Macro Roundup

New paper speaks to the high cost of low skilled labor, finding a dollar increase in the minimum wage is associated with a 1.4% increase in the share of jobs that require a high school degree.

"... We explore whether minimum wage increases result in substitution from lower-skilled to slightly higher-skilled labor. Using 2011-2016 American Community Survey data (ACS), we show that workers employed in low-wage occupations are older and more likely to have a high school diploma following recent statutory minimum wage increases. To better understand the role of firms, we examine the Burning Glass vacancy data. We find increases in a high school diploma requirement following minimum wage hikes, consistent with our ACS evidence on stocks of employed workers. We see substantial adjustments to requirements both within and across firms…Most research focuses on the equilibrium employment effects of increases in wage floors, though there is recognition that other margins of adjustment may play a role. One important avenue by which firms may adjust in the face of minimum wage increases is through substitution towards higher-skilled labor. The underlying mechanism is straightforward: if the minimum wage exceeds the value of a worker’s output, a firm can eliminate their job or, potentially, find a replacement worker whose productivity meets or exceeds the floor. This phenomenon of “labor-labor substitution” can reduce the impact of minimum wage changes on equilibrium employment levels..... We find that effects are concentrated among individuals employed in low-wage occupations who are, on average, a quarter of a year older and 4 to 5 percent less like to be a young adult (age 16 to 21) or high school dropout, following statutory minimum wage increases that total around $1.70 over the full time period. We see no impacts on employment shares for other demographic groups, including groups defined by race, gender, and country of birth..... With the full set of controls included, a one-dollar increase in the minimum wage is associated with a statistically significant increase of 1.4 percentage points in the share of low-wage job postings that require a high school degree.....we show that the prevalence of requirements for a high school diploma increase following minimum wage hikes. The effect is concentrated among postings for low-wage occupations, where the diploma requirement increases by about 10 percent. Reassuringly, we find no effects for higher levels of education, like college degrees, that should be unaffected by minimum wage increases. We also find little impact on experience and other skill requirements....."

Jeffrey Clemens, Lisa B. Kahn, Jonathan Meer, "Dropouts Need Not Apply? The Minimum Wage and Skill Upgrading," National Bureau of Economic Research, May 2020, https://www.nber.org/papers/w27090

Perry reports on new minimum wage research from Jeff Clemens, “…Bottom Line: It should be obvious but this new NBER research provides additional empirical evidence that the greatest adverse effects of the minimum wage law are concentrated on exactly those workers the minimum wage advocates say they are most trying help: lower-skilled, limited experience workers who are the least educated. In other words, the workers who suffer the most from minimum wage laws are the workers who are the least advantaged, least skilled, most marginalized, and most vulnerable, and who are most in need of gaining skills and work experience. And that makes minimum wage laws cruel, detrimental, and misguided, especially for the workers most at risk. To quote Don Boudreaux, “Taking away from workers an important bargaining chip, namely the ability to offer to work at a wage less than the minimum, is the cruelest thing you can do for a lot of these workers.”..”

Mark Perry, "Research confirms that the cruel minimum wage law has the greatest adverse effects on the most vulnerable workers," American Enterprise Institute, May 4, 2020, https://www.aei.org/carpe-diem/new-research-confirms-that-the-cruel-minimum-wage-law-has-the-greatest-adverse-effects-on-the-most-vulnerable-workers/

Research confirms that the cruel minimum wage law has the greatest adverse effects on the most vulnerable workers

Unskilled workers compete against other workers - especially skilled workers — for a limited number of available jobs at a given point in time. If the minimum wage is increased from $7.25 or $10 to $15 an hour, that will give skilled workers an advantage over unskilled workers, and will take away from unskilled workers the one advantage they currently have to compete against skilled workers - the ability to offer to work for a significantly lower wage than what skilled workers can command. And to the extent that we remove the wage advantage for unskilled workers, we reduce their ability to compete against skilled workers, and reduce employment opportunities for those unskilled workers.

