In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.”
The returns to investing in US firms have become more unequal over time–a fact which might help to explain the rise in income inequality. Jason Furman and Peter Orszag provide evidence and discussion in their October 2015 paper, \”A Firm-Level Perspective on the Role of Rents in the Rise in Inequality.\”
Here\’s an example of the growing inequality of returns across firms based on stock market returns. The blue line shows the distribution of stock market returns across the Standard & Poor\’s 500 in 1996; the red line shows the distribution in 2014. The returns as shown on the horizontal axis are measured relative to the most common or \”modal\” return. Notice that in 2014, there are fewer firms in the middle of the distribution, and more that are out on the right-hand side with comparatively high levels of returns.
As another measure, here\’s a related but different calculation. Here, the approach is to look at the \”return on invested capital\” for publicly-traded nonfinancial firms. As they explain, \”the return on invested capital … [is] defined as net after-tax operating profits divided by capital invested in the firm. This measure reflects the total return to capital owners, independent of financing mix.\” That is, the measure takes into account whether some firms have lots of debt or lots of equity, and looks at all capital invested. The big takeaway here is that if you look at firms at the 90th percentile of return on invested capital and compare them to firms at, say, the median (or 50th percentile), the relationship doesn\’t change too much from 1965 through the 1980s. But after that point, the firms with a 90th percentile rate of return start doing comparatively much better.
The growth of these high-flying firms is part of the explanation for the rise in income inequality during the last quarter-century. What happens is that pay is higher for those who work at highly profitable firms. The overall growth in income inequality arises not because people inside a given firm are seeing more inequality, but because the between-firm level of inequality is rising. As evidence on this point, Furman and Orszag discuss a 2014 study by Erling Barth, Alex Bryson, James C. Davis, and Richard Freeman, \”It’s Where You Work: Increases in Earnings Dispersion across Establishments and Individuals in the U.S.\”
They estimate that increasing inequality between establishments explains more than two-thirds of the increase in overall earnings inequality between 1992 and 2007. Among workers who continued at the same establishment from one year to the next, the increased spread in average pay between establishments explained 79 percent of the rise in earnings inequality over that period.
Furman and Orszag also quote evidence from a recent paper by Jae Song, David J. Price, Fatih Guvenen, and Nicholas Bloom that I discussed back in July. As Furman and Orszag write:
Song et al. found that essentially all of the increase in national wage inequality from 1978 to 2012 stemmed from increasing disparities in average pay across companies. By contrast, their analysis suggests that the wage gap between the highest-paid employees and average employees within firms explains almost none of the rise in overall inequality. … [W]hile individual wage disparities have clearly increased in recent decades, virtually all the increased dispersion is attributable to inter-firm dispersion rather than intra-firm dispersion.
Just why this level of intra-firm dispersion in returns and the accompanying inequality of incomes has risen is a subject still being researched, but various hypotheses suggest themselves. One possibility suggested by Furman and Orszag is that certain industries have become more concentrated, allowing firms in that industry to earn higher profits in a situation of less competition. Another possibility is that a small number of firms are adopting new technologies, but these technologies are not diffusing as rapidly from the cutting-edge firms. Still another possibility is that the high-profit firms are more likely to be in industries that need a disproportionate amount of highly-skilled labor, which would help to explain the high pay in those industries. Thinking about how rising inequality in returns across firms is related to rising inequality of incomes seems likely to be a hot topic in the next wave of research on income inequality.
The fastest-growing countries around the world, now and probably for the next few decades, will not be the high-income countries. As a result, the global distribution of income will become–gradually–more equal over time. Tomáš Hellebrandt and Paolo Mauro offer a projection in their essay, \”China’s Contribution To Reducing Global Income Inequality,\” which appears as part of China’s Economic Transformation Lessons, Impact, and the Path Forward, a group of short essays published in September 2015 by the Peterson Institute for International Economics (PIEE Briefing 15-3). Here\’s the key figure.
The horizontal axis shows income level per person. You should think of this axis as broken down into small segments that are each $20 in width. Then, vertical axis shows what share of world population receives that income level, for each $20 segment of income. (If you used income widths greater than $20, the overall shape of the green, red, and blue lines would be essentially the same, but because the width of the \”bins\” would be larger, the numbers on the vertical axis would be larger, too.)
