Economist's View

Unions in Decline: Some International Comparisons

Tim Taylor: 

Unions in Decline: Some International Comparisons: Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."

Here are a couple of illustrative figures. ...

The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.

1) Labor union power is weaker just about everywhere.

2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels.  This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.

3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

Trade, Jobs, and Inequality (Video)

Participants:

Paul Krugman, Nobel Prize-winning economist, New York Times columnist, and distinguished professor at the Graduate Center.

David Autor, leading labor economist; professor at MIT, where he directs the School Effectiveness and Inequality Initiative; and editor in chief of the Journal of Economic Perspectives.

Brad DeLong, economics professor at U.C. Berkeley; weblogger for the Washington Center for Equitable Growth; and former U.S. deputy assistant secretary of the treasury, in the Clinton administration.

Anne Harrison, professor at the Wharton School, University of Pennsylvania; former director of development policy at the World Bank; and author of Globalization and Poverty.

'Reality Check in the Factory'

This is from Peter Dizikes at MIT News:

Reality check in the factory: When the globalization of manufacturing took flight a few decades ago, the problem of industrial workplace safety also became fully globalized. As many scholars, human-rights advocates, and labor leaders have observed, that challenge consists of more than just persuading developing nations to create labor laws — it is also a matter of enforcing those labor laws.

Indeed, enforcement may be the greater challenge, as new factories continue to spread across vast distances in Asia, Central America, and other regions. Problems include unsafe buildings, inhumane hours, pollution, unpaid wages, and more. A common enforcement scenario today involves an underfunded regulatory agency with a small staff, and hundreds of potential cases to examine. Where do regulators even begin?

Matthew Amengual, an assistant professor at the MIT Sloan School of Management, started investigating that question on the ground in Argentina nearly a decade ago — talking to regulators, union bosses, firm managers, and key players with knowledge about labor conditions. Over time, he interviewed hundreds of people, watched inspections occur, and catalogued Argentina’s intricate regulatory politics as deeply as any outside observer has.

What Amengual found surprised him. A large thread within political science theory, drawing from the German sociologist Max Weber, holds that states can best enforce labor laws when they act as politically neutral arbiters of regulations. But such neutral arbiters largely did not exist in Argentina. There, many regulators only learned where to find malfeasance by working closely with non-neutral parties, say, union leaders, or immigrant groups. The process of regulation needed to be politicized to happen at all.

In other cases, active regulators came from the ranks of business managers who were using their knowledge to clean up their own industries. None of this was textbook political science theory. But it was how things worked. ...

A “watershed moment” in Amengual’s research occurred in the Argentine province of Cordoba, when an inspector he knew met up with a union leader representing metal workers. Soon the two of them, and Amengual, were driving off in the union leader’s car to a factory.

‘The labor unions have all kinds of information and resources that allow the inspectors to do their jobs,” Amengual says. In Cordoba, he notes, the regulators “didn’t even have cars to be able to go out and do the inspections. They didn’t have time. They didn’t have strong training.”  

But the regulators did have information they could act on, courtesy of the unions — and so they did. Enforcement would not have been possible otherwise.

That said, while regulators were busy inspecting the metal industry, they were less watchful over small-scale brickmakers, an industry where many kinds of violations may have been even more abundant, but which lacked union organizing.  

“You have enforcement, but it’s happening where the unions are present, not [always] where it’s most needed,” Amengual says.

It wasn’t just labor advocates driving regulation, however. Surprisingly, in the province of Tucuman, where sugar mills that produced ethanol were polluting the water, the move toward legal compliance occurred thanks in part to business managers who joined the government and pushed firms to meet environmental regulations.

The government hired regulators “right out of industry, they gave them short-term contracts, and some of them went right back into industry afterwards,” Amengual says. “It was a recipe for disaster, according to [political science theory]. But those were the guys who were actually doing something to enforce environmental laws.” 

How could that happen? Amengual attributes it partly to the presence of environmental groups, in conjunction with the gradual increase in regulators’ ability to assess the pollution problems. “Industry actually wanted regulators between it and the social movement pressure,” Amengual observes.

In turn, Amengual says, he would like political scientists and policymakers alike to recognize these realities of regulation. Instead of regarding politicized enforcement as a tainted form of state action, he thinks, people should realize that labor regulations are always going to be political. The question is how to let the politics spur enforcement, while not totally capturing the process.

“If this is the way policies are being enforced in much of the world, it does matter,” Amengual asserts. “I don’t think Argentina is unique.” ...

'Economic Policy Splits Democrats'

Anyone think this is correct?:

Economic Policy Splits Democrats, WSJ: The old guard of a party that laid the groundwork for the election of a two-term president watches with unease at what’s happening to their electoral prospects and economic policy proposals. ...

That alarm shines through in a new 52-page report from centrist Democratic think tank the Third Way...

“The right cares only about growth, hoping it will trickle down,” says Jonathan Cowan, president of Third Way. The left, meanwhile, is too focused on “redistribution to address income inequality.”

Third Way says a better agenda focuses on growth by promoting skills, job growth and wealth creation without adding to deficits or raising taxes on the middle class. Its report outlines a series of policies it says can do this...

The gist of the report concludes that the economic problems facing the American middle class have less to do with unfairness—or the idea that the system is fundamentally “rigged” against workers—and more to do with technological and globalization forces that can’t be reversed.

[That statement will drive Larry Mishel nuts.]

The report spotlights a divide on the left in both substance and style. ...

Progressives want to see a more fundamental rewrite of the rules to break up political power, on par with President Theodore Roosevelt‘s “trust-busting” of a century ago. “This country is in real trouble,” Ms. Warren said at the May event. “The game is rigged and we are running out of time.”

That kind of rhetoric gives Mr. Cowan fits because he says it isn’t a winning political message. ...

He says that leading economic ideas on the left, including advocacy for a $15 minimum wage, expanded Social Security benefits and a single-payer health-care system, won’t play well with independent voters. The report cites focus group research in advancing its argument that Americans, particularly independents and moderate voters, are more anxious than they are angry about these changes.

Third Way cites the failures of main street icons such as Kodak, Borders Books and Tower Records as proof that new technologies and delivery systems, as opposed to a “stacked deck” in Washington, are primarily responsible for economic upheaval.

Tower Records explains inequality? Seriously? From Larry Mishel (linked above):

Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades.

So, should I adopt a message I don't think is true because it sells with independents who have been swayed by Very Serious People, or should I say what I believe and try to convince people they are barking up the wrong tree? (For the most part anyway, I believe both the technological/globalization and institutional/unfairness explanations have validity -- but how do workers capture the gains Third Way wants to create through growth and wealth creation without the bargaining power they have lost over time with the decline in unionization, threats of offshoring, etc.? That's the bigger problem.) It is unfair when, say, economic or political power redirects income away from those who created it to those who did not (I am using the normative equity principle that each person has a right to keep what he or she produces, to reap what they have sowed, and I have little doubt that workers have been paid less than their productivity, and those at the top more. That's unfair, and redirecting income -- redistributing if you will -- to those who actually earned it is not harmful. It is just, and it creates the correct economic incentives). Wealth creation/growth has not been the biggest problem over the last four decades (i.e. since inequality started to increase), it is how the gains have been distributed. I'd rather convince people of the truth that more growth and more wealth creation won't solve the problem if we don't address workers' bargaining power at the same time than gain their support by patronizing their views. In the meantime redistributing income from those who didn't earn it to those who did can serve as a temporary solution until we get the more fundamental underlying problems fixed (e.g. level the playing field on bargaining power between workers and firms).

Maybe politicians have to tell people what they want to hear, I'll let them figure that out, but I will continue to call it as I see it even if "independents and moderate voters are more anxious than they are angry about these changes." That won't change if we play into those anxieties instead of explaining why new approaches are needed, and explaining how they will benefit from a system that does a better job of rewarding hard work instead of ownership, connections, and power.

