Macro Roundup

Ioana Marinescu, Ivan Ouss and Louis-Daniel Pape, "Wages, Hires, and Labor Market Concentration," Institute of Labor Economics, May 2020, https://www.iza.org/publications/dp/13244/wages-hires-and-labor-market-concentration

Core of their evidence, “…Figure 5(a) depicts the log of the average hourly wage against the log labor market HHI by commuting zone in 2015. There is a clear negative relationship between hourly wages and labor market concentration. Figure 5(b) shows a strong negative relationship between market size (in terms of recruitment flows) and labor market concentration. Both of these observations are consistent with the core predictions of the monopsony model. Of course, the negative relationship between concentration and hires is somewhat mechanical since fewer hires also typically entails fewer firms hiring. Our regression analysis will address this issue by using an instrument for labor market concentration based on the concentration in other markets….”

Impact of regional employer concentration/market power on wages based on evidence from France finds that labor market concentration lowers wages and number of new hires, product market concentration has a positive impact on wages, “…We leverage detailed French administrative data to show that labor market concentration decreases both the number of hires and the wages of new hires, as hypothesized by Monopsony Theory. Based on our instrumental variable estimates with worker and firm fixed effects, a 10% increase in labor market concentration decreases hires by about 12.4% and the wages of new hires by nearly 0.9%, with less negative effects in more unionized industries. A 10% increase in product market concentration increases wages by 0.9%, with more positive effects in more unionized industries. The impact of product market concentration on wages is consistent with rent sharing. Product market concentration also has a negative but not always significant impact on the number of new hires…”

Why inflation could be on the way back

Are we about to move into a new era of unexpectedly high inflation, rather than the below-target inflation we are used to? Many dismiss this view. But the boy who cried wolf was right the last time. A book just out is crying wolf insistently. Notably, it states that, as a result of today’s fiscal and monetary largesse, “as in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even on the order of 10 per cent in 2021”. That would change everything.

The prediction comes from The Great Demographic Reversal by Charles Goodhart, a respected academic, and Manoj Pradhan, formerly at Morgan Stanley. Its prophecy of imminent inflationary doom is in fact less significant than its analytical framework. These authors argue that the world economy is about to shift regimes. The last time this happened was the 1980s. The big shifts four decades ago were not so much the desire to bring inflation under control, but globalisation and the entry of China into the world economy. That era, they argue, which was one of low inflation and high, rising indebtedness, is now ending. Its inverse will soon follow.

Now, they argue, all this is going into reverse. Globalisation is under attack and no other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert, as the number of consumers rises relative to that of producers, inflationary pressure will increase. Moreover, as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures.

The authors are correct in arguing that the world economy is undergoing big structural shifts. Ageing and a weakening of globalisation in the production of goods are well under way. Moreover, this process includes China. That combination will transform our economies.

Yet it is also vital to remember how little we know about how such shifts might play out in the real world. What if we had known in 1980 that China was going to open up its economy to the world and launch the biggest investment boom in world history, culminating in an investment rate of 50 per cent of GDP? How many would have predicted that the macroeconomic situation a few decades later would be one of excess savings, low real interest rates, ultra-loose monetary policies and debt overhangs? Most would surely have assumed that booming China was about to import savings massively and so raise real interest rates and export net demand, instead.

Similarly, Messrs Goodhart and Pradhan may be right that, in their brave new world, the desire to save will tend to fall faster than that to invest, the savings glut will turn into a shortage, and real interest rates will soar. But the difference between desired savings and investment is a narrow one. It is quite possible, instead, that, with slow economic growth and continuing declines in the relative price of capital goods, corporate retained profits will continue to exceed investment in high-income economies. The Chinese corporate sector might also follow suit. If so, demand might stay weak and real interest rates low for a long time, reinforced by the huge private-sector debt overhangs in all these economies.

It is not even clear that globalisation was the main historic driver of changes in labour markets. It was just one element in a set of transformations — new technologies, the shareholder-value-maximisation model of corporate governance, the rising role of finance and growing monopoly power.

Doubts about these theses are warranted. But it is also dangerous to extrapolate the present into the future. In 1965, few imagined that postwar Keynesianism would shortly die. The world of “lower for longer” may similarly vanish. Big changes are in process. We need to think rigorously about how our future may differ from our past.

Wolf’s description of Goodhart/Pradhan’s argument"...Globalisation is under attack andno other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert,as the number of consumers rises relative to that of producers, inflationary pressure will increase. Moreover,as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures....."

