Category Archives: Labour Market

Full v Fulfilling Employment

Just going through the Natural Rate of Unemployment with my A2 class and I remembered a post I did last year. Free Exchange in The Economist had an article which looked at the change in terminology used by Janet Yellen ex-chairman of the Federal Reserve. In a statement last year she alluded to the US economy near maximum employment and that rate rises could ensue. However only 69% of American adults have a job.

Full employment has normally been the concept that has been used to describe a situation where there is no cyclical or deficient-demand unemployment, but unemployment does exist as allowances must be made for frictional unemployment and seasonal factors – also referred to as the natural rate of unemployment or Non-Accelerating Inflation Rate of Unemployment (NAIRU). If a central bank wishes to stimulate demand below this level there is the concern that inflation will increase therefore they take a guess as to what is the natural rate of unemployment – the lowest rate of unemployment where prices don’t accelerate. Maximum unemployment is the same in that it refers to the labour market being as tight as it can be without increasing prices. Natural rates in the US have varied – around 5.3% in 1950 and then peaking at 6.3% in the stagflation period before falling 4.9% in 2008 and then rising to 5.1% after the GFC, see graph below.

NRU and its causes

The NRU mainly depends on the level of frictional unemployment – defined as those who are in between jobs. This number can vary as at different times of the business cycle as there can be a delay in matching those looking for work with the vacancies themselves – a mismatch sometimes referred to as Structural Unemployment. The increase in frictional unemployment in the 1970’s and 80’s was largely due to the decline in manufacturing jobs with the advent of automation and more right wing policies (Reagan and Thatcher). Workers would stay unemployed in the hope that good high paid manufacturing jobs would reappear.

Unions can also influence the NRU with protecting workers jobs and pushing up wages so that employers find it too costly to employ more labour. However the fall in the 1990’s could be due to the advent of technology in the hiring process and the growth of part-time jobs which assisted those workers facing a career change.

Another influence on the NRU is wage growth as with the higher wages you attract more of the labour force to engage in actively looking for work.

A central bank will have to use trial and error to make a decision on how much spare capacity there is in an economy. Only when prices start to increase do they have an idea how capacity is running.

Quality not Quantity

As alluded to by The Economist the goal of full employment must consider the quality of jobs as well. With the acceleration of technology over labour, maximum employment should consider more than capacity constraints or inflationary pressure.

Rather, governments need to consider the options available to workers: not just how easily they can find jobs they want, but also how readily they can refuse jobs they do not. By lifting obstacles to job changes and giving workers a social safety net that enables them to refuse the crummiest jobs, societies can foster employment that is not just full, but fulfilling.

Sources: The Economist 28th January 2017, St Louis Federal Reserve – Natural Rate of Unemployment

Are smartphones causing a loss of productivity?

A recent article on the Bank of England blog written by Dan Nixon caught my attention as it is something that I have long been concerned about – that is the amount of time we spend on our phones / devices and its impact on people’s productivity in the workplace.

Smartphone use and the amount of notifications that we get is enormous. Research in 2015 found that on average we check our 150 times a day – roughly 6½ mins – and spend 2½ hours each day on the phone, spread across 76 sessions. From this the ‘attention economy’ emerges as a scarce and valuable resource and is seen as one of the greatest problems of our time – American philosopher William James noted, our life experience ultimately amounts to whatever we had paid attention to.

The attention economy and the workplace.

The graph below makes for interesting interpretation – productivity growth has been very weak whilst shipments on smartphones has increase by 10 fold. You would expect that the output of a worker would depend on his/her ability to focus and be able to pay attention to the task in hand. However research into observing inner states (attention) and mapping those outcomes with attention (productivity) is fraught with difficulty.

Cyberslacking – The US Chamber of Commerce Foundation finds that people typically spend one hour of their workday on social media – rising to 1.8 hours for millennials. Another survey, meanwhile, found that traffic to shopping sites surged between 2pm to 6pm on weekday afternoons. An influx of emails and phone calls, for example, is estimated to reduce workers’ IQ by 10 points – equivalent to losing a night’s sleep.