'Union Power and Inequality'

IMF economists Florence Jaumotte and Carolina Osorio Buitron (via Vox EU):

Union power and inequality, by Florence Jaumotte and Carolina Osorio Buitron, Vox EU: Inequality in advanced economies has risen considerably since the 1980s, largely driven by the increase of top earners’ income shares. This column revisits the drivers of inequality, emphasizing the role played by changes in labor market institutions. It argues that the decline in union density has been strongly associated with the rise of top income inequality and discusses the multiple channels through which unionization matters for income distribution.

Revisiting the drivers of inequality: The role of labor market institutions

Rising inequality in advanced economies, in particular at the top of the distribution, has become a great focus of attention for economists and policymakers. In most advanced economies, the share of income accruing to the top 10% earners has increased at the expense of all other income groups (Figure 1). While some inequality can increase efficiency by strengthening incentives to work and invest, recent research suggests that high inequality is associated with lower and less sustainable growth in the medium run (Berg and Ostry 2011, Dabla-Norris et al. 2015). Moreover, a rising concentration of income at the top of the distribution can also reduce welfare by allowing top earners to manipulate the economic and political system in their favor (Stiglitz 2012).

Traditional explanations for the rise of inequality in advanced economies have been skill-biased technological change and globalization, which increase the relative demand for skilled workers. However, these forces foster economic growth, and there is little policymakers are able or willing to do to reverse these trends. Moreover, while high income countries have been similarly affected by technological change and globalization, inequality in these economies has risen at different speeds and magnitudes.

Figure 1. Evolution of inequality measures in advanced economies

Sources: World Top Incomes Database; SWIID (v.4.0); and  Luxembourg Income Study/New York Times Income Distribution Database.
1/ Advanced Economies = USA, GBR, AUT, BEL, DNK, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, FIN, IRL, PRT, ESP, AUS, and NZL. For the top 10 income share,  FIN, GBR, and PRT are excluded  due  to missing data over part of the 1980-2010 period. Simple average.
2/ Shares of disposable income by decile using Luxembourg Income Study data. Varying years for countries, including  AUS, AUT, BEL, CAN, DNK, FIN, FRA, DEU, IRL, ITA, NLD, NOR, ESP, SWE, CHE, GBR, and USA.

As a consequence, the more recent literature focuses on the relation between institutional changes and the rise of inequality, with financial deregulation and the decline in top marginal personal income tax rates often cited as important contributors. Surprisingly, the role played by changes in labor market institutions – such as the widespread decline in the share of workers affiliated with trade unions, so-called ‘union density’ – has not featured prominently in recent inequality debates. Nevertheless, these changes could potentially have profound implications on income distribution.

In a recent paper (Jaumotte and Osorio Buitron 2015), we fill this gap in the literature and examine the relationship between labor market institutions and various income inequality measures (namely, the top 10% income share, the Gini of gross income, and the Gini of net income), focusing on the experience of 20 advanced economies over the 1980-2010 period.¹ While we pay particular attention to labor market institutions, our empirical approach controls for other determinants of inequality identified in the literature, such as technology, globalization, financial liberalization, top marginal personal income tax rates, and common global trends.

A surprising finding: A strong negative link between union density and top earners’ income shares

The most novel aspect of our paper is the discovery of a strong negative relationship between unionization and top earners’ income shares (Figure 2).² Although causality is always difficult to establish, the influence of union density on top income shares appears to be largely causal, as evidenced by our instrumental variable estimates. The set of instruments used for union density captures the fact that, although unionization tends to decline in periods of high unemployment, the effect is weaker in countries where unemployment benefits are managed by unions (i.e. the Ghent system) or where collective bargaining is more centralized. In addition, the result survives the inclusion of possible omitted variables that could both reduce unionization and increase inequality. These additional controls include changes in elected government and in social norms on inequality, sectoral employment shifts such as the decline of industry and rise of services sectors, the strong expansion of employment in finance, and rising education levels.

Figure 2. Top 10% income share and union density in advanced economies

Sources: OECD; and World Top Incomes Database.
Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, AUT, CAN, DNK, FIN, FRA, DEU, IRL, ITA, JPN, NLD, NZL, NOR, PRT, ESP, SWE, CHE, and GBR.

The magnitude of the effect is also significant; the decline in union density explains about 40% of the average increase in the top 10% of income share in our sample countries. One important caveat, though, is that the effect could be partly offset when collective bargaining coverage largely exceeds unionization (e.g. through extension agreements), likely reflecting higher unemployment. While this second finding is somewhat less robust and needs further corroboration, it does suggest that representativeness of unions may be an important element for the latter to reduce inequality.

Another main result of our analysis is that the decline in union density has been strongly associated with less income redistribution, likely through unions’ reduced influence on public policy (Figure 3). Historically, unions have played an important role in the introduction of fundamental social and labor rights. Again, this relationship appears largely causal. With regard to other labor market institutions, we find that reductions in the minimum wage relative to the median wage are related to significant increases in overall inequality. But we do not find compelling evidence concerning the effects of unemployment benefits and employment protection laws on income inequality. 

Figure 3. Redistribution effect of unions in advanced economies

Sources: OECD; and SWIID (v.4.0).
Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, IRL, PRT, ESP, AUS, AUT, BEL, DNK, FIN, NZL,and GBR.

Channels: A balance of power story

Our finding of a strong negative relationship between union density and top earners’ income share challenges preconceptions about the channels through which union density affects the distribution of incomes. Indeed, the widely held view is that changes in labor market institutions affect low- and middle-wage workers but are unlikely to have a direct impact on top income earners. Our finding highlights the interconnectedness between what happens to the middle class and top income shares. If de-unionization weakens earnings of middle- and low-income workers, the income share of corporate managers and shareholders necessarily increases.

There are several channels through which weaker unions could lead to higher top income shares. In the workplace, the weakening of unions reduces the bargaining power of average wage earners relative to capital owners and top executives. Channels include the positive effect of weaker unions on the share of capital income – which tends to be more concentrated than labor income – and the fact that lower union density may reduce workers’ influence on corporate decisions, including those related to top executive compensation (Figure 4). Outside the workplace, there could be a political economy channel by which a weakening of unions reduces workers’ political voice and strengthens other already dominant groups, enabling them to better control the economic and political system in their favor (Acemoglu and Robinson 2013).

Figure 4. Episodes of strong declines in union density: Effects on inequality

Sources: World Top Incomes Database; EU Klems; OECD; and author’s calculations.
1/  Labor income share is share of labor compensation in value added, adjusted for the labor income of the self-employed.
2/ Relative wage in finance is the ratio of labor compensation per hour worked in finance to the labor compensation per hour worked in the rest of the economy.

Conclusion

If our findings are interpreted as causal, higher unionization and minimum wages can help reduce inequality. However, this is not necessarily a blanket recommendation for higher unionization and minimum wages. Other dimensions are clearly relevant. The experience with unions has been positive in some countries, but less so in others. For instance, if unions primarily represent the interests of only some workers, they can lead to high structural unemployment for some other groups (e.g. the young). Similarly, in some instances, minimum wages can be too high and lead to high unemployment among unskilled workers and competitiveness losses. Deciding whether or not to reform labor market institutions has to be done on a country-by-country basis, taking into account how well the institutions are functioning and possible trade-offs with other policy objectives (competitiveness, growth, and employment). Finally, addressing rising inequality will likely require a multi-pronged approach including tax reform and policies to curb excesses associated with the deregulation of the financial sector.

Authors’ note: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

References

Acemoglu, D and J A Robinson (2013), “Economics versus Politics: Pitfalls of Policy Advice,” Journal of Economic Perspectives, Vol. 27, No. 2, pp.173-192.

Berg, A and J Ostry (2011), “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Note No. 11/08 (Washington: International Monetary Fund).

Dabla-Norris, E, K Kochhar, N Suphaphiphat, F Ricka, and E Tsounta (2015), “Causes and Consequences of Income Inequality: A Global Perspective” IMF Staff Discussion Note No. 15/13 (Washington: International Monetary Fund).

Jaumotte, F and C Osorio Buitron (2015), “Inequality and Labor Market Institutions” IMF Staff Discussion Note No. 15/14 (Washington: International Monetary Fund).