Ordered a copy of the book as it seems interesting even though I'm not likely to be persuaded but though you might like these charts

Just an FYI, David Splinter updated his work in response to a critique from PSZ and contrasts it with other high quality estimates (CBO) and finds that AS estimate of the pre-tax income of top one percent increasingly 3.6pp btw 1988-2015 is consistent with CBO 3.4pp.

He also confirms that the tax code has grown more progressive,”…. In AS, we found that top average tax rates have changed little since the early 1960s while bottom 50 percent average tax rates have fallen substantially... Between 1979 and 2016, top quintile rates decreased by about 1 percentage point, middle quintile rates decreased by about 5 percentage points, and bottom quintile rates decreased by about 8 percentage points. The larger decrease at the bottom of the distribution means tax progressivity increased….”

See his Figure 1, “…Mainstream estimates show that federal taxes are progressive in recent years. Figure 1 displays estimates of average tax rates by income from Piketty and Saez (2007), the Congressional Budget Office (CBO, 2019), the Joint Committee on Taxation (JCT), Treasury’s Office of Tax Analysis (OTA), and the Urban-Brookings Tax Policy Center (TPC). These estimates, as well as those from AS (which have lower levels due to the inclusion of additional untaxed income sources), are broadly consistent with one another: negative or negligible tax rates for the bottom income quintile, 11 to 16 percent for the middle quintile, and about 33 percent for the top one percent…..”

Good factoid from a trade publication on NYC infrastructure costs, New York taxpayers pay 3x German salaries while projects are overstaffed by 4x“…Although the material and equipment costs are similar (within 10%) for projects in the United States and in Europe, labor costs are substantially higher in the United States as outlined above. For example, in California the average billing labor rates for qualified tunnel workers is about $70/hrand the average New York labor rate of qualified tunnel workers is at over $100/hr, whereas in Germany (one of the high labor rates countries in Europe) the comparable labor rate is about $30/hr.In other European countries such as Spain, Portugal, Italy, Poland, etc., labor rates are even lower. The EU legislation allowing workers from lower paid countries such as Spain and Poland working in other EU countries keeps the labor cost low. Union rules are significantly different in Europe vs the United States, especially as related to overtime and number of workers in a tunnel. For example, in New York, the number of workers at the face of the tunnel can be up to four times the number of workers required in Germany or Austria for similar projects.Overtime in the United States is paid using a factor of up to 2 or 3 of the base rates; while in Germany for example, overtime is compensated by time off instead….”

Nasri Munfah and Paul Nicholas, "Why Tunnels in The US Cost Much More Than Anywhere Else in The World,"Tunnel Business Magazine, August 18, 2020, https://tunnelingonline.com/why-tunnels-in-the-us-cost-much-more-than-anywhere-else-in-the-world/

The writers are not optimistic in terms of a solution, they cite the GAO report we looked at that also was unable to come up with a solution, “…Transit tunnel costs in Europe are about 50% less expensive than those in the United States and even significantly lesser than those in New York.Based on our evaluation, we outline below the main differences that create these cost differentials, it should be noted that European tunnel projects also suffer from some of the same costly issues experienced in the United States but to a lesser overall effect…. Even with the political will and if better controls were applied,the main elements that can be controlled would be the soft costs, the environmental approval process, and the provisions to project stakeholders. It is unlikely that labor cost could be reduced greatly. Understanding the extreme tunnel costs in New York compared with other places in the United States is an enigma that is difficult to comprehend and cannot be controlled without major industry and government practice changes…”

Henrik Kleven, Camille Landais, Johanna Posch, Andreas Steinhauer and Josef Zweimüller, "Do Family Policies Reduce Gender Inequality? Evidence from 60 Years of Policy Experimentation," National Bureau Of Economic Research, November 2020, https://www.nber.org/papers/w28082

Their conclusion, "....We find that parental leave policies have had negative short-term effects on female labor market outcomes, but no long-term effects.... Our main conclusion is simple and striking: The enormous expansions of parental leave and child care subsidies have had virtually no impact on gender convergence..... The short-term effects are relatively small and largely inconsequential for the evolution of aggregate gender inequality. More surprisingly, we also find that publicly provided and heavily subsidized child care has had no effect on the secular decline in gender inequality. This stands in contrast to the strong cross-country correlation between child care subsidization and gender gaps, while within-country quasi-experimental studies of specific reforms have led to mixed results. Broadly speaking, our evidence is consistent with the ideas exposed in Goldin (2014), arguing that gender convergence relies less on government intervention than on equilibrium features of the labor market. Our work is also consistent with the notion that gender convergence reflects the evolution of gendered preferences and norms.....This underlines the need for furthering our understanding of the formation of preferences and social norms regarding the family-career choices of men and women, and to account for their potential interaction with public policies. Endogenous preferences may create multiple equilibria and tipping points, whereby small changes in policies can have large effects on gender inequality. Conversely, as seems to be the case in Austria, gendered preferences can be sufficiently strong that gender gaps do not respond to even very large expansions of policies..."

