Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, November 5, 2020

AI Summary. A study of low-skilled warehouse workers estimates that firms gain $1.10 in productivity for every $1 increase in wages, with productivity rising 7% after a pay increase. The authors also estimate large recruitment and turnover responses to higher pay, with 80% of the turnover improvement attributed to workers' behavioral responses.

Natalia Emanuel and Emma Harrington Harvard University
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Higher wages yield a $1.10 increase in productivity for every $1 increase, with 80% of turnover improvement stemming from workers’ behavioral responses. @NataliaEmanuel @EmmaHarrington

Do higher wages raise worker productivity enough to pay for themselves?

Core argument: The study finds that firms gain $1.10 in productivity for every $1 increase in wages paid to low-skilled workers.

A study on the impact of wage increases on low-skilled workers reveals that firms gain $1.10 in productivity for every $1 increase in wages. In a warehouse setting, productivity rose by 7% following a pay increase, with boxes moved per hour increasing from 4.92 to 5.248. This corresponds to an elasticity of 1.2, indicating a strong productivity response to higher wages. Recruitment elasticities exceed 3, while turnover elasticities range from -3 to -4.5, highlighting significant reductions in turnover due to higher pay. Notably, 80% of turnover improvement stems from workers' behavioral responses. Gender differences show women increase productivity more than men in response to wage hikes, despite having slightly less elastic labor supply. These findings suggest that higher wages not only enhance productivity but also improve worker retention and engagement, offering a net positive return for firms.

Takeaways by Macro Roundup® AI

  1. The study finds that firms gain $1.10 in productivity for every $1 increase in wages paid to low-skilled workers.
  2. Warehouse productivity rose 7% after a pay increase, with boxes moved per hour rising from 4.92 to 5.248, corresponding to an elasticity of 1.2.
  3. Recruitment elasticities exceed 3 and turnover elasticities range from -3 to -4.5, with 80% of the turnover improvement stemming from workers' behavioral responses.

Natalia Emanuel and Emma Harrington, "The Payoffs Of Higher Pay: Elasticities Of Productivity And Labor Supply With Respect To Wages," Harvard University, November 3, 2020, https://scholar.harvard.edu/files/nataliaemanuel/files/emanuel_jmp.pdf

What the productivity increase looked like in terms of warehouse workers, “….In the three months before the pay change, the treated warehouse moved an average of 4.9 boxes per hour, or 7.7 boxes per moving hour. The time-series of boxes moved per hour is shown in Figure 2, Panel B. As shown in Table 3, Panel A, in the three months following the pay jump at the warehouse, boxes moved per hour increased by 0.328 off a base of 4.92 boxes moved per hour, an increase in productivity of 7 percent. This corresponds to an elasticity of 1.2. Our metric of boxes moved per moving hour is 0.316, an increase of 4 percent. Finally, we find an increase of 0.018 in the ratio of moving to total hours, which corresponds to an increase of 8.6 minutes of moving per person per day. This increase in productivity could come from a number of sources: it could arise from attracting and retaining more productive workers, from workers exerting more effort, or from workers collaborating more seamlessly in light of reduced turnover.…”

Though this new paper would be of interest given the story you told me about the difficulties a Bain portfolio firm had with staffing at their warehouse. Using evidence from a fortune 500 company paper found"... warehouse workers and customer service representatives are responsive to wages, not only with regard to recruitment and turnover, but also with regard to their on-the-job productivity. We estimate recruitment elasticities in excess of 3, turnover elasticities between -3 and -4.5, aswell as productivity elasticities in excess of one.The productivity response to higher pay yields a net positive return. We estimate that80 percent of the improvement in turnover arises from workers’ behavioral responses to higher pay...."

Interesting they found the effect more pronounced for women, "...This paper also estimates gender differences in these elasticities. We find that while women’s labor supply is slightly less elastic than men’s, women increase their productivity in response to higher pay more than do men...."

Ed Comment:It would be the case that if the labor market is fairly efficient (of course they aren’t perfectly efficient), then, increases in pay should correspond to offsetting increasing in efficiency. This should be, after all, what establishes the wage structure. it’s hard to believe there would be lasting systematic differences.