Stiglitz, J (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future (New York: W.W. Norton).

Footnotes

1 The advanced economies in this study are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK, and the US.

2 The relationship with the Gini coefficient of gross income is also negative but somewhat less robust.

'How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility?'

Via the NBER:

How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility?, by Richard Freeman, Eunice Han, David Madland, Brendan V. Duke, NBER Working Paper No. 21638 [Open Link to Earlier Version]: This paper examines unionism’s relationship to the size of the middle class and its relationship to intergenerational mobility. We use the PSID 1985 and 2011 files to examine the change in the share of workers in a middle-income group (defined by persons having incomes within 50% of the median) and use a shift-share decomposition to explore how the decline of unionism contributes to the shrinking middle class. We also use the files to investigate the correlation between parents’ union status and the incomes of their children. Additionally, we use federal income tax data to examine the geographical correlation between union density and intergenerational mobility. We find: 1) union workers are disproportionately in the middle-income group or above, and some reach middle-income status due to the union wage premium; 2) the offspring of union parents have higher incomes than the offspring of otherwise comparable non-union parents, especially when the parents are low-skilled; 3) offspring from communities with higher union density have higher average incomes relative to their parents compared to offspring from communities with lower union density. These findings show a strong, though not necessarily causal, link between unions, the middle class, and intergenerational mobility.

'Marxists and Conservatives Have More in Common than Either Side Would Like to Admit'

Chris Dillow on common ground between Marxists and Conservatives:

Fairness, decentralization & capitalism: Marxists and Conservatives have more in common than either side would like to admit. This thought occurred to me whilst reading a superb piece by Andrew Lilico.

He describes the Brams-Taylor procedure for cutting a cake in a fair way - in the sense of ensuring envy-freeness - and says that this shows that a central agency such as the state is unnecessary to achieve fairness:...

The appropriate mechanism here is one in which there is a balance of power, such that no individual can say: "take it or leave it."

This is where Marxism enters. Marxists claim that, under capitalism, the appropriate mechanism is absent. Marx stressed that ... the labour market is an arena in which power is unbalanced...

Nor do Marxists expect the state to correct this, because the state is captured by capitalists - it is "a committee for managing the common affairs of the whole bourgeoisie."...

Instead, Marx thought that fairness can only be achieved by abolishing both capitalism and the state - something which is only feasible at a high level of economic development - and replacing it with some forms of decentralized decision-making. ...

In this sense, Marxists agree with Andrew: people can find fair allocations themselves without a central agency. ...

The Decline in Unionization and Inequality

Research by Jaumotte and Carolina Osorio Buitron of the IMF finds that "The decline in unionization in recent decades has fed the rise in incomes at the top":

Power from the People: Inequality has risen in many advanced economies since the 1980s, largely because of the concentration of incomes at the top of the distribution. ...

While some inequality can increase efficiency by strengthening incentives to work and invest, recent research suggests that higher inequality is associated with lower and less sustainable growth in the medium run (Berg and Ostry, 2011; Berg, Ostry, and Zettelmeyer, 2012), even in advanced economies (OECD, 2014). Moreover, a rising concentration of income at the top of the distribution can reduce a population’s welfare if it allows top earners to manipulate the economic and political system in their favor (Stiglitz, 2012). ...

We examine the causes of the rise in inequality and focus on the relationship between labor market institutions and the distribution of incomes, by analyzing the experience of advanced economies since the early 1980s. ... [W]e find strong evidence that lower unionization is associated with an increase in top income shares in advanced economies during the period 1980–2010 (for example, see Chart 2)... This is the most novel aspect of our analysis, which sets the stage for further research on the link between the erosion of unions and the rise of inequality at the top. ...

'Labor Union Membership and Life Satisfaction'

Via a tweet from Bruce Bartlett:

Labor Union Membership and Life Satisfaction in the United States, by Patrick Flavin and Gregory Shufeldt: Abstract While a voluminous literature examines the effects of organized labor on workers’ wage and benefit levels in the United States, there has been little investigation into whether membership in a labor union directly contributes to a higher quality of life. Using data from the World Values Survey, we uncover evidence that union members are more satisfied with their lives than those who are not members and that the substantive effect of union membership on life satisfaction rivals other common predictors of quality of life. Moreover, we find that union membership boosts life satisfaction across demographic groups regardle ss if someone is rich or poor, male or female, young or old, or has a high or low level of education. These results suggest that organized labor in the United States can have significant implications for the quality of life that citizens experience.

'What Unions No Longer Do'

Justin Fox:

What Unions No Longer Do, by Justin Fox: Forty years ago, about quarter of American workers belonged to unions, and those unions were a major economic and political force. Now union membership is down to 11.2% of the U.S. workforce, and it’s increasingly concentrated in the public sector — only 6.7% of private-sector workers were union members in 2013.

This isn’t exactly news... What doesn’t get talked about so much, though, are the consequences. Income inequality has, for example, become a hot topic. You might think that the dwindling away of an institution that devoted much of its energy to equalizing incomes would be a big part of that discussion. It hasn’t been.

Jake Rosenfeld, an associate professor of sociology at the University of Washington ... is out to change that. His book What Unions No Longer Do ... is an account of Rosenfeld’s attempt to empirically establish (mainly through a lot of regressions...) the consequences of Big Labor’s decline. ... [H]ere, for Labor Day, are the four big things that, according to Rosenfeld, unions in the U.S. no longer do:

Unions no longer equalize incomes. ...

Unions no longer counteract racial inequality. ...

Unions no longer play a big role in assimilating immigrants. ...

Unions no longer give lower-income Americans a political voice. ...

The decline of unions in the U.S. has often been painted as inevitable, or at least necessary for American businesses to remain internationally competitive. There are definitely industries where this account seems accurate. ... But ... even if the decline of unions was inevitable or desirable, that still leaves those tasks unions once accomplished — which on the whole seem like things that are good for society, and good for business — unattended to. Who’s going to do them now?

[See also, "The Origins of Labor Day" by Tim Taylor.]

Don't Blame the Robots for our Wage or Job Problems

I'm a bit more sympathetic to the skill based technical change causing wage inequality arguments than Larry Mishel, technological change is at least part of the story in my view (but, importantly, not the whole story, unionization and relative bargaining power between workers and firms, political forces, etc. are also at work), but his arguments are certainly worth noting (and this extract may not fully reflect his views):

The Robots Are Here and More Are Coming: Do Not Blame Them for our Wage or Job Problems, , by Lawrence Mishel: The “robots are coming” narrative dominating discussions of the economy  was popularized by Erik Brynjolfsson and Andrew McAfee in their 2011 book, Race Against the Machine. They have built on that theme in the richer, deeper The Second Machine Age (W.W. Norton, 2014). The first half of the book provides a valuable window, at least for a non-technologist like me, into past developments and the future trajectory of digitization. Their claim is that digitization will do for mental power what the steam engine did for muscle power—that is, quite a bit, transforming our lives at work and play.

The remainder of the book dwells on the role of digitization in generating both bounty (more consumer choice and greater output, wealth, and income) and spread (greater inequalities of wages, income, and wealth). In treating these topics, they heavily rely on the work of others. As in their last book, they do not provide much direct evidence of the connection between technological change and wage inequality. I study these issues and believe they are wrong to tightly link digitization and robots to wage inequality and the slow job growth of the 2000s. Although the authors claim “technology is certainly not the only force causing this rise in spreads, but it is one of the main ones” my fear is that this book, like their last one, will fuel the mistaken narrative that technology is responsible for our job and wage problems and that we are powerless to obtain more equitable growth. ...

On wage inequality, the authors offer “skill-biased technical change” or SBTC as the explanation. In fact, they offer two distinct SBTC narratives, both of which cannot be simultaneously true and neither of which aptly explains wage trends.

In general, SBTC narratives are weak because they cannot explain one of the key inequality trends, the remarkable wage and income growth of the top 1.0 and 0.1 percent. ...

