritedness.”

More Stuff

A classmate asked if I believed that politicians always acted in self-interest or if there were moral lines that some would not cross. In response, I pointed out that Simler and Hanson are largely arguing against what they see as the tendency for people to tiptoe around hidden motives and self-deception. It’s not that we’re only motivated by selfish motives. We just tend to gloss over them. But they are deeply embedded. Failing to acknowledge them not only has personal consequences, but public ones as well (their chapter on medicine is especially on point). I think we should consider moral motivations through all possible means available, including life experience and behavior. However, I think a healthy dose of skepticism is necessary. It can certainly help protect us against intentional deception. But perhaps more importantly, it helps protect us against unintentional deception. It’s easy to give more weight to life experience, moral principles, and the like when it’s a politician on “our side,” all while harshly judging those on “the other side” as unscrupulous. Political skepticism or cynicism can aid in keeping our own selfish motives and emotional highs in check. And it can lead us to seek out more information, improve our understanding, and refine our beliefs. Otherwise, we end up being consumed by our own good intentions and moral principles without actually learning how to implement these principles.

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My classmate also put forth a hypothetical to get a feel for my position: if legislative districts were redrawn so that legislators now represented districts with a different ideological makeup, how many would change their positions on issues just to stay in power? Personally, I think we would see a fair number of politicians shift their position because it is more advantageous. However, there is considerable evidence that political deliberation with ideological opposites actually backfires. Political philosopher Jason Brennan reviews the evidence in chapter 3 of his book Against Democracy and finds that political deliberation:

  • Undermines cooperation
  • Exacerbates conflict when groups are different sizes
  • Avoids debates about facts and is instead driven by status-seeking and positions of influence
  • Uses language in biased and manipulative ways, usually by painting the opposition as intrinsically bad
  • Avoids controversial topics and sticks to safe subjects
  • Amplifies intellectual biases

There’s more, but that should make my point. So even if some politicians did not flip flop in their newly-drawn districts, the above list should give us pause before we conclude that their doubling down is proof of disinterest in status or moral grandstanding.

I certainly believe that people have moral limits and lines they will not cross. My skepticism (which I prefer to the word cynicism, but I’m fine with interchanging them) is largely about honest self-examination and the examination of others. For example, consider something that is generally of no consequence: Facebook status updates. My Facebook feed is often full of political rants, social commentaries, and cultural critiques. Why do we do that? Why post a political tract as a status? It can’t be because of utility. A single Facebook status isn’t going to fix Washington or shift the course of society. It’s unlikely to persuade the unsaved among your Facebook friends. In fact, it’s probably counterproductive given our tendency for motivated reasoning. When we finally rid ourselves of the high-minded rationales that make next to zero sense, we find that it boils down to signaling: we are signaling our tribe. And that feels good. We get “Likes.” We get our worldview confirmed by others. We gain more social capital as a member of the group. We even get to moral grandstand in the face of that friend or two who hold (obviously) wrong, immoral beliefs. Sure, some of it may be about moral conviction and taking a stand. That certainly sounds and feels better. But I think we will all be better off if we realize that’s really what those behaviors are about: sounding and feeling good. And I think our politics will be better off if we apply a similar lens to it. 

And More Stuff

A classmate drew on Dan Ariely’s work to argue that people–including politicians–have a “personal fudge factor“: most people will cheat a little bit without feeling they’ve compromised their sense that they are a “good person.” When people are reminded of moral values (in the case of the experiments, the honor code or 10 commandments), they don’t cheat, including atheists. So while politicians may compromise their values here and there, they still have a moral sense of self that they are unlikely to violate.

In response, I pointed out that a registered replication report last year was unable to reproduce Ariely’s results. That doesn’t mean his results were wrong, just that we need to be cautious in drawing any strong conclusions from them.

