Category Archives: Economy

What’s the matter with Oklahoma?

Source: The Economist, January 30, 2018

Low teacher pay and severe budget cuts are driving schools to the brink. ….

Forty miles from Tulsa, sometimes along unpaved roads, sits Wagoner High School, with its 650 pupils, championship-calibre football team and show barn—a seemingly ordinary small-town school. But unlike most high schools, Wagoner is closed on Mondays. The reason, a severe reduction in state funds, has pushed 90 other school districts in Oklahoma to do the same. Teacher pay is the third-lowest in the country and has triggered a statewide shortage, as teachers flee to neighbouring states like Arkansas and Texas or to private schools. “Most of our teachers work second jobs,” says Darlene Adair, Wagoner’s principal. “A lot of them work at Walmart on nights and weekends, or in local restaurants.” Ms Adair hopes that Walmart does not offer her teachers a full-time job, which would be a pay rise for many.

The roots of the fiasco are not hard to determine. As in Oklahoma’s northern neighbour, Kansas, deep tax cuts have wrecked the state’s finances. During the shale boom, lawmakers gave a sweetheart deal to its oilmen, costing $470m in a single year, by slashing the gross production tax on horizontal drilling from 7% to 1%. North Dakota, by contrast, taxes production at 11.5%. The crash in global oil prices in 2014 did not help state coffers either. Oklahoma has also cut income taxes, first under Democrats desperate to maintain control over a state that was trending Republican, and then under Republicans, who swept to power anyway. Mary Fallin, the Republican governor, came to office pledging to eliminate the income tax altogether. Since 2008 general state funds for K-12 education in Oklahoma have been slashed by 28.2%—the biggest cut in the country. Property taxes, which might have made up the difference, are constitutionally limited….

….No fact embarrasses Oklahomans more, or repels prospective businesses more, than the number of cash-strapped districts that have gone to four-day weeks……

The False Choice Between Automation and Jobs

Source: James Manyika, Michael Spence, Harvard Business Review, February 5, 2018

….The catch is that adopting these technologies will disrupt the world of work. No less significant than the jobs that will be displaced are the jobs that will change—and those that will be created. New research by the McKinsey Global institute suggests that roughly 15% of the global workforce could be displaced by 2030 in a midpoint scenario, but that the jobs likely created will make up for those lost. There is an important proviso: that economies sustain high economic growth and dynamism, coupled with strong trends that will drive demand for work. Even so, between 75 million to 375 million people globally may need to switch occupational categories by 2030, depending on how quickly automation is adopted.

It is no small challenge. The jobs gained will require higher educational attainment and more advanced levels of communication and cognitive ability, as work requiring rote skills such as data processing or collection increasingly are taken over by machines. People will be augmented by increasingly capable machines acting as digital working partners and assistants, further requiring ongoing skills development and evolution. In advanced economies, which the research shows will be the most affected, downward pressure on middle-wage jobs will likely grow, exacerbating the already vexed issue of job and income polarization, although in emerging economies the balance between jobs lost and jobs gained looks to be more favorable in the short- to medium-run., and the net effect is likely to be an acceleration of growth in the middle class…..

Related:
What the future of work will mean for jobs, skills, and wages
Source: James Manyika, Susan Lund, Michael Chui, Jacques Bughin, Jonathan Woetzel, Parul Batra, Ryan Ko, and Saurabh Sanghvi, McKinsey Global Institute, Report, November 2017

The Economic Effects of Providing Legal Status to DREAMers

Source: Francesc Ortega, Ryan Edwards, Amy Hsin, IZA – Institute of Labor Economics, IZA DP No. 11281, January 2018

This study quantifies the economic effects of two major immigration reforms aimed at legalizing undocumented individuals that entered the United States as children and completed high school: Deferred Action for Childhood Arrivals (DACA) and the DREAM Act. The former offers only temporary legal status to eligible individuals; the latter provides a track to legal permanent residence. Our analysis is based on a general-equilibrium model that allows for shifts in participation between work, college and non-employment. The model is calibrated to account for productivity differences across workers of different skills and documentation status, and a rich pattern of complementarities across different types of workers. We estimate DACA increased GDP by almost 0.02% (about $3.5 billion), or $7,454 per legalized worker. Passing the DREAM Act would increase GDP by around 0.08% (or $15.2 billion), which amounts to an average of $15,371 for each legalized worker. The larger effects of the DREAM Act stem from the expected larger take-up and the increased incentive to attend college among DREAMers with a high school degree. We also find substantial wage increases for individuals obtaining legal status, particularly for individuals that increase their educational attainment. Because of the small size of the DREAMer population, legalization entails negligible effects on the wages of US-born workers.

