Tuesday, August 28, 2018

Wage Stagnation and Globalization

William Gladstone wrote in the Wall Street Journal on August 14 that "wage stagnation is everyone's problem." I agree, but I strongly disagree with his analysis of cause and effect. Wage stagnation is a problem for the economy's growth and very much a problem for the people who find their wages stagnating. The challenge is doing something about it. Something that will work.

After looking at many possible causes of wage stagnation, Gladstone quotes a single Federal Reserve Bank of San Francisco publication that attributes 85% of the decline in labor's share to globalization. Since I know that there have been hundreds, if not thousands, of articles written about the many impacts of globalization, it made me wonder why he chose only one single article to support a very extreme claim. I promise I will read that article and get back to you. But today I decided to look at some relevant data and see what it says.

I didn't look at wage data because I know that wages are not the exclusive source of income for most workers. Most of us get benefits at work. Some grocery workers lift a banana now and then, and many of us have retirement and health benefits. When you combine wages and benefits, you get something called earnings. If a worker accepts a better health plan in lieu of a wage increase, one should count that benefit. So earnings is a superior measure of what the employee gains.

I also chose constant dollar earnings because that deflates the earnings figure for changes in the cost of living. The Labor Department deflates earnings with the consumer price index. With constant dollar earnings, we get a pretty good measure of how much the spending power of employees changes over time.

I chose the time period from 2001 to 2018 because Gladstone argued that most of the labor wage problems stemmed from that time period. The data found in the table below come from the US Bureau of Labor Statistics.

BLS loves to collect this kind of data. Among the many economic times series they publish, I found information about constant dollar earnings for a number of occupations and industries. I was hoping by looking at this information I could see if there is a strong case for a large impact of globalization on the earnings of US workers. It is well known and often cited that foreign countries have stolen jobs from America, especially manufacturing jobs.

The table presents data for various US occupations and industries. The numbers for June of 2001 and June of 2018 are called index numbers and represent the levels of constant dollar earnings in those years. The last column presents the cumulative change over those 17 years. At the top is the average for all civilian workers. The table shows that the buying power of wages plus benefits rose by 10.2% over those 17 years. The typical employee in 2018 could buy about 10% more than he could in 2001.

The next part of the table gives similar data for various occupations. The strongest real earnings growth was the 14% increase for the occupation called Office and Administration. The lowest increase was earned by the category called Management, Business, Finance. Other weak growth occupations included Production and Management Professional. While this occupation information has no direct bearing on which industries were impacted the most, it does show that a broad spectrum of employees had less than average earnings growth. Production workers were among that group with less than average buying power increases. But so were many office workers.

The bottom of the table shows changes by industry. Workers at Hospitals and those in Administrative industries did the best while those that produced Goods and Manufacturing did the worst. Aha, you say. See, globalization hurt production workers! But by how much? The average worker saw her buying power increase by 10.2%. Goods producing workers earnings expanded by 9.2%. That is a cumulative difference over 17 years. That means that the buying power of the average worker beat that of the goods producer by 0.06% per year. If the average worker had an increase of $100 in a given year, then the production worker had an increase of $99.40.

Workers in Public Administration firms saw their buying power rise by 16.8% over those 17 years. That is 7.6% more than workers at Production firms. That sounds like a lot but when you look at the average yearly amount the major difference disappears. The gap suggests an improvement of 0.45% per year. If a worker at a Public Administration firm had an increase of $100, then the worker at a Production company would have gained purchasing power of about $99.54.

I redid these calculations several times, and they are correct. The reason why we might disbelieve them is that an increase in the buying power of wages of around 10% over one year is great -- but over 17 years it is tiny. Thus the differences among industries and occupations are even tinier. Maybe globalization did impact production workers -- but the Labor Department tables suggest that average employees of none of these occupations and industries got rich.

I'm not sure globalization had much to do with all that but it is worth pondering the real causes. The US is a very large economy and trade is a relatively minor part. If employee earnings have grown too slowly, we might want to look a little harder at what is causing that. Check out this blog next week. I will offer one explanation then.

Constant Dollar Employment Cost Index
As of June in each year
2001 2018           Change
All Civilian Workers 94.5 104.1 10.2
Management, Professional 94.6 103.8 9.7
Management, Business, Finance 96.1 104.7 8.9
Sales and Office 94.2 104.3 10.7
Office, Administration 93.6 106.7 14.0
Natl Resource, Constrn, Maint. 93.8 104.4 11.3
Construc, Extraction, Farming, etc 94 104.3 11.0
Installation, Maintenance, Repair 93.6 104.5 11.6
Production 94.1 102.6 9.0
Transportation 95.5 106.6 11.6
Services 95.2 105.4 10.7
Goods 93.6 102.2 9.2
Manufacturing 93.3 102.1 9.4
Services 94.7 104.5 10.3
Education 93.5 103.9 11.1
Healthcare and Social Assistance 93.5 103.6 10.8
Hospitals 90.9 104 14.4
Public Administration 91.4 106.8 16.8

Tuesday, August 21, 2018

Lesson 23 The Hidden Bond Market

The market approach was very popular when I learned macroeconomics. A macro model was composed of several markets – for goods and services, labor, money, and financial markets (bonds and stocks). By studying those markets we would learn about changes in things such as output, unemployment, wages, prices, and interest rates.

