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Stefan Karlsson
A worker counts U.S. dollar bills at a money changer in Manila in this file photo. Karlsson argues that falling unemployment shouldn't have a major impact on minimum wage (Romeo Ranoco/Reuters/File)
Does higher minimum wage increase unemployment?
Ralph Musgrave posted this comment to my post about minimum wages:
Stefan,
You claim that the text books say that “higher minimum wages will increase unemployment if set above the marginal productivity of more workers.” I suggest the latter statement is meaningless (or it’s a circular argument) because minimum wages themselves (along with union wages and other factors) determine what level of remuneration corresponds to the marginal worker. I’ll explain.As unemployment falls, the marginal product of labour falls because it becomes increasingly difficult for employers to find suitable labour amongst the unemployed. And employers will continue hiring from the ranks of the unemployed till the marginal product equals the minimum wage / unions wage, etc. At which point employers tend to begin poaching labour from each other, rather than hire from the unemployed.
Well, first of all, let's make it clear what "marginal productivity" is. Marginal productivity has nothing directly to do with the actual pay received by workers. Marginal productivity is the value added that a particular worker's work effort creates (or could create in cases where the worker is unemployed). To what extent this value goes to the worker or the employer is irrelevant for the issue of how big this value is.
And as for the idea that marginal productivity of workers fall as unemployment falls, it seems plausible and could in some circumstances be right, but only under certain circumstances. First of all, employers must always hire the best persons, something that probably and hopefully is usually true, but definitely not always, either because employers have too little information, or because the job seekers is not as good at applying for jobs as performing jobs or because employers might have irrational hiring practices.
And secondly, employers might not pick employees on the basis of their marginal productivity, they could pick them on the basis of how costly it is to hire them. A profit maximizing employer wants to maximize the difference between his workers marginal productivity and pay, but that can be maximized both by maximizing marginal productivity and minimizing pay.
And thirdly, to the extent that falling unemployment reflects rising demand or lower supply for labor rather than lower pay, this means that the perceived marginal productivity of workers (again defined in the term of how much value added a worker's efforts creates) rises generally.
Furthermore, the idea that hiring of the best unemployed during a period of falling unemployment means that marginal productivity falls is in a way true, but misleading because it confuses "generic marginal job seeker that can be hired" with individual workers. If the most productive unemployed gets hired it won't affect the (potential) marginal productivity of either any of those that gets hired and those that don't. It simply means that one shifts from more to relatively less productive workers.
Riot Police push back protestors, one waving the Greek flag, who try to enter at the Parliament building at Athens' main Syntagma square, during a 24-hour strike on Feb. 7, 2012. While U.S. exports to Europe are low, a severe recession could have an outsized impact on the U.S. economy. (Petros Giannakouris/AP)
A European recession could have American consequences
Paul Krugman notes that only about 2% of America's GDP consists of goods exports to Europe and argues that even after increasing that number by 25% (to 2.5% of GDP) to take service exports into account that means that there is little reason to expect a downturn in the European economy to affect the U.S. economy.
But first of all, while no country or region specific data for service exports exists, total service exports is more like 40% of goods exports as goods exports was $126.6 billion while service exports was $51.3 billion. America's exports consists of services to a much higher extent than most other countries (with some exceptions like Britain and Hong Kong).
Still, with a 2.8% of GDP estimate for total exports, even a 25% decline in exports would at most reduce GDP by only 0.7%, less to the extent that the value of exported goods consists of imported input goods.
However, while America because of its size is less sensitive to developments in Europe, and other parts of the world, than most other countries, a severe recession in Europe would affect it beyond the direct effect on exports to Europe for two reasons.
One is that because other countries in the world also export to Europe, their economies will weaken too, weakening U.S. exports to those countries as well.
The second, and more important is the effect that globalized financial markets create. When there is panic in one market, other markets usually panic as well. Europe experienced that in 2008 after the Lehman meltdown. And if there is a similar meltdown now in Europe, America will experience it too.
This file photo shows Wayne Hashell of South Dakota working at at the Pogo Gold Mine outside Delta Junction, Alaska. The American mining market is booming, with a 13.4 percent increase in January. (John Hagen/AP/Fairbanks Daily News-Miner/File)
The American mining jobs boom
Another noteworthy news from the latest employment report is that the boom in mining (including oil extraction) employment continued. Whereas overall employment rose 1.5% and overall private sector employment rose 2% in the year to January, mining employment gained as much as 13.4%. While it even after that gain was only 0.6% of total employment, its increase was 4.6% of the total increase in employment.
And that's only counting the direct employment in that sector. Add to that the jobs created by the demand from all those newly hired workers. The inflow of all those workers into the state who has benefited the most from the mining boom, North Dakota, has also created a construction boom in that state.
Though not the only factor, the direct and indirect effects of this mining boom is therefore an important factor behind the recent uptick in U.S. growth.
