Glenn Loury interviews David Neumark about the minimum wage

From Bloggingheads.tv comes this interview of David Neumark by Glenn Loury about the effects of the minimum wage.

The employment effects of minimum wages

A brief summary of the state of play.

First, the evidence on the disemployment effect of minimum wages is contested, and there clearly are studies that find no employment effect – both in the United States and in other countries. However, the preponderance of evidence indicates that minimum wages reduce employment of the least-skilled workers. Earlier estimates suggested an ‘elasticity’ of about -0.1 to -0.2. Many estimates are still in this range, some are closer to zero, and some are larger. To be clear, some researchers may have reason to put more store in the types of estimates that tend to find no employment effects – typically the research designs that I have labeled ‘close controls’. I have indicated reasons I am somewhat skeptical of these designs, but also indicated that the jury is still out. More definitively, though, it is indisputable that there is a body of evidence pointing to job losses from higher minimum wages. Characterizations of the literature as providing no evidence of job loss are simply inaccurate.

Second, there are two kinds of changes in minimum wages about which we know a lot less. The first change is the adoption of much higher minimum wages – as is happening in the United States with serious movement toward a $15 minimum. There is a great deal of uncertainty about the employment effects of a $15 minimum wage. One thing we do know is that it would impact far more workers than the current minimum wage, especially in lower-wage states and lower-wage areas of most states. More speculatively, my sense is that the costs of a much higher minimum wage are likely to be understated by simply scaling up the effects based on employment elasticities in the existing literature, because the much higher share of workers affected will reduce employers’ ability to partially offset minimum wage increases by changes in margins other than employment.

The second kind of change about which we know relatively little concerns the introduction of a new minimum wage – like in Germany. There is some evidence from the introduction of a new minimum wage in the United Kingdom. Some of this evidence points to job loss, but the evidence is mixed. And, of course, the institutional setting is not the same.

From "The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns" by David Neumark, German Economic Review, Forthcoming.

The employment effects of minimum wages

There is a new NBER working paper out on The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns by David Neumark.

The abstract reads:

I discuss the econometrics and the economics of past research on the effects of minimum wages on employment in the United States. My intent is to try to identify key questions raised in the recent literature, and some from the earlier literature, that I think hold the most promise for understanding the conflicting evidence and arriving at a more definitive answer about the employment effects of minimum wages. My secondary goal is to discuss how we can narrow the range of uncertainty about the likely effects of the large minimum wage increases becoming more prevalent in the United States. I discuss some insights from both theory and past evidence that may be informative about the effects of high minimum wages, although one might argue that we first need to do more to settle the question of the effects of past, smaller increases on which we have more evidence (hence my first goal). But I also try to emphasize what research can be done now and in the near future to provide useful evidence to policymakers on the results of the coming high minimum wage experiment, whether in the United States or in other countries.

Monopsony models and the minimum wage

In an interesting and provocative article at Bloomberg Noah Smith discusses recent empirical research that suggests that higher minimum wages do not have negative effects on employment. Smith argues that this work discredits the standard competitive model of labour markets He favours a model of monopsonistic markets where employers have market power. Smith writes,

Together with the evidence on minimum wage, this new evidence suggests that the competitive supply-and-demand model of labor markets is fundamentally broken. If employers have the power to set wages, then not just minimum wage, but other labor market policies -- for example, union-friendly laws -- can be expected to help workers a lot more than popular introductory economics textbooks now predict.

Textbook writers and instructors should respond by changing the baseline model of labor markets that gets taught in class. Students ought to start with a model of market power, in which a few companies set wages below levels found in a competitive market unless prevented from doing so. That model is about as easy to work with as the traditional supply-and-demand setup, but matches the data much better.

Perhaps not too surprisingly not all economists agree with him.

At the EconLog blog, Scott Sumner says he is not convinced by Smith's arguments. Sumner writes,

1. The replication crisis in the sciences, and the social sciences.

2. Conservative studies seem able to explain the very low levels of hours worked in Europe much better than progressive studies. And the studies that Smith cites are progressive studies. That doesn't mean progressives are wrong, but until progressives are able to explain Europe's labor market, I'll continue to have trouble taking them seriously.

3. Most importantly, Smith overlooks the fact that empirical research is just as unfriendly to the monopsony model of labor markets as it is to the competitive model of labor markets. AFAIK, almost all the empirical studies of the minimum wage suggest that higher minimum wages do not come out of profits, but rather are passed on in terms of higher prices. That result is 100% consistent with the competitive model of labor markets, and inconsistent with the monopsony model (which suggests that if employment doesn't fall then product prices do not rise.)

Thus empirical studies show that when a minimum wage increase forces grocery stores to pay higher wages, they pass on the increased costs in the form of higher prices.

Now I suppose that progressives could argue that demand curves don't slope downwards, and that the higher prices will not reduce sales. In that case, a higher minimum wage need not reduce employment. But as soon as you abandon downward sloping demand curves, you are faced with other dilemmas. For instance, why should progressives oppose "regressive" consumption taxes? After all, if demand curves don't slope downwards, then higher prices would not reduce consumption. And since living standards depend on consumption, regressive taxes would not reduce the living standards of the poor.

