Tag Archives: Labor

The Great Decoupling in Itself is Not the Problem

In two recent Wall Street Journal opinion pieces – “The U.S. Needs a New Social Contract” and “Closing the Productivity and Pay Gap” – William Galston presented an in-depth analysis on the widening gap between productivity and wages. He calls the divergence between these two metrics the “Great Decoupling” and believes it is a defining phenomenon of our era. A significant share of income has shifted from labor to capital. According to Glaston, “In 1947, labor received 67% of nonfarm business output. At the end of 1973, that figure still stood at 66%. In 2012 (the latest year for which data have been released), labor received only 58% of total output, the lowest by far in the entire postwar period.” Galston’s concern on this issue is tied closely to the inequality issue that has been a recent hot topic. While he presents compelling ways to fix this problem, Galston fails to recognize the root causes and shows a gross misunderstanding of economic principles.

The divergence in productivity and wages stems primarily from efficiency gains. As technology has improved, automation and computers have taken over many tasks once performed by hand and productivity has increased dramatically without the need for new workers. Galston fails to mention this point at all and it is very important. Technological progress drives long run growth in macroeconomic models and makes everyone better off. In the short-run technological advancements will shift income to owners of capital, but in the long run this should even out as new industries and jobs are created that did not exist previously. It is also important to think about this issue in absolute terms, rather than purely relative. While it is true that labor is receiving a smaller share of total income than it did through much of the post-war period, in absolute terms workers are better off than through most of that period.

A second issue that Galston fails to recognize is that in a competitive labor market the equilibrium wages should be equal to the marginal product of labor. If the marginal product of labor is higher than wages, firms could increase profits by hiring additional workers. Eventually the marginal product reaches a point where it is equal to the wage and it is not longer profitable for firms to hire additional employees. The point that Galston fails to realize is that, from a micro level, in order to increase wages we need to increase marginal product of labor.

The best way to increase marginal product of labor and therefore wages are to increase education so workers are able to utilize the advances in technology to increase their own productivity. Education reform should be a more pressing issue than it is in order to sustain economic growth. Many unskilled workers likely have a marginal product of labor that is below the current equilibrium wage level and so it does not make sense for firms to hire them. A focus on providing education to the unskilled workers could improve the plight of the poorest American’s, while unlocking productivity from a currently under-utilized labor source. Galston proposes some education reform in his piece and he is right about that – he just needs to realize that the “Great Decoupling” itself is not the problem, but rather a symptom of deeper trends in the economy.

Interesting Activity in the Job Market

In economics we learn that expectations help determine economic activity. This happens across all markets, including the labor market. A recent Wall Street Journal article by Neil Shah explores the recent increase in the “quit rate” of the job market. The reason for this is that people are more optimistic about having better prospects if they leave their current job. This is a change of pace from the take almost any job to keep income attitude. This can create jobs for other people.

In the New York Times, an article by Floyd Norris suggests that employment statistics are ambiguous. More people are going to work than they have in many years. The twist is that fewer jobs have been created than any seen in a 3-month interval. What is going on here?According to the article, the problem is a discrepency between two different surveys. They each are measuring different things. The Washington Post tells the overall story about how the economy added 113,000 jobs in the month of January 2014. This lowered the unemployment rate to 6.6%.

What can be made of all of this information? With more people quitting their jobs, then some lucky unemployed people may find employment. The interesting piece of information mentioned by the Journal is that about one fifth of the quits are in the food industry, which has a high turnover rates and lower pay. If this is the case, then those with the take any job attitude my be in luck for the time being. A discrepancy between two labor statistic surveys The Times mentions that one of these surveys will be revised. We should expect to see more inconsistent information between the two, as time progresses. As for the unemployment rate, these numbers were not what anyone hoped for. A large contributing factor is that more public jobs were cut than created. The private sector had to contribute the rest. The construction industry had the largest expansion it has had since March 2007. This is interesting since construction is normally sensitive to bad weather, but the polar vortex seems to have no effect on it.

In my opinion, all of these stories make our job market situation ambiguous. People are more optimistic about their future prospects, so they are quitting their jobs and more people are working than they have in decades. However, only 113,000 jobs were created in January and labor surveys are not consistent. What are we supposed to expect? I, for one, think that patience is our most valuable asset today. The first month of the year is not enough to determine the entire year’s job market. We will need to see how the next few months play out.


