Walmart opened its stores at 6 p.m. I drove by the Irvine Supercenter at 8:00 p.m and found barricades all around the parking lot, leading up to the store entrance. There were enough barricades for veritable hordes of people but, as you can see, the expected sea of humanity was nowhere to be found.
I’d driven by earlier to see if there were any people camping out. There weren’t.
My foray into the periphery of my local shopping Meccas reminded me of the last jobs report that every one was positively glowing about but failed to mention that a good number of the added jobs were in preparation for this day, and probably not the highest paying or longest term.
Which brings me to Jared Bernstein’s latest posts…
The first post I am including is a thorough critique of the way the minimum wage is portrayed by the various political campaigns, versus models used by economists:
Models of the minimum wage (for what they’re worth)
The recent minimum wage debates among the various campaigns are pretty disconnected from a model of how the damn thing actually works in the real world. In part, that’s a function of campaigns not doing nuance, but it’s also because there is no model that economists agree on as per why the empirical results on minimum wage increases are so different from the predictions of the classical model.
As I’ll show in a moment, that model predicts a lot of unemployment and you just don’t see that following moderate minimum wage increases. To be clear, I’m not arguing you don’t see any job loss. But you don’t see anything like the predictions of minimum-wage opponents: the number of beneficiaries of the increases virtually always far surpasses anyone hurt by them.
Start with the classical, textbook model. Now, as you’ve heard me say before, “all models are wrong; some models are useful.” But when it comes to the minimum wage, this model is both wrong and useless. If you’re in an econ class and your professor presents this model of the minimum wage and nothing more, she is guilty of malpractice.
The X-axis measures employment (N) and wages (W) are on the Y-axis. Demand curves generally slope down, a negative function of the wage rate, and vice-versa for supply curves. The equilibrium wage and employment levels are at the intersection of D and S. Impose a minimum wage above the equilibrium level and workers want to supply more labor than employers demand, so the wage mandate generates unemployment.
Why is this model so off? Staying within the competitive framework, the first variation adds dynamics, showing how a positive demand shock can absorb the wage increase. D_0 is the original demand curve, but Paul Krugman gets elected president and introduces a massive infrastructure program, such that the demand curve moves out to D_1, absorbing the wage increase with no unemployment.
This is, of course, fanciful, but to the extent that higher minimum wages get spent in places where consumer demand is constrained by working poverty, the model may be telling us something about why moderate increases have their intended impact. The same dynamic is likely operative when immigration raises labor supply: the demand the immigrants generate helps to offset their added supply.
Of course, a negative demand shock would have the opposite impact. Yet even when wage increases have been introduced in down economies (e.g., 1991), we’ve not seen large disemployment effects, so this model too is surely incomplete. Also, demand increases can be accompanied by supply increases (I’m holding supply constant in this second figure), and that too will just get you back to the similar, doleful dynamics seen in Figure 1.
[During the 1990s, the minimum wage and the EITC were increased, and welfare reform was introduced. In the context of these first two figures, that might lead you to expect a large supply shock, lowering wages and boosting employment. Except what actually occurred was both low wages and low-wage employment went up significantly. Thus, in the context of these models, supply expanded but demand expanded further. Or, as we say around here: full employment solves a lot of problems.]
Still sticking with the model, we can introduce some ideas into the diagram that comport a bit more with reality. In the low-wage labor market, demand has consistently been found to be highly inelastic, meaning workers/employers are not that responsive in terms of employment to changes in wages (dlog(emp)/dlog(wage)=small number like -0.1 to -0.3, or something…). Let’s assume supply is pretty inelastic too, which at least from the perspective of low-income workers (versus kids of wealthier families) seems plausible, since they’ve gotta work as opposed to choosing whether or not to work.
When you draw inelastic supply and demand curves, you end up predicting a lot less unemployment. Given the confidence intervals (statistical uncertainty) around our econometric estimates, you can see how if this model is more accurate, significant estimates of job loss effects are hard to pull out of the data. Which they are, suggesting this version may well be trying to tell us something about low-wage workers and their employers’ tempered responsiveness to increases in the wage floor.