Specifically, the authors’ first SBTC narrative, the “race between technology and skills,” falls short because it doesn’t square with recent trends. Under this narrative, technological change makes employers value education more, and the more education or skills one has, the better one fares. Despite the absence of prima facie evidence for this popular narrative for two decades, it barrels along anyway. For instance, the wage gap between middle and low-wage workers has been stable or falling since 1987 or so, meaning that those with the least skills have done at least as well or better than those in the middle. ...

The second narrative is that technology is eroding jobs and wages in middle-wage occupations but expanding opportunities and wages among low- and high-wage occupations. This “job polarization” narrative, which emerged around 2006, was designed to overcome the flaw in the education narrative’s explanation of wage trends in the 1990s, when low-wage workers fared as well or better than middle-wage workers. The accumulating evidence now shows that job polarization has not occurred in the entire 2000s...

So, again, these two SBTC narratives can’t both be true—either middle-wage workers are doing better than low-wage workers or they’re not. And neither one can explain the trends of the 2000s, the period where one would expect digitization’s impact to be most evident. The robots are here and more will be coming but they are not responsible for our employment or our wage problems. Read the first half of the book to learn about technology but take the second half with a grain of salt. For understanding wage inequality you should look elsewhere.

Stiglitz: We Created This Inequality

Joe Stiglitz:

The People Who Break the Rules Have Raked in Huge Profits and Wealth and It's Sickening Our Politics, by Joe Stiglitz, Alternet [Video]: The following is taken from a transcript of Joseph Stiglitz's remarks to the AFL-CIO convention in Los Angeles on September 8.

... For too long, the hardworking and rule-abiding had seen their paychecks shrink or stay the same, while the rule-breakers raked in huge profits and wealth. It made our economy sick, and our politics sick, too. ...

We have become the advanced country with the highest level of inequality... We use to pride ourselves--we were the country in which everyone was middle class. Now that middle class is shrinking and suffering.

The central message ... is that ... inequality is not inevitable. ... It is not the result of the laws of nature or the laws of economics. Rather, it is something that we create, by our policies, by what we do.

We created this inequality—chose it, really—with laws that weakened unions, that eroded our minimum wage to the lowest level, in real terms, since the 1950s, with laws that allowed CEO's to take a bigger slice of the corporate pie, bankruptcy laws that put Wall Street’s toxic innovations ahead of workers. We made it nearly impossible for student debt to be forgiven. We underinvested in education. We taxed gamblers in the stock market at lower rates than workers, and encouraged investment overseas rather than at home. ...

It is plain that the only true and sustainable prosperity is shared prosperity..., an economy in which 95% of the growth goes to the top 1% can only be called that: sick. ... A hundred and sixty five years ago, Lincoln said, "A house divided against itself cannot stand. " We have become a house divided against itself – divided between the 99% and the 1%, between the workers, and those who would exploit them. We have to reunite the house, but it won't happen on its own.

It will only happen if workers come together. If they organize. If they unite to fight for what they know is right, , in each and every workplace, in each and every community, and in each and every state capital and in Washington. We have to restore not only democracy to Washington, but to the workplace. ...

The challenge facing you has seldom been greater. You are still a small fraction of America. But you are the largest group representing the vast majority of Americans who work hard and play by the rules. .

You must get others to join you, to work with you, to organize with you, to fight with you. ... Together, we can grow our economy, strengthen our communities, restore the American dream, and re-establish our democracy--a government not of the 1%, for the 1%, and by the 1%, but a government of all Americans, for all Americans, and by all Americans.

I am doubtful that traditional unions can be an effective economic voice (through collective bargaining) given the threat of moving work to other states or countries, but I do think unions have an important role to play in representing workers in the political process -- unions can give workers a countervailing political voice. So I'm curious what you think about this idea:

... In contemporary America,... there is a nearly insurmountable impediment to unions’ ability to serve as a collective political voice for workers. It stems from the legal requirement that unions bundle political organization with collective bargaining, which means that in order to take advantage of the union as a form of political organization, workers must organize economically for collective bargaining purposes.

This bundling of functions, an artifact of how unions formed historically, is a major problem for political organizing today. This is true most obviously because managerial opposition to collective bargaining has become pervasive. It is also true because changes in markets have made the practice of collective bargaining difficult. ...

All of this has contributed to a dramatic decrease in unionization rates, which has in turn played a central role in the declining responsiveness of government.

But what if we unbundle the union and allow workers to organize politically without also organizing for collective bargaining? If we shift our aim away from reviving collective bargaining and toward enabling political organizing by underrepresented groups, we would allow workers to organize “political unions” even when they don’t want to organize collective bargaining ones.

It’s more straightforward than it sounds. The key is that we would make the workplace available as a site for political organization. While the law would continue to protect workers’ right to organize traditional unions, it would also protect workers’ right to organize strictly political ones. ...

Employers would be prohibited from retaliating against their employees who organized politically, and if the workers did form a political union, they would be entitled — as traditional unions are — to use voluntary payroll deductions to finance their activities. But these political unions would be prohibited from collective bargaining, and no worker would ever be required to pay dues to a political union — or to be represented by one — unless she chose to be.

What is the Link between Unionization and Inequality?

Stephen Gordon asks:

What is the link between unionisation and inequality?

After looking at the data he concludes:

Increases in inequality were accompanied by declines in union coverage in Canada, the US, the UK and some other countries. But similar increases in inequality were accompanied by increased union coverage in Sweden, Norway and Finland.

I don't really see much of a link - either in theory or in the data - between unionisation rates and increases in inequality across occupations. (Inequality within an occupation is a different story.) 

'Profits, Norms and Power'

Chris Dillow:

Profits, norms and power, by Chris Dillow: Jesse Norman says companies have a duty not just to obey the law but to follow an ethic of good stewardship. Andrew Lilico and Stephen Pollard disagree. Implicit in this debate is something that should be made explicit - the role of corporate power.

Lilico and Pollard are following the tradition of Milton Friedman, who argued that "the social responsibility of business is to increase its profits."

This principle is an expression of the first theorem of welfare economics ... which says that rational self-interest will lead to socially optimum outcomes.

However, this is only the case under a particular condition - that companies' economic and political power is limited. ...

Now, here's the thing. When Friedman advocated profit-maximization as a socially optimal strategy, he did so at a time when firms faced countervailing power. In a pre-globalized era of strong unions, they couldn't easily maximize profits by paying lousy wages or offering degrading conditions, and they couldn't so easily dodge taxes. With their power limited, it was at least possible that profit-maximization did increase aggregate welfare. Friedman acknowledged this when he said that firms should "[conform] to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

But things have changed. Firms' bargaining power is now so great that there can be a tension between profit-maximizing and welfare. Maximizing profits now entails ducking taxes, paying wages which are regarded by many as unfair, and producing unpriced externalities such as risk pollution (pdf).This is exacerbated by the fact that "ethical custom", as perceived by capitalists and their apologists, tolerates such behaviour.

There are several possible responses to this:

- To ignore the role of power. Doing so, I suspect is an example of how beliefs, such as Friedman's, can persist after the conditions in which they were reasonable have disappeared.

- To think that power can be restrained by social norms, as Jesse does. It's a good conservative position, to think that free markets are welfare-enhancing if they operate within a particular moral code.

- To think legislation is necessary to rein in firms. This is the statist social democratic view.

There is, though, a fourth view - the Marxian one. This says that the tension between profit maximization and welfare hasn't increased simply because of a failure of law and morals, but because of a genuine shift in the balance of class power. Firms now have power and one thing we know about power is that it'll be used. Unless this changes, hopes of reconciling profit maximization with well-being might well prove mistaken.

'Why are Unions Unpopular?'

A brief post via Chris Dillow, then I'm out of here for a bit:

Why are unions unpopular?:  ... Nobody under the age of 40 can remember when unions were (plausibly or not) accused of wrecking the economy. Indeed, these days, the wreckers are not unions but managers. From bankers  causing recession through bosses plundering their companies to BBC executives stealing licence-payers money, the economic vandals today are bosses, not unions.