Increasing minimum wage

In his State of Union address, the President Barack Obama urged Congress to raise minimum wage to $10.10 per hour from $7.25. The Wall Street Journal reported about this controversial issue of minimum wage increase. Like many other economic issues, economists do not have consensus on this issue either, and are divided into two groups. Some of them argue that minimum wage increase actually hurts the employment situation of the low end of income level, especially in times of high unemployment. Some argue that minimum wage increase has no effects on unemployment. But it seems that majority of economists are more in favor of the first opinion that minimum wage increase worsens the employment situation. According to the Wall Street Journal survey, 57% of the economists were against extending emergency jobless benefit and minimum wage increase.

My economics class memory reminds me that the real wage is determined by marginal product of labor. If the real wage is increased above the marginal product level by minimum wage regulation, then employers hire less employees and unemployment increases. So, if new minimum wage of $10 per hour is over the current marginal product of labor, it may worsen the employment situation making unemployment increase. In that sense, I could agree with majority of economists that increase of minimum wage actually hurts people who are in need.

By the way, one surprising story to me is that according to Adriana Kugler, a Georgetown University professor of public policy, minimum wage increase has been long overdue, making inflation adjusted wage level for low skilled workers less than 1960s. Even though it is for the lowest skilled workers, how come real wage level has not increased for 50 years? Basically, in my understanding, this may result from decrease of marginal product of labor for those 50 years, which seems to me impossible considering technology development, or the real wage in 1960s was well above then marginal product. Simply thinking, if the real wage level in 1960s was higher than marginal product, I guess the unemployment rate also was high too. But, when I look up the unemployment rates in 1960s, it moved mostly within the range of 3.5~5.5%. This is generally lower than the current level of unemployment rate. Comparing lower unemployment and higher real wage in 1960s, I begin to think that increase of minimum wage may not harm employment situations of people of low end income.

There are surely many other economic factors that affect this surprising decrease of real wage. So, it will not be appropriate to compare those two periods only by unemployment rate and real wage level. But it seems to me that the current minimum wage does not reveal efficient labor market mechanism.

Chinese Economy Cooling Down?

It has been recently observed that China’s economy is showing signs of slowing down. One bit of evidence for this is the shrinking labor force. According to an article by the Wall Street Journal Staff, China’s labor, which consists of people between the ages of 16 and 59, force had dropped by approximately 2.4 million people in 2013. Furthermore, the article discusses that this is the first time China’s labor force had shrunk in decades. This has worried people about the beginning of a shrinking Chinese Labor market and that wages would rise.

Another sign of China’s economic changes is discussed in Bettina Wassener’s article in the New York Times. She delves into China’s transition from high exports to rising domestic consumption. Large, international corporations, such as Ford and Mariott have been expanding in China. Wassener continues by mentioning that recent data has shown that factory output has been steadily decreasing in China.

In his article, Simon Denyer of the Washington Post attributes the cooling down of the Chinese economy with a large amount of investment in real estate and infrastructure. This would cause large amounts of debt, so investments would eventually slow down.

All three of these indicators of a slowing economy are about as clear as they come. First of all, the decline in population of the labor force can have very negative effects in the near and not so near futures. One effect mentioned in the Wall Street Journal article is that wages are rising. This is a near and far future effect. When wages rise, employment continues to decrease. This will cause fewer people to take home a salary that they can use to put money back into the economy. A large cause of this unemployment would be the decrease in foreign outsourcing. One reason why foreign companies, such as American firms, outsource labor to China is that the wages are low. This means that costs of production are minimized. When these wages rise, the costs of production increase, so fewer workers will remain employed. At a certain point, These foreign firms will pull out of China when the wages become too high. This will hurt the Chinese economy even more.

China decreasing its exports and increasing domestic consumption also can lead to a downfall in its economy. First of all, exports have been a large part of Chinese GDP for many years. If exports fall quickly, then China will see decreases in GDP. Domestic consumption may be rising, but the money will be going towards foreign companies that have expanded business to China. In reality, that flow of cash is not going towards the Chinese economy, but to the economies from which these foreign companies came. This can be linked to the increases in investments in real estate and infrastructure. As previously mentioned, this causes a sharp increase in debts, hindering the credit market. A bad credit market leads to decreases in investments, which are another component of China’s GDP, and integral to keeping the economy going. With two components of GDP decreasing, China will continue to see negative growth in its economy.