Of course we know that demand curves do slope downwards, and we know that regressive taxes tend to adversely impact the poor. What we need to figure out is whether higher minimum wages raise prices and reduce sales. So far, the empirical evidence suggests that they do.

To summarize, the empirical evidence on the effect on minimum wages on employment is mixed. The empirical evidence on the effect of minimum wages on prices is pretty clear---it raises prices. That means that, on balance, the empirical evidence is more supportive of the competitive labor market model than the monopsony model.

This doesn't mean that firms have no monopsony power---they almost certainly have some. The question is how much, and whether the short and long run labor demand elasticities differ.

At the Cafe Hayek blog, Don Boudreaux says,

First, as Jim Buchanan, Donald Dewey, and other economists have pointed out, as long as demand curves for outputs are downward sloping, monopsony power is only a necessary and not a sufficient condition for minimum wages not to reduce the employment prospects of low-skilled workers. For minimum wages not to reduce these workers’ employment prospects, employers with monopsony power must also have monopoly power (and not just the sort of such ‘power’ as is identified in models of monopolistic competition). That is, these employers must have the ability to keep the prices of the outputs they sell above average total costs. If they do not have this ability, then there are no excess profits, or rents, out of which the higher labor costs can be paid.

Second, empirical studies typically fail to examine all the many ways that employers and employees can adjust to minimum wages. The list of such possible adjustments other than reduced hours of employment includes reductions in formal fringe benefits (such as paid leave), reductions in informal fringe benefits (such as workplace safety higher than what is minimally required by legislation), and changes in the nature of the jobs such that workers are worked harder in order to produce more output per hour. To the extent that adjustments such as these occur, minimum-wage-induced reductions in employment will be fewer or lower, but the standard textbook model really still holds.

Third, because in the U.S. the national minimum wage has been in place now for 80 years and is at no risk of being repealed, employers have long ago adjusted their business plans – their capital-labor ratios – to the existence of minimum wages. And employers expect occasional minimum wage increases. Therefore, even the finest and most carefully controlled empirical study of a minimum-wage hike today will not detect the employment-reducing effects of the long-standing expectation of minimum-wage hikes. Because employers have already adjusted to the reality of minimum wages – and to the reality of minimum wages being increased from time to time – any study that correctly finds little or no negative employment effect from this or that minimum-wage hike today nevertheless misses the negative employment effects of minimum wages overall.

Fourth, about monopsony power: it’s more difficult to detect than, ironically, standard textbook models suggest. Suppose that Acme, Inc., competes for workers by offering unusually attractive fringe benefits and work conditions. And suppose that Acme, Inc., has a differential advantage over other employers at supplying to its workers such non-wage amenities, or that for Acme, Inc., the marginal cost of attracting X number of workers by supplying non-wage amenities is lower than is its cost of attracting X number of workers by increasing the wages it pays. Under such conditions, Acme, Inc., gains the power to lower its workers wages by some amount without losing all, or perhaps even any, of its workers.

An empirical study of this firm would conclude that Acme, Inc., has monopsony power. But this conclusion would be incorrect, for the ‘power’ that Acme, Inc., is detected to have over its workers is ‘power’ that Acme, Inc., purchased from its workers – workers who voluntarily agreed to Acme’s employment terms.

Put differently, if (as is not unreasonable for many employers) Acme, Inc., values a steady workforce, it can purchase – with non-wage amenities – from its workers the ability to cut their wages without their quitting. The textbook-bound economist, seeing only the reduced wages and no mass exodus of workers from Acme, leaps confidently to the conclusion that Acme has monopsony power. Yet clearly, in this example, that conclusion would be mistaken.

On Twitter, David Neumark, an economist who has spent many years studying minimum wages, wrote,

Strong mischaracterization of the evidence on the #minimumwage https://t.co/Xd5JUXp0ks

— David Neumark (@NeumarkDN) April 5, 2018

Thus, while Smith's position is certainly interesting, and could apply in some particular labour markets, I think he needs to do more to convince many of his fellow economists that the markets with monopsony power should be the standard model for labour markets.

The 10-Year baby window that is the key to the women’s pay gap

An interesting new twist on the effects of children on the pay gap between men and women. It has long been argued that having kids is one reason for the gap in pay between men and women but now a new study suggests that women who have their first child before 25 or after 35 eventually close the salary divide with their husbands. It's the years in between that are most problematic.

Claire Cain Miller discusses the new research at the Upshot blog at the New York Times. Millar writes,

Today, married couples in the United States are likely to have similar educational and career backgrounds. So while the typical husband still earns more than his wife, spouses have increasingly similar incomes. But that changes once their first child arrives.

Immediately after the first birth, the pay gap between spouses doubles, according to a recent study — entirely driven by a drop in the mother’s pay. Men’s wages keep rising. The same pattern shows up in a variety of research.