The green line shows distribution of global income in 2003, the red line in 2013, and the blue line is a projection for 2035. You can see the median and mean income distributions rising over time. The overall flattening of the income distribution over time as a smaller share of the population is bunched at the bottom tells you that the income distribution is getting more equal. On the graph, inequality is measured by a \”Gini coefficient,\” which is a standard measure of inequality.
For quick intuition, I\’ll just say that the Gini coefficient is measured along a scale from 0-100, where zero means complete equality of incomes, and 100 means that a single person receives all the income. To get a more intuitive feel for what the Gini means, the World Bank publishes estimates of Gini coefficients, when data is available, for countries around the world. Countries with a very high level of inequality, like Brazil, Mexico, Zambia and Uganda, have a Gini around 50. In the United States and China, the Gini is about 40. In Germany and France, it\’s about 30. In highly egalitarian countries like Sweden or Norway, it\’s closer to 25. It\’s not especially surprising that the global Gini coefficient is higher than the Gini for any given country: after all, global inequality is greater than inequality within any given country.
If you would like a more detailed explanation of how a Gini coefficient is calculated, you can check out my earlier post on \”What\’s a Gini Coefficient?\” (April 3, 2014). One of the bits of intuition given there goes like this: \”A Gini coefficient of G per cent means that, if we take any 2 households from the population at random, the expected difference is 2G per cent of the mean. So that a rise in the Gini coefficient from 30 to 40 per cent implies that the expected difference has gone up from 60 to 80 per cent of the mean.\”
Thus, in the figure above, in 2013, the Gini coefficient is 64.9 and the mean income is $5,375. Thus, if you pick at random two households from anywhere in the world, the average difference in their incomes will be 2 x (.649) x $5,375=$6,976.
For much of the 20th century, the economies of the world that had the largest GDP were also among those with the largest per capita GDP. The weight of global economic activity was aligned with the US, Canada, western Europe, and Japan. But we seem to be headed for a world in which this pattern no longer holds. For a few years now, the consulting firm PricewaterhouseCoopers been publishing reports offering long-range forecasts of the size of national economies for the year 2050. A recent example is the February 2015 report: \”The World in 2050:Will the shift in globaleconomic power continue?\”
Here\’s a table (which I snipped from a larger table in the report) listing the top 10 economies in the world by size, using what are called \”purchasing power parity\” exchange rates–which roughly means the exchange rates that equalize buying power of internationally traded goods across economies. Using this measure, China now has the largest economy in the world (using market exchange rates, it will still be a few more years before China\’s economy overhauls the United States). It\’s striking to look out at these projections for 2050, when China will have by far the largest economy in the world–and India will be edging out the US for second place. Countries like Indonesia, Brazil, Mexico and Nigeria will also be in the world\’s top 10 largest economies. Only three of today\’s high-income countries–the US, Japan, and Germany–are projected to be in the top 10 by 2050.
Of course, many of the largest economies in 2050 are also countries with large populations. In the 2050 projections, a large GDP does not imply a large per capita GDP. Here\’s a figure showing per capita GDP for a number of countries,with the darker lines showing the level for 2014 and the lighter lines showing the projection for 2050. Even projecting rapid growth for countries like China, India, Indonesia, Brazil, and Mexico more than three decades into the future, their average standard of living as measured by per capita GDP will still be far below the high-income countries.
Of course, the precise levels of these long-range projections should not be taken too seriously. After all, they are based on estimates about rates of economic growth and other economic variables in countries all around the world decades into the future. The numbers also look a little different if one does the calculations using market exchange rates, rather than the purchasing power parity exchange rates. Readers who want details can check out the report.
But tweaking the numbers is not going to change the overall conclusion, which is based on the fact that when it comes to international relations, size matters. Countries with bigger economies tend to get more say, and the United States has been used to having the biggest say of all. But in 21st century, when it comes a wide array of decisions–international trade talks, decisions of the the International Monetary Fund and the World Bank, who leads the way during global financial crises, who dominates the flows of international investment capital and foreign aid, who has the power to impose trade or financial sanctions, and what kind of military threats are most credible–the shifts in the global economy suggest that the high-income countries of the world will not dominate as they did during most of the 20th century. Instead, countries with the world\’s largest economies, but much lower standard of living for their populations, will play a central role in setting the rules.