Here’s an example: Suppose an employer can hire two unskilled workers at $7.25 an hour for a total cost of $14.50 an hour and provide them with on-the-job training, or hire one skilled worker for $20 an hour, provide no training, and get the same hourly output as two unskilled workers. Given that choice, the employer hires two unskilled workers and saves $5.50 an hour in labor costs. Now suppose that the minimum wage is raised to $15 an hour, which would require the employer to pay $30 an hour for two unskilled workers. In that case, the employer would switch to hiring one skilled worker at $20 an hour over two unskilled workers, and save $10 an hour in labor costs. Result of a minimum wage hike to $15 an hour? Demand for skilled workers goes up, demand for unskilled workers goes down, and employment opportunities for unskilled workers are reduced.

Here’s how Milton Friedman explained it:

The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills. That’s what the law says. The law says that here’s a man who has a skill that would justify a wage of $5 or $6 per hour (adjusted for today), but you may not employ him, it’s illegal, because if you employ him you must pay him $9 per hour. So what’s the result? To employ him at $9 per hour is to engage in charity. There’s nothing wrong with charity. But most employers are not in the position to engage in that kind of charity. Thus, the consequences of minimum wage laws have been almost wholly bad to increased unemployment and increase poverty. What you are doing is to assure that workers whose skills are not sufficient to justify that kind of a wage will be unemployed.

A new NBER research paper “Dropouts Need Not Apply? The minimum wage and skill upgrading” by Jeffrey Clemens, Lisa B. Kahn, Jonathan Meer find empirical evidence of an adverse effect of minimum wage hikes on the least skilled, least educated workers as employers substitute away from those workers to hire higher-skilled, more educated workers with more experience. Below are the introduction from the paper and part of the conclusion:

Introduction:

We explore whether minimum wage increases result in substitution from lower-skilled to slightly higher-skilled labor. Using 2011-2016 American Community Survey data (ACS), we show that workers employed in low-wage occupations are older and more likely to have a high school diploma following recent statutory minimum wage increases. To better understand the role of firms, we examine the Burning Glass vacancy data. We find increases in a high school diploma requirement following minimum wage hikes, consistent with our ACS evidence on stocks of employed workers. We see substantial adjustments to requirements both within and across firms.

Conclusion:

We investigate whether changes in firms’ skill requirements are channels through which labor markets respond to minimum wage increases. We present evidence on two sets of outcomes: observable skill proxies and the skill requirements firms include in online job postings. Data from the American Community Survey show that recent minimum wage changes resulted in increases in the average age and education of the individuals employed in low-wage jobs. Data on job vacancy postings show that the prevalence of a high school diploma requirement increases at the same time. The shift in skill requirements begins within the first quarter of a minimum wage hike. Further, it results from both within-firm shifts in postings and across-firms shifts towards firms that sought more-skilled workers at baseline.

Given the poor labor market outcomes of individuals without high school diplomas, these findings have substantial policy relevance. This possibility was recognized well over a century ago by Smith (1907), who noted that the “enactment of a minimum wage involves the possibility of creating a class prevented by the State from obtaining employment.” Further, negative effects may be exacerbated for minority groups in the presence of labor market discrimination (Becker, 2010; Agan and Starr, 2017; Doleac and Hansen, 2016).

Bottom Line: It should be obvious but this new NBER research provides additional empirical evidence that the greatest adverse effects of the minimum wage law are concentrated on exactly those workers the minimum wage advocates say they are most trying help: lower-skilled, limited experience workers who are the least educated. In other words, the workers who suffer the most from minimum wage laws are the workers who are the least advantaged, least skilled, most marginalized, and most vulnerable, and who are most in need of gaining skills and work experience. And that makes minimum wage laws cruel, detrimental, and misguided, especially for the workers most at risk. To quote Don Boudreaux, “Taking away from workers an important bargaining chip, namely the ability to offer to work at a wage less than the minimum, is the cruelest thing you can do for a lot of these workers.”