Frequent distractions – might lead to a persistently lower capacity to work, over and above the direct effects. What is the argument for this being the case?

1. There’s habit formation – what we do is designed by smartphone apps which make us be as addictive as possible – to ‘hijack the mind’, as Tristan Harris puts it. The psychological mechanism at play here – “intermittent variable rewards” – is the same as the one that gets people hooked on slot machines.

2. The more choice of notifications we have the more time we will spend scanning them looking for instant gratification. Cal Newport goes so far as saying that media like email, far from enhancing our productivity, serve to ultimately deskill the labour force.

Algorithms and attention
Ultimately what we look at is determined by algorithms – so the more technology the less we make the decisions ourselves and our suggested we buy certain goods or services because of out previous behaviours. There has been a lot of talk about artificial intelligence and machines that will be capable of an increasingly wide set of tasks. But most agree on the need to cultivate our distinctively human skills in order to differentiate ourselves from machines. And the human ability to empathise – central to the work of social workers, performers and nurses, among others

But is technology all bad?

IT does help business for the following reasons:

  • Speeds up communication
  • Allows documents to be shared remotely
  • Easier to find information own the Internet.

From the above productivity surged in the late 1990’s and early 2000’s as email, databases and the Internet have had a significant effect on the productivity of business processes.

Is the cause of weak productivity distraction?

Distraction is not the whole story with regard to weak productivity. Industries such as manufacturing and construction have had disappointing productivity rates but this can hardly be due to workers being on their smartphones. As pointed out by The Economist ‘Free Exchange’ productivity is also a consequence of the movement of workers from industries with relatively high rates of growth to more stagnant ones. For instance in the US productivity half of total employment growth since 2000 has been in low productivity areas such as education and health care.

Final thought

According to Dan Nixon constant notifications results in workers becoming less empathetic which is a serious side-effect in an economy where human connections with customers are cast as a defense against automation. Distraction also appears to reduce happiness which ultimately impact on worker productivity. Must end this post now – better check my email accounts, twitter, Facebook and Linkedin.

 

Sources: 

Dan Nixon – Bank Underground blog

Free Exchange – The Economist.

 

A2 Economics – Introducing Unemployment with UB40

I recently started teaching the Unemployment topic to my Year 13 A2 class and remembered that one of the first albums I bought was UB40 Signing Off – released in 1980 (see right). The front cover and reverse has been made to look like the UB40 unemployment benefit attendance card from which the band took their name. Their UK top-ten hit “One In Ten” was an attack on Thatcherism and is mistakenly cited as referring to the number of unemployed in the UK at that time. It is in fact a song about government statistics in general, and how politicians use them to de-humanise problems. Useful way to introduce the subject especially if the class like reggae. I found it useful to have two windows open and play the video along side the lyrics. Click here for the lyrics of the song and here to see UB40 perform on Top of the Pops in 1981.  I was surprise at how many of the class knew of the band.

Zero sum game – Tax cuts v Higher interest rates.

The recent tax cuts in the US by the Trump administration are estimated to create above 4% growth each year according to Gary Cohn – Director of the National Economic Council. If the US does achieve this level of growth, tax reform is said to have little impact as long-term growth – studies have estimated that the tax bill will have an impact of between 0.4% – 0.9% on GDP.

Textbooks that cover supply-side policies tend to suggest that lower taxes on labour income should raise its supply whilst lower taxes on capital income should increase saving and investment which should then increase labour productivity and competitiveness in the market place. But there is the income and substitution effect to consider. With tax cuts people’s income increase therefore there is the chance that the substitution and income effects come into play.

