Tag Archives: wages

Abenomics: Success or Failure

This is the third post I’ve written recently about Japan’s economic policy of Abenomics.  I figured I would revisit the topic due to two recent articles, one by the IMF and one by the WSJ, that analysis Abeconomics.  Both of the articles illustrate the difficulty that Abenomics will have if wages do not rise.  As I mentioned in earlier posts, unless there is an increase in wages, the economic growth that Japan has seen recently will slow down.  According to the IMF paper, the average Japanese worker has been funding their consumption by dipping into savings.  The savings rate, as a percentage of disposable income, in Japan has fallen from 5% to 0% todayThis means the most of Japan’s increased consumption is due to deficit spending, or spending more than the average worker is bringing in.  This is a huge problem because worker’s savings are a finite number.  This means that there is an upper limit on how high consumption can go.  Eventually, consumption will hit a peak and then start dropping if wages don’t increase.  Next years increase in consumption tax will place even higher pressures on consumers.

One reason that wages have failed to rise in the past few years is the increase in non-regular workers.  Non-regular workers are paid less and have less incentive to invest their human capital into firms due to the belief that they’re part time.  In the end, the firm is hurt by losing investments in human capital and production by hiring non-regular workers.  Abenomics - Time for a Push from Higher Wages 2

Abenomics “third arrow” is supposed to help solve the stagnation in wages.  Unfortunately, there hasn’t been much success in this area.  Japan’s government has used financial policy to try to increase wages with little success.  The Japanese government has offered a tax break for companies who’s labor expenses increase by 2-5%.  According to the WSJ article, the main reason why these polices aren’t helping is a lack of credibility among the Japanese government.  Critics don’t believe that the BOJ can hit their target inflation rate of 2%.  One of the few ways that the BOJ can reach the 2% target is another round of quantitative easing, even though critics claim this could lead to runaway inflation and a spike in interest rates.  From what we’ve learned in 411 though, the BOJ’s quantitative easy will only lead to runaway inflation and a spike in interest rates if they make mistakes.  I think the best thing that Japan can do to raise wages is to raise the minimum wage.  Japan has the lowers minimum wage out of all OECD countries.  A raise in the minimum wage would also lead to a decrease in non-regular workers, which would put upward pressure on wages and increase the efficient use of human capital by firms and an increase in productivity.

(Revised) The NCAA: Athletics or Economics

In a previous blog post, I outlined some reasons showing that the NCAA is more concerned with money, than with their stated goal of provided college athletes with an education.  Since the time of that post, there have been significant developments in several instances of litigation against the NCAA pertaining to the compensation of players, and the commercial rights the NCAA has over its players.  The NCAA’s monopolistic iron-grip over players and their compensation has been eroding for several years through many different pieces of ligation.  In this blog, I will quickly discuss the NCAA, the cases against it, and then outline what might happen as a result of these cases.

The NCAA is a non-profit organization that serves as the organizing and regulatory body for college athletics.  Despite all the criticism leveled against the NCAA, they are an essential organization for keeping college athletics as fair as possible for the hundreds of member schools.  Recently, the NCAA has become bloated with money; in 2010 CBS paid $11 billion over 14 years to broadcast the NCAA tournament, and ESPN agreed to pay $5.64 billion over 12 years to broadcast the College Football Playoff.  While the NCAA reaps record profits while functioning under non-profit status, many poor players struggle to afford the costs of college, even while on athletics scholarships.  Many players claim that the actual cost of college is higher than the combination of tuition, room, board, and books, and that universities cannot pay them enough, due to the rules handed down by the NCAA.

A 2002 suit, White v. NCAA, argued that “restricting a scholarship to the cost of tuition, books, housing and meals was an unlawful restraint of trade because of the billions of dollars the NCAA earned through broadcast and licensing deals”.  The NCAA settled out of court for about $10 million.  A more prominent piece of litigation is O’Bannon v. NCAA, set to go to trial in June, that questions the NCAA’s right to commercial use of player’s likeness to gain financially, even long after the player is no longer a collegiate athlete.  Video game maker Electronic Arts paid $40 million to be removed from the claim as a defendant.  Today, March 17, 2014, another lawsuit was filed against the NCAA by a sports labor attorney who has been highly successful against the major sports leagues.  The suit claims that capping the pay of student athletics, at tuition, room, board, and books is a fixed price agreed upon the NCAA and it’s member universities and is unlawful.  Besides litigation, some college football players have sought to unionize to gain more bargaining power against the NCAA, because currently they are forced to more or less sign their rights away to participate in college athletics.

