Category Archives: labor market

Consequences of Internal Free Trade

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Dietrich Vollrath writes,

The scale of the relative job changes, though, indicates that more of the losses have to do with free trade within the US than free trade outside of the US. The areas with relative decline lost 13 million jobs compared to the 1990 distribution of jobs. In total the US shed 6 million manufacturing jobs from 1990 to 2015 (18 million to 12 million, roughly). So this relative decline cannot possibly be a function only of manufacturing and international trade in manufactured goods. There is just too much relative movement out of the declining counties to attribute to this. This is a sloppy way of thinking about how this would work counter-factually (I’m ignoring spillovers entirely), but if you magically added 6 million extra jobs to those counties in relative decline, they would still be in relative decline compared to the Sunbelt in terms of jobs. They’d have 84.4 million jobs (as opposed to 78.4 million), but you’d expect them to have 95.6 million based on the 1990 distribution, so they would still be 11.2 million jobs off the pace.

Pointer from Mark Thoma. I recommend the entire post, which is rich in data analysis. One thought that occurred to me in looking at some of the information is that job losses have tended to occur in large metro areas long controlled by Democrats, and job gains seem to be in locations that are a bit more fluid politically.

Erik Hurst on the Labor Market

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In a podcast with Russ Roberts. Self-recommending.

An excerpt (there were many to choose from):

in earlier periods, manufacturing jobs were, you know, slowly going away. But at the same time, population was growing. So new young people could come into the market, and they adjust; and they don’t see, there isn’t enough jobs in manufacturing, and they kind of reallocate to other sectors. In the early 2000s, we lost, as I said before, about 4 million manufacturing jobs, in the early 2000, 2004, 2005 period. You know, from 1980 to 2000, we lost about 2 million manufacturing jobs over that 20-year period. And here we lost, you know, very quickly. And it might be that when shocks happen quickly, it just takes people longer to adjust. Some people get displaced; and then they have to work through, you know, accumulating new skills, moving to a different sector, moving to a different location. And if the young are more likely to do that than older workers, then we have to have enough young to kind of clear the market. And that might just take a little time. So, I don’t think this is going to be a long-run problem. I just think it’s–you know, we are seeing the medium run responses to this right now.

Wither Factor-Price Equalization?

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Elisa Giannone writes,

The interaction of SBTC [skill-biased technical change] and agglomeration economies imply that more educated locations have larger skill premium. High and low-skill workers have some degree of complementarity, so, agglomeration effects raise the wages of all the workers. The differential increase in the wages of high-skill workers makes the migration patterns for high and low-skill workers diverge: high-skill workers migrate to educated cities more than do low-skill workers. Migration has a twofold effect. First, the more workers migrate to a location, the marginal productivity of each will decrease, hence, the returns will decrease. Second, when more high-skill workers move to a location, productivity goes up because of agglomeration effects, raising the wages of all the workers, but especially the wages of the high-skill workers.

Pointer from Tyler Cowen.

She points out that within the U.S. since 1980, wages have stopped converging across cities, and this is mostly due to divergence among high-skilled workers. So we are not getting factor-price equalization, and she wants to try to explain why. Her explanation strikes me as quite complex (it includes more than just what is in the quoted paragraph) and a bit just-so-story-ish, but that is what happens when you observe a phenomenon that challenges a core interpretive framework.

If you believe in factor-price equalization, then you predict that workers with similar skills will tend toward the same pay in different locations. The word “similar” often gives me pause. As consumers, we value different amenities. In my prime, I could have earned a higher wage working in Manhattan, but relative to the people who chose to work there, I valued the amenities less. I wonder how much of the apparent divergence can be traced to the interaction of consumer preferences with other factors. I am guessing that assorattive mating fits in somewhere.

Disperse the Federal Government

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I have a random suggestion for the new Administration: disperse the Federal government. The idea is to move agencies that do not really need to be in Washington to depressed areas of the country. This would improve the labor market in those areas.

We could move HUD to Detroit. We could move the Department of Energy to West Virginia. We could move the Department of Education to rural Mississippi.

I know that some of you do not think we need these agencies at all. But dispersing them might accomplish some of what you want. Many of the employees would be unwilling to relocate.