A worker is pictured at a residential construction project along N. Beverly Glen Boulevard, a two lane road in Los Angeles, California February 3, 2012. Construction spending is at its highest in four months. (Fred Prouser/Reuters )
Austerity is working
With both the manufacturing and the non-manufacturing surveys indicating increased expansion and with construction spending and employment increasing, it seems clear that the U.S. economy has started to go from the ""recovery" that feels like a continued recession for most people" state it has been in since the summer of 2009 to something resembling a real recovery, though still nowhere near as vigorous as for example the 1983-84 recovery.
What are the causes of this turnaround? In part it reflects the fact that growth is the natural state of the economy and that the factors that depressed it are dissipating and in part it reflects a credit-driven investment boom. Fixed business investments rose 7.5% in real terms in the year to the fourth quarter financed by a 11.4% gain in commercial & industrial loans. The fact that it is credit-driven indicates that it is an early stage of a classical Austrian business cycle scenario, but with the level of investments still below the peak levels of previous expansions, there is room for further expansion.
One aspect that makes the upswing look sounder is that it has happened while government spending has declined. The category government purchases (spending excluding transfer- and interest payments) has dropped from a post-1992 peak of 21.1% of GDP in the third quarter of 2009 to 19.7% in the fourth quarter of 2011, mostly because of spending cuts at the state and local levels.
This makes what Krugman wrote a few months ago especially interesting:
"Basically, government has been shrinking for the past year — in practice, fiscal policy has been doing exactly what Republicans say it should be doing. Where’s my confidence fairy?"
Right here, it seems.
The German national flag and the European flag fly in front of the Reichstag cupola in Berlin, January 31, 2012. Germany's 5.5 percent reported unemployment rate doesn't include workers working less hours than they would like, but Karlsson argues that's in keeping with how other unemployment rates across the globe are reported. (Thomas Peter/Reuters)
What is Germany's real unemployment rate?
Dean Baker criticizes the New York Times for reporting Germany's unemployment rate as 6.7% instead of 5.5%. The 5.5% rate refers to those who have no job at all, while the 6.7% rate also includes those who have only apart-time job but would want to have full-time employment instead. While there is a case for including those who have fewer hours than they want to, it becomes misleading to include them while making comparisons between countries because other countries only include those who are so to speak full time unemployed.
I agree with Baker on this point, and could add that numerous other media outlets make the same mistake as New York Times. But he is actually wrong to assert that the German government reports the higher number as its official rate. Obviously, the German government reported it, as they are the source of both numbers, but the number specified in its official press release on employment and unemployment is in fact 5.5% and only (for the overall unemployment rate) 5.5%. The same goes for the Eurostat release on unemployment in the 27 EU countries including Germany. That makes it all the more puzzling why so many media outlets insist on using the higher number for Germany, and only Germany.
In this file photo, flames from a fire set alight in a container by activists of the Frankfurt Occupy movement are seen in front of the European Central Bank and a sculpture of the euro symbol in Frankfurt, Germany. Demographics and excessive government spending are to blame for the economic stagnation of some European nations, Karlsson argues. (Michael Probst/AP/File)
Why has European growth been so weak for so long?
Interesting Wall Street Journal editorial which discusses why European growth has been weak for so long-namely demographics and excessive government spending. The article mentions Germany and Sweden as two countries that are "better run", which is basically true, but the point that could have been added was that their better relative performance is mostly because they have implemented tax- and social benefits cuts.
Germany by the way is an example of how countries in the short run can compensate for the effects of a shrinking working age population by employing a higher percentage of the people in that age group. They still have room to increase the employment rate for a few more years but with a 5.5% unemployment rate there is a limit to that. Perhaps Germany should encourage some of those newly unemployed Southern Europeans to learn German and move to Germany?
Big Ben and the Parliament buildings from the London Eye Wheel in London, England are seen in this file photo. (Robert E. Klein/AP/File)
The British economy is in worse shape than we thought
It is pointed out by Brad DeLong that the British economy has fared worse than even during the 1930s, since 2008.
The numbers are even worse if you adjust for the fact that the British population has increased by more than 2% during the period, though population increased almost as much in the 1930s as well.
DeLong of course blames Cameron's austerity policies, but there is a problem (actually there are several). That would suggest that the slump is demand driven, and if that had been the case we would have seen price inflation fall. But as it happens, inflation has increased the last few years and is at an annual average of 3.6% the last 3 years the highest since the early 1990s, and also significantly above the alleged 2% target of the Bank of England.
British inflation has also been a lot higher than in almost all other advanced economies. For example Sweden, whose economy has fully recovered even on a per capita basis, had an average inflation rate of 1.75% during the last 3 years.
The part of the austerity package that involved higher taxes (mainly a higher VAT) is really the only part that can explain this since they represent a negative supply shock that both raise price inflation and reduce real output, but that should have largely been cancelled out in part by the reduction in real disposable income from the tax increases and in part by the spending cuts.
