Month: June 2013

China\’s wages have risen quickly in the last decade or so, but not quickly enough to keep up with productivity growth. (To put it another way, the share of national income earned by labor is falling in China, as elsewhere.) One factor that has prevented wages from rising even faster is that China has had a vast number of underemployed workers. As China\’s industry expanded, it could keep drawing more and more of these underemployed workers into its higher-productivity sectors, but the presence of these underemployed workers held the average pay raise below what it would otherwise have been. However, Mitali Das and Papa N’Diaye explain that this dynamic is reaching its end in \”The End of Cheap Labor,\” which appears in the June 2013 issue of Finance and Development. They refer to some of the best-known work of development economist Sir Arthur Lewis, who won the Nobel prize back in 1979, to set up their argument.

\”In Sir Arthur Lewis’s seminal work (1954), developing economies are characterized by two sectors: a low-productivity sector with excess labor (agriculture, in China’s case) and a high-productivity sector (manufacturing in China). The high-productivity sector is profitable, in part, because of the surplus of labor it can employ cheaply because of the low wages prevalent in the low-productivity sector. Because productivity increases faster than wages, the high-productivity sector is more profitable than it would be if the economy were at full employment. It also promotes higher capital formation, which drives economic growth. As the number of surplus workers dwindles, however, wages in the high productivity sector begin to rise, that sector’s profits are squeezed, and  investment falls. At that point, the economy is said to have crossed the Lewis Turning Point. …

\”Recent developments in the Chinese labor market seem somewhat contradictory. On the one hand, aggregate wage growth has remained about 15 percent during the past decade, and corporate profits have remained high. Wage growth lags productivity, resulting in rising profits, which suggests that China has not reached the so-called Lewis Turning Point … at which an economy moves from one with abundant labor to one with labor shortages. At the same time, though, since the financial crisis began, industry has increasingly relocated from the coast to the interior, where the large reserve of rural labor resides. As a result, previously large gaps between the demand for and supply of registered city workers have progressively narrowed, and worker demand for higher wages and better working conditions has risen—suggesting the onset of a structural tightening in the Chinese labor market.\”

Part of their argument is based on estimates of how many workers in China remain in the low-productivity sectors, and thus could still transfer over to the high-productivity sectors. But such estimates are inevitably a little shaky. They are on stronger ground, it seems to me, in pointing out that \”demographics virtually guarantee that China will cross the Lewis Turning Point—almost certainly before 2025.\”

Here\’s a figure showing the annual growth rate of China\’s working-age population. Back in the 1970s and 1980s, the China\’s working age population was growing at 10-15% per year. But as the effects of the one-child policy began to bite, growth in the working-age population is slowing, and will start to shrink around 2020. 

As another illustration, here\’s a figure showing the total size of China\’s \”core group\” of workers age 25-39, compared with the size of the group of those under age 15 and over age 64. In the 1970 and 1980s, the boom in China\’s working-age population meant that the number of \”core workers\” outstripped what can be viewed as the \”dependent\” population for a few years. This pattern of a surge in workers is sometimes called the \”demographic dividend.\” But the \”core group\” is already starting to shrink in size, and the number of elderly in China is about to take off. China\’s labor market is clearly evolving toward a very different situation. 

For a more in-depth discussion of these patterns, I recommend a couple of articles from the Fall 2012 issue of the Journal of Economic Perspectives: Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong contributed \”The End of Cheap Chinese Labor.\” and Xin Meng writes on \”Labor Market Outcomes and Reforms in China.\”  (Full disclosure: I\’m the managing editor of JEP, so I am predisposed to believe that all of its content is fascinating and well-done. It\’s also freely available compliments of the American Economic Association.)
 

What are the world\’s biggest health problems and risks? The Global Disease Burden study, a collaborative project that in its most recent version includes 488 co-authors from 303 institutions in 50 countries, tries to answer that question. A nice summary of some of the results is available from the Institute for Health Metrics and Evaluation at the University of Washington in its report \”The Global Burden of Disease: Generating Evidence, Guiding Policy.\”

There are perhaps two main ways to measure health effects. The simpler one is how many deaths are caused. A more complex one uses DALYs, or \”disability-adjusted life years,\” a measure that was first developed in the first Global Disease Burden study in the 1990s, but has become common since. It seeks to measure how many healthy years of life are lost: thus, if someone\’s health is injured, there is a cost in DALYs even if their life expectancy doesn\’t change. Of course, if their health is diminished and life expectancy falls, too, the cost in DALYs is greater.