The argument that athletes are making is powerful.  The NCAA is able to generates enormous revenue; for example in 2011-2012, the University of Michigan football team generated $85,209,247 in revenue, compared to $23,640,337 in costs.  This means that the football team made around $62 million in profit, and with 85 scholarship players that amounts to over $700,000 per player.  Obviously every scholarship player didn’t generate equal revenue, a player like Denard Robinson brought in millions while others brought in almost none.  Since his professional career has yet to materialize, Denard capturing some of that profit he generated seems fair.  The point being, Michigan, and many other major football programs would more than be able to compensate players more fully without cutting into their bottom line too much.

The opposition from paying players often comes from schools who believe they are already paying their athletes enough or don’t have the means to pay them more.  A scholarship, and a free education, is enough and athletes should be thankful for the opportunity they have received.  I believe this statement distorts the truth.  Yes, receiving a scholarship is a great opportunity, and is significant payment, but why should school administrators and coaches benefit financially from the revenue generated by football players? Nearly all other industries reward employees for generating revenue and profits via bonuses and commissions, but not college athletes.

The NCAA has vigorously defended this system using the mystique of “amateurism”, but major college athletes are hardly treated like amateurs any more.  Football and basketball players don’t even have to stay long enough to get a degree; the top prospects leave after three years and one year respectively.

There are several systems that could be used to compensate players.  One is simply increasing scholarships to the full cost of tuition to cover incidental expenses.  Another would be to set up trust funds for players that take a fraction of the revenue they create and give the players access after they leave (or perhaps they graduate).  Neither of these systems are perfect, but they are better than what exists today.

Who Needs to Know How to Code?

In this week’s edition, Angela Chen of the Wall Street Journal explains how the fad of learning to code is taking the world by storm. Chen describes how many parents are beginning to buck the trend of sending their children to piano or foreign language lessons in favor of sending them to computer programming tutors. Children as young as 7 are starting to take classes at coding “bootcamps” to learn how to build apps, write simple websites, and to become fluent in a technical language. College and young job seekers are flocking to coding classes such as that at New York’s Flatiron School that “offers a 12-week, $12,000 program[s] to turn novices into developers.” Even corporate managers at companies such as American Express Co. and General Electric Co. have been sending senior teams on corporate development trips to learn topics including introductory data mining or product prototyping. It appears that strong coding ability is a hot commodity right now in the human capital market.

On the other hand, not everyone appears to be buying into the fad, and some fear that an overemphasis on coding could be harmful. For instance, Jathan Sadowski of Wired Magazine writes in his article “Pushing People to Code Will Widen the Gap Between the Rich and Poor” that we should focus on improving the literacy rate in the U.S. before making coding a mandatory class in school. He explains that the English literacy rate is still dismal in the U.S., as around 45 million adults “read below a 5th grade level” or are “functionally illiterate.” While many may dispute his sources and statistics, Sadowski does bring up the valid argument that by making coding a mandatory class in primary or secondary school, teachers would have to cut class time for other lessons. In addition,  wealthier kids, especially those at private schools, may have greater opportunities to achieve proficient literacy levels sooner, so they may benefit from coding classes more than less-fortunate students who lag behind in basic reading and math classes.

Despite Sadowski’s pessimism about the new fad, I’m confident that the pros of learning to code far outweigh the cons. In my opinion, coding shouldn’t be taught in primary or secondary school classes. This isn’t because I think it’s a waste of time, I just think this is a topic best learned in one’s free time. There are countless websites including Codeacademy.com or MIT Open Courseware that offer coding classes from the elementary all the way up to the graduate school level for free. Rather than having schools across the country wasting millions of dollars providing a poor learning product (let’s face it, how many high school teachers in the U.S. would be even marginally qualified to teach computer science? – mine could barely use MS Word), it’s far more time and cost efficient to have students learn to code on their home computers or at the local library. In my opinion, learning to code in this way trumps the expensive bootcamps as well, so long as you can stick to a plan and force yourself to learn. The most important reason is the cost-benefit ratio. First, these boot camps are expensive ($10k-20k at some places) which is a major hurdle to many young, underprivileged learners who may be turned away by the high tuition fees. Second, as interest in coding grows the supply of human capital in the programming space increases as well, which may eventually push down the wages in this sector. We already see this happening in large tech and financial firms who outsource many of their programming projects to places such as Bangladesh where coding talent is, for better or for worse, cheap and plentiful. This is not to say that learning to code won’t be valuable for job seekers in the future, or that masterfully talented programmers will become worthless. It will just mostly likely turn out that basic programming knowledge may become only one of many pre-requisites and instead of a direct ticket to a high-paying job.  Like with many things in life, a healthy dose of reality is required before taking the plunge, otherwise one might end up disappointed in the end.