In some cases, it has been observed that employment increases after the minimum wage is raised. There’s a model for that too, called a monopsony labor market, meaning a job market with one employer (details here; figure shown below). Compared to the models shown thus far, where wages are set at the level of the macroeconomy (vs. the level of the firm), in monopsony, the big employer sets the wage. If she sets it too low, employment and output can be inefficiently low. Since the employer faces an upward-sloping supply curve, when she raises the wage, she pulls more people into work (see the link for the meaning of the other labels in the model).
The monopsony model may sound arcane—the classic example is the one-company coal town—but it may not be too much of a reach to conclude that the low-wage labor market in a given town or city works kind of like this. As the link concludes, “the minimum wage is increasingly effective in improving efficiency, the more the market is controlled by buyers. A minimum wage is increasingly problematic, the more the market is competitive.” The fact that employment has not responded to wage increases as in the competitive market (Figure 1) might confirm your suspicion, as it does mine, that the low-wage labor market is typically not in equilibrium and is dominated by buyers (of labor), like fast-food restaurants, who may well operate in ways that mimic monopsony.
In a Republican debate the other night, Donald Trump, when asked whether the minimum wage should be raised, answered “no” because, he asserted, our problem is that wages are too high. His colleagues generally seemed to agree with him.
The next figure plots this (cockamamie) idea. W_0–the current minimum wage–is too damn high, and is thus restricting job growth. Take it down to the intersection of supply and demand, and you end up with more jobs. But here’s a fun wrinkle: deport 11 million unauthorized immigrants—7 percent of your workforce—and build a wall, thus whacking the heck out of your labor supply (as seen by the inward shift of S_0 to S_1) and the competitive model predicts higher wages but fewer jobs. If the negative supply shock is strong enough, it can fully offset the initial wage loss such that the post-wall wage of W_2 equals the original minimum wage.
This part of the exercise proves that much as you shouldn’t look directly at a solar eclipse, thinking through Trumponomics is ill-advised.
Otherwise, do we learn anything from all this modeling? Most importantly, the competitive model as conventionally drawn is misleading. Economic models vastly simplify the economy, which can yield some insights, such as the dynamic, inelasticity, and monopsony points above. But at end of the day, you really don’t want to push any of these too far. In economics, when the theory doesn’t match the evidence, trust the evidence.
(h/t, Ben S for help with figures.) Reprinted with permission from Jared Bernstein On The Economy
There should be no disagreement that wages have been stagnant over the past few decades. There also should be no argument that there has been a wage depreciation since the start of the Great Recession. The last jobs report saw optimism from a number of economists. Few were those who, up front, made mention of the fact that the additions to the labor market were related to the nearing holiday season. Most continued, however, to caution against what is assumed to be a certain raising of interest rates by the Fed. Jared Bernstein, again:
Solid jobs report will likely lead the Fed to raise next month…but what about after that?
The nation’s employers added 271,000 jobs in October, and the unemployment rate ticked down slightly to 5% in a solid report on labor market conditions. Wages grew 2.5% over the past year, their strongest yearly performance since the recession officially ended in June 2009.
Today’s report portrayed a very different job market than that seen in the September release, when payrolls were up a by only (a revised) 137,000. As I stressed last month (“a weak report, but does it represent a true downshift?”), this sort of volatility is to be expected in “high-frequency” data and it is a strong reminder not to over-weight any one month’s data when forming your views of the job market.
Better to average monthly payroll gains as seen in my monthly smoother below. Over the past three months, payrolls were up 187,000 on average, compared to 235,000 over the past year. That suggests a mild deceleration of job growth but I consider anything above 150K to be solid employment growth meaning enough jobs per month to put legitimate downward pressure on the jobless rate.
Other positive signs in today’s report include:
–A decline in the number of involuntary part-time workers, down 1.2 million over the past year.
–We finally may be seeing some wage acceleration, and if it sticks, that would be a very big story. I already noted the annual 2.5% growth rate, but I also averaged hourly wages over the past three months and the three months before that, creating pseudo quarterly wage values (as opposed to calendar quarters). Annualized, wage growth is up 2.7% over the past three months, compared to 2.1% over the prior “quarter.”