".....Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”. The other, on “Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt....The paper on the savings glut makes two points. First, rising inequality in the US has resulted in a large increase in the savings of the top 1 per cent of the income distribution, not matched by a rise in investment. Instead, the investment rate has been falling, despite declining real interest rates. The rising savings surplus of the rich has been matched by the rising dissaving, or consumption above income, of the bottom 90 per cent of the income distribution.... There are two apparent solutions. The first is for governments to keep on borrowing. But, in the very long term, this is likely to lead to some sort of default. The well-off, who are the principal creditors of government, are bound to bear much of the costs, in one way or the other. The alternative is to shift the distribution of income, in order to create more sustainable demand and so stronger investment, without soaring household debt….”

Martin Wolf, "How to escape the trap of excessive debt,"Financial Times, May 5, 2020, https://www.ft.com/content/2c5ddbd0-8e09-11ea-9e12-0d4655dbd44f

How to escape the trap of excessive debt

“It is utterly impossible... for the rich to save as much as they have been trying to save, and save anything that is worth saving.” Marriner Eccles, Congressional testimony 1933.

Debt creates fragility. The question is how to escape from the trap. To answer it, we need to analyse why today’s global economy has become so debt-dependent. That did not happen because of the idle whims of central bankers, as many suppose. It happened because of an excessive desire to save relative to investment opportunities. This has suppressed real interest rates and made demand far too reliant on debt.

Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”. The other, on “Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt.

As Eccles said so clearly, beyond a point, inequality weakens an economy by driving policymakers into a ruinous choice between high unemployment or ever-rising debt. The paper on the savings glut makes two points. First, rising inequality in the US has resulted in a large increase in the savings of the top 1 per cent of the income distribution, not matched by a rise in investment. Instead, the investment rate has been falling, despite declining real interest rates. The rising savings surplus of the rich has been matched by the rising dissaving, or consumption above income, of the bottom 90 per cent of the income distribution.

There is a clear link between the saving of the rich and dissaving of the less rich, and the accumulation of credit and debt. Since 1982, the decline in net indebtedness of the rich has been matched by the rise in indebtedness of the bottom 90 per cent. This is why the argument that low interest rates hurt the less well off is absurd. The less well off are not large net creditors. The rich hold claims on the less rich, not only directly, via bank deposits, but via equity holdings in businesses that also hold such claims. This phenomenon of rising household debt and rising inequality is not unique to the US. It is widespread.

In 1933, Eccles also told Congress, “It is for the interests of the well to do... that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.” That happened, partly by accident and partly deliberately, after the second world war. Ever-rising household and government debt will not stabilise the world economy ­forever. Nor should asset-price bubbles remain so central to our economy. We will have to adopt more radical alternatives. A crisis is a superb a time to change course. Let us start right now.

Just an FYI, Martin Wolf wrote up Mian and Sufi’s Research:

Steve Sailer, “Deaths of Despair,” Taki Magazine, May 6, 2020, https://www.takimag.com/article/deaths-of-despair/

Deaths of Despair

In 2017, 158,000 Americans died from what we call deaths of despair: suicide, overdoses, and alcoholic liver disease and cirrhosis. This is the equivalent of three full 737 MAXs falling out of the sky every day, with no survivors.

The new book Deaths of Despair: And the Future of Capitalism by economists Anne Case and Angus Deaton attempts to explain their important discovery—the declining lifespans of working-class white Americans since the turn of the century—by way of a strained analogy with the social chaos that African-Americans unleashed upon themselves as soon as the civil rights struggle was won for them in the 1960s:

What happened to inner-city African Americans after midcentury is, we shall argue, a foreshadowing of our account of whites in the 21st century….

But the more I study the White Death of the past two decades, the more I am instead reminded of the tragic trajectory of a now much less publicized American race, Native Americans. Like American Indians, working-class white Americans seem to be living, and dying, like a defeated people, quietly offing themselves with so little to-do that nobody even noticed what was happening to working-class white lifespans for the first fifteen years of this century.