The new twist in the research is to point out that,

When women have their first child between age 25 and 35, their pay never recovers, relative to that of their husbands. Yet women who have their first baby either before 25 or after 35 — before their careers get started or once they’re established — eventually close the pay gap with their husbands.

Why?

One explanation is that the modern economy requires time in the office and long, rigid hours across a variety of jobs — yet pay gaps are smallest when workers have some control over when and where work gets done. In high-earning jobs, hours have grown longer and people are expected to be available almost around the clock. In low-earning jobs, hours have become much less predictable, so it can be hard for working parents to arrange child care.

The issue, in general, comes down to time. Children require a lot of it, especially in the years before they start school, and mothers spend disproportionately more time than fathers on child care and related responsibilities. This seems to be particularly problematic for women building their careers, when they might have to work hardest and prove themselves most, and less so for women who have already established some seniority or who have not yet started careers.

So it may not just be having kids that matters for the pay gap, but when you have them matters as well.

Early gender gaps among university graduates

In a recent article at VoxEU.org Marco Francesconi and Matthias Parey write on Early gender gaps among university graduates. A summary of their column reads

Women earning substantially less than men in all advanced economies, despite the considerable progress women have made in labour markets worldwide. This column explores the recent experience of university graduates in Germany soon after their graduation. Men and women enter college in roughly equal numbers, but more women complete their degrees. Women enter university with slightly better high school grades but leave with slightly lower marks. Immediately after university completion, male and female full-timers work very similar number of hours, but men earn more across the pay distribution. The single most important proximate factor that explains the gap is field of study at university (Emphasis added).

Francesconi and Parey go on to say,

Several channels may be at work behind our results. One could be related to human capital considerations. The importance of field of study indicates the relevance of pre-market choices. These also interact with subsequent market decisions (such as occupational choice) at the very beginning of professional careers (e.g. Liu 2016). In turn, such choices could be partly driven by gender differences in preferences (e.g. risk aversion and time discounting), self-confidence, competitiveness, earnings expectations, and valuation of non-wage benefits (e.g. Buser et al. 2014, Mas and Pallais 2017, Reuben et al. 2017). Another possible channel is related to statistical discrimination against women, based on employers’ difficulty in distinguishing more from less career-oriented women (e.g. Gayle and Golan 2012, Reuben et al. 2014). These mechanisms deserve more attention in future research.

The gender wage gap is really a child care penalty

A couple of graphs make this point.

and

These graphs come from a column at Vox. The column is A stunning chart shows the true cause of the gender wage gap by Sarah Kliff.

Kliff discusses research by Henrik Kleven, an economist at Princeton University. Kliff writes

His [Kleven] study is among a growing body of research that suggests what we often think of as a gender pay gap is more accurately discussed as a childbearing pay gap or motherhood penalty.

Childless women have earnings that are quite similar to men’s salaries, while mothers experience a significant wage gap.

Kliff continues,

A 2009 study led by University of Chicago’s Marianne Bertrand echoes that conclusion. It examined the earnings of thousands of business school graduates. It found that women earned an average salary of $115,000 right out of graduate school, while men earned $130,000. Men also worked, on average, a few more weekly hours and had a bit more prior experience as they entered the workforce.

But nine years into their careers, women saw their salaries rise to an average of $250,000 — while men’s salaries averaged out at $400,000. Men were earning 60 percent more than women.

“The one thing which is not changing is the effect of children,” Kleven says of the gender wage gap. “This is very persistent and constant. All the other sources are declining, but the child effect sticks, and that ends up taking over as the key driver.”

Historical drivers of the gender wage gap — a lack of education among women, for example — are disappearing. But the professional penalty women face for having children is stubborn, and it isn’t going anywhere.

Such findings are consistent with the findings of yet other researchers such as Claudia Goldin. Goldin (Professor of Economics at Harvard University) has written,

These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children. Whatever changes have already taken place in American society, the duty of caring for children — and for other family members — still weighs more heavily on women. And if you thought that moving to a more family-friendly nation would eliminate the gap, think again. In several nations, including Sweden and Denmark, a “motherhood penalty” in earnings exists, even though these nations have generous family policies, including paid family leave and subsidized child care.

Such considerations bring us to a very sensitive area: domestic arrangements at home, especially among couples with children. These are personal questions. In theory, gender earnings equality is possible when both parents take off the same amount of time and enjoy the same flexibility at work.

So the answer to the pay gap may be in the choices made within the home. And that makes it difficult for public policy to deal with.

Claudia Goldin on the gender earnings gap

Claudia Goldin (Professor of Economics at Harvard University) writes, in the New York Times, on How to Win the Battle of the Sexes Over Pay (Hint: It Isn’t Simple.)

The executive summary

In sum, the gap is mainly the upshot of two separate but related forces: workplaces that pay more per hour to those who work longer and more uncertain hours, and households in which women have assumed disproportionately large responsibilities.

And now a bit more detail.