–Outside of manufacturing and mining, which remain weakened by cheap oil and the strong dollar, most industries added jobs, with strong showings in construction, business services, health care, retail trade, and bars and restaurants. The latter two industry gains may reflect a broader swath of consumers flexing their spending muscles given stronger nominal wage growth amidst very low inflation.
Less positive signs include:
–As mentioned, factory employment is being hurt by the strong dollar which makes our exported goods less competitive. The sector was flat last month, and is down 28,000 jobs over the past three months.
–The labor force participation rate—the share of the working-age population either working or looking for work—remains historically low and was unchanged last month. Based on an aging/retiring labor force, no one should expect the LFPR to regain previous heights, but at least one of the 3.6 percentage points decline from its peak of 66% might be regained if labor demand remains strong, especially if job quality (i.e., compensation) improves as well, pulling more potential workers in off the sidelines.
Which brings us to the Federal Reserve. According to Chair Janet Yellen, before today’s report, the Fed was already considering raising their target interest rate slightly in their December meeting—she called the Dec. liftoff a “live possibility” but added they’ve “made no decision about it.”
Today’s report is likely to push them over the edge. Clearly the markets expect a Dec. rate increase as short-term Treasury yields this AM spiked to the highest levels in 5 years, as bond traders are trying to get ahead of the expected Fed rate bump.
You might well ask: “why should a jobs report be a deciding factor when inflation is so consistently below the Fed’s 2% target?” Good question. The liftoff advocates would say they’ve got to see around corners and the tightening job market may now be giving rise to wage pressures that will soon thereafter show up as price pressures.
But there’s a lot of links in that chain, and [trigger warning—life lesson from aged person follows!] I’ve learned to distrust economic arguments with a lot of steps. There’s many a slip between those linkages. For example, wage growth does not appear to be bleeding over into price growth as it has in the past.
Also, unless the Fed allows the job market to heat up and stay hot, the benefits of growth won’t reach significant swaths of the workforce who depend on lasting full employment to boost their sorely diminished bargaining clout. And remember, 2% inflation isn’t a ceiling; it’s an average, so having been below it for so long we’ve got room to rise above it for a while.
If today’s numbers push the Fed to raise slightly, so be it; 25 basis points (a quarter of a percent) shouldn’t make much of a difference to the macroeconomy, and we could finally be done with the “will-they-won’t they?” game.
But the important discussion now turns to the pace of their “normalization” campaign. Once again, the critical factor here is to remember that a few months of decent average wage growth at freakishly low inflation does not make up for decades of inequality, wage stagnation, and the persistent, growing split between productivity growth and median compensation.
So go ahead and tap the brakes, if you must, Yellen and co., but this recovery, much like the last one, has yet to lift the poor and middle class. Please give it a chance to do so.
Reprinted with permission of Jared Bernstein On The Economy
Which brings me to the hot topic (not!) of unemployment and how we count our precariat. Paul Krugman hasn’t written about unemployment, the unemployed, or jobs in quite some time. Jared Bernstein is among a scant few who do, and on a regular basis. Here he is on the topic of U6. First, though, what is U6? :
U6 is a figure published by the Bureau of Labor Statistics that is seldom referred to by the press and economists when they talk about unemployment. That number is usually larger than the one that is quoted because it includes not only those who are eligible to receive unemployment insurance payments, but also those who are no longer eligible, are still looking for work, only work part-time but want to work full time, or have given up looking for jobs altogether.
What is the “natural rate” for u6?
Not the sexiest title, I grant you, but important stuff, nevertheless.
Those of us interested in just how close we are to full employment like to track the more comprehensive “u6” rate, aka, “underemployment.” It includes all the unemployed, but also the millions of involuntary part-timers (IPT)—who are, quite literally, underemployed—plus a small subset of those out of the labor market who might be willing to work if there were more good opportunities available. Especially because IPT has been so elevated in this recovery, and because some special factors, like depressed labor force participation, have led to a downward bias of the unemployment rate, u6 is worth watching closely.