What's more, it would be easy to argue that stronger unions would be in everyone's interest, and not just because they help restrain managerial parasitism. They represent the "little platoons" that Tories should admire, and could be part of the "big society" that allows state regulation to be scaled back. And it's quite possible that the higher wages unions want would help the economic recovery by increasing aggregate demand.

Why, then, are unions still seen as the big bogey man...

He goes on to suggest several reasons.

'Labor Union Decline, Not Computerization, Main Cause of Rising Corporate Profits'

I haven't read this paper, so I can't say a lot about how much confidence to place in the results, but it did grab my attention (and I believe it's in one of the top journals for sociology):

Labor union decline, not computerization, main cause of rising corporate profits, EurekAlert: A new study suggests that the decline of labor unions, partly as an outcome of computerization, is the main reason why U.S. corporate profits have surged as a share of national income while workers' wages and other compensation have declined.

The study, "The Capitalist Machine: Computerization, Workers' Power, and the Decline in Labor's Share within U.S. Industries," which appears in the June issue of the American Sociological Review, explores an important dimension of economic inequality...

Tali Kristal, an assistant professor of sociology at the University of Haifa in Israel ... found that from 1979 through 2007, labor's share of national income in the U.S. private sector decreased by six percentage points. This means that if labor's share had stayed at its 1979 level (about 64 percent of national income), the 120 million American workers employed in the private sector in 2007 would have received as a group an additional $600 billion, or an average of more than $5,000 per worker, Kristal said.

"However, this huge amount of money did not go to the workers," Kristal said. "Instead, it went to corporate profits, mostly benefiting very wealthy individuals."

The question is: why did this happen?

"Some economists contend that computerization is the primary cause and that it has increased the productivity of machines and skilled workers, prompting firms to reduce their overall demand for labor, which resulted in the rise of corporate profits at the expense of workers' compensation," Kristal said. "But, if that were the case,... then labor's share should have declined in all economic sectors, reflecting the fact that computerization has occurred across the board in the past 30 to 40 years."

This is not the case, however... "It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor's share of income," Kristal said. "By contrast, in the lightly unionized industries of trade, finance, and services, workers' share stayed relatively constant or even increased. So, what we have is a large decrease in labor's share of income and a significant increase in capitalists' share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers' bargaining power, was the main force behind the decline in labor's share of national income."

In addition to the erosion of labor unions, Kristal found that rising unemployment as well as increasing imports from less-developed countries contributed to the decline in labor's share.

"All of these factors placed U.S. workers in a disadvantageous bargaining position versus their employers," said Kristal...

'Why the AFL-CIO Is Embracing Immigration Reform'

Robert Reich:

What Immigration Reform Could Mean for American Workers, and Why the AFL-CIO Is Embracing It, by Robert Reich: Their agreement on is very preliminary and hasn’t yet even been blessed by the so-called Gang of Eight Senators working on immigration reform, but the mere fact that AFL-CIO President Richard Trumka and Chamber of Commerce President Thomas J. Donohue agreed on anything is remarkable.  

The question is whether it’s a good deal for American workers. It is...

The unions don’t want foreign workers to take jobs away from Americans or depress American wages, while business groups obviously want the lowest-priced workers they can get their hands on.

So they’ve compromised on a maximum (no more than 20,000 visas in the first year, gradually increasing to no more than 200,000 in the fifth and subsequent years), with the actual number in any year depending on labor market conditions... Priority would be given to occupations where American workers were in short supply.  

The foreign workers would have to receive wages at least as high as the typical (“prevailing”) American wage in that occupation, or as high as the prospective employer pays his American workers with similar experience — whichever is higher.

The unions hope these safeguards will prevent American workers from losing ground to foreign guest-workers.

But employers hope the guest-worker program will also prevent low-wage Americans from getting a raise. As soon as any increase in demand might begin to push their wages higher, employers can claim a “labor shortage” — allowing in more guest workers, who will cause wages to drop back down again.   

So why would the AFL-CIO agree to any new visas at all?

Presumably because some 11 million undocumented workers are already here, doing much of this work. The only way these undocumented workers can ever become organized – and not undercut attempts to unionize legal workers — is if the undocumented workers also become legal. ...

Will Obama Help Unions?

John Cassidy:

... Now that Obama’s back in the White House, is the reform of labor laws back on the agenda? Almost certainly not. With the Republicans controlling the House, any effort to revive the card-check bill would be doomed. ...

With anything that requires congressional approval effectively ruled out, Obama’s options ... are limited. One thing he’s already done is speak out against the so-called right-to-work laws that Michigan and other Republican-run states are introducing... As the latest figures from the B.L.S. make clear, the Republican union-bashing is working. Last year, union membership fell... The unions badly need the President’s active involvement in the struggle against these G.O.P. initiatives...

The other venue where the unions will be looking for more favorable action is the National Labor Relations Board, which enforces labor laws and oversees elections at workplaces where unions are seeking to organize. ... At the start of 2012, Obama used recess appointments to appoint two union-friendly officials to the N.L.R.B.

By issuing some more rulings favorable to the unions over the next four years, the N.L.R.B. will help tilt the balance of power in the workplace back towards labor. But after many years in which employers were allowed to flout the law and intimidate union organizers with impunity, nobody in the labor movement is under any illusion that these administrative changes will be sufficient to reverse the unions’ historic decline. Indeed, even some economists who are sympathetic to unions believe that their decline is irreversible. ... Changing that is going to take much more than two terms of Obama in the White House. But if he is serious about pursuing a liberal agenda, he can’t avoid getting involved.

I meant to post this yesterday, but travel got in the way. Today, things have changed:

In a ruling that called into question nearly two centuries of presidential “recess” appointments that bypass the Senate confirmation process, a federal appeals court ruled on Friday that President Obama violated the Constitution when he installed three officials on the National Labor Relations Board a year ago. ...

Is anyone counting on the Supreme Court to overturn this?

Paul Krugman: The Twinkie Manifesto

The good old days hold lessons for today:

The Twinkie Manifesto, by Paul Krugman, Commentary, NY Times: The Twinkie ... will forever be identified with the 1950s... And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.

Needless to say, it wasn’t really innocent. But the ’50s ... do offer lessons that remain relevant in the 21st century. ... Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. ...

Yet in the 1950s ... taxes on corporate profits were twice as large... The best estimates suggest that circa 1960 the top 0.01 percent ... paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals...

Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. ... Between the 1920s and the 1950s real incomes for the richest Americans fell sharply...

Today, of course, the mansions, armies of servants and yachts are back, bigger than ever — and any hint of policies that might crimp plutocrats’ style is met with cries of “socialism.” ... Surely, then, the far less plutocrat-friendly environment of the 1950s must have been an economic disaster, right? ...

On the contrary,... the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth...

Which brings us back to the nostalgia thing.

There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation... Oh, and the food has improved a lot, too.

Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda..., it prospered. And we can do that again.

The US Jobless Recovery: Assertive Management Meets the Double Hangover

Robert Gordon says the changing balance of power between labor and management helps to explain the jobless recovery:

The case of the US jobless recovery: Assertive management meets the double hangover, by Robert J. Gordon, Vox EU: High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007–09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline in output (IMF 2011).

Here we quantify the shortfall of US employment—some 10.4 million missing jobs—and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

• First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
• Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble.

By explaining why the recovery of aggregate demand has been so weak, we provide an understanding of the refusal of the large negative output gap to shrink—a refusal shared by its twin, the employment gap.

Dimensions of the job shortfall: 10.4 million missing jobs in the recovery

Part of the job shortfall is reflected in the rise of measured unemployment. The rest comes from a decline in labour-force participation. The employment-population ratio (E/P in the figures) measure combines the two.¹ As shown in Figure 1, the ratio (as shown by the green line) was 64.3% at the NBER business cycle peak in 2001:Q1. By the next peak (2007:Q4) it had fallen to 62.8% (blue line).

• This descent from 64.3% to 62.8% led numerous commentators to lament that the 2001-07 US economic recovery was not a complete recovery. Indeed, the seemingly ‘minor’ 1.5% drop in the ratio represents more than 3.6 million “missing” jobs—even before the recent recession.
• In mid-2011, the ratio (wavering red line) is only 58.1%—far below 2001 and 2007 levels.