Yet it is also true that the time demands of many jobs can explain much of the pay difference, a finding that has sobering implications. Eliminating the gender earnings gap will require changes in millions of households and thousands of individual workplaces.

and

The gap is larger among more educated people, for example, and varies according to occupation, often in big ways. Among college graduates, it is far larger in business, finance and legal careers than in science and technology jobs. In health care, it is larger when self-employment is high (think dentists) and much lower when professionals are mainly employees (think pharmacists).

What’s more, the gap is a statistic that changes during the life of a worker. Typically, it’s small when formal education ends and employment begins, and it increases with age. More to the point, it increases when women marry and when they begin bearing children.

and

Similar patterns appear using data for women and men who have earned master’s degrees in business administration. Immediately after graduation, women earn 92 cents for each male dollar. A decade later they earn only 57 cents.

Correcting for time off and hours of work reduces the difference in the earnings between men and women but doesn’t eliminate it.

On the face of it, that looks like proof of disparate treatment. It may seem understandable that when a man works more hours than a woman, he earns more. But why should his compensation per hour be greater, given the same qualifications? But once again, the problem isn’t simple.

and

The data shows that women disproportionately seek jobs — including full-time jobs — that are more likely to mesh with family responsibilities, which, for the most part, are still greater for women than for men. So, the research shows, women tend to prefer jobs that offer flexibility: the ability to shift hours of work and rearrange shifts to accommodate emergencies at home.

Such jobs tend to be more predictable, with fewer on-call hours and less exposure to weekend and evening obligations. These advantages have a negative consequence: lower earnings per hour, even when the number of hours worked is the same.

Is that unfair? Maybe. But it isn’t always an open-and-shut case. Companies point out that flexibility is often expensive — more so in some jobs than others.

Certain job characteristics have a big impact on the gender earnings gap. I have looked closely at these issues, including the extent to which workers are:

• Subject to strict deadlines and time pressure
• Expected to be in direct contact with other workers or clients
• Instructed to develop cooperative working relationships
• Assigned to work on highly specific projects
• Unable to independently determine their tasks and goals

Occupations with a lower level of these characteristics (like jobs in science and technology) show smaller gaps, corrected for hours of work. Occupations with a higher level (like those in finance and law) have greater gaps. Men’s earnings tend to surge when there are fewer substitutes for a given worker, when the job must be done in teams and when clients demand specific lawyers, accountants, consultants and financial advisers. Such differences can account for about half the gender earnings gap.

Ask yourself, do you really care who your pharmacist is versus do you care who your doctor or lawyer is? A particular pharmacist not having to be there to deal with customers mean greater flexibility in hours worked but this comes with lower pay while the fact that people want a particular doctor or lawyer to deal with them means long hours with little flexibility but with higher pay to compensate.

These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children. Whatever changes have already taken place in American society, the duty of caring for children — and for other family members — still weighs more heavily on women. And if you thought that moving to a more family-friendly nation would eliminate the gap, think again. In several nations, including Sweden and Denmark, a “motherhood penalty” in earnings exists, even though these nations have generous family policies, including paid family leave and subsidized child care.

Such considerations bring us to a very sensitive area: domestic arrangements at home, especially among couples with children. These are personal questions. In theory, gender earnings equality is possible when both parents take off the same amount of time and enjoy the same flexibility at work.

So domestic arrangement with a more equal distribution of childcare may reduce the wage gap but it may also make the family poorer.

From a classic economic standpoint, if one spouse or partner can earn more by working less flexible hours, as a family, the couple would earn more money by having that parent in that job, while the other partner accepts the more flexible one. A man can certainly be the more flexible member of this household — though he typically is not. Such decisions need to be made couple by couple.

So the answer to the pay gap may be in the choices made within the home. And that makes it difficult for public policy to deal with.

Employment effects of Chinese imports in the US

In 2013, Autor, Dorn, and Hanson published a paper in the American Economic Review showing that rising import competition from China has been an important contributor to the recent decline in the employment rate of working age population in the United States.

Exploiting variation in exposure to Chinese import across local labor markets (commuting zones) over 1990-2007, they find that Chinese import exposure caused a large reduction in manufacturing employment: a $1,000 per worker increase in import exposure over a decade reduces manufacturing employment per working-age population by 0.6 percentage points (their Table 3, column 6), explaining about 44 percent of the actual decline in manufacturing employment from 1990 through 2007. Furthermore, the negative employment shock by Chinese imports goes beyond manufacturing and exists for nonmanufacturing workers. To be more specific, import exposure to Chinese imports caused a substantial employment decline in both manufacturing and nonmanufacturing sectors for workers without college education; while for workers with college education, import exposure caused substantial job loss in manufacturing sectors but a statistically insignificant increase in employment in nonmanufacturing sectors (their Table 5, Panel B) (Feenstra, Ma and Xu 2017: 2).