Returning to the initial question, “who needs to know how to code?” my answer would be “almost everyone*.” I add an asterisk to reflect that many professions won’t require this skill, for instance if one wanted to be a concert musician or NFL linebacker this would not likely help. However, a surprising variety of professions are beginning to embrace the mantra that coding is key. Take lawyers for instance: instead of having to memorize and sort through thousands of physical case documents a savvy lawyer could combine their legal skills with the ability to design algorithms to search databases and the internet for key features of past court cases when organizing an argument. This is especially important in patent and tax law, as there may be hundreds of thousands of pages of documents containing vital legal information that would be inaccessible without the use of querying algorithms. On the quantitative side, coding is a vital skill for those who wish to do research in physics, economics, or neuroscience. From analyzing thousands of terabytes of collisions data in a particle physics lab, to simulating and forecasting economic supply shocks, to mapping billions of neurons using MRI technology, understanding how to program is fast becoming a necessity.

So is learning to code a quick way to make $100k a year at Google? Probably not. But is it distracting kids from learning about more “important” topics like reading and math? I’d say it’s doing quite the opposite. The important take away message is to remain realistic when confronted with this new fad, but to also maintain optimism about how far this long, long, long, and difficult journey can take you.

 

REVISED: “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.” The chart below taken from FRED, shows the divergence visually – total factor productivity growth has outpaced wage growth considerably since the mid 1980s.

Screen shot 2014-02-22 at 6.28.20 PM

Galston’s concern on this topic 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 general 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 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 most workers are better off today.

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. Focusing on providing education to the most 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 economic forces in the economy.

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.

Income Inequality

It seems like as long as America has existed, equality has been a key virtue.  Thomas Jefferson opined in the Declaration of Independence that “all men are created equal“, and I believe that value has stuck in American society as a whole.  Lately, there has been much discussion of the topic of income inequality, namely how income inequality is at an all time high, and also how incomes of the richest people in America are growing substantially faster than poorer people.  However, I believe that much of the discussion of this issue is misguided and misinformed, either by asking the wrong questions or misusing the data.

incomeinequality

Those most opposed to income inequality often point to the fact that the richer someone is, the richer they are getting.  You have probably seen graphic likes the GIF to the right (click to make it work).  The graphic shows how the incomes of the top 1% are skyrocketing compared to the bottom 99%.  However, this GIF is a typical overstatement of the probably for income inequality.  The researcher behind this study, defines income as “pre-tax cash market income — wages and salaries; dividends, interest, rent and other returns on invested capital; business profits; and realized capital gains”.  This is to say, no tax payments are incorporated into the GIF.  However, considering that the top 1% pay a higher tax rate than the the bottom 99%, this graph overstates the problem with income inequality.

after-tax-income-growth201207251048

While it is true that wage growth for that top income earners is far higher than for low wage workers, the more important question to ask is whether low wage workers are better or worse off.  The chart of the left illustrates that while top earners have seen a much larger increase in wage over a 28 year-period, real income growth for the lowest quintile was about 25%.  Is the fact that top incomes increase more rapidly a problem?  Clearly wage increases are not a zero-sum game; the top earners are not necessarily benefitting at the expense of the poor.

Another measure that is used for income inequality is the Gini coefficient, which attempts to fix into one number how wages in a country are distributed, on a scale from 0 to 1, where 0 is perfect equality, and 1 is perfect inequality.  The following chart show 2000’s Gini coefficients:

cassidy_03

The before-tax Gini coefficient of the United States is actually fairly close to places typically well known for high equality, like Sweden, Finland, and Norway.  However, the U.S.’s post-tax Gini coefficient is the highest of any of these nations.  This suggests that through taxes, all these other countries do a better job of redistributing income.  Critics equate this to mean that the U.S. doesn’t have a progressive enough tax system.  However, a 2008 study by the OECD indicated that the U.S. actually has the most progressive income tax system out of the OECD-24 nations, which includes all of the richest European nations (With the recent increase on taxes to the highest income bracket in the U.S., our system can only be more progressive now than previously).  How does this all make sense, one might ask?  Although I’m not entirely sure, one solution is that higher overall taxes, on all people, would create such an effect.  By the government taking, and redistributing a higher percentage of the income of the nation overall, the Gini coefficient will be lower, but could also lead to a less progressive tax system.