They control for composition, so it’s not just the firm being able to attract higher quality workers, “….When setting pay, firms trade off the potential benefits of higher compensation—including increased productivity, decreased turnover, and enhanced recruitment—against their direct costs. We estimate productivity and labor supply elasticities with respect to wages among warehouse and call-center workers in a Fortune 500 retailer. To identify these elasticities, we use rigidities in the firm’s compensation policies that create plausibly exogenous variation relative to local outside options, as well as discrete jumps when the firm adjusts pay. We document labor market frictions that give firms wage-setting power: we estimate moderately large, but finite, turnover elasticities (−3.0 to −4.5) and recruitment elasticities (3.2 to 4.2). The firm gains $1.10 from increased productivity for a $1 increase in wages. By comparing warehouse workers’ responses to higher wages both across and within workers, we estimate that over half of the turnover reductions and productivity increases arise from behavioral responses as opposed to compositional difference…We estimate elasticities of turnover, productivity, and recruitment among warehouse workers and customer service employees at a major online retailer, using sharp, discrete changes in wages or outside options. Our approach permits us to calculate the return to the firm higher pay, inclusive of productivity effects. Moreover, by looking at comparing different workers’ responses to pay to the same workers’ responses, we can distinguish whether decreased turnover and increased productivity arise from behavioral responses of the workers or compositional changes in the workforce due to selection….”

Their takeaway, “….Our paper makes five contributions. First, we document the effect of higher pay on productivity for warehouse workers and customer service representatives, using objective productivity metrics of calls answered and boxes moved. We estimate that the increase in productivity caused by raising wages fully pays for itself. This builds on the important literature on efficiency wages.3Our findings echo the analysis of Ford Motor Company where high wages reduced turnover rates and elicited greater effort from workers Raff and Summers (1987) and Cappelli and Chauvin (1991), who find that higher relative pay in a multi-plant firm reduced disciplinary infractions.4 Moreover, we find that the gross productivity returns to higher pay are larger than one both when the firm voluntarily raises pay and when the firm keeps wages constant….”

AI Summary. Expansions of the Earned Income Tax Credit, a wage subsidy delivered through the tax system, are associated with higher employment among low-skilled unmarried mothers, with a $1,000 increase in the maximum credit linked to a 3.2–3.7% employment gain. The authors find similar effects in states without early welfare reforms.

Diane Whitmore Schanzenbach and Michael R. Strain National Bureau of Economic Research
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Federal EITC expansion increases employment, expansion drove a 3.2-3.7% increase in employment among low-skilled unmarried mothers, federal and state expansion drove 2.9-3.3% gain.

Do wage subsidies delivered through the tax system raise employment?

Core argument: A $1,000 increase in the maximum Earned Income Tax Credit is associated with a 3.2–3.7% rise in employment among low-skilled unmarried mothers, and 2.9–3.3% when both federal and state expansions are counted.

Analysis reveals that expansions of the Earned Income Tax Credit (EITC) have significantly boosted employment among low-skilled unmarried mothers. A $1,000 increase in the maximum credit correlates with a 3.2-3.7% rise in employment for this group. When both federal and state expansions are considered, employment gains range from 2.9-3.3%. These findings challenge previous assertions that welfare reform was the primary driver of employment increases, as states without early welfare reforms also showed strong EITC impacts. The study underscores the EITC's role in enhancing labor supply, particularly during periods of economic stability, and highlights its effectiveness across multiple expansions, except during the 2009 financial crisis. This comprehensive evaluation suggests that EITC expansions are a potent tool for increasing employment among targeted demographics, offering valuable insights for policymakers aiming to stimulate labor market participation.

Takeaways by Macro Roundup® AI

  1. A $1,000 increase in the maximum Earned Income Tax Credit is associated with a 3.2–3.7% rise in employment among low-skilled unmarried mothers, and 2.9–3.3% when both federal and state expansions are counted.
  2. The findings challenge prior claims that welfare reform was the primary driver of employment gains among low-skilled unmarried mothers, since states without early welfare reforms also showed strong EITC effects.
  3. EITC expansions were associated with employment gains across multiple expansions, except during the 2009 financial crisis, with labor supply effects concentrated in periods of economic stability.