When discussing his priming with the 10 Commandments on pg. 635, Ariely references Shariff and Norenzayan’s well-known 2007 study. This found that people behave more prosocially (in this case, generosity in experimental economic games) when primed with religious concepts. They offered a couple explanations for this. One hypothesis suggested that “the religious prime aroused an imagined presence of supernatural watchers…Generosity in cooperative games has been shown to be sensitive to even minor changes that compromise anonymity and activate reputational concerns” (pg. 807). They then cite studies (which later studies confirm) that found people behaving more prosocially in the presence of eye images. “In sum,” the authors write, “we are suggesting that activation of God concepts, even outside of reflective awareness, matches the input conditions of an agency detector and, as a result, triggers this hyperactive tendency to infer the presence of an intentional watcher. This sense of being watched then activates reputational concerns, undermines the anonymity of the situation, and, as a result, curbs selfish behavior” (pg. 807-808). In short, religious priming makes us think someone upstairs is watching us. This has more to do with being seen as good.

However, religious priming obviously doesn’t work for the honor code portion. Yet, Shariff and Norenzayan’s other explanation is actually quite helpful in this regard: “the activation of perceptual conceptual representations increases the likelihood of goals, plans, and motor behavior consistent with those representations…Irrespective of any attempt to manage their reputations, subjects may have automatically behaved more generously when these concepts were activated, much as subjects are more likely to interrupt a conversation when the trait construct ‘‘rude’’ is primed, or much as university students walk more slowly when the ‘‘elderly’’ stereotype is activated (Bargh et al., 1996)” (pg. 807). Being primed with the “honorable student” stereotype, students were more likely to behave honorably (or honestly). 

In short, Ariely’s study I think shows a mix of motivations when it comes to behaving morally: (1) maintaining our self-concept as a good person, (2) fear of being caught and having our reputation (and the benefits that come with along with it) damaged, and (3) our susceptibility to outside influence.

My point about moral grandstanding is not that we should interpret all behaviors by politicians through the lens of self-delusion and status seeking. But being aware of it can help us cut through a lot of nonsense and avoid being swept up in a collective self-congratulation. To quote Tosi and Warmke, “thinking about grandstanding is a cause for self-reflection, not a call to arms. An argument against grandstanding shouldn’t be used as a cudgel to attack people who say things we dislike. Rather, it’s an encouragement to reassess why and how we speak to one another about moral and political issues. Are we doing good with our moral talk? Or are we trying to convince others that we are good?” And as philosopher David Schmidtz is said to have quipped, if your main goal is to show that your heart is in the right place, then your heart is not in the right place.

Does Employment Protection Actually Lead to Fewer Jobs?

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Based on a new analysis of a 2001 Swedish reform, it appears so:

The effect of employment protection legislation (EPL) on employment is theoretically ambiguous. Increased firing costs make employers both less prone to dismiss workers and less inclined to hire them, as employers anticipate these potential costs already in their hiring decisions (Bertola, 1999). In accordance with the theoretical prediction, empirical evidence on the overall employment effect is mixed (see, e.g., OECD, 2013, and Skedinger, 2010, for surveys).

…There is ample evidence, based on various types of data and identification strategies, suggesting that stricter EPL indeed hurts the employment prospects of vulnerable groups, like women, youth, immigrants, the low-skilled, and the disabled…Unlike previous work in this field, we focus on the employment prospects of the unemployed and participants in active labor market programs (ALMPs). We examine a reform of seniority rules in Sweden in 2001 that affected small firms only. Seniority rules – or last-in first-out – imply that dismissals should occur in reverse order of seniority…We investigate whether the liberalization of EPL made employers in small firms more willing to hire “wild cards”, with little previous experience. Seniority rules are also likely to increase the average productivity of dismissed workers, thus making unemployment less of a stigma and increasing the hiring rate of unemployed workers, as argued by, e.g., Baumann (2010) and Kugler and Saint-Paul (2004). 

…Our results indicate that the reform increased the share of workers hired from unemployment by 5-10 percent, depending on specification. We obtain mixed results concerning transitions from ALMPs to employment following the reform. The findings suggest an increase in transitions for programs focusing on preparatory training by 5-11 percent. The reform appears to have decreased the share of workers hired from subsidized employment, albeit only for certain firm size categories. No effect is found on transitions from longer unemployment spells to employment. Finally, we note that the increase in the share of workers hired from unemployment and ALMPs seems to be driven primarily by those with some college education (pg. 1-3).

