Macro Roundup

"...Rising profitability and market valuations of US businesses, sluggish wage growth, and reduced unemployment and inflation, have defined the macroeconomic environment of the last generation - especially the period of recovery from the financial crisis. This paper offers a unified explanation for these phenomena based on reduced worker power, and argues that the declining worker power exploration is both most compelling on scientific grounds and is most usefully prescriptive for policy. In particular we present a variety of evidence that declining worker power explains more than increases in monopoly or monopsony power....Three broad shifts are behind this decline in worker power. First, institutional changes, as the policy environment has become less supportive of worker power by reducing the incidence of unionism and the credibility of unionism or other organized labor threats, and as the real value of the minimum wage has fallen. Second, changes within firms, as the increase in shareholder power and shareholder activism has led to pressures on companies to cut labor costs, resulting in wage reductions within firms and the “fissuring” of the workplace as companies increasingly outsource and subcontract labor (Weil 2014). And third, changes in economic conditions, as increased competition for labor from technology or from low-wage countries has reduced workers’ relative bargaining power...In this paper, we argue that a decline in worker power...by worker power we mean workers' ability to increase their pay above the level that would prevail in the absence of such bargaining power..... not a rise in monopoly or monopsony power, nor technological developments, has been the major structural change responsible for these phenomena.....Finally, we note two broad implications of our arguments. One of the puzzles highlighted by a number of observers is that technological change and globalization are ubiquitous but the extent of increases in inequality - both between capital and labor incomes, and within labor incomes - differ substantially across countries. Our hypothesis which emphasizes the relative power of labor and capital fits this fact, given far more empowered shareholders and weaker unions in the U.S. than in the rest of the industrial world. Further study of the cross-country trends in labor shares, profitability and valuation, the NAIRU, and worker power would be valuable...."

Just an FYI, NBER just published research Summers/Stansbury presented @ BPEA (which we looked at when it was released). Paper implies that the increase in wage inequality/wage stagnation is a function of an erosion of worker power not monoploy power. They use "worker power" to mean the majority of a firms workers (excluding executives) ability to increase their pay above the level that would prevail in the absence of such bargaining power They found the profits going to workers haven fallen since the 1980s, by ~ 5 percentage points of value added in the nonfinancial corporate sector over 1987-2016 (Figure 8) which explain the entire overall decline of labor share. Overall the majority of the decline in aggregate labor share was driven by manufacturing, wholesale trade, transportation, and utilities the same industries with big falls in worker power

Tyler Cowen on new Summers/Stansbury (He citesHuman Capitalistas part of his critique of their view of the labor share):“…There is a good deal of critical thinking about how different macroeconomic trends fit together, and a willingness to consider disconfirming evidence, so I do recommend you read through this one…. Rather than labor losing bargaining power, I think of the key development as “management measuring the marginal product of labor more precisely.”Admittedly that does lower the bargaining power of the majority of workers, given the 20/80 rule, or whatever you think the proper proportions are (Stansbury and Summers themselves presumably are underpaid, but in general wage dispersion has been going up in high-skilled sectors). A minority of highly productive workers have much more bargaining power than they did before, which doesn’t quite fit the “lower bargaining power per se” hypothesis. And under my interpretation, easier unionization may not be much of a solution, since the problem here is the actual reality of who produces what. Consistent with my view, labor’s share isnot really downif you consider the super-talented labor/owners/capitalists who start their own companies. That is a return to labor as well….”

Tyler Cowen, "Stansbury and Summers on the declining bargaining power of labor,"Marginal Revolutions, May 27, 2020, https://marginalrevolution.com/marginalrevolution/2020/05/stansbury-and-summers-on-the-declining-bargaining-power-of-labor.html

“…. At 2.7%, productivity growth in the digital industries over the last 15 years has been strong. On the other hand, productivity in the physical industries grew just 0.7% annually, leading to anemic economic growth over the last decade. The digital industries, which account for around 25% of U.S. private-sector employment and 30% of private-sector GDP, make 70% of all private-sector investments in information technology. The physical industries, which are 75% of private-sector employment and 70% of private-sector GDP, make just 30% of the investments in information technology…”

Michael Mandel and Bret Swanson, “The Coming Productivity Boom: Transforming the Physical Economy with Information,” Technology CEO Council, March 2017, http://entropyeconomics.com/wp-content/uploads/2017/03/The-Coming-Productivity-Boom-Transforming-the-Physical-Economy-with-Information-March-2017.pdf

“…Has there been an increase in positive assortative mating? Does assortative mating contribute to household income inequality? Data from the United States Census Bureau suggests there has been a rise in assortative mating. Additionally, assortative mating affects household income inequality. In particular, if matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data,then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. Thus,assortative mating is important for income inequality. The high level of married female labor-force participation in 2005 is important for this result….”

Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos, “Marry Your Like: Assortative Mating and Income Inequality,” January 2014, National Bureau Of Economic Research, http://www.nber.org/papers/w19829

“….The figure indicates that labor costs vary significantly across US metropolitan areas. The average high school graduate living in the median metropolitan area earns $14.1 for each hour worked. The 10th and 90th percentile of the distribution across metropolitan areas are $12.5 and $16.5, respectively. This amounts to a 32% difference in labor costs. The 1st and 99th percentile are $11.9 and $19.0, respectively, which amounts to a 60% difference. While some of these differences may reflect heterogeneity in skill levels within education group, differences across metropolitan areas conditional on race, experience, gender, and Hispanic origin are equally large…. The distribution of the average wage of college graduates across metropolitan areas is even wider than the distribution of the average wage of high school graduates. The 10th and 90th percentile of the distribution for college graduates are $20.5 and $28.5. This amounts to a 41% difference in labor costs. The 1st and 99th percentile are $18.1 and $38.5, respectively, which amounts to a 112% difference…High school graduates living in Stamford, CT or San Jose, CA earn an hourly wage that is two times as large as workers living in Brownsville, TX or McAllen, TX with the same level of schooling…”

Enrico Moretti, “Local Labor Markets,” National Bureau Of Economic Research, April 2010, http://www.nber.org/papers/w15947.pdf

“…Since the 1970s, market restructuring has shifted many workers into workplaces heavily reliant on sales to outside corporate buyers. These outside buyers wield substantial power over working conditions among their suppliers. During the same period, wage growth for middle-income workers stagnated. By extending organizational theories of wage-setting to incorporate interactions between organizations, I predict that wage stagnation resulted in part from production workers’ heightened exposure to buyer power. Panel data on publicly traded companies shows that dependence on large buyers lowers suppliers’ wages and accounts for 10 percent of wage stagnation in nonfinancial firms since the 1970s.These results are robust to a series of supplementary measures of buyer power; instrumental variable analysis using mergers between buyers; corrections for selection and missing data; and controls for individual worker characteristics like education and occupation. The results show how product market restructuring and new forms of economic segmentation affect workers’ wages. The spread of unequal bargaining relations between corporate buyers and their suppliers has slowed wage growth for workers…..”

Nathan Wilmers, “Wage Stagnation and Buyer Power: How Buyer-Supplier Relations Affect U.S. Workers’ Wages, 1978 to 2014,“ American Sociological Review, 2018, https://journals.sagepub.com/doi/pdf/10.1177/0003122418762441

“…So what do we learn from the California comeback? Mainly, that you should take anti-government propaganda with large helpings of salt. Tax increases aren’t economic suicide; sometimes they’re a useful way to pay for things we need. Government programs, like Obamacare, can work if the people running them want them to work, and if they aren’t sabotaged from the right. In other words, California’s success is a demonstration that the extremist ideology still dominating much of American politics is nonsense….”

The states, Justice Brandeis famously pointed out, are the laboratories of democracy. And it’s still true. For example, one reason we knew or should have known that Obamacare was workable was the post-2006 success of Romneycare in Massachusetts. More recently, Kansas went all-in on supply-side economics, slashing taxes on the affluent in the belief that this would spark a huge boom; the boom didn’t happen, but the budget deficit exploded, offering an object lesson to those willing to learn from experience.

And there’s an even bigger if less drastic experiment under way in the opposite direction. California has long suffered from political paralysis, with budget rules that allowed an increasingly extreme Republican minority to hamstring a Democratic majority; when the state’s housing bubble burst, it plunged into fiscal crisis. In 2012, however, Democratic dominance finally became strong enough to overcome the paralysis, and Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare.

I guess we’re not in Kansas anymore. (Sorry, I couldn’t help myself.)

Needless to say, conservatives predicted doom. A representative reaction: Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, “the looters and moochers of the Golden State” (yes, they really do think they’re living in an Ayn Rand novel) were committing “economic suicide.” Meanwhile, Avik Roy of the Manhattan Institute and Forbes claimed that California residents were about to face a “rate shock” that would more than double health insurance premiums.