As you see below, u6 rose more in the Great Recession and has fallen faster in the expansion than the official rate.
Unemployment and Underemployment (u6)
Now, for reasons I’ll explain, it’s necessary to guesstimate to the “natural rate” of unemployment, i.e., the unemployment rate consistent with stable prices. The Fed thinks it’s about 5% which is where we are now, ergo, they’re getting ready to raise rates.But I think that these days, it’s better to gauge slack using u6, which last clocked in at 9.8%. But where is that relative to the natural rate of underemployment?The (justifiably) influential macro team at Goldman Sachs believes that the natural rate for u6, call it u6*, is 9%. That’s about where u6 stood at the end of the last expansion (late 2007) when the official rate was at 5%, so not an unreasonable guess.OTOH, as you can see in the figure, u6 was around 7% at the end of the 2000s expansion, when the official rate was around 4% (and inflation was perfectly well behaved, ftr). There are reasons to believe the “natural rate” is higher today than it was back then—certainly productivity and thus potential growth are lower now. And, of course, there are good reasons not to truck in this whole “natural rate” business at all; there’s no reliable way to nail it down, it moves around, and economists invariably tend to pitch it too high, at great cost to those who depend on truly full employment.But here’s why it’s important: the Taylor Rule. This is the rule that says at least one Taylor Swift hit must be on pop radio at any given time (whoops—sorry—just a little whining from a chauffeur whose teenagers insist on controlling the radio). The other Taylor Rule is one of the methods the Fed employs to decide whether the interest rate they control needs to be raised, lowered, or left alone.There are many variations of Taylor rules, and I’ll let you Google them to your heart’s content. They’re a touch controversial right now because House Republicans are trying to pass legislation to make the Fed follow some version of the rule, a terrible idea that Fed chair Yellen has inveighed against. Like I said, the rule is but one input and there are too many variants to reliably count on it to give anything more than a range of impressionistic answers as to where the Fed funds rate (ffr) should be set.The rule is just a formula that takes data on inflation and slack and spits out an ffr. If you use the version Yellen describes here in footnote 5, and you plug in u6 instead of the official rate for slack, as I strongly think you should, you have to, as part of the formula, guesstimate u6* (the natural rate for u6).So that’s what I did, using a few different methods (data available upon request).1) regress u6 on Levin’s comprehensive slack variable, such that u6*=the intercept term, i.e., underemployment when slack=0.2) regress u6 on the difference between the unemployment rate and the CBOs natural rate; the intercept is again the natural rate.3) same as 2 but just plug in 4.5% for CBO’s natural rate, under the assumption that they peg it too damn high.The table shows the results, using Yellen’s ftnt 5 version of the Taylor rule, and the most recent observation of year/year core PCE inflation (1.3%).
If, like the GS team, you think u6* is 9%, the rule returns 0.17% which is about where the Fed’s likely heading in a few weeks, when they raise the ffr by 25 basis points. If you think u6* is something less than that, as I do, you’d be in less of rush to get started with your “normalization campaign” as the rule says the economy still needs a negative real rate to get back to full employment.But these differences are small and there are many sensitive assumptions built into the calculations. As I’ve said here re Fed liftoff plans, go ahead and raise a tiny bit if you must. What matters now is the path of future increases which, if we are to get to and stay at truly full employment, should surely be shallow and driven by the extent to which income and wage growth are reaching those who have heretofore been left behind.
Reprinted with permission from Jared Bernstein.
Bernstein published a post-script to his piece on U6. You can read it here.
The next topic of conversation that we, non-existent hordes, don’t get any of, are analyses of what the Democratic candidates are proposing in the way of economic prescriptions. Jared Bernstein again:
Imagine that…candidates actually debating substantive differences on economic policy
Of course, Saturday’s debate between the Democratic candidates was initially dominated by foreign policy in the wake of the horrific attacks in Paris.
But when they turned to the economy, there were interesting substantive differences at a level of specificity you don’t often hear in these debates. I add my own few sense [sic] in re Glass-Steagall, the minimum wage, and the importance of who’s on the president’s economics team. Over at WaPo.