In short, “a less stringent EPL made it easier for employers to allow for more uncertainty regarding the productivity of workers in their hiring decisions” (pg. 14). They note that “the [Swedish] reform may not have been far-reaching enough to have any favorable effect on the employment of the long-term unemployed and those in subsidized jobs, for whom the stigma is arguably more severe. The increase in workers hired from short-term unemployment and preparatory labor market programs may have adversely affected the remainder of the labor market, crowding out the employment of some of the most marginal groups” (pg. 15).

You find similar results with minimum wage hikes. You can protect the (slightly) higher-paying jobs of the already employed at the expense of the lower-skilled, lower-educated unemployed or you can make lower-paying jobs more accessible to the most vulnerable. 

Are the Rich Getting Richer and the Poor Getting Poorer?

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With yet another Oxfam report out, Swedish author Johan Norberg felt the obligation to point out its deficiencies:

There are two rules to stick to when someone reports that the rich are getting richer and the poor poorer. The first is to check the source. The second is that if the track shows that the information comes from OXFAM, you can throw it in the trash. Few organizations have such a consistent habit of misleading about the world’s prosperity.

The fact is that poverty is decreasing dramatically regardless of the degree of poverty that is used. According to the UN and World Bank’s measures of extreme poverty, it has fallen from 18.1 to 8.6% between 2008 and 2018. It is the biggest economic lift in history.

So how can Oxfam get it to the poor become poorer? Firstly, they ignore the income and consumption, and count only financial assets, which the poor rarely have – often they do not even have a bank account. And although some have it, there will not be much left in total when you deduct all the debts they have from this amount.

It enables OXFAM every year to shock journalists by saying that a single billionaire owns more than two billion people together. The problem with the reasoning is just that my daughter – who owns about 500 kronor – owns more than two billion people together, because these two billions do not have any net financial assets at all.

Or, as he said on Twitter a couple years ago:

Norberg then cites some recent research on global earnings inequality. The researchers explain,

We focus exclusively on labour earnings, which is the main income source for the vast majority of the world’s population (Hammar and Waldenström 2017). We create the first estimates of global earnings inequality, its trend between 1970 and 2015, and some evidence on its main drivers.

The estimation of the global earnings inequality rests on a unique earnings survey database run by UBS, a Swiss bank. It contains data on earnings, taxes, working hours, and local prices for workers in 15 representative occupations. The data have been collected in the same way every third year since 1970, in up to 85 cities in 66 countries, in all the world’s continents. We match it with occupational and country population data from the ILO and the World Bank. Our balanced sample covers more than 80% of the global population, and correlates well with statistics from other sources. It should be noted that the tails of the distribution are not well covered in our data, but imputations from other sources (top incomes from the World Wealth and Income Database, for example) suggest only a modest impact on the global earnings inequality trend.

Figure 1 [below] shows the main result – that global earnings inequality was very high in 1970 (with a Gini coefficient of around 70), but has fallen to a lower level today (around 60). The main equalisation occurred in the late 1990s and 2000s. Global pre-tax inequality is higher than global post-tax inequality (approximately 3 Gini points), and inequality is higher for hourly wages than for yearly earnings (approximately 1 percentage point). The latter suggests a negative relationship between earnings and hours worked at the global level. Compared with earlier studies on global inequality in income or consumption, we find that inequality in earnings and wages is slightly lower, but follows a similar trend.

Figure 1

They continue,

Decomposing the global earnings inequality trend within and between countries, we find that within-country inequality rose over this period (by 5 Gini points), while between-country inequality fell (by 15 points), leading to the combined effect of a 10-point fall in total earnings inequality. In Figure 3, we can also see that the main shift in both of these trends took place at almost the same time, during the early years of the 21st century. We also find that inequality within occupations has fallen, especially within the traded, industrial sector. This suggests that globalisation could be a potential driver of this earnings convergence trend.