Here\’s a figure showing the top 10 leading diseases and injuries on a global basis, shown with blue diamonds, and the top 10 risk factors for for deaths, shown with brown diamonds. The horizontal axis shows their cost in deaths in 2010. The vertical axis shows their cost in DALYs. Thus, \”Low Back Pain\” among the top 10 diseases and injuries based on DALYs, although it is not a direct cause of death. Lung cancer and diarrhea cause a similar number of deaths, but diarrhea is far worse in terms of DALYs.  A few of the high risk-factors that jump out at me as being a little unexpected to find in the top 10 are \”Diet low in fruit,\” \”Household air pollution,\” and \”High sodium.\”

What problems are getting better, and what  problems are getting worse? Here\’s a figure which lists the top 25 risk factors, from left to right. Thus, in keeping with the figure above, the first five are \”High blood pressure,\” \”Smoking,\” \”Household air pollution,\” \”Diet low in fruit,\” and \”Alcohol use.\” However, rather than showing the level of health damage done, the figure shows how the level if injury changed from the 1990 data in the first Global Disease Burden study to the 2010 data used in this study.

Clearly, the three big success stories in the last two decades in terms of reduced DALYs are a reduced health cost from \”Household air pollution,\” from \”Childhood underweight,\” and from \”Suboptimal breastfeeding.\”

Among the rising problems, the world is managing to combine a rising number of DALYs from \”High body mass index\” with people having health problems from \”Diet Low in Fruit,\” \”High sodium,\” \”Diet Low in Nuts and Seeds,\” \”Diet low in whole grains,\” \”Diet low in vegetables,\” \”Diet low in omega-3,\” \”High-processed meat,\” and \”Diet low in fiber,\” not to mention \”Smoking\” and \”Alcohol.\” In short, a large share of the world\’s health risk factors, and a large share of the problems that are getting worse, have to do with what people are putting in their mouths.

Between credit cards, debit cards, automatic deposits, automatic payments, making payments via a smartphone, and similar technologies, it seems as if cash must be on the way out. But John C. Williams explains otherwise in \”Cash Is Dead! Long Live Cash!\” an essay written for the 2012 Annual Report of the Federal Reserve Bank of San Francisco.  Williams writes :

\”[S]ince the start of the recession in December 2007 and throughout the recovery, the value of U. S. currency in circulation has risen dramatically. It is now fully 42% higher than it was five years ago. … Over the past five years, cash holdings increasedon average about 7¼% annually, more than three times faster than theeconomy’s growth rate over this period. At the end of 2012, currency in circulation stood at over $1.1 trillion, representing a staggering $3,500 for every man, woman, and child in the nation.\”

To get a sense of what\’s happening here, consider this figure. The red line in the middle shows growth of GDP over time. The green line at the bottom shows the growth of U.S. currency in circulation in denominations of $50 or less. The blue line at the top shows total currency in circulation: that is, the gap between the green line and the blue line is made up of $100 bills.

From 1989 through the early 1990s, the growth of currency with denominations of $50 or less pretty much tracked the rise in GDP. But with the arrival of all the alternative methods of payment listed above, the rise in currency in denominations of $50 or less began to lag well behind the rise of GDP. However, overall currency in circulation, and especially those $100 bills, have risen faster than the rise in GDP.

Part of the story here is that in the scary economic times of the last few years, when many financial institutions looked unsafe, more Americans have been holding cash. Williams writes: \”As fears about

But it\’s not just Americans who hold U.S. currency. If you were a European looking  at the financial and banking struggles across the continent, holding some U.S. dollars in the form of cash might make some sense. Williams writes: \”As Europe’s crisis worsened in the spring of2010, U.S. currency holdings rose sharply. And they continued to rise as economic and political turmoil and uncertainty about the future sent Europeans scrambling to convert some of their euros to dollars. It’s estimated that the share of U.S. currency held abroad rose from about 56% before the tumultuous events of the past five years to 64% in 2011.\” My guess is that many of the newly well-to-do in China, India, Brazil and Russia have also built up a stash of U.S. $100 bills.

In both of these situations, it\’s important to notice that with interest rates at such extremely low levels, those who decide to hold cash are not giving up much in terms of foregone interest payments.