Employment Effects of the Earned Income Tax Credit: Taking the Long View: Extended Excerpt Image 1


Diane Whitmore Schanzenbach and Michael R. Strain, "Employment Effects of the Earned Income Tax Credit: Taking the Long View," National Bureau Of Economic Research, October 2020, https://www.nber.org/papers/w28041

An Overhyped Tax Credit

The earned-income tax credit is one of those bipartisan policy idols that everybody worships but nobody examines closely for results. Now comes A study showing that its employment benefits are grossly overstated.

Congress created the EITC in 1975 as temporary assistance to increase the marginal incentive to work. The idea, inspired in part by Milton Friedman’s negative income tax, was that tax benefits would increase as workers earned more and phase out after they hit a certain threshold (initially $4,000).

We supported the credit as an alternative to raising the minimum wage because it doesn’t reduce incentives to hire low-skilled workers. But politicians expanded the credit and have kept raising the minimum wage. (Memo to those who want a carbon tax to replace some other tax.) One in five households now claims the credit, and government payments exceed cash welfare by six times.

Complicated rules on eligibility and credit size have encouraged fraud. According to the IRS, a quarter of the $69 billion in EITC payments last year were “improper.” Yet politicians from both parties continue to pump it as a labor inducement. As Princeton economist Henrik Kleven shows, there’s scant evidence it boosts employment.

The biggest EITC expansion occurred in 1993 when Congress doubled the maximum to about $2,152 for taxpayers with one child and tripled it for those with two or more. Most economists have attributed the subsequent spike in labor participation and employment among single mothers to the credit. But Mr. Kleven concludes that the real labor stimulator was welfare reform aided by a booming economy. It’s odd, he notes, that none of the other four EITC expansions in history has been linked to higher labor participation among single mothers. So what was special about the 1993 expansion?

Some economists have posited that the 1993 expansion was simply larger than the others, though this doesn’t explain why employment increased most among women with more children. Following the 1993 expansion, employment increased by 10 percentage points among single mothers with one child, 15 points among those with two, 20 among those with three and 30 points among those with four or more. Mr. Kleven says this pattern is more consistent with state and federal welfare reforms in the early 1990s that reduced government cash benefits most among women with more children.

Before Congress passed welfare reform in 1996, 113 state and county waivers were approved to establish work requirements and family size caps and time limits on benefits. A 2016 study found Connecticut’s welfare waiver induced many women to work. Yet Mr. Kleven finds in his study that state EITC expansions have not produced a similar effect.

“Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile,” Mr. Kleven concludes. His study adds to the economic research finding that the EITC phase-out causes steep infra-marginal tax rates as workers make more money.

None of this may bother Republicans or Democrats who want to redistribute more income, but they shouldn’t claim these welfare tax payments are an incentive to work.

Reconciling their work with Kleven’s“…Column (3) adds fixed effects for the interaction between year and presence of children. Recall that the fundamental identification approach in studying the EITC is the interaction of year and whether a household had children present, so the inclusion of these fixed effects absorbs most of the variation in the EITC, leaving only the differences across family sizes for those with 20 children to identify the effects. When these controls are added, the EITC’s impact on annual employment is no longer significant in either the low-education sample or among all observations, though the impact on worked last week is still significant in this specification. Following Kleven, column (4) adds a three-way fixed effect, interacting presence of waivers with presence of children with year. Once this additional control is added, coefficients on the EITC variable lose statistical significance in all four specifications. It is unsurprising that these fixed effects that absorb most of the variation used to identify the EITC’s impact also absorb its impact on employment. Instead of employing a differences-in-differences approach, Kleven (2019) estimates an event study which allows the coefficient on indicators for presence of welfare waivers (which vary at the state and year level) to vary by children-times-year. We exactly replicate his findings (column 3 of Table 6) in Appendix Table 5. Kleven shows estimates on the year-3 and year-10 post-EITC expansion coefficients; we also include year 5. We present estimates separately for the low-education sample and the overall sample of unmarried women, and for annual employment as well as whether the respondent worked in the prior week. When waivers*children*year fixed effects are included, year 3 effects are small and not statistically significant, though those in years 5 and 10 are. When this three-way fixed effect is omitted, we find consistent, positive impacts of the EITC on employment….”