They conclude,

Our new evidence on global earnings and wage inequality shows a falling trend over the past half-century. Similar to previous findings for global household income inequality, the main equalisation period was the late 1990s and 2000s. At this time several large, developing economies experienced high growth rates. Higher earnings in the agricultural sector, but also some low-skill urban professions, contributed specifically to this trend.

Once again, things are getting better.

Do Immigrants Decrease Economic Freedom?

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In my BYU Studies Quarterly article last year, I wrote,

Another objection [to increased immigration] is what is known as the “epidemiological case,” which argues that immigrants may bring with them foreign values that undermine the culture and institutions of the host country. In essence, immigrants transmit to rich countries those elements that make their source countries poor. What makes this rather prejudiced argument all the more jarring is the fact that it has virtually no supporting evidence. Unfortunately, very little empirical research has been conducted exploring the impact of immigrants on cultural, political, and economic institutions at all. However, the research that is available should calm fears and actually provide reasons for optimism. For example, there is no association between growth of total-factor productivity (TFP) in rich countries and the ratio of migrants from low-income countries, indicating that migrants do not “contaminate” their new homes with the low productivity of their source countries.

The Canada-based Fraser Institute publishes its oft-cited Economic Freedom of the World report annually. Its indicator—known as the Economic Freedom of the World (EFW) Index—defines economic freedom based on five major areas: (1) size of the government, (2) legal system and the security of property rights, (3) stability of the currency, (4) freedom to trade internationally, and (5) regulation of labor, credit, and business. According to the institute’s most recent report (which looks at data from 2015), countries with more economic freedom had considerably higher per-capita incomes and economic growth. Relying on this index, a 2015 study found that a larger immigration population marginally increases the economic freedom of the host country’s institutions. No negative impacts on economic freedom were found. Several authors from this study looked at Israel during the 1990s as a natural experiment in mass migration. During the 1990s, Israel’s population grew by 20 percent due to immigrants from the former Soviet Union. Yet, instead of experiencing decline, Israel shot up “from 15% below the global average [in economic freedom] to 12% above it and improv[ed] its ranking among countries by 47 places.” Similarly, a 2017 study found that higher diversity—measured by levels of ethnolinguistic and cultural fractionalization—predicts higher levels of economic freedom. While this particular study mainly discusses development economics, the correlation between high diversity and high economic freedom is an important aspect of the immigration debate. Barring members of different ethnolinguistic groups from entering the country may actually be holding back economic development (pg. 95-97).

Research on Jordan provides further evidence for the position above. Another 2018 study piles on. Overall, the authors’ 

results don’t show any strong relationship between increases in immigration and less economic freedom, nor do they show any strong relationship between an increase in the share of naturalized US citizens and less economic freedom. Therefore, our results indicate that, so far, Borjas’s concerns about a deterioration in the quality of institutions following an increase in immigration are not supported by the empirical results as they apply to the US states (pg. 394).

There were mixed results when it came to minimum wage legislation and union density. In the cases where the effects are slightly negative, the authors explain,

In states with larger immigrant population shares, are the increases in minimum wages and union densities the result of immigrants pushing for higher minimum wages and joining unions at higher rates than native-born individuals (because immigrants’ wages tend to be lower than natives’ wages)? Or are they the result of native-born individuals unionizing and pushing for higher minimum wages as a way of pricing out and restricting immigrant labor market supply? It could be explained either way and both explanations probably operate. However, our results don’t necessarily indicate whether the negative impact on labor market freedom is coming more from immigrants or more from native-born citizens. Therefore, when we study the relationship between immigration and economic freedom, the results don’t tell us much about the direct impact immigrants may have (pg. 376).

If you think the only way to “Make America Great Again” is by keeping out foreigners in the name of protecting our institutions, you need to chillax. 

