Macro Roundup

Using evidence from France new Borjas looks at immigrations impact on wages in terms of composition of labor force, argues that due to selection bias we miss the impact of supply shocks on labor.

For example the wage change found in a labor market after an immigrant supply shock is a function of not only the number of natives who “switched” markets, but which native workers switched. “…Immigrant supply shocks are typically expected to reduce the wage of comparable workers. Natives may respond to the lower wage by moving to markets that were not directly targeted by immigrants and where presumably the wage did not drop. This paper argues that the wage change observed in the targeted market depends not only on the size of the native response, but also on which natives choose to respond. A non-random response alters the composition of the sample of native workers, mechanically changing the average native wage in affected markets andbiasing the estimated wage impact of immigration. We document the importance of this selection bias in the French labor market, where women accounted for a rapidly increasing share of the foreign-born workforce since 1976. The raw correlations suggest that the immigrant supply shock did not change the wage of French women, but led to a sizable decline in their employment rate. In contrast, immigration had little impact on the employment rate of men, but led to a sizable drop in the male wage. We show that the near-zero correlation between immigration and female wages arises partly because the native women who left the labor force had relatively low wages. Adjusting for the selection bias results in a similar wage elasticity for both French men and women (between -0.8 and -1.0)….”

The evidence. “…Our sample is restricted to persons aged 18-64 living in European France. We exclude all persons who are self-employed, are in military occupations, are enrolled in school, or do not report their educational attainment. In our wage analysis, we will exclude observations that have extreme values of the hourly wage. Specifically, we exclude workers who are either in the top 0.5% or bottom 0.5% of the hourly wage distribution. Table 1 summarizes some of the key characteristics of our data. Perhaps the most striking trend is the rapid increase in the employment rate of native women between 1962 and 2016, almost doubling from 37.2 to 70.1 percent. At the same time, the employment rate of French men declined noticeably, from 89.4 to 73.6 percent. The data also indicate that the size of the supply shock was roughly similar for low and high-educated native women. The immigrant share rose from 3.2 to 9.2 percent for women with a baccalaureate degree and from 5.7 to 14.1 percent for women without the degree. In contrast, immigration had a larger impact on the number of high-educated men, where the immigrant share rose from 5.3 to 10.0 percent while the immigrant share among the low-educated men was roughly constant (between 12 and 14 percent)…The raw data in the French labor market reveals a striking gender asymmetry in how immigration correlates with wages and employment. The correlation between immigration and wages (across cities and over time) is negative for native men, but essentially zero for native women. At the same time, the correlation between immigration and employment rates is negative for native women, but essentially zero for native men….Our empirical application of this framework in the context of the French labor market shows that the orthogonality between immigration and wages for French women is partly an artifact of selection bias. The native women who exited (or did not enter) the labor market after the supply shock tended to be low-wage women, mechanically increasing the average wage in those cities targeted by immigrants and making it seem as if immigration had no impact on the female wage. After adjusting for selection, our evidence indicates that the wage elasticity for native women is also negative and roughly the same size as that found for native men (where labor supply was much more inelastic). The gender asymmetry in the labor market impact of immigration can thus be reconciled by jointly examining how immigration affects wages and labor supply, and by accounting for the size and the inevitable selection bias in the native response…”

George J. Borjas and Anthony Edo, "Gender, Selection into Employment, and the Wage Impact of Immigration," National Bureau Of Economic Research, April 2021, https://www.nber.org/papers/w28682

The dynamics, “…We document the empirical relevance of this type of selection bias by examining how immigration differentially affected the employment and wages of men and women in the French labor market. The French context is particularly suitable for exploring the central hypothesis proposed in this paper for a simple reason:France experienced a remarkable “feminization” of its immigrant labor force in the past few decades, witnessing a very rapid rise in the female share of foreign workers. Because men and women could be imperfect substitutes, the rising number of immigrant women relative to immigrant men could affect the labor market outcomes of native men and women differentially…..Moreover, female labor supply tends to be more elastic than that of men at the extensive margin….As a result, the supply shock may have had a considerable impact on the labor force participation rate of native women, potentially producing a sizable selection bias in the measurement of the wage impact of immigration….”