While each market could be studied separately in isolation, the trick of macro was to study them as an interconnected system of markets. What fun. We learned that something that first disturbed one of the markets, for example, the goods & services market, could subsequently affect outcomes in the other markets. Not everything was obvious by looking at one market. You had to study the whole system. 

Think of the US economy as being composed of a bunch of lily pads. A frog lands on one of those pads and impacts that one pad. But then the change in that one pad may affect the whole pond and all the other pads. The impact of those pads then reverberates around until that dang frog leaves the pond. That’s the way we think about macro. Something might disturb the labor market but before all is done, all the markets will have been impacted and therefore that one initial change might affect output, employment, wages, price, interest rates and more.

Isn’t macro fun? Lily pads! Frogs!

An economist named Leon Walras (pronounced vall rah) was diddling around with macro systems of markets and decided that one could focus on all the markets except one. You would always know the results for the “dropped” market because it was totally determined by looking at all the other markets. It became traditional to “drop” the bond market via Walras’ Law. That does NOT mean there is no bond market. It does not mean that the bond market is unimportant. It means only that one can learn all one needs to learn about all the markets without directly addressing the bond market.

The bond market is, therefore, hidden in macro models. It is lurking in the background but generally not in direct view. (Many of us learned something called the IS-LM model in macro. The IS curve represented goods & services and the LM curve was the money market. The bond market was "dropped" and we just looked at goods, services, and money.)

Aside from silly macro modeling, why would a normal human care about any of this? The answer is that sometimes the hidden bond market is forgotten, yet sometimes the bond market is very important. Today, this is especially important given all the focus on the Fed and its impacts on interest rates. 

People mistakenly think the interest rate is determined in the money market and is very much impacted by the Fed’s policy decisions. That belief oversimplifies the truth. The interest rate is the rate of return on a bond or other similar credit instruments. Changes in the supply and demand for bonds, therefore, have fundamental impacts on interest rates. To forget the bond market is to leave out critical factors impacting interest rates.

Today, we are concerned that Fed policy is going to raise interest rates. Our eyes are peeled for Fed policy meetings and the resulting impacts of their decisions on interest rates. But wait, there is much more to it. The Fed might influence interest rates, but much depends on the other factors in asset markets. For example, because the government is going to have large deficits in coming years, the Treasury is going to sell a bunch of government bonds to finance those deficits. Call that a large increase in the supply of bonds. Without a corresponding increase in the demand for bonds, that launch of new bond sales puts upward pressure on interest rates. One could argue that the Fed need do very little to raise interest rates since the Treasury is going to do a nice job of lifting them anyway.

Think about other borrowing in the economy. Firms will need to borrow more to permanently raise the amount they spend on plant, equipment, and innovation. Students will likely borrow more, too. There seems to be no end to how much we want to borrow for new cars. In a strong economy, all of that borrowing combined with the Treasury’s borrowing could be putting strong pressure on rates to rise. What if the Fed pushes rates even higher?

What I am suggesting is that ignoring the “dropped” bond market could result in interest rates rising too much too soon. If rates rise too much, this could trigger the next recession. Interest rates are returning to more normal higher levels due to the usual impacts of a growing economy that is reliant on debt. The Fed seems overly worried about inflation these days and is very willing to push rates upward. But they should also be worried about the bond market’s impact on interest rates and instead be focused on not letting interest rates rise too much.

The Fed is always somewhere between a rock and a hard place. The Fed finally decided that interest rates were too low. Sadly, it might be true that the real worry is that rates may be already rising too much. Why is the Fed always a day late and a dollar short?

Tuesday, August 14, 2018

Mr. Knowitall

Correct me if I am wrong, but no one wants the label Mr. Knowitall. That’s how many of us felt about our parents who were always ramming their half-baked ideas down our throats. We swore we would never be like them. One problem with Mr. Knowitall is that we  know he is trying to impress us with his vast store of knowledge. But worse than that obnoxious trait is that he really thinks he knows it all. He has nothing left to learn. So he listens very little and pontificates often. Communication is a one-way street. Yes, shes can be knowitalls too! 

None of us likes to be wrong, especially when we are arguing with friends and relatives. But it is the essential nature of our world that we are usually wrong. Most of the valuable or interesting things are complicated if not uncertain. What is the best way to raise your child? What is the best diet for you? What is the best way to get from Bloomington, IN to Burnsville, NC? How do you eliminate poverty? How do you stop chipmunks from digging under the foundation of your house? What is the best way to stop terrorism?