The Big Push Falls Short

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I just started my first semester at John Hopkins this week and one of my classes is “Economic Growth: The Politics of Development in Asia, Africa and Beyond.” I was happy to see that I owned a few of the books on the “Recommended Reading” list and that virtually all of the authors I had read quite a bit from. As I reviewed the list of authors and resource, I was reminded of this blog post by economist Alex Tabbarok on Jeff Sachs’ plans for African development. Sachs believed that Africa needed a “big push” in public investment to escape the “poverty trap” and spur growth. This led to the Millennium Village Project in 2005. Tabarrok explains,

The initial MVP evaluation claimed great success but simply compared some development indicators before and after in the treated villages without comparing to trends elsewhere. In 2010 such a study was completely out of step with contemporary practices in impact evaluation. Red flag! Clemens and Demombynes showed that comparing to trends elsewhere significantly moderated the impact. A second MVP paper was published in the Lancet but then was quickly retracted when Bump, Clemens, Demombynes and Haddaddemonstrated that it had  significant errors. Clemens and Demombynes wrote a summary piece on the controversy then in an astounding and under-reported scandal the MVP tried to stifle Clemens and Demombynes. The MVP, with Jeff Sachs at the head, also sicced their lawyers on Nina Munk and her book, The Idealist: Jeffrey Sachs and the Quest to End Poverty. More red flags.

Yet, despite all of this controversy and bad behavior, the MVP project continued to move ahead and in 2012, the UK Department for International Development (DFID) funded US $11 million into an MVP in Northern Ghana that ran until December 2016. Under the auspices of the DFID, we now finally have the first in-depth, independent evaluation of one MVP project and it doesn’t look great.

While Sachs and crew saw the outcome in a rosier light, the DFID’s evaluation put it bluntly:

Overall, the MVP in northern Ghana did not achieve the overall MDG target to reduce extreme poverty and hunger at the local level. Where there are attributable changes to the MDG targets, these tended to be the more limited changes than those that will fundamentally improve people’s health, educational and other outcomes. For instance, the project did increase attendance at primary school (Goal 2) but did not go beyond this MDG and improve the learning outcomes of children; the project did increase the proportion of births attended by professionals and women said to be using contraceptive methods (MDG indicators), but it is not possible to assess the effect on maternal health (Goal 5); and the project did increase the number of toilets (a target under Goal 7), but not beyond this MDG in terms of hygiene and sanitation practices. There are, however, exceptions. The project
had a remarkable impact on stunting, which is a long-term health indicator and a predictor of socioeconomic outcomes in adulthood (pg. 162).

Projects like these may have some positive results, but they ultimately look like more Western hubris. 

Doing Business 2019

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The World Bank’s latest Doing Business report is out (check out the last couple years). The report “measures regulations affecting 11 areas of the life of a business. Ten of these areas are included in this year’s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Doing Business also measures labor market regulation, which is not included in this year’s ranking.” 

It’s key findings are as follows:

  • Doing Business captured a record 314 regulatory reforms between June 2, 2017, and May 1, 2018. Worldwide, 128 economies introduced substantial regulatory improvements making it easier to do business in all areas measured by Doing Business.
  • The economies with the most notable improvement in Doing Business 2019 are Afghanistan, Djibouti, China, Azerbaijan, India, Togo, Kenya, Côte d’Ivoire, Turkey and Rwanda.
  • One-third of all business regulatory reforms recorded by Doing Business 2019 were in the economies of Sub-Saharan Africa. With a total of 107 reforms,  Sub-Saharan Africa once again has a record number this year.
  • The BRIC economies—Brazil, the Russian Federation, India and China—introduced a total of 21 reforms, with getting electricity and trading across borders the most common areas of improvement.
  • The 10 top economies in the ease of doing business ranking share common features of regulatory efficiency and quality, including mandatory inspections during construction, automated tools used by distribution utilities to restore service during power outages, strong safeguards available to creditors in insolvency proceedings and automated specialized commercial courts.
  • Training opportunities for service providers and users are positively associated with the ease of doing business score. Similarly, increased public-private communication on legislative changes and processes affecting SMEs are associated with more reforms and better performance on the Doing Business indicators.

 

The World Bank notes, “The most popular reform is making it easier to start a business. More than a quarter of economies did just that in 2017/18. It now takes an average of 20 days and costs 23% of income per capita to start a business, compared to 47 days and 76% of income per capita in 2006. Thirteen of the top 20 economies have at least one procedure that can be completed online in half a day.”