What has actually happened? There is, I’m sorry to say, no sign of the promised catastrophe.

If tax increases are causing a major flight of jobs from California, you can’t see it in the job numbers. Employment is up 3.6 percent in the past 18 months, compared with a national average of 2.8 percent; at this point, California’s share of national employment, which was hit hard by the bursting of the state’s enormous housing bubble, is back to pre-recession levels.

On health care, some people — basically healthy young men who were getting inexpensive insurance on the individual market and were too affluent to receive subsidies — did face premium increases, which we always knew would happen. Over all, however, the costs of health reform came in below expectations, while enrollment came in well above — more than triple initial predictions in the San Francisco area. A survey by the Commonwealth Fund suggests that California has already cut the percentage of its residents without health insurance in half. What’s more, all indications are that further progress is in the pipeline, with more insurance companies entering the marketplace for next year.

And, yes, the budget is back in surplus.

Has there been any soul-searching among the prophets of California doom, asking why they were so wrong? Not that I’m aware of. Instead, I’ve been seeing many attempts to devalue the good news from California by pointing out that the state’s job growth still lags that of Texas, which is true, and claiming that this difference is driven by differential tax rates, which isn’t.

For the big difference between the two states, aside from the size of the oil and gas sector, isn’t tax rates. it’s housing prices. Despite the bursting of the bubble, home values in California are still double the national average, while in Texas they’re 30 percent below that average. So a lot more people are moving to Texas even though wages and productivity are lower than they are in California.

And while some of this difference in housing prices reflects geography and population density — Houston is still spreading out, while Los Angeles, hemmed in by mountains, has reached its natural limits — it also reflects California’s highly restrictive land-use policies, mostly imposed by local governments rather than the state. As Harvard’s Edward Glaeser has pointed out, there is some truth to the claim that states like Texas are growing fast thanks to their anti-regulation attitude, “but the usual argument focuses on the wrong regulations.” And taxes aren’t important at all.

So what do we learn from the California comeback? Mainly, that you should take anti-government propaganda with large helpings of salt. Tax increases aren’t economic suicide; sometimes they’re a useful way to pay for things we need. Government programs, like Obamacare, can work if the people running them want them to work, and if they aren’t sabotaged from the right. In other words, California’s success is a demonstration that the extremist ideology still dominating much of American politics is nonsense.

Left Coast Rising

Paul Krugman, “Left Coast Rising,”New York Times, July 24, 2019, https://www.nytimes.com/2014/07/25/opinion/paul-krugman-california-tax-left-coast-rising.html

International Monetary Fund (IMF). April 2015. “IMF World Economic Outlook.”http://www.imf.org/external/pubs/ft/weo/2015/01/

“…In this paper we have shown that employed American men are more likely to work 50 or more hours per week today than a quarter century ago. We think that this trend is likely to be of interest to labor economists because (a) it reversed (perhaps temporarily) a secular decline in the work week that dates back over a century; and (b) it occurred at a time when other dimensions of men’s labor supply, such as employment rates, were in decline. What might explain this change in work behavior? In this paper we are able to rule out a number of possible causes, some more fundamental than others. For example, we know that the recent increase in the prevalence of long work weeks is not an artifact of changing CPS survey techniques, not a purely cyclical phenomenon, and not easily attributable to the changing mix of occupations and industries in the male labor force. Because the change is strongly concentrated among skilled, salaried men, we know that it is not a direct consequence of the declining economic fortunes of unskilled American men over the past two decades. For a number of reasons including the fact that we measure usual hours, we know that this phenomenon is not an artifact of increased month-to-month variability in hours worked. We know that it is not a consequence of increased self employment (nor of higher hours among the self employed). Nor is it related to an increase in multiple jobholding, or hours worked on second- and higherorder jobs. Because the bulk of the increase occurred during the 1980s, it is not likely related to advances in communication technology (such as the internet) that facilitate additional work from home. Further, because it was concentrated in the subgroups of men who experienced the smallest declines in labor supply on other margins, the increase in long hours cannot be easily interpreted as a simple reallocation of a fixed amount of labor within a representative worker’s life cycle….”

Kuhn, Peter, and Fernando Lozano. January 2008. “The Expanding Workweek? Understanding Trends in Long Work Hours Among U.S. Men, 1979-2006.” University of California-Santa Barbara.http://econ.ucsb.edu/~pjkuhn/Research%20Papers/LongHours.pdf

Research (using evidence from Denmark, largely manufacturing firms) finds that domestic production at offshoring firms didn't fall even as their produced good imports increased and the firms domestic workforce reorganized increasing the number and share of tech workers. Offshoring didn't "hollow out" firms in the Danish experience.