This file photo shows a pack of bills of Chinese yuan bills next to U.S. currency. Karlsson argues that recent data shows that China's economy may become bigger than the US economey sooner than previously expected. (EyePress/AP/File)
China's economy may surpass US before 2020
According to preliminary estimates, China's GDP in 2011 was 47.156 trillion yuan, which at the current exchange rate of 6.3138 translates into roughly $7.47 trillion.
By comparison, tomorrow's GDP report for the United States will likely show that 2011 GDP was roughly, or slightly over $15 trillion. That means that China's economy is now nearly half as big as the U.S. economy.
This in turn means that China's economy could become bigger even sooner than previously thought. If the economic growth gap is 6% per year(lower than the average rate the last decade) and real appreciation is 2.5% per year (again, a lot lower than the average rate the last decade) than that would be sufficient for China's economy to become bigger by 2020. If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.
It is true that per capita income in China would still be a lot lower since China's population is more than 4 times as big. And in per capita terms, China might never surpass America. However, the fact that average income is so low is reason to believe thatv the "catch up" effect will continue to fuel growth in China. And so note that per capita income of one fourth of the U.S. level means that it would still be a lot lower than in the other majority Chinese countries (Hong Kong, Macao, Taiwan and Singapore).
In this file photo, workers maintain the huge Euro logo in front of the headquarters of the European Central Bank. The S&P has downgraded the bond yields of several eurozone countries, which Karlsson argues has an unjust effect on how those countries do business. (Ralph Orlowski/Reuters/File)
Why the Euro debt downgrade matters (even though it shouldn't)
Given the fact that bond yields of most of the euro area countries that were downgraded by Standard & Poors actually fell (contrary to what one might expect), similar by the way to how U.S. treasury yields dropped after they got downgraded by S&P, one can ask if S&P and other credit rating agencies have become irrelevant.
The short answer is: no thay haven't, though they should.
First of all we must realize that the move was expected and therefore already more or less priced in before the formal announcement after Friday's closing, so big changes wasn't to be expected. And other factors, for example ECB bond buying was active in pushing down yields.
And secondly, we have a really good reason to expect ratings to matter: namely that regulation requires many fund managers to only hold bonds that have sufficiently high ratings. It was because of this that Portuguese bond yields (already the second highest after Greece's) soared, as the downgrade forced many bond holders to sell.
But this is clearly something that should be changed. The credit ratings of credit rating agencies shouldn't in any way be encouraged or be made a mandatory standard by governments. They shouldn't play any role in legal accounting rules, nor in rules of which securities funds should invest in. This is both because it is principally wrong for governments to give private institutes such priviligies and because of their awful track record (to the extent they've been "right" it has almost always been because of the self-fulfilling prophecy mechanism).
So unfortunately, the incompetent credit rating agencies matter. But they shouldn't.
The European Union flag. It would seem that countries with high deficits–like Europes' Spain, Italy, and Greece–would have low economic growth, but according to Karlsson that is not always the case. (Bogdan Cristel/Reuters/File)
Can an economy still grow with serious debt?
Currently, there seems to be a positive correlation between current account balances and economic growth. Countries with big deficits like Greece, Spain and Britain are performing really bad, while surplus countries like Hong Kong, Singapore, Germany and Sweden are performing really good. And China with its large surplus are outperforming India with its deficit.
There are exceptions to this rule, of course. While having roughly as large (proportionally) a current account surplus as its northern and northern neighbors growth in Denmark has been very weak, and another surplus country, Japan has also had weak growth. Similarly, Turkey's economy has had extremely high growth even as it has a very large current account deficit. But despite these exceptions, surplus nations seems to be generally doing better right now.
This might seemingly vindicate mercantilism against non-mercantilist economics that says that we should expect higher growth in deficit countries because they get to invest the savings of the surplus nations in in their economy, creating jobs and production in the deficit countries.
But as it happens, non-mercantilist economics doesn't say that that deficits, or more accurately the capital inflows that are the flip side of them, will necessarily strengthen an economy. It will if it goes to finance sound investments , but not if it finances excess consumption or malinvestments. Even in the latter cases it might provide a short-term boost to economic growth (Turkey's boom for example contain some unsound elements), but once the unsuatainablity of the excess consumption or malinvestments become evident for investors, it will weaken the economy.
So the lesson is not that it is good to have a surplus or bad to have a deficit in the current account balance. The lesson is that it is bad to have excess consumption or malinvestments while good to have sound investments. This is escpecially true considering that surplus countries during problems in deficit countries are hurt too. Though still stronger than the deficit countries, growth in the surplus countries have weakened too because of falling exports and furthermore the surplus countries are likely too lose much of their formal export earnings because of inflation, formal defaults or both.
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