The Monopsony Issue

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A reader asked me to comment on the issue, raised by the President’s economist Jason Furman, that labor markets are monopsonistic. I do not have much to add to other blogosphere comments, but here goes:

1. Just to clarify, a monopsonist in the labor market is an employer who can set wages below a competitive rate, because its workers have no other potential employers.

2. Suppose that we accept as true the finding by Richard Freeman that the highest wages are paid at the most profitable firms. If there is a monopsony story there, I do not see how to tell it. A monopsonist would exploit its workers by paying low wages, so I would expect that if monopsony were prevalent then we would see the highest wages paid to the least profitable firms (the ones who are competitive in the labor market and cannot exploit their workers). I think that to account for Freeman’s results, you either have to say that the most profitable firms have monopoly power in the markets for their output, and they share some of the rents with their workers, or you have to be like me and be skeptical of Freeman’s ability to measure the true productivity of various workers.

3. If you have some government policy to force employers to pay higher wages, this only helps increase labor’s share if the demand for labor is inelastic. Even if firms have monopsony power, that does not necessarily make their labor demand inelastic.

4. One way for government to make workers better off would be to decouple health insurance from employment, while replacing Obamacare.

5. Another way for government to make workers better off would be to reduce the payroll tax and cut spending by a corresponding amount.

How Fractal is High-skilled Immigration?

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Sari Pekkala Kerr, William Kerr, Çaǧlar Özden, and Christopher Parsons write,

The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia.

Pointer from Tyler Cowen.

I wonder if this pattern is fractal. That is, within the United States, do we see a net influx of high-skilled individuals to only a few metro areas? Within metro areas, do we see a net influx to only a few hot spots?

Factor-price Non-equalization?

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A commenter wrote,

Given this definition of ‘discipline’, under what condition do you stop believing your intuition? What would you observe that would cause you to drop your belief in price-factor equalization, or, assortative mating?

Coincidentally, Josh Zumbrun writes,

Why would a company pay someone $80,000 if most people with an identical background—clones, in the paper’s parlance—earn $40,000? Conversely, why would someone with that background stay in the job earning $40,000 if another company will pay $80,000 for the same work?

The puzzle is that worker pay increases are highly correlated with the rate at which profit increases at the firms that they work.

My thoughts:

1. I tend to distrust the ability of economists to know more than a firm what the firm’s workers ought to be paid. Imagine an economist trying to tell Google that, based on your regression equation, it is paying its programmers more than the market wage. Google might reply that its programmers earn more because Google has selected better programmers.

2. The article offers the theory that firms with monopoly power will pay workers more. Perhaps, but a monopolist still has an incentive to avoid paying an above-market wage to its workers. In any case, if Google pays more because it has monopoly power, how pervasive is this? Do they pay above-market wages to janitorial staff? Above-market prices for office supplies? When Google employees travel, does Google pay more than the asking prices for hotel rooms and airline tickets?

3. Suppose that we grant that two workers who appear to be identical to someone running a regression equation are in fact identical in practice. It could be that each worker made a long-term commitment to a firm, and one chose a firm that happened to succeed and the other chose a firm that happened to fail. That might lead to factor-price non-equalization.

As you can see, I am very reluctant to let go of factor-price equalization. But if more evidence against it accumulates, I will be willing to change my mind.

However, in Specialization and Trade, I make the point at length that economic propositions are not falsifiable. If you want to stay committed to a proposition, you can. I say that economics deals with very few falsifiable hypotheses and many non-falsifiable frameworks of interpretation.

I can tell from the comments on previous posts that my position bothers some people enormously. They strongly oppose the situation as I describe it. Perhaps it will help to say that I have nothing against rigorous falsifiability in science, I just do not think it can be carried out in economics.

I hope you can appreciate that this is the situation with history. I doubt that we will ever be able to prove that wars are caused by X or that revolutions are caused by Y. Still, there are useful interpretive frameworks that tell us something about these issues.

I believe that all of the disciplines that deal with human society are going to have to live with this. If someone is really attached to their interpretive framework, it will be difficult or impossible to dissuade them. The best that one can hope is that people will not be so unreasonable as to assign 100 percent credibility to any information that supports their view and 0 percent credibility to any information that opposes it.