Indians used to be admired by whites for having put up a strong fight for over 250 years, in contrast to blacks, who were relatively easy to dominate. But in this century, whites have lost interest in Indians, who also seem to have lost interest in themselves as the other Indians have come to play a much larger role in American life.

Human beings have always concocted rationalizations for why they deserve privilege. For most of history, a common explanation of why you should be privileged was that your ancestors were warriors and conquerors who had defeated their foes.

In 21st-century America, however, the new fashion for asserting your claim to privilege is that you come from a long line of victims and losers. By intention, this leaves white Americans, the descendants of the men who won The Big One and went to the Moon, psychically dispossessed in their own native land.

Another obvious analog to the White Death in America is how Russian men drank themselves into an early grave during their defeat in the Cold War. Case and Deaton note in passing that life expectancy for Russian males declined by 7.3 years between 1987 and 1994. But since 2005, Russian life expectancy has rebounded.

As the US suffers from its epidemic of deaths, Russia appears to have overcome its own.

It’s worth remembering that the main reason the media paid attention to Case and Deaton’s paper in November 2015 demonstrating that white lifespans had been falling since the end of the 1990s was because Deaton had won the (quasi) Nobel Prize for economics just the month before. This horrible trend had been happening for fifteen years with virtually no news coverage. As Case and Deaton explain, they were shocked to discover in 2014 the life-shortening trends besetting whites.

“As White Privilege became a preoccupation of the press, whites increasingly shot themselves, or drank themselves to death, or overdosed on synthetic or natural opioids.”

Back in 2014-2015, the mainstream media were instead obsessed with proving that the police were racistly gunning down blacks in vastly larger numbers than their propensity toward violence would warrant. In truth, though, blacks only comprise about 30% of all victims of police shootings, while committing 57% of gun homicides. That’s not, by the way, because cops particularly want to kill more whites than blacks. It appears to be mostly because suicide-by-cop is much more of a white thing than a black thing.

In contrast to whites these days, African-Americans in the late 1960s, when they started to overdose and murder each other in ever larger numbers, were a triumphant race, celebrated all over the world for their soul. The black murder rate accelerated in 1964, the year of the landmark Civil Rights Act, and grew higher into the mid-1970s, then peaked during the gangsta-rap/crack era of the early 1990s, then soared again during the Great Awokening in the two years after Ferguson. In other words, blacks seem to shoot each other the most precisely when they are encouraged by whites to feel best about themselves.

The obvious difference between what happened to whites in the early 21st century and what blacks did in the last 35 years of the 20th century is that whites grew more suicidal while blacks grew more homicidal.

Case and Deaton admit that their conceit that whites are following the path of inner-city blacks can’t explain why suicide rates for blacks are so much lower than for whites (not to mention American Indians):

But in deaths from suicide, the parallel breaks down. African Americans are much less likely to kill themselves than are white Americans; their suicide rates in midlife have changed little in the past fifty years and are currently about a quarter of those for whites.

From the 1960s onward, it became increasingly unfashionable to criticize blacks, but trendy to criticize whites. Not surprisingly, blacks reacted to this new dispensation with increasing exuberance, while whites became more depressed and withdrawn. As black egos expanded after their civil rights victories, they increasingly shot each other in knuckleheaded beefs. Meanwhile, as White Privilege became a preoccupation of the press, whites increasingly shot themselves, or drank themselves to death, or overdosed on synthetic or natural opioids.

In Case and Deaton’s view the White Death, which got rolling after the Sackler family’s Purdue Pharma introduced OxyContin in the mid-1990s, symbolizes the failures of Milken Era capitalism that let down the white American working class:

Our main argument in this book is that the deaths of despair reflect a long-term and slowly unfolding loss of a way of life for the white, less educated, working class.