Those programs have had the following impact on the wage gap, "... we rely on exceptional administrative data covering the labor market and birth histories of Austrian workers from 1953 to 2017. During this era, the Austrian gender gap in earnings fell by about 30 percentage points, while public policies supporting families with children were introduced and greatly expanded...."

Though their Figure 9 was strongly illustrative of the null effect they found (here in terms of childcare expansion)“…We start in Figure 9 by presenting the results for nursery care expansions. In panel (a), we focus on women who are one year before birth (t = −1), and report their estimated earnings in control municipalities vs treated municipalities, from five years before, to five years after the expansion shock. The graph first shows no evidence of a differential trend in earnings before expansion. This helps alleviate concerns that the supply shock was an endogenous response to the evolution of female labor market outcomes in treated municipalities. Secondly, the graph reveals that the expansion had no effect on the outcomes of women prior to giving birth. In other words, the increased access to child care did not lead to anticipatory effects among women about to have children…”

Bottom line more generous family policy extension over 50 years has had no impact on gender convergence “…Our main conclusion is simple and striking: The enormous expansions of parental leave and child care subsidies have had virtually no impact on gender convergence…”That implies the gap is a revealed preference, “…Broadly speaking, our evidence is consistent with the ideas exposed in Goldin (2014), arguing thatgender convergence relies less on government intervention than on equilibrium features of the labor market. Our work is also consistent with the notion that gender convergence reflects the evolution of gendered preferences and norms…”

The NBER study mentioned in WSJ uses several natural experiment resulting from family policy reforms (childcare and parental leave expansions) in Austria. For context this is what Austria looks like today, "...The raw gender gap in earnings is roughly 40% and the female labor force participation rate is about 55% (in 2018)..."

Daniel Newman and Jimmy O’Donnell, “The Dynamism Divide: Examining the 2020 Election Through the Lenses of Population Growth, Jobs, and Business Formation,” Economic Innovation Group, November 19, 2020, https://eig.org/news/the-dynamism-divide

(3) DFA by education. Finally for now, let’s have a look at the impact of education on the ownership of corporate equities and mutual fund shares. The DFA data show that households headed by college-educated persons held 82.9% of corporate equities and mutual fund shares during Q2-2020 (Fig. 15 and Fig. 16). That percentage has been trending higher since Q1-1995, when it fell to a series low of 60.2%. Households with heads who had some college, high school, and no high school owned only 9.9%, 6.3%, and 0.8%. Education is clearly a vitally important determinant of financial well-being.

Here are the values of corporate equities and mutual funds held by the four generations and their percentage shares during Q2-2020: Silent ($5.1 trillion, 19.0%), Baby Boomer ($14.8 trillion, 55.3%), GenX ($6.3 trillion, 23.4%), and Millennial ($0.6 trillion, 2.2%) (Fig. 13 and Fig. 14).

The widespread notion that the very rich own a disproportionate share of corporate equities is true, but their collective share is more like 50% of the total held by households than the urban legend of 80%-90%.

(2) DFA by generations. The DFA allows us to compare the amount of an asset or liability held and the percentage shares by four generations: Silent (born before 1946), Baby Boomer (1946-1964), GenX (1965-1980), and Millennial (1981-96).

III. Which households own equities, according to DFA? The link between the household sector in the FA and in the DFA is Table B.101.h titled “Balance Sheet of Households,” which unlike Table L.223 excludes nonprofit organizations from the household sector. On the other hand, this balance sheet shows the household sector’s combined holdings of corporate equities and mutual fund shares, which include bond funds but not money market mutual funds or ETFs. The assets and liabilities in this version of the household balance sheet are the ones for which the DFA provides all the data needed for analyzing the distribution of household net worth. (See “Household Balance Sheet” from our forthcoming study on income and wealth in America.)