I think that we naturally try to fight back when one of our views is threatened, as mine are by the research cited above. The ideal would be for us to fight back when a study supports our views and be more accepting of studies that threaten our view, but it is difficult to live up to that ideal.

How High is Geographic Mobility?

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Ioana Marinescu and Roland Rathelot write,

The data is from CareerBuilder.com, arguably the largest job board in the U.S., and is broadly representative of the U.S. labor market. Using this data to document the geography of job search, we find that job seekers are more likely to apply to jobs closer to home: a job seeker is 35% less likely to apply to a vacancy that is 10 miles away than to a vacancy that is in the job seekers’ ZIP code of residence. Still, we find that, on average, a job seeker sends 11% of their applications to out-of-state vacancies.

They conclude that there is little lack of geographic mobility.

This may be correct, and I may be wrong that men nowadays are not eagerly moving to where jobs can be found, or into occupations (truck driving, construction) where jobs currently are available. But I would pick some nits about this particular paper.

1. My guess is that CareerBuilder.com is probably not a go-to web site for low-skilled, unemployed males. I amya be wrong, of course.

2. An average of 11 percent out-of-state applications could still mean that a large number of visitors to the web site apply to 0 out-of-state vacancies.

Where are the Servants?

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I asked this question five years ago. Recently, on Facebook, Nathan Smith wrote,

Consider the following hypothesis. Once upon a time, there was a notion of “respectability.” Society, represented chiefly by the gossip of housewives, imposed honesty, chastity, and maybe some degree of piety, not so much by force as by public opinion. And I think that mere “respectability” qualified one for certain jobs, such as child care, handling money, personal service, etc. Nowadays, tolerance and the Sexual Revolution have abolished the category of respectability, but there are still a lot of jobs where people don’t need special skills but do need to have good character, so some filter is needed. So education has become the new respectability. . .A whole social stratum finds it hard to get access to jobs they could do, because our nonjudgmental society refuses to circulate the information about people’s characters that potential employers need, and the substitute for respectability, education, can’t be universal because, while everyone could be chaste and honest, many don’t have the academic ability to succeed in college, and/or can’t afford it. So personal service, which almost vanished during the economically egalitarian mid 20th century, but would be well worth reviving today, doesn’t make a comeback for lack of an identifiable class of respectable people whom the rich would allow to be present in their homes. . .

My thoughts.

1. There are a lot of jobs that involve personal care. Elder care and child care are what I have in mind.

2. What Smith calls “character” might be described as conscientiousness.

3. I do not get the impression that the personal care market fails in any dramatic sense. That is, I do not get the impression that there are many conscientious people willing to take jobs in personal care who are unable to find such jobs. If such a market failure were to present itself, it could be solved by entrepreneurs forming companies to vet and guarantee the quality of individual providers of elder care and child care.

4. Not that Smith was responding to my original post, but there I was suggesting that the high concentration of wealth would imply not so much that every middle class family should have personal servants but that rich people should have hundreds or thousands of personal servants. I think it is an instructive issue to ponder, but I have not come up with any new theories in the past five years, although I would add that the “supply problem” might include the fact that there are many people who are not conscientious.

An Outbreak of Laziness

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Erik Hurst says,

In our culture, where we are constantly connected to technology, activities like playing Xbox, browsing social media, and Snapchatting with friends raise the attractiveness of leisure time. And so it goes that if leisure time is more enjoyable, and as prices for these technologies continue to drop, people may be less willing to work at any given wage. This explanation may help us understand why we see steep declines in employment while wages remain steady – a trend that has been puzzling economists.

Right now, I’m gathering facts about the possible mechanisms at play, beginning with a hard look at time-use by young men with less than a four-year degree. In the 2000s, employment rates for this group dropped sharply – more than in any other group. We have determined that, in general, they are not going back to school or switching careers, so what are they doing with their time? The hours that they are not working have been replaced almost one for one with leisure time. Seventy-five percent of this new leisure time falls into one category: video games. The average low-skilled, unemployed man in this group plays video games an average of 12, and sometimes upwards of 30 hours per week.

Pointer from Tyler Cowen.

Back in the 1980s, during the Macro Wars, Franco Modigliani taunted freshwater economists with the line, “Was the Great Depression an outbreak of laziness?”