Robert Feenstra, Hong Ma and Yuan Xu have written a comment, "The China Syndrome: Local Labor Market Effects of Import Competition in the United States: Comment" (pdf), on that paper. In their comment Feenstra, Ma and Xu report results that cut the total employment effect in half, and in some groups the employment effect becomes insignificant, by controlling for the US housing boom .

The comment's abstract reads,

We re-examine the findings by Autor, Dorn, and Hanson (ADH, American Economic Review 2013, 103(6)) on the impact of Chinese import penetration on U.S. local employment by taking into account the concurrent housing boom. The responses of total employment, unemployment, or not-in-the-labor force to import exposure fall by about one-half when controlling for changes in housing prices, and become statistically insignificant in a number of cases. Results across sectors are more subtle. Noncollege workers in the manufacturing sector continue to experience a reduction in employment after correcting for the ‘masking’ effect of the housing boom, but that reduction does not occur in the nonmanufacturing sector. For college workers, their employment in the nonmanufacturing sector even rises due to the China shock, which fully offsets their reduced employment in manufacturing during 2000-2007. Our results imply that the net reduction in total US employment due to Chinese import exposure was about 0.8 million workers, or less than one-half of that implied by the estimates in ADH (2013).

The economic consequences of labour market regulations

A recent working paper from the Penn Institute for Economic Research reviews the empirical evidence on the effects of a minimum wage on employment. And yes, they are still negative.

The paper is "The Economic Consequences of Labor Market Regulations"  (pdf) by Jesus Fernandez-Villaverde. The abstract reads,

What do we know about the economic consequences of labor market regulations? Few economic policy questions are as contentious as labor market regulations. The effects of minimum wages, collective bargaining provisions, and hiring/firing restrictions generate heated debates in the U.S. and other advanced economies. And yet, establishing empirical lessons about the consequences of these regulations is surprisingly difficult. In this paper, I explain some of the reasons why this is the case, and I critically review the recent findings regarding the effects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages (Emphasis added).

The traditional view among economists of the effect of minimum wages is simple: if the minimum wage is set above the equilibrium wage you get unemployment. This core understanding of how the labour market functions has been attacked, most famously, by the publication of Card and Krueger (1994) and, three years later, by a companion book, Myth and Measurement (Card and Krueger, 1997). Card and Kruger looked a the case of an increase in the minimum wage that took place in New Jersey but not in the neighbouring state of Pennsylvania. On April 1, 1992, New Jersey increased the minimum hourly wage from $4.25 to $5.05. Pennsylvania, in contrast, kept the minimum wage at $4.25.

To most economists’ surprise, Card and Krueger documented a relative increase in employment in New Jersey of 2.75 full-time equivalent (FTE) employees per restaurant. In fact, there was even an absolute increase in employment in New Jersey and a drop in Pennsylvania (Card and Krueger, 1997, Table 2.2, p. 34). While, employment at the restaurants Card and Krueger surveyed in New Jersey went from 20.44 FTE employees per restaurant to 21.03, in Pennsylvania, it fell from 23.33 to 21.17

But as Fernandez-Villaverde notes the result has not aged well.

Card and Krueger’s results were sensational because they challenged a centuries-old understanding in economics. Also, their findings rationalized a policy intervention that has had strong political backing for almost as long. But sensational results invite close examination, and Card and Krueger’s findings have not held up to that torrent.

Refs.:

• Card, D., and A. B. Krueger (1994): “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” American Economic Review, 84(4), 772–93.
• Card, D., and A. B. Krueger (1997): Myth and Measurement. Princeton University Press.

Career costs of children (updated)

In short, big.

A new paper just out in the Journal of Political Economy (vol. 125, no. 2, April 2017, pp. 293-337) look at "The Career Costs of Children". It is by Jerome Adda, Christian Dustmann and Katrien Stevens.

The abstract reads:

We estimate a dynamic life cycle model of labor supply, fertility, and savings, incorporating occupational choices, with specific wage paths and skill atrophy that vary over the career. This allows us to understand the trade-off between occupational choice and desired fertility, as well as sorting both into the labor market and across occupations. We quantify the life cycle career costs associated with children, how they decompose into loss of skills during interruptions, lost earnings opportunities, and selection into more child-friendly occupations. We analyze the long-run effects of policies that encourage fertility and show that they are considerably smaller than short-run effects.

Adda, Dustman and Stevens point out that women have a number of disadvantages in the labour market and note that

Having children may be one important reason for these disadvantages, and the costs of children for women’s careers and lifetime earnings may be substantial.

Interestingly Adda, Dustmann and Stevens look at the gender wage gap,

Using a sample of comparable male cohorts who made similar educational choices, we run simulations to understand better the wage differences between women and men over the life course and how these are affected by fertility decisions. We find that fertility explains an important part of the gender wage gap [about one third], especially for women in their mid-30s.

What drives the cost of children?