Curiously, however, they insist that immigration can’t possibly be considered even one of the causes for the declining prosperity of white Americans without college degrees since the 1970s. Although they repeatedly allude to the golden age of the American working class during the low-immigration 1945-1973 era, they refuse to admit that there might have been a causal link from the low supply of workers to the high price of labor.

And yet, in the central story line of the White Death, opioids, immigration plays a major role. As reporter Sam Quinones documented in his book Dreamland, as American authorities started to rein in OxyContin prescriptions, addicts switched to Mexican black tar heroin peddled by Mexican dealers seeded by the cartels throughout the American heartland.

Then, the Mexican cartels switched to buying the chemical precursors of ultra-potent fentanyl from Wuhan, China. The fentanyl smuggling business went gangbusters until 2020, when the coronavirus locked down Wuhan and the Trump Administration finally cracked down on travel across the Mexican border.

In Case and Deaton’s book, though, they start their discussion of why immigration hasn’t hurt native workers by asserting their Intersectional Pokémon Points:

One of us is a first-generation immigrant.

That would be Edinburgh-born Angus Deaton, or as the Princeton U. website refers to him, “Professor Sir Angus Deaton.” Wikipedia explains:

In 1983, he left the University of Bristol for Princeton University. He is currently the Dwight D. Eisenhower Professor of International Affairs and Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs (WWS) and the Department of Economics at Princeton. Since 2017, he holds a joint appointment with the University of Southern California where he is the Presidential Professor of Economics. He holds both British and American citizenship.

Like the man said, he is a “a first-generation immigrant.”

The book goes on to explain that Sir Angus’ wife, Anne Case, Professor of Economics at Princeton,

…was born in America, but her ancestors came from Ireland to northeastern Pennsylvania in the middle of the nineteenth century, and her family remains influenced by their national and religious heritage.

So don’t think of Professor Case as just a plain white American: The Cases have only been here for 170 years!

The two economists go on to explain that while it might seem like the law of supply and demand suggests that a certain amount of immigration is bad for native workers’ wages, that is only in the short run. In the long run, the economy could adjust to a short burst of immigration. But then it briefly occurs to them that advocates of immigration, such as themselves, don’t want immigration to ever stop, which defeats their logic about immigration not being so bad in the long run:

Yet if each wave is followed by another wave, the economy may never get the chance to fully adjust, and the wages of the less educated could be permanently lower, at least until the immigration stops.

Indeed.

But at that point, Case and Deaton’s crimestop kicks in and they stop pondering the implications of their own runaway train of thought.

Deaths of Despair isn’t a bad book, but it’s constantly derailed by political correctness keeping them from pursuing their own interesting ideas. For example, why do blacks have shorter life expectancies in America than whites?

For African Americans, there is widespread agreement that the worse outcomes, like so many other important outcomes, are tied to long-standing discrimination, as well as to poorer access to high-quality medical care. The superior longevity of Hispanics over non-Hispanic whites has been much researched but not fully explained. It is worth noting that other groups, such as Asian Americans, do better still, better than either Hispanics or whites.

That would seem pretty interesting, but Case and Deaton then largely drop other races besides white and black at that point. “We do not try to tell a coherent story for,” they admit.

They never return to trying to learn anything from the quite different life-expectancy trends of the five main races in the U.S. My impression is that the developments are:

(1) Asians increasingly live, as comedienne Ali Wong says, forever.
(2) Hispanics live much longer than you’d expect.
(3) Whites die increasingly early.
(4) Blacks were living longer until Black Lives Matter encouraged them to start shooting each other again.
(5) American Indians are in free fall, except that old Native Americans tend to live a long time.

I don’t know what all this means, but surely five data points are more useful than restricting yourself to just two? After all, you’ve already won a Nobel Prize: How much do you still have to fear from the enemies of science?

Steve Sailer’s review of Deaton new book. His five takeaways, Asians increasingly live a long time, Hispanics are living longer, whites are dying early, backs were living longer but that’s changing due to crime and American Indians are in “freefall”