Substitution effect – if wages are higher workers may forgo some of their leisure time and work longer hours. SS1 on the graph

Income effect – if wages are higher workers may reduce some of their working hours as the demand for leisure time goes up – SS2 on the graph

Most textbooks favour the substitution effect with tax cuts although research shows that neither labour-force participation nor hours worked move in response to tax changes. However reported labour income does rise in response to income tax cuts, thanks largely to less tax avoidance. Furthermore savings rates have changed little with tax cuts in fact they have decreased in the US over the past 40 years. Savings rates are important for investment purposes although the current administration believes that this shortfall will be filled by overseas investors.

Oligopolists to benefit

With the lack of competition in US industry – especially in the banking sector – it is the these companies (many whom are oligopolists) and their shareholders who will reap the benefits of tax cuts. Research has shown that a cut in corporate tax of 10% would raise long-run output output by 0.15%. National Income would raise less with much of the addition to GDP going overseas.

What about higher interest rates?

Although tax cuts (increase in demand) do help out especially when there is a lot of spare capacity in the economy this is hardly the case at the moment. The US has limited spare capacity and the Federal Reserve fearing inflation have been more contractionary in their actions by recently increased interest rates which cancels out the stimulatory tax cuts.

Tax cuts and inequality

Although the republican rhetoric has been that tax cuts will benefit all they haven’t mentioned the distributional consequences. The cuts will reduce the tax burden of the top 0.2% by an average of $278,000 by 2017. This is in contrast to the bottom 20% of earners will get an extra $10 dollar by 2017.

Economic Theory v Economic Reality

Most theories in economics rest on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an introductory economics textbook, even though the assumptions behind those diagrams virtually never hold true in the real world.

Below is a table that I found in James Kwak’s book “Economism”. It takes theories found in most introductory economics textbooks and suggests what actually might happen to these theories in the real world.

 

Does CEO pay equal their marginal revenue product?

One reason for the increasing inequality in society is the stagnant wages for the lower and middle income groups – in the USA the top 0.1% have as much wealth as the bottom 90%. Labour compensation at the very top has increased dramatically since the 1970’s.

1970’s – the top 0.1% took home less than 3% of all income
2010 – the top 0.1% took home more than 10% of all income

In the USA the top CEO’s average compensation has grown since the late 1970’s by over 900% to around $15 million a year. In contrast the lower income groups have gone up by only 10%. However when you look at hedge fund and private equity fund managers the salaries are astounding. In 2014 which was seen as not a great year for the industry 25 fund managers made at least $175 million each, and 3 made more than $1 billion.

Are CEO’s worth every cent?

In theory the demand for labour is determined by their marginal revenue product – that is the value of revenue generating by employing an additional worker. Labour markets are imperfect and a monopsony occurs in the labour market when there is a single or dominant buyer of labour. The buyer therefore is able to determine the price at which is paid for services. The monopsonist will hire workers where:

Marginal Cost of labour (MCL) = Marginal Revenue product of labour (MRPL)

Therefore it will use labour up to level of Eq which is where MCL=MRPL. In order to entice workers to supply this amount of labour, the firm need pay only the wage Wq. (Remember that ACL is the supply of labour). You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.

So if Goldman Sach’s CEO, Lloyd Blankfein, made $24 million in 2014, that’s because he is worth $24 million to his company. In short, you make what you deserve based on your skills, effort, and productivity, in this fairest of all possible worlds.

However this theory has little to do with how the world actually works. The idea that good CEO’s are entitled to enormous rewards is based on the belief that success or failure of the company depends on one person. According to historian Nancy Koehn, business is a team sport: not only is it impossible to quantify a single leader’s marginal revenue product; it is hard even to describe it clearly. Ultimately a CEO can appoint friends and place them on the compensation committee which recommends the CEO salary. The committee invariably proposes to pay at least as much as the median comparable company, because no board wants to admit that its company has a below-average leader. CEO’s do have key performance indicators (KPI’s) but the CEO can encourage the committee to select metrics that will be easy to satisfy. John Kenneth Galbraith describes CEO pay very succinctly – “The salary of the chief executive of a large corporation is not a market reward for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