How many jobs are lacking? Figure 2 shows that the shortfall amounts to 10.4 million missing jobs compared to the 2007 version of normality and a much higher 14.1 million missing jobs compared to the 2001 definition. In the rest of this analysis, we take the less ambitious 2007 value for the ratio of 62.8% as the relevant benchmark.

Figure 1. Actual vs. two criteria of normal employment per capita (2000 Q1—2011 Q2)

Figure 2. Actual vs hypothetical employment, 2000 Q1—2011 Q2

What caused the destruction of 10.4 million jobs?

The first explanation is the change in managerial power. For decades I have been tracking the responsiveness of labour market variables to the output gap (see most recently Gordon 2003 and 2010).

• Before the mid-80s a 1% change in the output gap would generate roughly a response of 0.45% in the similarly-defined gap of the Employment-Population ratio.
• The rest of the 1% shortfall of real GDP would show up in declining productivity and in hours per employee.

The observed ratios in the data for 1954–86 are roughly consistent with the predictions made by Arthur Okun (1962) in what soon became christened as ‘Okun’s Law’.

After the mid-1980s, however, these responses changed in a process I have described as the “Demise of Okun’s Law”. The response of the ratio jumped from 0.45 in the 1954–86 interval to 0.78 in an otherwise identical regression equation applied to 1986–2011. This means that when output slumps, employment drops much more than it would have done previously.

The disposable worker hypothesis

When the economy begins to sink—like the Titanic after the iceberg struck—firms begin to cut costs any way they can; tossing employees overboard is the most direct way. For every worker tossed overboard in a sinking economy prior to 1986, about 1.5 are now tossed overboard. Why are firms so much more aggressive in cutting employment costs? My “disposable worker hypothesis” (Gordon 2010) attributes this shift of behaviour to a complementary set of factors that amounts to “workers are weak and management is strong.” The weakened bargaining position of workers is explained by the same set of four factors that underlie higher inequality among the bottom 90% of the American income distribution since the 1970s—weaker unions, a lower real minimum wage, competition from imports, and competition from low-skilled immigrants.

But the rise of inequality has also boosted the income share of the top 1% relative to the rest of the top 10%. In the 1990s corporate management values shifted toward more emphasis on shareholder value and executive compensation, with less importance placed on the welfare of workers, and a key driver of this change in attitudes was the sharply higher role of stock options in executive compensation. When stock market values plunged by 50% in 2000–02, corporate managers, seeing their compensation collapse with profits and the stock market, turned with all guns blazing to every type of costs, laying off employees in unprecedented numbers. This hypothesis was validated by Steven Oliner et al (2007), who showed using cross-sectional data that industries experiencing the steepest declines in profits in 2000–02 had the largest declines in employment and largest increases in productivity.

Why was employment cut by so much in 2008–09? Again, as in 2000–02, profits collapsed and the stock market fell by half. Beyond that was the psychological trauma of the crisis; fear was evident in risk spreads on junk bonds, and the market for many types of securities dried up. Firms naturally feared for their own survival and tossed many workers overboard.

Three million missing jobs due to altered management response to recession

Figure 3 provides the results of a simple experiment regarding the loss of jobs.

• Labour-market responses to business-cycle shortfalls were quite different when estimated with regressions over the 1954–1986 (“early”) and 1986–2011 (“late”) sample periods.
• Responses of employment and other labour market variables were much larger in the “late” period (as predicted by the disposable worker hypothesis).

Given the decline in the output gap, simulated employment fell short by 9.82 million with the “late” dynamic adjustment behaviour, quite close to the 10.39 million actual shortfall. Yet with the “early” coefficients employment fell by a substantial but significantly smaller total of 6.72 million.

Figure 3. Actual vs hypothetical and dynamic simulation employment 2007 Q4—2011 Q2

Thus labour’s weakened bargaining situation with changes in management behaviour toward greater emphasis on cost-cutting in recessions accounts for roughly 3 million lost jobs in the current jobless recovery. The other 6.72 million would have been lost even with the earlier responses because the output gap was so large.

Why is aggregate demand so weak? The double hangover explanation

This explains the outsized job cuts that came in response to the recession. But we are still left with the question of explaining why the output gap is still so negative 2 years after the NBER business-cycle trough (June 2009).

America’s double hangover goes back to the consumption binge that accompanied the 2000–06 housing bubble.

• The residential construction industry was building houses at a pace much higher than the underlying rate of household formation.
• Housing demand was boosted by speculators who bought new condominiums hoping to “flip” them for easy profits and by mortgage brokers who were out combing the weeds for low-income families to whom they could peddle dangerous adjustable-rate interest-only mortgages.
• Consumption of all types, particularly of durable goods like autos and appliances and services like nail salons and child tutoring, grew faster than income, implying an ever-declining personal saving rate.

Households could use not only their own income to buy consumer goods and services but could finance expenditures in excess of income through second mortgages and refinancing that allowed them to drain cash from their appreciating residences.

Once the bubble burst and house prices began to tumble, the double hangover began.

• The first hangover was the excess supply of housing.

This led to a glut of unsold houses and condos that put continuous downward pressure on home prices. Foreclosures added to the glut; each foreclosure raises the supply of vacant housing units by one unit while increasing the demand for housing units by zero, because the foreclosed family has by definition defaulted on its mortgage and cannot obtain credit for several years into the future. Many homeowners avoided foreclosure but were “underwater,” with houses now worth less than the face value of the mortgage and thus faced the hapless choice of draining resources to pay the mortgages or defaulting, with the consequence of a ruined credit rating.

• The second hangover was the impact of excessive indebtedness.

Just as consumption could exceed income as debts were being run up, so the second hangover required consumption to be below income while debts were paid off. The ratio of total household indebtedness to personal disposable income rose from 90% in 1995 to 133% in 2007 and has since fallen just to 120%. Year after year of saving and underconsumption will continue as households continue to pay off debts.

Just as hangovers have negative impacts on family members and job performance, so the double hangover of the slump in residential housing investment and in personal consumption expenditures has spilled over to other components of GDP. Nonresidential investment was hit as firms supplying consumers and home builders reduced their need for new computers, machinery, factories, office buildings, and hotels. State and local governments, by law required to balance their current budgets, began to lay off school teachers and other employees.

Translating lost spending into lost jobs

Table 1 lists the major components of spending and the subcomponents and displays the percentage shortfalls in output. Then we use the shares of each subcomponent in the total output shortfall to calculate the jobs shortfall for each subcomponent. Notice that this method treats all components of spending as equally labour-intensive, an acceptable approximation for this exercise.

• The shortfall of consumer-services spending is the largest subcomponent; it translates into 3.59 million missing jobs.²
• Next come the 2.17 million lost jobs in residential construction (on top of those lost between 2006:Q1 and 2007:Q4),
• The 1.76 million in nonresidential structures,
• 1.65 million in consumer durables,
• 1.47 million in state and local government, and
• 1.38 million in equipment and software.

The overall simulated job shortage would have been 11.88 million but for the helpful performance of net exports. Its positive contribution brings the figure to a smaller but still unfortunate 10.39 million.

Table 1. Contribution of GDP components to output gap and employment shortfall 2011:Q2

Conclusion

A change in labour market dynamics accounts for about 3 million of the over 10 million missing jobs in mid-2011. This shift can be traced to weakness of labour and growing assertiveness of management. But even with the labour-market institutions of 1955 through 1985, the weakness of aggregate demand in the recession and recovery would have cost roughly 7 million jobs instead of the 10 million jobs that are actually missing compared to normal economic conditions such as occurred in 2007.

The recession itself is usually and correctly traced to the collapse of the housing bubble and the post-Lehman financial panic. But the recovery has been unusually weak, completely unlike the economy’s rapid bounce-back in 1983–84, and this requires an explanation as well. The best place to start is the double-hangover approach, which explains not just the collapse of residential structures investment but also the continued and growing weakness in consumer spending. Perhaps the most surprising result of this essay is that the spending component responsible for the largest share of the missing jobs is not residential investment but consumer spending on services.