new Strain pushes back at Kleven's argument that EITC gains were largely driven by welfare reform. He finds that states without early welfare reform had strong EITC impacts, suggesting welfare reform didn't do all the work, on average employment increase by ~ 5 percentage points 5 years after an EITC expansion (See Figure 3, F “All Federal Reforms”) “…When studying all federal expansions together, we find that a $1,000 increase in the size of the maximum credit is associated with a 3.2 to 3.7 percentage point increase in employment among unmarried mothers with low levels of education. When examining both federal and state expansions together, we find a 2.9 to 3.3 percentage point increase in employment…”

Looking at a series of EITC expansions, “…. We find robust evidence that four of the five credit expansions increase employment among unmarried mothers. The exception is the 2009 expansion, which was targeted on households of a specific size and occurred during a period of historically weak labor demand following the 2008 financial crisis and Great Recession. We also look more closely at the 1993 expansion and conclude that this generous credit expansion increased the extensive margin of labor supply separate and apart from any pro-work reforms to state welfare systems that occurred at the same time. Finally, we study the EITC holistically, pooling all five expansions into one event-study framework and using continuous variation in the size of the maximum EITC benefit to estimate its employment elasticity. To our knowledge, the only other paper to look comprehensively at all five federal EITC expansions is Kleven (2019), which comes to different conclusions. Specifically, Kleven finds little evidence for an EITC extensive margin effect. We find the opposite, reconcile our findings with Kleven, and argue that our analytic approach is most appropriate….”

Ed Comment:Not sure how to believe. I suspect Kleven is mighty credible

Monday, November 9, 2020

AI Summary. Research estimates that genetic factors account for 32–40% of the variation in overall happiness, implying a substantial share of life satisfaction is shaped by inherited traits rather than circumstances.

Hannah Frishberg New York Post
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Genetic factors account for 32-40% of variation in overall happiness, suggesting a significant portion of life satisfaction is predetermined by genetics.

How much of happiness variation do genetic factors explain?

Core argument: Research indicates that genetic factors account for 32–40% of the variation in overall happiness, suggesting a substantial portion of life satisfaction is shaped by genetics.

Research indicates that genetic factors account for 32-40% of the variation in overall happiness, suggesting a significant portion of life satisfaction is predetermined by genetics. This insight has profound implications for economic policy and workforce productivity, as happiness levels can influence economic output and consumer behavior. Understanding the genetic basis of happiness could lead to more targeted interventions in mental health and well-being, potentially reducing healthcare costs and improving labor market outcomes. As policymakers and business leaders consider strategies to enhance societal well-being, acknowledging the genetic component of happiness may help in designing more effective programs that complement environmental and social initiatives.

Takeaways by Macro Roundup® AI

  1. Research indicates that genetic factors account for 32–40% of the variation in overall happiness, suggesting a substantial portion of life satisfaction is shaped by genetics.
  2. Happiness levels can influence economic output and consumer behavior, giving the genetic component of well-being implications for economic policy and workforce productivity.
  3. Understanding the genetic basis of happiness could support more targeted mental health and well-being interventions that complement environmental and social programs, potentially lowering healthcare costs and improving labor market outcomes.

Genetic roots of human happiness, “….Close to 40% of human happiness is a result of good genes, Zinn told Insider this month. The claim is backed by research published in 2016 in the Journal of Happiness Studies. “ influences…account for 32-40% of the variation in overall happiness,” the study’s authors wrote in its abstract. For example, having a specific variation of the gene 5-HTTLPR, according to a separate 2011 study, was found to likely contribute to humans having higher life satisfaction….”

Hannah Frishberg, "Nearly half of happiness is genetic, so most of us are doomed,"New York Post, November 6, 2020, https://nypost.com/2020/11/06/nearly-half-of-happiness-is-genetic-so-most-of-us-are-doomed/