Luck plays an important role in CEO’s pay. Heads of oil companies were paid more when profits increased, even when the profits were not due to their decision making but simply by a rise in the price of oil. On the contrary it is argued that some boards actually do a good job in firing under-performing leaders and that in the end, high compensation is simply the result of the market for talent – supply and demand. The financial sector tend to use the marginal revenue product of labour theory in their awarding of compensation for CEO’s. Bonuses of traders and investment bankers’ are based on the profitability of their own deals but because bonuses can never be negative, individual employees can generate enormous payouts on bets that turn out well while sticking shareholders with the losses on bets that go bad. Furthermore even if bankers do make money by buying low and selling high in the securities markets there is no value generation as there is no tangible output that anyone can consume.

In aristocratic societies such as 18th century France or 19th century Russia, wealthy noblemen who owed their riches to the accident of birth had to worry about the prospect of violent rebellion by the have-nots. By contrast in the US today the wealthy are protected by the widespread belief that their extraordinary incomes – and the inequality that they generate – are simply the product of inescapable economic necessity.

Source: Economism by James Kwak

Recession Recovery or He-cession She-covery?

Radio NZLast Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.

“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”

Boosting the minimum wage is stimulatory

She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.

He-cession and She-covery

However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.

Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.

Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.

Tight labour market in Japan but wages stagnant.

As is mentioned in simple economic theory, when you have a good or service that becomes more scarce there is an increase in the value of that good or service. The labour market in Japan is becoming very tight in that the supply of labour is starting to decrease with the demand increasing – see graph. This should ultimately lead to higher wage demands by workers as they are becoming more and more scarce relative to the demand. Recent figures out of Japan show this situation:

Japan labour market* Working age population – 15-64 years in Japan – fallen by 3.8m since December 2012 = decrease in supply of labour = upward pressure on wages
* People actually working has increased by 2.2m = increase in demand for labour = upward pressure on wages
* Unemployment in Japan = 2.8% the lowest rate since 1994 = upward pressure on wages

Why has there been no increase in Japanese wages?

Japanese labour unions have not been very aggressive in wage bargaining and there was a wage increase of only 0.2% in 2016 but already in negative territory this year – see chart. Wages have remained stagnant as strong demand has resulted in an increase in supply of labour rather than the price of labour – wages.

Japan - wage growth
Supply of labour increase:
* Japan now has 1 million foreign workers as compared to 680,000 in 2012
* Numbers of elderly men and women in the workforce has increased by over 2 million
* There is a rising share of part-time work

Job security at the expenses of wage increases.
It seems that market forces don’t really affect those employed in large firms. The pay in these firms has been largely unresponsive to the pressure of supply and demand as employees of life-time employment do not worry about being made redundant but don’t expect significant pay rises during the good times. However in times of inflation they do request higher pay to offset the increased cost of living.

So if general workers pay does increase there is the possibility of the general level of prices will also go up which would in turn increases the wage demands of those in large firms. However as stated by The Economist

“Japan’s workers are hugely in demand but strangely undemanding.”

Russia – economic concerns.

Part of the excellent Al Jazeera documentary series about Russia, which addresses the problems facing many Russians today. The global economic crisis, conflicts with neighbouring countries and the drop in oil prices all played their part in the demise of the Russian people. There is a very good interview with the former Central Bank Chairman Viktor Gerashchenk who held the position during Yelstin’s reign. He explains very simply how you grow your economy and that there must be money in the banks so that companies can borrow and invest. Buying US Treasury Bills was loaning money to the US and paying for their deficit. Meanwhile the infrastructure and public services declined rapidly causing a lot of anguish amongst the people. You can’t suddenly jump from a socialist system into the free market. Worth a look.

China's wages on the increase

Useful new video from the FT showing the increase in China’s wages and how they are catching up with those in the developed world. China’s labour force as a whole, hourly wage is around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International. Has China reached the Lewis Point where the abundance of cheap labour has dried up as workers return to the rural areas? Could be used for the A2 Developing Economies topic.