Two other explanations are sometimes offered for the rise of cash, but they are probably minor factors. First, price levels in general have risen, and so more people are likely to use $100 bills for transactions–like buying a tankful of gasoline or going grocery shopping. While this is probably a contributing factor,  not that many people are walking around with $100 bills in their wallets for daily transactions. Second, $100 bills may be used to pay those in the \”gray economy,\” all those people who work jobs that are paid in cash and  not reported to the IRS or Social Security or unemployment insurance or workman\’s compensation. Again, this is probably a contributing factor, but most cash-based employers are not handing their nanny or gardener a few $100 bills.

It sounds like the plot-line from a crime-caper-gone-wrong movie, but Canada\’s global strategic maple syrup reserve was drained of $18 million worth of syrup last fall. robbed last fall. Jacqueline Deslauriers tells the story in \”Liquid Gold,\” in the June 2013 issue of Finance & Development. She tells the story (citations omitted for readability) :

\”Although its value to the Canadian economy may pale in comparison with, say, wheat or soybeans, maple syrup trumps the vast wheat fields of Manitoba and Saskatchewan when it comes to Canadian cultural identity. It is for good reason that the maple leaf is Canada’s best-known symbol. Canadians’ deep attachment to this exotic food shapes their attitude toward protecting the price farmers receive for producing maple syrup.­ … Maple trees, the source of maple syrup, grow naturally in eastern North America. Canada produces 80 percent of the world’s supply of maple syrup, and the province of Quebec, where the heist took place, accounts for 90 percent of Canada’s production …

\”The Federation of Quebec Maple Syrup Producers was set up in 1966 to represent and advocate for producers—most of them dairy farmers who supplemented their income by tapping maple trees. By the 1990s, maple syrup output had grown rapidly, and by 2000 the industry was producing a surplus of between 1.3 and 2 million gallons a year. Because maple syrup is so easily stored, in bumper years the 80 licensed maple syrup buyers from Canada and three U.S.-based buyers stocked up at low prices, and bought less during lean years when prices tended to be higher. By and large, farmers were at the mercy of the buyers. …

\”Things changed in 2001, when a bumper crop of almost 8.2 million gallons of maple syrup sent prices plunging. That prompted producers to change the federation from an advocacy group to a marketing board that could negotiate better prices with the buyers. … The new-look federation also began to store surplus production to keep prices from plunging.  Initially, individual farmers were free to produce as much as they wanted.  But another bumper crop in 2003 resulted in so much syrup, much of which had to be stored, that the industry decided to control production by imposing quotas on individual producers.­…  Because production has been lean in the past few years, producers currently can sell 100 percent of their quota. If there are a few bumper crop years, the cartel can reduce the amount that farmers are permitted to sell.­

Any output that cannot be sold must be transferred to the federation’s reserve. Producers do not receive payment for this excess production until the federation sells it…. Maple syrup is sold from the reserve when current production does not meet the demand from authorized buyers. In 2009, after four dismal years of production, the global maple syrup reserve ran dry. Since then production has bounced back and the reserve is overflowing.­…

The $18 million theft was from one of three warehouses the federation uses to stash excess production and was discovered in mid–2012 during an audit of the warehouse contents. The warehouse, about 60 miles southwest of provincial capital Quebec City, was lightly guarded—in retrospect, perhaps, too lightly guarded. The thieves set up shop nearby, and over the course of a year, according to police, made off with roughly 10,000 barrels of maple syrup—about 323,000 gallons, or about 10 percent of the reserve. Because one gallon of Quebec maple syrup looks like any other gallon of the product, consumers had no way of distinguishing the federation-approved product from stolen syrup. And some buyers may not have cared.­

It appears the thieves attempted to unload their booty to buyers in other Canadian provinces and the United States. Officers from the Royal Canadian Mounted Police, the Canada Border Services Agency, and U.S. Immigration and Customs Enforcement helped the Quebec provincial police with their investigation. Police arrested three suspects in December 2012 and 15 more soon thereafter. Those arrested faced charges of theft, conspiracy, fraud, and trafficking in stolen goods. Police have recovered two-thirds of the stolen syrup.­\”

Teachers of economic in search of a new and lively example might stick a fork in the maple syrup example. I\’ve poured attention on maple syrup issues in the past. Back in September 2012, I posted on \”The Great Maple Syrup Theft: A Supply and Demand Story.\”

When I was getting my feet wet in economics back in the late 1970s and early 1980s, it was conventional wisdom that the share of national income going to labor fluctuated a bit from year to year, but didn\’t display a rising or falling trend over time. But the stability of labor\’s share no longer holds true. The Internation Labour Organization discusses some of the data in Chapter 5 if its Global Wage Report 2012/13 on the theme of \”Wages and equitable growth.\” Here, I\’ll provide a few background charts, and then some thoughts. The ILO report summarizes some of the evidence this way:

\”The OECD has observed, for example, that over the period from 1990 to 2009 the share of labour compensation in national income declined in 26 out of 30 developed economies for which data were available, and calculated that the median labour share of national income across these countries fell considerably from 66.1 per cent to 61.7 per cent … Looking beyond the advanced economies, the ILO World of Work Report 2011 found that the decline in the labour income share was even more pronounced in many emerging and developing countries, with considerable declines in Asia and North Africa and more stable but still declining wage shares in Latin America.\”

Here\’s the labor share of income in the U.S., Germany, and Japan. For example, the U.S  labor share of income (shown by the triangles) hover around 68-70% of GDP through the 1970s, and even by the mid-1980s is near the bottom end of this range, but has declined since.

Here\’s a figure showing patterns for several groups of emerging and developing economies. The longest time series, shown by the darker blue diamonds, is an average for Mexico, South Korea, and Turkey.

And what about China? Labor share is declining there, too.

One of the results of the declining labor share of the economy is that as productivity growth increases the size of economies, the amount going to labor is not keeping up. Here\’s a figure showing the divergence in output and labor income that has opened up since 1999 for developed economies. The results here are weighted by the size of the economy, so the graph largely reflects the experience of the three biggest developed economies: the U.S., Japan, and Germany.

What can be said about this pattern of a declining labor share? 
 
1) When a trend cuts across so many countries, it seems likely that the cause is something cutting across all countries, too. Looking for a \”cause\” based on some policy of Republicans or Democrats in the U.S. almost certainly misses the point. The same is true of looking for a \”cause\” based in policies more common in Europe, or in China.

2) The causes are still murky, but one possible answer can be pretty much ruled out. The declining labor share is not caused by a shift from labor-intensive to more capital-intensive industries–because the trend toward a lower labor share is happening across all industries. The difficulty is that the other possible explanations are interrelated and hard to disentangle. They include technological change, globalization, the rise of financial markets, altered labor market institutions , and a decline in the bargaining power of labor. But after all, technological changes in  information and communication technology are part of what has fed globalization, as well as part of what led to a rise of the financial sector. Globalization is part of what has reduced the bargaining power of labor.The ILO report offers some evidence that the rise of the financial sector is a substantial part of the answer. Here\’s a post from a couple of weeks ago on the growth of the U.S. financial sector.

3) The flip side of a lower share of national income going to labor is a higher share of income going to capital. The ILO report argues that in many countries, this pattern seems to involve rising dividend payments. 

4) While understanding causes is useful, policies don\’t always have to address root causes. When someone is hit by a car, you can\’t reverse the cause, but you can still address the consequences. However, it\’s worth remembering that the falling share of labor income has been happening all over the world, in countries with a very wide range of different policies and economic institutions. For example, European labor market institutions are often thought of as being more worker-friendly, but they haven\’t prevented a fall in the labor share of income.

5) It\’s important to remember that the falling share of labor income is different from a rising level of wage inequality. The share of income going to labor as a whole is falling, and also a greater share of labor income is going to those at the highest levels of income. Both trends mean that those with lower- and middle-incomes are having a tougher time.

What would it cost to take large steps to reduce the extinction risk of all globally endangered species? Donal P. McCarthy and a list of 15 other authors estimate \”Financial Costs of Meeting Global Biodiversity Conservation Targets: Current Spending and Unmet Needs\” in the November 16, 2012, issue of Science magazine (which isn\’t freely available on-line, although many academics will have access through a library subscription). Here is their summary:

\”World governments have committed to halting human-induced extinctions and safeguarding important sites for biodiversity by 2020, but the financial costs of meeting these targets are largely unknown. We estimate the cost of reducing the extinction risk of all globally threatened bird species … to be U.S. $0.875 to $1.23 billion annually over the next decade, of which 12% is currently funded. Incorporating threatened nonavian species increases this total to U.S. $3.41 to $4.76 billion annually. We estimate that protecting and effectively managing all terrestrial sites of global avian conservation significance (11,731 Important Bird Areas) would cost U.S. $65.1 billion annually. Adding sites for other taxa increases this to U.S. $76.1 billion annually. Meeting these targets will require conservation funding to increase by at least an order of magnitude.\”

I\’ll leave the details of their methodology to the article, but basically it uses a combination of expert estimates of conservation costs, and then using them as a basis for modeling that includes information on forests, breeding, and size of local economies.