Related:
‘Dreamers’ could give US economy – and even American workers – a boost
Source: Amy Hsin, IZA Newsroom, January 24, 2018

Do Unions Increase Labor Shares? Evidence from US Industry-Level Data

Source: Andrew T. Young, Hernando Zuleta, Eastern Economic Journal, Online First, December 9, 2017
(subscription required)

From the abstract:
We explore the relationship between union membership rates and labor shares using panel data on 35 industries, spanning the entire US economy, for the years 1983–2005. For the full sample, a standard deviation increase in union membership rates is associated with an increase in an industry’s labor share of about 10%. Starting from the mean labor share in our sample (0.614), this effect amounts to about 6 percentage points. However, the effect is weaker and not statistically significant for manufacturing industries. We control for the capital-to-output ratio in all of our estimations, and the results are consistent with an elasticity of substitution between capital and labor that is less than unity. As such, the positive union effect on labor share is consistent with either the right-to-manage or the efficiency bargaining model of unions.

Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered?

Source: Edward N. Wolff, National Bureau of Economic Research, NBER Working Paper No. 24085, November 2017
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From the abstract:
Asset prices plunged between 2007 and 2010 but then rebounded from 2010 to 2016. The most telling finding is that median wealth plummeted by 44 percent over years 2007 to 2010. The inequality of net worth, after almost two decades of little movement, went up sharply from 2007 to 2010, and relative indebtedness for the middle class expanded. The sharp fall in median net worth and the rise in overall wealth inequality over these years are largely traceable to the high leverage of middle class families and the high share of homes in their portfolio. Mean and median wealth rebounded from 2010 to 2016, by 17 and 28 percent, respectively. While mean wealth surpassed its previous peak in 2007, median wealth was still down by 34 percent. More than 100 percent of the recovery in both was due to a high return on wealth but this factor was offset by negative savings. Relative indebtedness continued to fall for the middle class from 2010 to 2016, and wealth inequality increased somewhat. The racial and ethnic disparity in wealth holdings widened considerably between 2007 and 2016, and the wealth of households under age 45 declined in relative terms.

Kansas Provides Compelling Evidence of Failure of “Supply-Side” Tax Cuts

Source: Michael Mazerov, Center on Budget and Policy Priorities, January 22, 2018

from the summary:
The deep income cuts that Kansas enacted in 2012 and 2013 for many business owners and other high-income Kansans failed to achieve their goal of boosting business formation and job creation, and lawmakers substantially repealed the tax cuts earlier this year. Former supporters have offered explanations for this failure to prevent the Kansas experience from discrediting “supply-side” economic strategies more broadly.  But the evidence does not support these explanations.  Rather, the Kansas experience adds to the already compelling evidence that cutting taxes does not improve state economic performance…..

Labor Market Concentration

Source: José Azar, Ioana Marinescu, Marshall I. Steinbaum, National Bureau of Economic Research, NBER Working Paper No. 24147, December 2017
(subscription required)

From the abstract:
A product market is concentrated when a few firms dominate the market. Similarly, a labor market is concentrated when a few firms dominate hiring in the market. Using data from the leading employment website CareerBuilder.com, we calculate labor market concentration for over 8,000 geographic-occupational labor markets in the US. Based on the DOJ-FTC horizontal merger guidelines, the average market is highly concentrated. Using a panel IV regression, we show that going from the 25th percentile to the 75th percentile in concentration is associated with a 15-25% decline in posted wages, suggesting that concentration increases labor market power.

U.S. Regional Outlook 2018: Full Employment Brings New Challenges

Source: Adam Kamins, Regional Financial Review, December 2017
(subscription required)

As the expansion matures and labor supply becomes a greater burden, wage pressures will grow more pronounced across regions. This will provide an additional jolt to consumers, who are already doing much of the heavy lifting this cycle. As in recent years, the West and the South will set the pace in the coming year, with income gains accelerating most rapidly in those areas.