Thus, the costs of fertility consist of a combination of occupational choice, lost earnings due to intermittency, lost investment into skills, and atrophy of skills while out of work and a reduction in work hours when in work. In addition, fertility plans affect career decisions already before the first child is born, through the choice of the occupation for which training is acquired—an aspect that is important not only for policies aimed at influencing fertility behavior but also for understanding behavior of women before children are born. An important additional aspect for the lifetime choices of fertility and career is savings that help women to smooth consumption. Furthermore, fertility leads to sorting of women into work, with the composition of the female workforce changing over the life course of a cohort of women, because of different career and fertility choices made by women of different ability.

and early occupational choice really affects wages,

Occupational choices at the beginning of the career, and before any fertility decision is made, represent 19 percent of the overall costs induced through wages, indicating that a substantial portion of the wage-induced career costs of children is already determined before fertility decisions are made, through occupational choices conditioned on expected fertility pattern.

Another factor influencing women's is is the amenity value of an occupation with regard to children (which can be interpreted as the ease with which women in these occupations can combine work with child raising).

We present estimates of these amenity values, normalized to be zero for routine occupations, in panel C of table 3. The figures show that—in comparison to routine jobs—abstract jobs are least desirable when children are present. Our estimates imply that if abstract and manual occupations had the same amenity value as routine ones,the proportion of women opting for abstract or manual occupations would increase by 5 percent. The amenity of part-time work—an option chosen by many mothers in our data—is likewise lower in abstract jobs, as the second row of this panel shows. Our estimates imply that if women in abstract jobs had the same amenity value for part-time jobs as in routine ones, the proportion of part-time work in abstract jobs would be 7 percent higher by the age of 30.

All this points to there being a complex interaction between career and fertility decisions with the costs of children often being high.

Update: Thanks to a message in the comments section we learn that you can get an open access version of the paper here.

If economic ignorance were a natural resource, our world would be paradise

You have to love a heading like that! It comes not from me but from the ever insightful Don Boudreaux at the Cafe Hayek blog. Boudreaux is commenting on the idea that the government subsidisation of low-skilled workers’ "housing, food, medical care, and transportation" enables employers of such workers to pay them less than some "true value" of their work.

There is an obvious question as to what this "true value' is.

Boudreaux writes,

The central economic point is this: the welfare programs to which Mr. Phelps alludes (with the possible exception of transportation subsidies) reduce the supply of labor and, thus, push wages up. Far from employers being subsidized by such welfare programs, employers of workers who receive these government benefits are obliged, as a result, to pay wages that are made artificially high.

But to show just how deeply confused this Mr. Phelps is, let’s pretend that he’s correct to insist that welfare programs artificially reduce wages. Mr. Phelps then asserts that “Failure to pay a living wage gives consumers artificially low prices and increases corporate profits.” Because nearly all employers of low-skilled workers operate in intensely competitive industries such as retail and food service, workers’ artificially low wages would indeed result in artificially low prices for consumer goods, but not in increased corporate profits. The ability to hire workers at artificially low wages would attract new entrants into these markets, as well as cause existing firms to expand their outputs, until the rate of profit earned by employers of these workers is no higher than it would be if wages were higher. That Mr. Phelps is oblivious to this reality is sufficient reason to dismiss his economic analysis.

While I agree with Boudreaux's point, I do wonder just how large the effect is. Of all the things the government does to stuff-up the labour market is this a big player?

Protection and job losses

At the Cafe Hayek blog Don Boudreaux makes the point that protection does not stop job losses.

You are correct that under a regime of free trade some people, through no fault of their own, lose jobs. You are also correct that such experiences are unpleasant. But protectionism does not stop job losses from occurring. Even if Uncle Sam were to completely shut the American economy off from global markets, job losses would still occur. American consumers would still change their spending patterns such that goods and services that were in high demand yesterday would be in lower demand today. Entrepreneurs would still experiment with new products and with new, labor-saving methods of production and distribution. Economic churn would still happen, complete with its unavoidable job losses.

The difference would be that, being denied access to the creative insights and productive efforts of 95 percent of the world’s population as well as to the bulk of the world’s resources, we’d all be much poorer.

What changes in trade policy do is change who has jobs, not the total number of jobs. Change trade policy and you just move jobs around the economy without having much effect on the total number of those jobs. As Paul Krugman has written,

It should be possible to emphasize [...] that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

But the other point made by Boudreaux is also important, protection makes us poorer. The more we protect, the more we have to do things we are (relatively) bad at doing and the less time we spend on doing things we are good at doing. In the process we make ourselves worse off. It is better for us to concentrate on what we are good at producing and trading that for the things we are bad at producing with people who are good at producing it. As Krugman notes efficiency is what matter and by doing things we are bad at we become less efficient, not more.

Why are there still so many jobs?

Here's a paradox you don't hear much about: despite a century of creating machines to do our work for us, the proportion of adults in the US with a job has consistently gone up for the past 125 years. Why hasn't human labor become redundant and our skills obsolete? In this talk about the future of work, economist David Autor addresses the question of why there are still so many jobs and comes up with a surprising, hopeful answer.

Mandating extra employee benefits comes at a cost

May be not immediately but over time they do. Tyler Cowen makes the point in an article at Bloomberg.