There’s a well-known story about how a long-ago head of the US Patent Office supposedly proposed that it was time to shut down the patent office, and said something like: “Everything that can be invented has been invented.” The story seems implausible on its face: after all, who would be appointed to run the patent office, or who would take the job, believing that invention was about to become obsolete? Nonetheless, the story seems to have appeared in two incarnations: one citing Henry L. Ellsworth, who was the first commissioner of the US Patent Office from 1835-1845, and Charles Duell, who was commissioner from 1898-1901.
A first debunking of this story appears in an article by Eber Jeffrey called “Nothing Left to Invent,” which appeared in the Journal of the Patent Office Society in 1940 (vol. 22, pp. 479-481, available through the magic of online inter-library loan). Jeffrey writes:
Numerous versions of the story appear. A discouraged examiner is said to have declared in his letter of resignation, that there was no future for the inventor; a Congressman favored termination of the functions of the Patent Office since the time was near at hand when such functions would serve no purpose; and an eminent Commissioner of Patents retired almost a century ago, offering as his reason the view that the limits of human ingenuity already had been reached. This last variant is told of Commissioner Harry L. Ellsworth, who resigned on the first day of April, 1845.
As Jeffrey points out, there is nothing in Ellsworth’s resignation letter (which he reprints) showing any belief that the Patent Office was soon to be obsolete. However, one can find a phrase in one of Ellsworth’s earlier reports which suggests he might have held such views. Ellsworth wrote a ten-page introduction to the 1843 Annual Report of the Commissioner of Patents(magically available online), which on p. 5 contains a one-sentence paragraph which reads:
“The advancement of the arts from year to year taxes our credulity, and seems to presage the arrival of that period when human improvement must end.”
However, in the context of this report, this phrase doesn’t read like a prediction that human improvement is about to end. It reads like a sign of wonder about how much technical improvement is in fact happening, beyond what seems imaginable. As Jeffrey summarizes it in the 1940 essay:
Ellsworth did not elaborate on this statement. The content of the whole report, though, surely indicates that he did not think the end of “human improvement” was immediately at hand. He recommended that Congress provide for additions to the Patent Office building and asked for more equipment. He showed that great scientific progress was to be expected in the use of electricity, particularly for the telegraph and for railroads. He pointed out that important forward steps had been taken and were to be expected in medicine, in sugar refining, in the manufactures of textile, leather, and iron products. He anticipated a great variety of improvements in agriculture. Ellsworth probably did more than any other Commissioner to promote scientific farming while the agricultural bureau was a unit in the Patent Office. From these considerations it seems that Henry L. Ellsworth could not have felt that the end of progress in the mechanic arts was near. It is much more likely that the statement in question, probably an unfortunate one, was a mere rhetorical flourish intended to emphasize the remarkable strides forward in inventions then current and to be expected in the future.
Charles Duell was the US Commissioner of Patents from 1898 to 1901. Stephen Sass, who was a librarian for a division of General Motors, told Duell’s story for a magazine called the Skeptical Inquirer (Spring 1989, pp. 310-313).Sass writes:
This new story surfaced in the fall of 1985, when full-page advertisements sponsored by the TRW Corporation appeared in a number of leading periodicals, including Harper and Business Week. These ads had as their theme “The Future Isn’t What It Used to Be.” They contained photographs of six individuals, ranging from a baseball player to a president of the United States, who had allegedly made wrong predictions. Along with such statements as “Sensible and responsible women do not want to vote,” attributed to President Cleveland, and “There is no likelihood man can ever tap the power of the atom,” attributed to physicist Robert Millikan, there is a prediction that was supposedly made by Commissioner of the U.S. Patent Office Charles H. Duell. The words attributed to him were: “Everything that can be invented has been invented.” The date given was 1899.