One thing I don’t get into was Sen. Sanders claim that “the business model of Wall Street is fraud.”
As you’ll see in the WaPo piece, I’m feelin’ the Bern re the senator’s impulse to thoroughly regulate financial markets. Such ideas, to be clear, hark back not to socialism but to smart economics from Adam (Smith) to Hy Minsky, who recognized that as the business cycle progressed, unregulated markets would eventually systematically underprice risk, inflate a bubble, and screw everything up for the rest of us for awhile, until the “shampoo cycle”–bubble, bust, repeat–can get started again.
But I don’t agree with his sweeping condemnation. And I say that fully understanding that campaign rhetoric often needs to reduce complex ideas down to simple assertions.
The reason this doesn’t work for me is that calling the model fraudulent actually makes it sound too easy to solve when the problem is the vast majority of what goes on in contemporary markets is of course legal. The problem isn’t fraud, it’s waste. It’s rent-seeking and anti-productive activities.
The role of early financial markets was to allocate excess savings that would otherwise sit in vaults not doing much of anything to productive endeavors with the potential to expand the economy’s productive frontier. More recent vintages added potentially useful instruments that allow market participants to hedge investments in ways that offset potential losses in investment A with investment B.
But from the very beginning, “innovators” found ways to speculate that generated temporary ebullience and hid the extent of growing risk. More often than not, the innovators were either a step ahead of the regulators or worse, tapped ideology about the wonder of innovation to drug regulators to fall asleep at their switches, dreaming Greenspanian dreams of self-regulating markets.
Fraud is much more concrete than any of that–think Madoff. Or for that matter, investment banks right before the crisis selling MBS long to clients while they, based on information they possessed in real time, were shorting them. That seemed fraudulent to me and should have been prosecuted. (Not the same thing, but it’s this sort of thing that leads me–and Lily B–to fight for the “conflict of interest” rule.)
There is a critical role for financial markets, for credit, for access to capital, for the ability to build assets through saving and investing. The goal of economic policy in this area must be to get back those fundamentals while blocking the shampoo cycle. I’m not sure yelling “fraud” helps to get us there.
Where I disagree with Bernstein is over the nitpicking on the usage of fraud, and I explained my disagreement in a comment I left Jared on his blog:
Was it not fraud when we had the S&L crisis? Was it not fraud when whatever banker genius it was came up with derivatives and derivatives became a thing? Is it not fraud when so few corporations are able to rig the economy to extract from the middle and working classes to the point we have a precariat that is larger than at any other time? Is it not a model based on fraud when the only thing a corporation aims for is increasing profits for its shareholders through money in politics and interference in policy, no matter the cost to an entire nation? I think if you take Sanders a little less literally in his usage of the word fraud, he makes a lot of sense.
The worst ideas Milton Friedman ever came up with have become our reality. Back in 1962, when I was born, corporate mentality was different. It isn’t that business-people were saints back then. They surely weren’t. I did a bit of research and mixed it with some Milton Friedman, ending with Ronald Dworkin…
There is a lot in the way of analyses and news the public is no longer getting from the mainstream press. Whether it is due to corporate interests in ensuring that one candidate get over the primaries this time around, or not, the radio silence is real and the voting public is aware – to the point of tuning out mainstream sources. If you spend any time in social media, you will notice that this is not only true of millenial voters, Black voters, but older whites who are former members of the middle class, all of whom hunger for analysis pieces on the economy and the precariat in particular. Those are also the demographics that make up my readership here on the blog.
I guess, for now, we, the hordes, will probably not see any substantive reporting on Sanders vs. Clinton. Let’s hope that once the primary is over, the press will get a collective case of amnesia and get behind Sanders.
Nate Silver brings some much needed perspective on mainstream media’s obsession with Donald Trump
The polls put out by mainstream pollsters after the last debate should be taken with a grain of salt, especially those that pronounce the Black vote in the pocket of the Clinton campaign. Rapper Killer Mike’s introduction of Bernie Sanders in Atlanta is not an anomaly.