Most likely, there is a big difference between short-run and long-run effects. For instance, employers value the workers they have, and are reluctant to fire them when labor costs go up. A lot of “pro-worker” policies thus seem to be a kind of magical free lunch. Over time, however, as a generation of workers turns over and is replaced, mandatory benefits represent a real added cost, evaluated anew, and employers will respond accordingly. They will cut the paid dollar wage, cut other job benefits, require more hard work, automate more, or cut back on plans for growing the business. The downward-sloping demand curve is the best established empirical regularity in all of economics, and in this context that means some laborers -- maybe most laborers -- will pay a price for their new benefits, one way or another.

Female/male pay gaps in STEM subjects

New research suggests that women earn, on average, around 31% less that men in STEM (Science, Technology, Engineering or Mathematics) subjects within a year of completing a PhD.

An obvious question is why.

Perhaps surprisingly the answer to this questions can be reduced to just two factors: 1) field of study and 2) kids.

But after controlling for differences in academic field, the pay gap between males and females is reduced to around 11% in first-year earnings. There is a tendency for women to graduate in less-lucrative academic fields - such as biology and chemistry than comparatively industry-friendly fields, such as engineering and mathematics.

This 11% difference can be explained entirely by the finding that married women with children earned less than men. Note that an unmarried, childless woman earned, on average, the same annual salary after receiving her doctorate as a man with a PhD in the same field.

So it turns out kids are bad for your income, and not just on the expenditure side but also the earnings side!!

These results come from a paper, "STEM Training and Early Career Outcomes of Female and Male Graduate Students: Evidence from UMETRICS Data Linked to the 2010 Census" by Catherine Buffington, Benjamin Cerf, Christina Jones and Bruce A. Weinberg published in the American Economic Review: Papers & Proceedings 2016, 106(5): 333–338.

There are a few things to keep in mind with the study. Given that the data is on PhD holders these are specialised labour markets. There are 1,237 students - 867 male and 370 female who graduated between 2007 and 2010 from just 4 universities in the study. Also the labour market outcomes likely reflect some unobserved heterogeneity, including in hours worked, and potentially household decisions on housework and child care. There is also the question of what happens in later post-doc years.

That said, the results, in particular the effects of children on earnings, are consistent with other work I have seen on pay differences between men and women. A number of other studies have reported similar gender pay gaps and have identified similar contributing factors — but few have systematically broken down the relative contributions of the different variables.

Pope Francis says it's 'scandalous' that women earn less than men for the same job

From Fox News Latino,

Pope Francis has added his voice to the feminist anthem of equal pay for equal work, saying it's "scandalous" that women earn less than men for doing the same job.

Francis also lambasted the attitude of some who blame the crisis in families on women getting out of the house to work. He says such attitudes are a form of "machismo" that shows how men "want to dominate women."

and

Francis says husband and wife must be complementary: "We should support with decisiveness the right to equal pay for equal work. Why is it a given that women must earn less than men?"

Good to see him making a stand. After all if there is one job with complete equality of the sexes its that of being Pope!

Employee satisfaction, labour market flexibility, and stock returns around the world

In a new NBER working paper Alex Edmans, Lucius Li, and Chendi Zhang study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. They show that employee satisfaction is associated with positive abnormal returns in countries with high labour market flexibility, such as the U.S. and U.K., but not in countries with low labour market flexibility, such as Germany. I wonder New Zealand would come in this ranking.

These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labour markets, where firms face fewer constraints on hiring and firing. In contrast, in regulated labour markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasise the importance of taking institutional features into account when forming such strategies.

The conclusions of the paper:

This paper studies how the relationship between employee satisfaction and stock returns depends critically on the level of a country’s labor market flexibility. The alphas documented by Edmans (2011, 2012) for the U.S. are not anomalous in a global context, in terms of economic significance, and do extend to several other countries. However, they do not automatically generalize to every country – being listed as a Best Company to Work For is associated with superior returns only in countries with high labor market flexibility. These results are consistent with the idea that the recruitment, retention, and motivational benefits of employee satisfaction are most valuable in countries in which firms face fewer constraints on hiring and firing. These benefits are lower in countries with inflexible labor markets, leading to a downward shift in the marginal benefit of expenditure on employee welfare. Moreover, in such countries, regulations already provide a floor for worker welfare, leading to a movement down the marginal benefit curve. Both forces reduce the marginal benefit of investing in worker satisfaction, and thus being listed as a Best Company may reflect an agency problem.