Obviously small flows (as of today) not large but ~ rhymes with the 2000s with equity in place of debt, "...In suburban neighborhoods near cities such asAtlanta, Las Vegas and Phoenix, blocks of families are sending monthly rent checks to ventures backed by Canadian pension funds, European insurers, and Asian or Middle Eastern government-run funds.... Foreign investors barely registered in these markets a few years ago. Now, they account for nearly a third of institutional investment in single-family rental homes, said Alex Foshay, head of international capital markets at real-estate services firm Newmark…German insurerAllianz SE last month said it is investing in a venture to buy more than $4 billion of U.S. rental homes. Singapore’s sovereign-wealth fund GICis backing plans by Quinn Residences to buy single-family rental homes across the southeastern U.S., according to people familiar with matter. Canada’s Public Sector Pension Investment Board, meanwhile, said in January it agreed to a $700 million rental-home venture in partnership with Pretium Partners LLC. The venture has bought around 2,000 homes, said Pretium Chief Executive Donald Mullen. Foreign institutions have also invested in the Pretium’s funds targeting single-family rental homes, he added….”
Konrad Putzier, "That Suburban Home Buyer Could Be a Foreign Government,"Wall Street Journal, April 13, 2021, https://www.wsj.com/articles/that-suburban-home-buyer-could-be-a-foreign-government-11618306380

Gian Maria Milesi-Ferretti, "The US is increasingly a net debtor nation. Should we worry?" The Brookings Institution, April 14, 2021, https://www.brookings.edu/blog/up-front/2021/04/14/the-us-is-increasingly-a-net-debtor-nation-should-we-worry/

The US is increasingly a net debtor nation. Should we worry?

At the end of 2020, Americans owed $14 trillion more to the rest of the world than the rest of the world owed to America, according to the latest reading on the nation’s Net International Investment Position (NIIP) from the Bureau of Economic Analysis (BEA). That’s 67 percent of U.S. GDP, up from about 50 percent at the end of 2019 and well above the 16 percent of GDP recorded a decade ago.

This blog discusses two questions: First, how did we get here? After all, U.S. current account deficits have been moderate during the past decade. So why has the U.S. net debtor position increased so much? Second, is this increase in net foreign liabilities a cause for concern? (Spoiler: Not much.)

HOW DID WE GET HERE?

The NIIP is the difference between U.S. foreign assets and U.S. foreign liabilities. U.S. assets abroad include the value of overseas affiliates of U.S. multinational corporations (foreign direct investment, or FDI), shares of foreign companies held by U.S. residents (portfolio equity), bonds issued by nonresidents (for instance, Mexican government bonds bought by a U.S. pension fund), U.S. banks’ deposits in foreign banks, etc. Symmetrically, U.S. liabilities include the value of U.S.-based affiliates of foreign corporations, shares of U.S. companies held by nonresidents, U.S. Treasury and corporate bonds held by foreign central banks and other foreign investors, as well as foreign deposits in and foreign loans to U.S.-based banks.

When spending by U.S. residents exceeds domestic production of goods and services (the GDP), the U.S. runs a current account deficit, which is financed by net borrowing from abroad. This borrowing can take the form of foreign purchases of U.S. Treasury securities or shares of U.S. firms, foreign direct investment in the U.S., or sales by U.S. residents of assets held abroad. In the same way in which the U.S. budget deficit adds to U.S. public debt, current account deficits add to the U.S. net debtor position. Figure 1 shows the U.S. NIIP as a share of GDP, together with the cumulative value of U.S. net borrowing from overseas during the period (broken line). If external assets and liabilities did not fluctuate in value and everything was measured perfectly, the two lines would coincide. Instead, there are substantial divergences.

Since 2010, external borrowing has waned, and, with the exception of 2020, cumulative net borrowing from abroad has roughly stabilized in relation to GDP. But the net international investment position has plunged by some 50 percent of GDP. This time the valuation effects have worked in reverse: the U.S. dollar has strengthened notably since 2010, and U.S. equity prices have risen much more than foreign equity prices. In other words, the value of foreigners’ investments in the U.S. has risen a lot relative to the value of Americans’ investments abroad. And with growing financial integration (a higher share of external assets and liabilities in relation to U.S. GDP), the valuation effects induced by these asset price changes apply to a larger “base” and are hence bigger.