This is not the place to talk about remedies.

• The spending decomposition shows that fiscal policy has failed in that the government spending sector has made the output gap shortfall worse, not better.
• The double-hangover theory helps to explain why monetary policy is impotent, no matter how much quantitative easing is attempted.

Authors including Hall (2011) focus on the zero lower bound as the crux of the Fed’s problem and ignore the complementary problem of low interest-insensitivity of consumers who are trying to pay off old debt instead of taking on new debt.

The failure of consumer and investment spending (IS) to respond to an ever-lower 10-year government bond rate, which fell below 2.3% this past week, demonstrates that the problem is an IS curve that is very steep if not vertical at an output level far below that necessary to generate a normal level of employment. The vertical IS curve is just as relevant for understanding today’s economy as that of the 1930s, and it plays an essential role in the twelfth edition of my macro textbook (2012) in explaining why monetary policy may at times be impotent, just as it did in the first edition more than three decades ago.

References

Estevão, Marcello and Evridiki Tsounta (2011), ‘Has the Great Recession Raised US Structural Unemployment?’, IMF Working Paper, WP/11/105, May.

Gordon, Robert J (2003), ‘Exploding Productivity Growth: Context, Causes, and Implications’, Brookings Papers on Economic Activity. 2:207-279.

Gordon, Robert J (2010), ‘Okun’s Law and Productivity Innovations’, American Economic Review Papers and Proceedings,100(2):11-15.

Gordon, Robert J (2012), Macroeconomics, 12^th edition. Pearson/Addison-Wesley.

Hall, Robert E (2011), ‘The Long Slump’, American Economic Review,101(2):431-469.

Okun, Arthur M (1962), ‘The Gap between Actual and Potential Output’, Proceedings of the American Statistical Association, in Edmund S Phelps (ed.), Problems of the Modern Economy. Norton, 1965.

Oliner, Stephen D, Daniel E Sichel, and Kevin J Stiroh (2007), ‘Explaining a Productive Decade’, Brookings Papers on Economic Activity, 1:81-137.

Footnotes

¹ This is defined as the employment rate (ratio of employment to the labour force) times the labour-force participation rate.

² Compared to the jobs that would be available if the economy were operating at potential real GDP as in 2007:Q4

The Contribution Scam

Paul Krugman:

The Contribution Scam: David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says,

Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply “contribute more” to Wisconsin’ s retirement system (or as the argument goes, “pay their fair share” of retirement costs as do employees in Wisconsin’ s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: “The Employer shall contribute on behalf of the employee.” This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.

So the right question — the only question — is whether government workers are getting an overall good deal compared with private-sector workers. Why, then, are we hearing so much about the meaningless contribution comparison?

The answer is simple: it’s because doing the comparison right doesn’t yield the desired answer. The new report by the Times gets the same answer as other studies: low-paid government workers do a bit better than their private-sector counterparts, but others if anything do worse.

Luo and Cooper report this as a “mixed answer” — but in terms of the political debate, it’s a body blow to the union-bashers, whose whole position is that public-sector workers are welfare queens in Cadillacs. They need to show outrageous overpayment, not rough equivalence at best.

And so they turn to a meaningless comparison that, to the unwary, sounds as if it supports their case.

Yes, some public-sector workers are overpaid. So are some private-sector workers. Doesn’t anyone read Dilbert? But the whole idea that union excesses are at the core of state and local fiscal problems is false, and only deliberate obfuscation keeps that from being obvious.

Public Sector Unions: The U.S. vs. Canada

Stephen Williamson:

Unions: ...In general, union organization is not an easy thing in the United States, relative to what happens in other rich countries. Twenty two states, mainly in the south and in the middle of the country have right-to-work laws. In some states, state employees have much less power to form unions relative to what exists in the private sector. However, in Western Europe, unions tend to be relatively powerful. In Canada, labor law is much more conducive to union formation and power. For example, most (if not all) Canadian provinces do not allow the hiring of permanent replacement workers during a strike, and some will not permit the hiring of temporary replacement workers. Strikes of public service workers in Canada are infamous, from old-time disruption in the post office to more recent strikes involving garbage collectors and transit workers in Toronto. The difference in labor laws in Canada and the US is reflected in unionization rates. The US has a unionization rate of only 7% in the private sector, and 29% in the public sector. In Canada, the comparable statistics are 16% in the private sector and 71% in the public sector.

Now, if we believe Scott Walker, the Governor of Wisconsin, public spending in Canada should be wildly out of control. We know, of course, that government is doing much more redistribution in Canada than is the case generally in the United States. But in Canada actual expenditures of all levels of government on goods and services amounted to 21.2% of GDP in Canada in 2009, and 20.6% of GDP in the US. Not much difference there. Further, in spite of union power in the public sector, the Canadian federal government was able to turn around a deficit which had exceeded 5% of GDP in the mid-1990s. Before the recent recession, the Canadian federal government had been running surpluses for several years. ...

Are Teachers Overpaid?

Barkley Rosser:

Are Teachers Overpaid In The US?, by Barkley Rosser: An ongoing meme of those supporting Governor Walker's efforts to crush public unions in Wisconsin is the repeated claims that public workers are overpaid. There is plenty of evidence that this is not so, even with their greater benefits, but I think another piece of evidence may be useful, a cross-country comparison of teacher salaries. This is important given that at the state and local levels, teachers are the most numerous of public workers, and it is hard to compare them with private sector equivalents, who are not that numerous at the K-12 level.

So, according to OECD data reported by the New York Times for 2007 at http://economix.blogs.nytimes.com/2009/09/09/teacher-pay-around-the-world , out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.

OTOH, according to http://economix.blogs.nytimes.com/2009/07/15/how-much-do-doctors-in-other-countries-make , out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.

While teachers are more likely to be publicly paid in all of these countries, doctors get a higher prooportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.

Paul Krugman: Wisconsin Power Play

Unions act as a "counterweight to the political power of big money," so big money wants them out of the way:

Wisconsin Power Play, by Paul Krugman, Commentary, NY Times: Last week, in the face of protest demonstrations against Wisconsin’s new union-busting governor, Scott Walker — demonstrations that continued through the weekend, with huge crowds on Saturday — Representative Paul Ryan made an unintentionally apt comparison: “It’s like Cairo has moved to Madison.” ...

Mr. Ryan was more right than he knew. For what’s happening in Wisconsin isn’t about the state budget, despite Mr. Walker’s pretense that he’s just trying to be fiscally responsible. It is, instead, about power. What Mr. Walker and his backers are trying to do is to make Wisconsin — and eventually, America — less of a functioning democracy and more of a third-world-style oligarchy. And that’s why anyone who believes that we need some counterweight to the political power of big money should be on the demonstrators’ side. ...

The bill that has inspired the demonstrations would strip away collective bargaining rights for many of the state’s workers, in effect busting public-employee unions. Tellingly, some workers — namely, those who tend to be Republican-leaning — are exempted from the ban; it’s as if Mr. Walker were flaunting the political nature of his actions.

Why bust the unions? As I said, it has nothing to do with helping Wisconsin deal with its current fiscal crisis...; it’s about the power.

In principle, every American citizen has an equal say in our political process. In practice, of course, some of us are more equal than others. Billionaires can field armies of lobbyists; they can finance think tanks that put the desired spin on policy issues; they can funnel cash to politicians with sympathetic views (as the Koch brothers did in the case of Mr. Walker). On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.

Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. ... You don’t have to love unions ... to recognize that they’re among the few influential players in our political system representing the interests of middle- and working-class Americans, as opposed to the wealthy. Indeed, if America has become more oligarchic and less democratic over the last 30 years — which it has — that’s to an important extent due to the decline of private-sector unions.

And now Mr. Walker and his backers are trying to get rid of public-sector unions, too.

There’s a bitter irony here. The fiscal crisis in Wisconsin, as in other states, was largely caused by the increasing power of America’s oligarchy. After all, it was superwealthy players, not the general public, who pushed for financial deregulation and thereby set the stage for the economic crisis of 2008-9, a crisis whose aftermath is the main reason for the current budget crunch. And now the political right is trying to exploit that very crisis, using it to remove one of the few remaining checks on oligarchic influence.