The results emphasize the importance of the institutional context for both managers and investors. Edmans (2011, 2012) uses long-run stock returns as the dependent variable to mitigate concerns about reverse causality from firm performance to employee satisfaction – any publicly- available performance measure should be incorporated into the stock price at the start of the return compounding window. However, these papers do not make strong claims about causality, as it may be that a third, unobservable variable (e.g. management quality) drives both employee satisfaction and stock returns. Even if their results are interpreted as causal, it is not the case that managers can hope to increase stock returns by investing in employee satisfaction, as a positive link only exists in countries with high labor market flexibility. Turning to investors, a strategy of investing in firms with high employee satisfaction will only generate superior returns in countries with high labor market flexibility. Given that the vast majority of empirical asset pricing studies that uncover alpha are based on U.S. data, the results emphasize caution in applying these strategies overseas. This caution is especially warranted for strategies that are likely to be dependent on the institutional or cultural environment, such as socially responsible investing strategies. Just as the value of employee satisfaction depends on the flexibility of labor markets and existing regulations on worker welfare, the value of other SRI screens such as gender diversity, animal rights, environmental protection, and operating in an ethical industry also likely depend on the context.

The role of labour market flexibility for the results of the paper is interesting. New Zealand is not in their data set and I wonder how flexible our labour markets would look internationally.

Do large modern retailers pay premium wages?

An important question given the grow we have seen in larger retailers in New Zealand and around the world. The question is studied in this new NBER working paper Do Large Modern Retailers Pay Premium Wages? by Brianna Cardiff-Hicks, Francine Lafontaine, Kathryn Shaw. The abstract reads,

With malls, franchise strips and big-box retailers increasingly dotting the landscape, there is concern that middle-class jobs in manufacturing in the U.S. are being replaced by minimum wage jobs in retail. Retail jobs have spread, while manufacturing jobs have shrunk in number. In this paper, we characterize the wages that have accompanied the growth in retail. We show that wage rates in the retail sector rise markedly with firm size and with establishment size. These increases are halved when we control for worker fixed effects, suggesting that there is sorting of better workers into larger firms. Also, higher ability workers get promoted to the position of manager, which is associated with higher pay. We conclude that the growth in modern retail, characterized by larger chains of larger establishments with more levels of hierarchy, is raising wage rates relative to traditional mom-and-pop retail stores.

So the short answer seems to be yes, at least for the U.S., but to me the interesting thing is the sorting effect with better working employed at the bigger retailers. Is this a version of the Henry Ford $5 a day idea?

Henry Ford’s friend and general manager, James Couzens, came up with the innovative idea of paying the workers enough to keep them from leaving. $5 a day, said Couzens. Henry, himself a multimillionaire, countered that $3 a day was more than enough, then a few days later he grudgingly agreed to $4 before eventually caving in to Couzen’s insistence. Finally, in January 1914, Ford doubled the wages of his workers to an unheard-of $5 a day. Ford was swamped with job applications and absenteeism dropped from 10% to 0.5%.

Jobs are a cost

We are often told by politicians and interests groups how many jobs this project or that project will create, as if jobs are somehow a benefit of the project. But are they? At the Forbes website Tim Worstall argues that jobs are not a benefit of a project but a cost. How so? Well,

Start with it from the point of view of the individual: neither I nor you particularly want a job. We most certainly aren’t all that fond of having to do the work that a job entails. We absolutely love being able to consume things, of course. And we all view having an income as most useful in being able to purchase the things we want to consume. But we all also view the job, the work we have to do, as a cost of getting that income so that we can consume stuff. The job is the cost, the consumption the benefit here.

Now look at it from the point of view of whoever is doing the employing of that labour. They certainly look upon a job as being a cost: they’ve got to pay out the wages to get people to do it after all. The benefit is that they get that work done so that they can go sell the goods or services produced. But the job itself, that’s still a cost to them. We even record the wages they pay on the cost ledger side of their accounting books, not on the benefits or income side.

Finally, think of it from the point of view of the whole society. No, don’t start thinking about “full employment” and the like just yet. Think instead about labour as being a scarce resource. Which it is of course: and just as with any scarce resource we want to use it as efficiently as possible. Say, imagine, we have 100 workers and all 100 were working on the farms to produce the food that kept all 100 people alive. Now we bring in new technology to farm with and we only need two people working to feed all. Well, we could say that 98 of the people are losing their jobs and that’s a disaster. But hold on a moment, jobs are a cost. Jobs here are a cost of producing food and we've just saved 98 job’s worth of cost. What this actually does is frees up those 98 people to go and do other things. Like, ooh, build libraries, hospitals, start manufacturing industry, join the military and so on. Roughly speaking this is also what has happened to the North Atlantic economies over the past four hundred years or so. We've moved from having nearly everyone working the land to about 2% of us doing so. And that has freed the labour up to go and build all the other things that we now generally refer to as civilisation.

Now you may well say I enjoy my job, which means, most likely, you enjoy some parts of your job but not others. This just means that the good parts of the job increase the consumption benefits that occur because of the job but the bad bits of the job are still a cost. They are the crap you have to put up with to get the good bits.

One of the great advantages of technological improvements and trade is that they reduce the requirement for labour to produce a given amount of output. Increasing specialisation and the division of labour has the same effect. All these reduce the cost of jobs for a given level of output and thus work to make us wealthier. As Tim Worstall points out as you reduce the number of jobs in one area you release a valuable resource to be utilised in another area of the economy.