Check it out.

Does Globalization Increase Economic Mobility?

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A new working paper draws on Swedish manufacturing data between 1997 and 2013 to determine the effects of globalization on economic mobility. Defining globalization as “a reduction in trade costs” (pg. 22), the authors note,

Most workers land their first full-time job in their 20s and then spend 40 to 50 years in the labor market trying to earn a living. Over their careers, workers acquire new skills, which enables them to change jobs and (sometimes) occupations in order to increase job satisfaction and career earnings. It follows that a complete picture of the impact of globalization on a typical worker should take into account its impact on skill acquisition and the rate at which workers are able to secure better jobs (that is, economic mobility) (pg. 38).

The authors develop “a model of a jobs ladder in which workers gain skills on the job that qualify them for higher-paying jobs at more productive firms” (pg. 38). They explain,

Our main finding is that when trade costs are initially high, globalization increases economic mobility through two channels. First, the reduction in trade costs leads to more international engagement by firms. As the number of exporting firms grows, the ability of workers to gain skills that reduce trade costs is enhanced. This makes it easier for workers to qualify for jobs at the top of the jobs ladder. Second, since high-productivity firms gain disproportionally from falling trade costs, globalization increases wage inequality. And, as the gaps between the wages paid by different groups of firms increase, workers become more willing to (a) incur the moving costs associated with changing jobs and (b) expend effort to keep their skills from deteriorating. As a result, upward economic mobility rises and downward economic mobility (due to demotions or terminations) falls. These changes in economic mobility reduce the differences in expected lifetime incomes forecast by workers in high-wage and low-wage jobs, resulting in the possibility that inequality in lifetime incomes might fall with globalization (even though wage inequality is rising). Even the case in which globalization increases inequality in terms of lifetime incomes, the impact is smaller than its impact on wage inequality (pg. 39).

What’s more,

Employment is reallocated from firms that pay medium wage towards the extremes, with high-wage and low-wage employment both increasing. While it is tempting to interpret this reallocation of employment as an explanation of “job polarization” as described in recent empirical work (see Goos and Manning 2007; Goos, Manning, and Salomons 2009; Autor, Katz and Kearney 2006, 2008 and Autor and Dorn 2013), we believe that would be a mistake…Our results indicate that globalization can result in a shrinking middle-class within a given occupation, with increased export opportunities resulting in more firms willing to recruit the most experienced workers by paying the highest wage; while others react to increased competition from imports by re-orienting their hiring toward inexperienced low-wage workers. These results are not driven by outsourcing. Instead, they are completely driven by the manner in which globalization alters the networks that firms use to fill their vacancies (pg. 39-40).

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When trade costs are high, “globalization allows [low-wage workers] to move up the jobs ladder more quickly and, as they reach higher and higher rungs, they enjoy the enhanced benefits of the higher real wages generated by freer trade. In this case, a focus on wage inequality can be misleading in that low-wage workers do not lose as much relative to others in the labor market as would be indicated by standard analysis” (pg. 28-29). However, when trade costs are already low, “[w]age inequality rises and the rate at which workers move
out of their entry level jobs slows.” However,

the proper way to measure the effect of globalization on a worker is to examine its impact on that worker’s expected lifetime real income. That measure considers both the change in real wages and the degree of economic mobility faced by that worker. Thus, we can get a better view of how globalization affects inequality by examining the changes in expected lifetime real incomes for workers in different labor market states…Inexperienced workers only hold low-wage jobs for a portion of their lifetime, moving on to much better jobs as they gain skills. As they mature, they benefit from the higher real wages paid to medium-wage and high-wage production workers if they can gain the proper skills and land better jobs. The fact that using current wages as a proxy for lifetime earnings can lead to misleading conclusions is not a new insight. This issue is well understood and heavily researched in many sub-fields of economics; but, as far as we know, it has not received much attention from those investigating the link between globalization and inequality (pg. 29-30).

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The devil is in the details.