So will the attack on unions succeed? I don’t know. But anyone who cares about retaining government of the people by the people should hope that it doesn’t.

The Unrest in Wisconsin

The use of recession induced budget gaps as an excuse to target unions is spreading:

Wisconsin Leads Way as Workers Fight State Cuts, by Michael Cooper and katherine Seelye, NY Times: The unrest in Wisconsin this week over Gov. Scott Walker’s plan to cut the bargaining rights and benefits of public workers is spreading to other states.

Already, protests erupted in Ohio this week, where another newly elected Republican governor, John Kasich, has been seeking to take away collective bargaining rights from unions.

In Tennessee, a law that would abolish collective bargaining rights for teachers passed a State Senate committee this week despite teachers’ objections. Indiana is weighing proposals to weaken unions. ...

In many states, Republicans who came to power in the November elections, often by defeating union-backed Democrats, are taking aim ... at union power as they face budget gaps in the years ahead. ...

Comments?

Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009

This is from a new CBO report, Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009:

Here's a summary of the CBO report:

Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009, CBO Director's Blog: Wages are a key component of the overall economic well-being of individuals and families. Hourly wages and hours worked determine an individual’s earnings, and for most nonelderly adults, earnings constitute the bulk of their family’s income. A CBO study released today, prepared at the request of the chairman and former ranking member of the Senate Finance Committee, documents changes in the amount and distribution of hourly wages received by workers in the United States between 1979 and 2009. It also reviews the leading explanations for changes in the supply of, and demand for, workers with different sets of skills, as well as how labor market institutions affect wages.

The wage rate (the wage per hour of work) received by workers in the middle of the wage distribution (the 50th percentile) increased by about 20 percent over the 1979–2009 period after adjusting for inflation, reaching about $17 per hour in 2009. The dispersion of wages—the gap between wages at the top and bottom of the distribution—also increased over that period, but the pattern of changes at the top and bottom differed. For men and women alike, the gap between the wage rates received by high-wage (90th percentile) and middle-wage workers expanded throughout the 30-year period; the wage rates of high-wage women grew especially rapidly. In contrast, the gap between the wage rates received by low-wage (10th percentile) and middle-wage workers widened for both men and women early in the 1980s but has remained stable for the past 20 years.

Wages are affected by market forces (the level and distribution of skills supplied by workers and employers’ demand for those skills) and institutional factors (such as minimum-wage laws and changes in the share of the workforce represented by unions). Given the complex pattern of changes in the wage distribution between 1979 and 2009, it is not surprising that no single explanation can account for the entire pattern.

In the category of market forces, the growing demand for skilled labor, particularly for highly educated workers, accounts for most of the widening gap during the past 30 years between the wages of college graduates and high school graduates. Although the post–World War II period saw steady growth in demand for college graduates that put upward pressure on their wages, growth in the share of workers with college degrees offset some of that pressure during the early part of that period. Beginning in the early 1980s, however, people entering the workforce did not have significantly more education than those retiring and leaving the workforce. That slowdown in the improvement in educational attainment combined with growing demand for more-educated workers drove the wage premium for college graduates higher—a key reason for the increasing wage dispersion in the top half of the wage distribution

Shifts in international trade might also have contributed to increasing demand for skilled labor, relative to that for less skilled labor, as imports from low-wage countries substituted for some domestic production and employment; however, research on the significance of that effect is inconclusive. In addition, a rising number of foreign-born people in the workforce affected the supply of workers with different amounts of education, but that shift appears to have had only a modest effect on the distribution of wages.

Turning to institutional factors, the federal minimum wage did not keep pace with inflation during the 1980s, and the decreasing real (inflation-adjusted) value of the minimum wage probably increased wage dispersion in the bottom half of the wage distribution during that period. Moreover, a decline in the share of workers who belonged to unions contributed to increasing dispersion in the upper half of the wage distribution for men over that same decade. Neither of those factors is a plausible explanation for the changes in the wage distribution in the 1990s and 2000s, however.

Although this study focuses on hourly wages, changes in the amount and distribution of hourly compensation, which includes both wages and fringe benefits, are also important. Unfortunately, data on hourly compensation are more limited than data on hourly wages. The available data indicate that the dispersion in hourly compensation in the upper half of the distribution was similar to the dispersion of wages, on average, between 1987 and 2007. In the lower half of the distribution, the dispersion of hourly compensation was somewhat greater than that for wages, on average, during the same period. Nevertheless, for both the upper and the lower halves of the distribution of compensation, the changes in dispersion over those two decades were similar to the changes in the dispersion of wages.

There is a lot to say about this, but not much that hasn't been said already, so let me simply point to a previous discussion of this topic: Driving Forces Behind Rising Income Inequality: Tracking the Internet Debate.

SOTU: Obama's Focus on Jobs

This is a year too late, more than that actually, but President Obama's intent to focus on jobs in the State of the Union address is welcome. The abandonment of the recommendations of the bipartisan majority on the debt-reduction commission -- for now anyway -- is also good news. This committee appeared to have Social Security in its sights mostly for ideological reasons rather than as something that would make a meaningful dent in the budget problem. However, some of the things emphasized in the speech do bring some concerns. In particular, Obama's new found friendliness toward business and the seeming embrace of a principle of what's good for business is good for America could lead him astray:

Obama to Press Centrist Agenda in His Address, NY Times: President Obama will outline an agenda for “winning the future” in his State of the Union address on Tuesday night, striking a theme of national unity and renewal as he stresses the need for government spending in key areas and an attack on the budget deficit.

Mr. Obama previewed ... that his speech would be geared more broadly toward the political center, to independent voters and business owners and executives alienated by the expansion of government and the partisan legislative fights of the past two years. ...

Mr. Obama has signaled that after two years in which his response to the economic crisis and his push for passage of the health care bill defined him to many voters as a big-government liberal, he is seeking to recast himself as a more business-friendly, pragmatic progressive.

That means emphasizing job creation, deficit reduction and a willingness to compromise in a new period of divided government. But it also means a willingness to make the case for spending — or investment, as many in his party would prefer to call it — in areas like education, transportation and technological innovation ... essential to the nation’s long-term prosperity. ...

Without going into detail, he will touch on issues like overhauling the corporate tax code and encouraging exports, and he will defend his health care law. ...

Mr. Obama is unlikely, they said, to embrace the recommendations of a bipartisan majority on the debt-reduction commission he created, which proposed slashing projected annual deficits through 2020 with deep cuts in domestic and military spending, changes to Social Security and Medicare, and an overhaul of the individual and corporate tax codes...

In general, the theme of deficit reduction will be less prominent in the speech as Mr. Obama emphasizes spending “investments” and “responsible” budget cutting...

Advisers said the president would describe five “pillars” for ensuring America’s competitiveness and economic growth: innovation, education, infrastructure, deficit reduction and reforming government. ...

“He’s making the transition from an economic security president to an economic growth president,” said Jim Kessler, co-founder of the centrist organization Third Way, “and he’s moving from the left to the center.” ...

While I'm happy about the focus on jobs, we shouldn't get our hopes up too much. There are job programs that are intended to carry people through the down side of a business cycle -- short run initiatives to put people to work that have been largely missing in the response to the crisis -- and there are initiatives that are designed to increase economic growth and create jobs over the longer run. I expect the focus will be much more on creating jobs through long-run growth than on the more immediate unemployment problem (which means a likely embrace of the GOP's claim that tax cuts lead to jobs -- though see here for a rebuttal to the claim that tax cuts spur economic growth). And to the extent that the president does focus on more immediate needs, it's unlikely to find support in Congress even with a strong move to (and even past) the center. These initiatives will be about long-run growth and a more hopeful future (and mostly confined to tax cuts, or to use the terms above "tax overhaul," if the GOP gets its way). That is surely needed, hope for the future has eroded substantially with the crisis, but we also have millions of people out of work right now and they need attention too.

[Also posted at CBS MoneyWatch.]