The above questions are debatable. There are two or more sides to each question. While there might seem to be a best answer today to one of these questions, we know that there is no guarantee that provisional knowledge today is perfect or that what worked yesterday will work today or tomorrow. Things change and therefore so do the correct answers. Correct answers are never 100% correct and are qualified or transient depending on changing conditions.

One response is to think that there is never a correct answer and since we are always wrong, we might as well have no opinion. While that might be good for some people, another option is to accept what you think is the best answer today but keep an open mind about what might change your opinion tomorrow. We lope along over time searching for the best truths.

While that might sound overly philosophical, another way of saying all this is that most of us try to learn. We read, we talk to people, we watch television. And best of all, we argue. Argue? Are you kidding? One connotation of argument is two sweaty red-faced people with different opinions trying to win at any price. Call him names! Make fun of her parents? Associate him with a cult. Whatever you have to do, argue to win!

But argument doesn’t have to be like that. Argument can be the best thing you did that day. Argument can be the way you learn. To argue a point, you have to first become acquainted with the topic. You then put together your best argument for a specific result. You might say spanking is a good approach to child-rearing. Your adversary, if you listen to her, will explain why it isn’t the best approach. If you both really listen, you might learn some things that you overlooked. Or you might raise the importance of something you thought was unimportant. The point is that no one knows everything. 

Argument is a wonderful way for spirited people to learn more. There is nothing like a contest to make you work harder. The everyday contest of argument is what can make us stronger and more confident about what we think we know. But it can also make us more humble and willing to keep learning. 

What bothers me today is that I see very few examples of people learning from each other when it comes to the most important issues of our day. People seem quite adept at memorizing an ideological mantra. They shout it at an opponent. And when something comes out of the mouth of the opponent, they shout their mantra louder. The opponent then shouts louder still. This is one-way communication at its worst, and it leads to zero learning. 

I had the loveliest conversation with one of my children recently. And yes, JD was involved.  It was about immigration. I was so proud of both of us because we listened to each other. I think we are each better informed because we both spoke and listened. I am not sure that either one of us changed our minds considerably, but I do think the conversation opened some new doors for learning and making future decisions. I feel especially blessed to have a family composed of people who try to keep learning and do it by arguing with and listening to each other.

Tuesday, August 7, 2018

US Monthly Employment and Excessive Analysis

On Friday August 3, the US Labor Department announced the monthly employment number for July 2018. You would have thought it was the 4th of July. That's the way the press seems to handle every data announcement. Every data report is a special baby announcement: It's a boy, and what a whopper he is!

The below graph of seasonally adjusted monthly non-farm employment shows all the changes since the beginning of 2002. If you can see the vertical axis, you will see that one-month employment changes stayed between a high of almost 600,000 and a low of negative 800,000. But those extremes exaggerate what you see most of the time. If you take out the largest changes and look at the rest, you see that both before and after the recession (shaded area), employment changes averaged around 200,000 per month.

Another thing you see in the graph for the years before the recession and after the brief recovery is that employment changes bounced around more than a Nolan in a bounce house. You could get sick watching the employment change number go up and then down and then up again.

What's my point? My point is that, except for recessions, this is pretty boring stuff. It's like my weight. I weigh pretty much 200 pounds (okay, I weigh more than that but let's stick with 200 since the chart says 200). Betty bakes some cookies and I gain a few pounds. I go to the gym and I lose a few pounds. No one cares. I weigh 200 pounds...plus or minus.

Imagine the press in my front yard waiting to hear my weight right after my cookie-binge week. One reporter says to the other, I hear he ate three plates of cookies every night. He even piled on vanilla ice cream. I bet he weighs 210. Another one heard that I dreamed I did 10 burpees each day and that I probably only gained 8 pounds. Apple Pie stock slipped just below a zillion dollars on hearing all this.

I finally waddle through the front door and announce to the thousands of reporters -- the scale says I weigh 206. There is a deep hush as the public realizes they overestimated my weight. Kroger closed early that day, and Apple Pie stock fell below Amazon.

When the employment number got announced on August 3, the reactions to the announcements reactions were similarly silly. Many pointed out that the number was very strong. A good number. But sadly, it was a little lower than some had expected. Much was written and much was said. Hand-wringing was profound. But really, folks? Look at that graph. If the employment change goes under 200,000 one month, what are you supposed to think? Yup -- next month it will likely go above 200. End of story. If it goes under 200,000 for two or three months, what do we learn? Yup, it will return to 200,000 the next month. If it goes under 200,000 for six months, then we have something to talk about!

In the meantime the press will indulge our need to be excited each month. Experts will say many interesting things about trends and cycles. I just can't wait until September's report for August.