The Effects of Legalizing Immigrants

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Over at SMU’s Texas-Mexico Center blog, I wrote,

Despite the recent political rhetoric and anti-immigrant sentiments, the economic benefits of immigration are well-established in the empirical literature. A 2011 meta-analysis by economist Michael Clemens found that dropping all current immigration restrictions would result in a doubling of world GDP.

A more recent analysis corroborated these findings, concluding that lifting all migration restrictions would increase world output by 126%. In 2015, migrants made up 3.4% of the world population yet contributed about $6.7 trillion to global output—9.4% of world GDP. The McKinsey Global Institute estimates that this is $3 trillion more than these migrants would have produced had they stayed in their origin countries. Even undocumented workers in the United States contribute about 3.6% of private-sector GDP annually—around $6 trillion dollars over a 10-year period. Granting these migrants legal status would increase their contribution to 4.8%. 

On this last point, a recent study explores the effects of immigrant legalization in Spain. The authors explain the background for the natural experiment:

In the early 2000s, Spain experienced an incredible boom in immigration. The share of immigrants in the working-age population increased from less than 2% in 1995 to around 10% in 2004. Many of these newly arrived immigrants lacked work permits. By 2004, there were close to 1 million undocumented immigrants in a country of around 43 million inhabitants.

Despite this large number of undocumented immigrants, the government at the time, led by Jose Maria Aznar (Popular Party) and with Mariano Rajoy in its cabinet, was unlikely to legalise the work status of immigrants. Traditionally, the Popular Party had been proposing tougher policies against immigration. Its main stance was to avoid implementing policies that could attract new waves of immigrants. In this context, in the early 2000s, immigrants were granted work permits mostly on the basis of family reunification.

On 14 March 2004, voters in the Spanish general election had to determine whether the Popular Party would continue in power or be replaced by the Socialist Party. In the week before the election, the outcome seemed clear: the polls were forecasting that Zapatero of the Socialist Party was trailing Rajoy by seven percentage points. 

Yet, something completely unexpected happened just three days before the election which, as shown by Garcia-Montalvo (2011), changed the final outcome: Madrid suffered the largest terrorist attack in Spanish history, a tragedy that was poorly managed by the Popular Party. As a result, the Socialist Party came to power, and one of the first policies it implemented was the legalisation of nearly 600,000 immigrants already living (and working illegally) in Spain.

Using administrative payroll tax revenues, the authors find

that the legalisation of immigrants’ work status increased revenues locally — i.e. at the province level — by around €4,189 per newly legalised immigrant. This amount is only 55% of what we would have expected if newly legalised immigrants had shared the same characteristics as previous contributors to the social security system and had enjoyed similar labour market experiences. Two factors may explain this. First, newly legalised immigrants were perhaps disproportionately low-skilled and had worse labour market experiences than natives. Second, the legalisation may also have affected previous workers.

…Using very detailed administrative and survey data on wages and employment, we show that the policy change disproportionately affected the labour market outcomes of workers in high-immigrant locations relative to low-immigrant locations. In particular, it worsened employment opportunities for both low-skilled natives and immigrants, while it improved them for high-skilled workers. Among low-skilled natives, those who lost their jobs were negatively selected — the policy change negatively affected employment prospects of native low-skilled workers at the bottom of the wage distribution. Putting together all the labour market changes and comparing them to payroll tax revenue changes, we show that this negative selection is crucial to fully understand the effects of the reform.

We also show that, following the reform, many immigrants moved from high- to low-immigrant locations. This is important since these immigrants also contributed to payroll tax revenues, but in traditionally low-immigrant locations. This, in turn, means that comparing local payroll tax revenues in high- relative to low-immigrant locations to evaluate the effect of the policy may underestimate the true impact of immigrant legalisation on payroll tax revenues. Once we take into account internal migration and selection, we argue that the true contribution was almost €5,000 per newly legalised immigrant, i.e. substantially higher than what we would have been able to estimate on the basis of local tax revenue data alone.