The estimate surprised me a bit, because it\’s more-or-less one-tenth of 1% of the global economy–a very large amount, but not an unthinkably large amount. However, my guess is that the practical issues of protecting and managing biodiversity-protection areas may be much larger than the straight monetary cost implies.

For those who want some additional discussion of biodiversity issues, the journal Wildlife Research has a recent issue with eight articles on \”Prioritisation and Evaluation of Biodiversity Projects\” that seek in various ways to tackle the \”Noah\’s Ark\” problem–that is, if the world isn\’t going to do all of what it could to conserve biodiversity, how should priorities be set?  And here\’s are some summary statistics from  the IUCN [International Union for the Conservation of Nature] Red List of Endangered Species.

From an American perspective,  a legal right to paid vacation sounds like a peculiar and impractical hypothetical. For other high-income countries in the world, it\’s the law. Rebecca Ray, Milla Sanes, and John Schmitt lay out the facts in \”No-Vacation Nation Revisited,\” written for the Center for Economic and Policy Research.

The dark-blue columns show the statutory minimum number of paid vacation days. The light-blue lines show national paid holidays. The zero at the far-right-side for either one is the United States.

Here is  table showing the numbers behind the figure.

Ray, Sanes, and Schmitt sum it up this way:

 \”The United States is the only advanced economy in the world that does not guarantee its workers paid vacation. European countries establish legal rights to at least 20 days of paid vacation per year, with legal requirements of 25 and even 30 or more days in some countries. Australia and New Zealand both require employers to grant at least 20 vacation days per year; Canada and Japan mandate at least 10 paid days off. The gap between paid time off in the United States and the rest of the world is even larger if we include legally mandated paid holidays, where the United States offers none, but most of the rest of the world\’s rich countries offer at least six paid holidays per year.\”

\”In the absence of government standards, almost one in four Americans has no paid vacation (23 percent) and no paid holidays (23 percent). According to government survey data, the average worker in the private sector in the United States receives only about ten days of paid vacation and about six paid holidays per year: less than the minimum legal standard set in the rest of world\’s rich economies excluding Japan (which guarantees only 10 paid vacation days and requires no paid holidays). The paid vacation and paid holidays that employers do make available are distributed unequally. According to the same government survey data, only half of low-wage workers (bottom fourth of earners) have any paid vacation (49 percent), compared to 90 percent of high-wage workers (top fourth of earners).\”

In my Principles of Economics textbook, I include a little table comparing average annual hours worked across countries, based on OECD data. Here\’s the figure with 2011 data (with thanks to Dianna Amasino):

Of course, more vacation time is not a free lunch. One reason why per capita GDP is lower in these other high income countries than in the United States is the average U.S. worker spends more hours on the job. There are political economy issues, too: it makes my economist\’s skin crawl to imagine Congress and a president happily handing out paid vacation days to all, with little concern for the tradeoffs. But on the other side, it\’s also true that many of the rules that govern employment, and vacation time, are based in tradition and an implicit agreement about what a \”job\” will mean, not the result of a free-form multidimensional negotiation between employers and potential employees. It can be quite difficult for an individual, especially one seeking a low-skilled job, to negotiate even for flexible hours, much less for paid vacation or company-paid health insurance.

As an American, the idea of a legal right to paid vacation is gap in hours worked is outside my personal experience. I am honestly not sure that I would be emotionally comfortable cutting my workload by, say, six or seven weeks per year. It feels to me as if such a change would reshape my personal relationship to work in ways that I cannot really anticipate. But I wouldn\’t mind seeing the federal government add a few more national holidays. Most employers would treat them as vacation, and accommodate without much trouble. School districts would do the same, allowing families to plan some time together. And many workers who don\’t get the day off would at least get a pay boost if they end up working on a federal holiday.

\”[L]et me wrap up economics while I\’m at it. Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.\”

So says Ben Bernanke in his recent commencement address at Princeton University. Sure, his advice is a little tongue-in-cheek, but there\’s a serious edge to it.

I\’ve sometimes tried to make a similar point, in a less elegant way: For any public policy problem, one can usually list a few dozen possible courses of action, ranging from passive inactivity to revolutionary change, with 50 shades of gray in between. Arguing over which choice is the \”best\” is often not all that productive, because our analytical tools often aren\’t sharp enough to be fully persuasive that, say, the #2 option is definitively better than the #4 option. But if our political system could reliably choose from, say, the top half-dozen options on the list, while avoiding the worst options in the bottom half of the list, it would be a genuine step forward for public policy.