These effects can be better understood looking at Figure 2, which splits the U.S. NIIP into two components: net debt instruments (debt securities plus loans, deposits, etc.) and net equity instruments (the sum of the net position in portfolio equity and FDI). As the issuer of the preeminent reserve, the U.S. has traditionally received substantial net debt inflows (for instance, purchases of Treasury securities by foreign central banks) and has hence accumulated a large net liability position in debt instruments (solid orange line). However, it has been a net “creditor” in terms of equity instruments, for example through investment overseas by U.S. multinational corporations. However, the run-up in U.S. equity prices and the dollar during the past decade has substantially raised the value of foreign equity investment in the U.S. and generated a massive shift in the net equity position (solid blue line), despite broadly balanced equity inflows and outflows (dotted blue line).

To address this question, it is first useful to compare U.S. net external liabilities in relation to the size of its economy with those of other countries. If we consider the more than 50 countries with GDP above $150 billion in 2020, only four have a net liability position as a share of their GDP larger than the U.S. Those are Ireland (where the NIIP data is heavily biased by the choice of multinationals to domicile their intellectual property there), Greece, Portugal, and Spain. All of them faced a severe debt crisis a decade ago.

The first is that the driving force of the worsening in the U.S. external position in the past decade has been an increase in the market value of U.S.-based wealth. Stronger prospects for U.S. firms are reflected in higher stock prices. So U.S. wealth has increased substantially during this period, benefiting both residents and nonresidents. Should U.S. prospects wane, a correction in the U.S. stock market and a depreciation of the dollar would correspondingly reduce the value of U.S. net external liabilities (and weaker U.S. demand and a weaker dollar would tend to reduce the U.S. current account deficit).

A second argument has to do with measurement. As discussed in a short appendix at the end of this post, the way the market value of FDI claims and liabilities is estimated may exaggerate the deterioration in the U.S. net equity position. An alternative estimate of net FDI, also published by the BEA (the blue line in Figure 3), shows a still-positive net FDI position, some 20 percentage points of GDP stronger than the one implied by the market value estimate (the orange line).

However, the U.S. borrows exclusively in its own currency so there is no “balance sheet risk” associated with dollar depreciation. On the contrary, a weaker dollar improves the U.S. external position, as discussed earlier. And as the issuer of the pre-eminent reserve currency, there are two favorable factors which temper the need for the U.S. to run a trade surplus:

The average yield on U.S. external liabilities over the past two decades has been below the growth rate of GDP, reflecting to an important extent the substantial decline in yields on U.S. Treasury and corporate bonds.

The yield on its assets has consistently exceeded the one on its liabilities—to the point that the U.S. investment income balance remains positive despite its large net debtor position.

While the favorable yield differential between U.S. foreign assets and its liabilities has been the subject of a heated academic debate, the evidence points clearly to the yield differential on FDI between U.S. investment abroad and foreign investment in the U.S. as the most important explanatory factor (Figures 4-5; see also Curcuru, Thomas, and Warnock, 2013). In turn, at least part of this differential reflects strategies of U.S. multinational corporations designed to book profits in low-tax jurisdictions (Guvenen et al, 2017), thus exaggerating U.S. returns on its foreign assets.

Snapshot of US net investment position. Currently -$14T deficit which is 67% of U.S. GDP, up from ~ 50% at the end of 2019 a major uptick over 16% of GDP a decade ago is being driven by America’s outperformance, “….Since 2010, external borrowing has waned, and, with the exception of 2020, cumulative net borrowing from abroad has roughly stabilized in relation to GDP. But the net international investment position has plunged by some 50 percent of GDP. This time the valuation effects have worked in reverse: the U.S. dollar has strengthened notably since 2010, and U.S. equity prices have risen much more than foreign equity prices. In other words, the value of foreigners’ investments in the U.S. has risen a lot relative to the value of Americans’ investments abroad. And with growing financial integration (a higher share of external assets and liabilities in relation to U.S. GDP), the valuation effects induced by these asset price changes apply to a larger “base” and are hence bigger….”