Incoherent Know-Nothings

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Cards Against Humanity’s Pulse of the Nation poll from 2017 to 2018 has some pretty interesting, disturbing, and rather unsurprising findings about the American public:

Conflicting Views

39.1% of Democrats think that it’s wrong to negatively stereotype people based on their place of birth, but also think Southerners are more racist.

65.2% of Republicans think that people are too easily offended, yet find Black Lives Matter offensive.

64.6% of Democrats think that a woman has the right to do what she wants with her body, except when it comes to selling her kidney. Nearly half also believe a woman has the right to do whatever she wants with her body, except sell it for sex.

57.9% of Republicans think that people should be free to express their political opinions in the workplace, but athletes shouldn’t be allowed to make political protests at games.

Over half of Democrats think that men and women “are equal in their talents and abilities,” except when it comes to multitasking and empathy.

About 1/3 of Republicans think we should be more suspicious of foreigners, yet believe Putin when he says he didn’t interfere in the 2016 election. (You’re twice as likely to do this if you support Trump.)

Over half of Republicans believe nobody deserves a handout and that the government should do more to help small, working-class towns in America’s heartland.

About 1/3 of Democrats say that they trust the scientific consensus, just not when it comes to GMOs.

Political Ignorance

39% of Americans either think low GDP is better than high GDP or have no clue altogether.

The majority of Americans can’t name the three branches of government.

Only 12.7% of Americans can name a living, breathing economist. 55.9% can’t name a living economist, but think their opinions about economic policy are well-informed.

The richest 1% of Americans own 39% of the country’s wealth. Everyone overestimates the amount. If you’re a Democrat, you think it is 75 percent. If you’re a Republican, you think it’s 50 percent. Perhaps surprisingly, the more educated you are, the more likely you are to overestimate the amount.

Nearly half of Americans do not believe the U.S. has interfered with foreign democratic elections. You’re less likely to believe it if you’re Republican.

Other Stuff

Those who think “sex without love” is okay are far more likely to be pro-choice.

If you rely on “common sense” instead of empirical evidence, you’re likely older, less educated, and lack a Twitter account. You also are more likely support military action against Russia for their 2016 election interference. 

29% of Trump supporters would still stick with him in 2020 even if he murdered journalist for spreading lies.

Do Bumps in the Minimum Wage Increase the Number of Job Seekers?

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Image result for minimum wage gif

Some argue that increasing the minimum wage will increase the number of job seekers and, consequently, employment. From a new NBER paper:

Do minimum wage increases affect search effort by job seekers?

…We investigate the effect of minimum wage increases on job search effort utilizing data from the Current Population Survey (CPS) and the American Time Use Survey (ATUS). We exploit the staggered nature of CPS and ATUS interviews and use an event-study approach, leveraging within-state variation in the adoption of minimum wage changes. We account for shocks affecting a particular state in a given year as well as month effects to control for seasonality, and individual demographic characteristics. Intuitively, we compare the outcomes in each month near the treatment date to the outcomes for otherwise-identical individuals in the same state and year whose survey period was not near a treatment date.

We find no evidence that the minimum wage has persistent effects on search effort; the likelihood of searching does not increase in the aftermath of minimum wage increases. However, there is a large yet transitory increase in the intensive margin of search effort, concentrated in the month of the minimum wage increase, that fades almost immediately. There is no short-run increase in the employment rate nor changes in observable characteristics of searchers, suggesting that our results are not driven by changes in the composition of job seekers. These findings are robust to the inclusion of demographic controls, the duration of unemployment benefits, and month-by-year fixed effects that account for any idiosyncratic national-level variation in a given month. We also conduct a permutation test for our search duration results in which we randomly assign minimum wage increases across time periods and show that these results do not appear to be due to chance.

Our results call into question the assumption underpinning search-and-matching models as applied to analysis of the minimum wage – namely, that more workers will enter the labor market and each worker will search harder, increasing the returns to firm vacancy postings. Importantly, we find minimum wage increases do not induce individuals to begin searching. While we find that minimum wage increases yield significant increases in worker search effort on the intensive margin, they are transitory (pg. 2-3).