"...This paper exploits new information on Danish firms’ offshoring activities to construct a rich dataset on firms’ global production choices. We use these data to analyze how firms’ decisions to relocate their primary activities to low-wage countries affect not only their aggregate employment and output, but also their employment across activities. We find that over time, offshoring firms change their employment composition significantly so that they ultimately employ a much higher share of technology and research-related workers.We show that after firms relocate their main activity to a low-wage region, they increase their imports from that region, but that these new imports are primarily in products produced domestically by the firm, rather than in intermediate inputs. This finding underpins our creation of a new measure of firm offshoring by destination based on the change in the share of produced-good imports by the firm.While offshorers increase imports of the same domestically-produced goods, we find that they continue - rather than abandon - domestic production of those goods. However, the imported varieties have lower prices than their domestic counterparts and prices of the domestic varieties increase after offshoring begins. These findings suggest that offshorers have product-specific capabilities and exploit low-wage destinations to pursue a quality differentiation strategy.The rise of new low-wage production opportunities in developing countries allows offshoring firms to reorganize their domestic activities by increasing the number and share of domestic tech workers at the firm. Although offshorers decrease their total employment by shedding production workers, they do not “hollow out” the firm and transform into pure intermediaries of imported products. In addition to maintaining their output and raising the quality of domestically product varieties, they shift their workforce towards innovation related occupations.The results in this paper point to important long-term implications of offshoring. We show that firms that relocate their main activities to a foreign low-wage country maintain their domestic production by shifting to higher price varieties and are more likely to shift their domestic workers into innovative activities. Since innovation is a major determinant of future performance, this shift has important potential implications for the long-term effects of offshoring on productivity and growth…"

Record highs in Bloomberg’s startup index (private firms) have collapsed versus NASDAQ 100 (see chart) though both are still up ~ 400% from 2007. Also Bloomberg reports on layoffs in tech sector, parallel’s your views on evolution, driven not by food competition but survival from extinction:“…Layoffs have slammed tech companies both large and small since the start of the coronavirus pandemic in mid-March. The industry has cut more than 40,000 jobs so far, but this month was the cruelest yet. In a single week in early May, Uber Technologies Inc. announced it would slash 3,700 positions, Airbnb Inc. said it would cut 1,900 and Lyft Inc. fired or furloughed more than 1,000….For the first half of the last decade, theperformance of tech startups, the lifeblood of the industry, surged along with the Nasdaq 100 Index, a technology-heavy mix of large non-financial companies. Then, in 2018, startups pulled well ahead of their publicly traded counterparts, driven in part by big gains in valuations at late-stage private companies. That momentum stalled this year. The Bloomberg Startup Index, a barometer for the health of the sector using metrics like funding and valuations, is now trailing the Nasdaq 100….”

Sarah McBride and Christopher Cannon, “Covid-19 Brings a Reckoning of Layoffs to Silicon Valley,” Bloomberg, May 28, 2020, https://www.bloomberg.com/graphics/2020-coronavirus-technology-layoffs/

“…When looked at from a decade-long perspective, the 2020 census will likely show the 2010s to be a period of healthy city growth compared with the 2000s, a somewhat down decade for cities. The Census Bureau’s new estimates show that 55 of the country’s 89 largest cities have already added more people between 2010 and 2019 than was the case in the 2000 to 2010 decade (download Table D). This is the case for each of the 10 cities with populations over 1 million except New York City. Moreover, within the nation’s major metropolitan areas, the city-suburb growth disparity from 2010 to 2019 was modest compared to the sharp disparity during the 2000s….Of course, this healthy city growth was heavily front-loaded early in the decade, before the declines in recent years. What does this mean for city growth in the early 2020s, especially in the wake of the COVID-19 pandemic? There are a lot of unknowns, making this difficult to predict. But it is worth noting that big cities registered their highest growth rates during the down economy and deflated housing market in the wake of the Great Recession. Thus, there is a possibility that young adults—both millennials and Gen Z—may again gravitate to big cities as the pandemic recedes and gives way to a recovering economy….”

William Frey analysis of the Census Bureau’s new estimates finds that the population move to cities has slowed down, in the second half of the last decade suburbs grew faster in population than primary cities