Now, let’s analyze the distribution of the DFA’s various series for corporate equites and mutual fund shares held by households, sliced and diced by wealth percentile, generation, and education:

(1) DFA by wealth percentiles. We repeat: The DFA is based on the FA’s Table B.101.h, which is the “Balance Sheet of Households” excluding the assets and liabilities of nonprofit organizations. It shows only annual data and reveals that corporate equities and mutual funds held by households at the end of 2019 totaled $29.1 trillion (Fig. 9). In the DFA, this series is shown on a quarterly basis. By the way, we can derive a similar quarterly series as the sum of corporate equities held by households and nonprofits plus mutual fund shares held by them, as reported in FA Table L.224, which excludes money market funds and ETFs (Fig. 10).

(2) Ownership by sectors. During Q2-2020, of the $52.0 trillion in equities, the major sectors directly held the following amounts and percentage shares: household sector ($19.5 trillion, 37.6%), mutual funds and exchange-traded funds (ETFs) ($14.5 trillion, 27.8%), rest of the world ($8.2 trillion, 15.8%), and institutional investors ($7.0 trillion, 13.4%) (Fig. 5 and Fig. 6).

Edward Yardeni, "INCOME & WEALTH IN AMERICA: Who Owns Equities?," Yardeni Research, November 14, 2020, http://blog.yardeni.com/2020/11/income-wealth-in-america-who-owns.html

INCOME & WEALTH IN AMERICA: Who Owns Equities?

A large team of the Fed’s researchers have been busy constructing a new database containing quarterly estimates of the distribution of US household wealth since 1989. They launched it with the release of a March 2019 working paper titled “Introducing the Distributional Financial Accounts of the United States.” The Distributional Financial Accounts (DFA) is an impressive accomplishment combining quarterly aggregate measures of household wealth from the Financial Accounts of the United States (FA) and triennial wealth distribution measures from the Survey of Consumer Finances (SCF).

I. A much more comprehensive database. We believe that the new database can be used to resolve lots of controversial issues about wealth distribution in the US. The DFA’s balance sheet of the household sector is much more comprehensive and timely than previously existing sources. The Fed’s researchers observe that their “approach produces rich and reliable measures of the distribution of the Financial Accounts’ household-sector assets and liabilities for each quarter from 1989 to the present.” The data can be used to study the distribution of wealth in America by wealth and income percentiles, education, age, generation, and race. Melissa and I intend to do just that in coming months with the goal of assembling a comprehensive study tentatively titled “Income & Wealth in America: Myths & Realities.”

II. Who owns equities in America, according to FA? Aggregate data are available in Table L.223 in the FA for corporate equities held by each of the major sectors in the accounts. Unlike the DFA, the household sector in the FA includes nonprofit organizations, and this sector’s data are calculated residually from the other accounts. Let’s review our findings:

(1) The supply side of equities. The total market value of equities held in the US during Q2-2020 was $52.0 trillion, with domestic issues totaling $43.5 trillion and foreign issues totaling $8.5 trillion (Fig. 1). Domestic issues included $33.5 trillion of nonfinancial issues and $10.0 trillion of financial issues and consisted of $37.2 trillion of publicly traded and $6.3 trillion of closely held equities (Fig. 2 and Fig. 3). The $6.3 trillion of closely held equity consisted of $4.7 trillion in S corporations and $1.6 trillion in C corporations (Fig. 4).

Ownership“….Directly and indirectly held by households. The FA includes a Table B.101e titled “Balance Sheet of Households and Nonprofit Organizations with Debt and Equity Holdings Detail.” It provides extraordinary insight into the indirect equity holdings of households through life insurance companies, private and public pension funds, and mutual funds. During Q2-2020, households and nonprofits directly held $19.5 trillion (37.6% of all equities) and indirectly held $12.4 trillion (23.8% of the total) (Fig. 7). In other words, their direct and indirect holdings of equities totaled $31.9 trillion, or 61.4% of all equities (Fig. 8). Interestingly, this percentage has been remarkably stable around 65% since the early 1980s…..”

Ed Yardeni on who owns them American equity and how much there is, “…. The total market value of equities held in the US during Q2-2020 was $52.0 trillion, with domestic issues totaling $43.5 trillion and foreign issues totaling $8.5 trillion (Fig. 1).Domestic issues included $33.5 trillion of nonfinancial issues and $10.0 trillion of financial issues and consisted of $37.2 trillion of publicly traded and $6.3 trillion of closely held equities (Fig. 2 and Fig. 3). The $6.3 trillion of closely held equity consisted of $4.7 trillion in S corporations and $1.6 trillion in C corporations (Fig. 4)….”