However, the most important issue with income inequality is “Is it necessarily bad?”  For a long time, many economists theorized that inequality was good for growth (because inequality might boost investment).  I think such a theory has some truth to it; I believe that an economy with perfect income equality would stagnate quickly because incentive to work would plummet.  In it’s recent revision of the long-term effects of the ACA, the CBO essentially admitted that an increase in the marginal tax rate makes people want to work less.  Recently, many economists have started to believe that perhaps income inequality hinders growth, but have had difficultly proving this empirically.

I think that much of the ire directed towards income inequality is actually misdirected.  For example, the problem of poverty is not the same thing as income inequality.    As I explained earlier, real incomes can rise both for the poor and the rich, even if income inequality is increasing. If the total amount of income in the economy was fixed, then income inequality would “cause” poverty, but this is not the case.  Income inequality does not cause poverty; low wages, not enough jobs, and many other factors cause poverty.

How New Immigration Policy Can Save America’s Economy

According to the WSJ, 2014 will be a great year for the American job market.  Total jobs is projected to pass it’s pre-recession peak, while adding almost 200,000 jobs per month. (WSJ: Signs Point to Healthier Job Market in 2014).  Nevertheless, even the aforementioned, optimistic WSJ article concedes that there is still considerable room for improvement, particularly given the distribution of new jobs.  In January of 2014, the Bureau of Labor Statistics released projections for job growth until 2022.  Unfortunately, with respect to salary levels, the jobs projected to experience the most growth pay very low wages.  Specifically, of the top five jobs projected to grow, 3 of them barely exceed the federal poverty level for a three-person family (annual income of $19,090), and 1 of them is below this poverty threshold (see graph below for details from MetroTrends Blog).  This data seems to suggest that job recovery in the United States is extremely one sided; low-wage employment is making a recovery while high-wage employment is not.  In this way, while the unemployment rate is falling, the Untied States definitely still has an employment problem

Job Growth

Interestingly, according to an article in Forbes titled “The Cities Creating the Most High-Paid Jobs, And Why They’re Good for Low-Wage Workers Too,” points out that if we focus on growing high-wage jobs, the low-wage job growth will follow (Forbes: The Cities Creating the Most High Paid Jobs…). This article points out that high-wage jobs, typically those requiring a large degree of specialization and existing in export-oriented industries (like technology, which siphons money into silicon valley from outside the region), have a very large “multiplier effect.”  Because they draw in so much money, high-wage jobs created a demand for services that pay low wages, like grocery services, food prep, and health aids.  Thus it seems logical that policymakers should focus on increasing high-wage employment, as the multiplier effect will help local economies maximize growth.

But how do we increase the amount of high-wage jobs?  One potential solution is to refocus immigration policy.  Specifically, the United States immigration department, by issuing more H1-B visas, can increase the level of high-wage employment (note: an H1-B visa is a visa granted to non-immigrants who temporarily come to the United States to work in specialized occupations like biotechnology, medicine, business, or engineering).  Indeed, data supports that issuing H1-B visas has an extremely positive impact on domestic employment.  In 2008, Bill Gates stated that “Microsoft has found that for every H-1B hire we make, we add on average four additional employees to support them in various capacities” (Immigration Policy Center).

It is logical to suspect that issuing fewer H-1B visas would force American corporations to rely on domestic labor for the “specialty labor” that foreigners provide.  But this does not seem to be the case.  A survey by the National Foundation for American Policy found that 65% of firms respond to low limits on H-1B visas by moving operations oversees where these firms can freely access the specialty labor they need (Immigration Policy Center).  Furthermore, H-1B visas allow non-immigrants to “temporarily” work in the United States.  In this way, they allow firms to create high-wage employment opportunities domestically by hiring foreign experts to get the ball rolling.

Certainly, adjusting immigration policy is just one way to increase the amount of high-skilled labor in the United States, and I would certainly enjoy hearing additional ideas.  The key takeaway, however, is that increasing the amount of high-skilled labor is a far more effective way of fueling economic recovery than growing low-wage employment.  By fueling high-wage job growth and taking advantage of the multiplier effect, US policymakers can accelerate this country’s economic recovery.