When Sass contacted TRW to find a source for the quotation, they pointed him to a couple of quotation books. The second quotation book cited the first one, and the first one had no link to a primary source. The 1899 Annual Report of the Commissioner of Patents (available online) is available online, and the quotation does not appear there. However, one does find a number of comments about the growth of patents and recommendations for legislation to improve the patent office. At the end, Duell writes: “May not our inventors hopefully look to the Fifth-Sixth Congress for aid and effectual encouragement in improving the American patent system?” Just before that, Duell quotes with evident approval a then-recent comment from President McKinley, who said in his annual message on December 5, 1899: “Our future progress and prosperity depend on our ability to equal, if not surpass, other nations in the enlargement and advance of science, industry, and commerce. To invention we must turn as one of the most powerful aids to the accomplishment of such a result.” Duell offered a similar message in other settings. For example, here is how Duell is quoted in a newspaper article called “Chances for the Inventor: Fame and Wealth Awaiting Him in Many Fields” in the New York Sun from December 29, 1901:
In short, when you hear claims about how someone in the US Patent Office once believed that it was about to run out of work, be very skeptical.
Producers try to figure out what the market wants, and then supply it. For the second half of the 20th century, the largest single world market was the United States. Not surprisingly, many products and brands were aimed at the US market. But during the next few decades, the single largest market is going to be China–and China is also likely to be among the fastest-growing markets. Producers around the world will re-orient accordingly.
Here\’s a figure showing growth of motor vehicle sales in China.
For another example of a global industry, consider movies. Here\’s some data from the MPAA (Motion Picture Association of America). If you go back to reports from earlier years, in 2001 the US was about half of the global market for movies. Now the US/Canada share of the global market for movies is just over one-quarter, and falling.
Here are the top international markets for movies. In 2014, China became the first non-US national market to exceed $4 billion in movie revenues.
It\’s worth remembering that China has about four times as many people as the US and about one-fifth the per capita income, so China has enormous potential for continued rapid growth of car sales, movies, and many other goods and services.
As a thought experiment, imagine that you are a movie executive trying to focus on movies that can be shown with minimal adaptations in a number of large global markets: the US, Europe, China, Japan, Latin America. What sort of movies would you make? Well, you might focus on movies that are heavy on action and sound effects, but light on complex dialogue, as well as movies with a number of comic-book characters and aliens, who can appeal across conventional lines of ethnicity.
In the closing decades of the 20th century, a lot of Americans took it for granted that prominent global brands would either be American-based or at least would have a large US market presence. Meanwhile, people in many other countries found it bothersome (sometimes mildly annoying, sometimes downright aggravating) that they were so often confronted in their own countries–both on store shelves and in advertising–with products that had a strong American identity. But global demand is shifting. The huge US market will remain important, of course. But more and more, Americans are going to be seeing brands and titles and products where the US market is just one among several–and not necessarily the most important one.
When the economy slows down, there\’s often a call for increased infrastructure spending to give employment and output a jump-start. This idea is far from new, but it seems difficult to implement.
As one example of this idea from the past, L.W. Wallace published an article back in 1927 called \”A Federal Department of Public Works and Domain: Its Planning, Activities and Influence in Leveling the Business Cycle,\” which appeared in the Proceedings of the Academy of Political Science in the City of New York (Vol. 12, No. 3, Jul., 1927, pp. 102-110, available through JSTOR). Wallace quoted a recent speech by President Calvin Coolidge, who said:
The idea of utilizing construction, particularly of public works, as a stabilizing factor in the business and employment situation has long been a plan of perfection among students of these problems. If in periods of great business activity the work of construction might be somewhat relaxed; and if in periods of business depression and slack employment those works might be expanded to provide occupation for workers otherwise idle, the result would be a stabilization and equalization which would moderate the alternations of employment and unemployment. This in turn would tend to favorable modification of the economic cycle. … The first and easiest application of such a regulation is in connection with public works; the construction program which involves public buildings, highways, public utilities, and the like. Most forms of Government construction could be handled in conformity to such a policy, once it was definitely established…. This applies not only to the construction activities of the Federal Government, but to those of states, counties and cities.
More than this, the economies possible under such a plan are apparent. When everybody wants to do the same thing at the same time, it becomes unduly expensive. Every element of costs, in every direction, tends to expand. These conditions reverse themselves in times of slack employment and subnormal activity, with the result that important economies are possible.
I am convinced that if the Government units would generally adopt such a policy, and if, having adopted it, they would give the fullest publicity to the resultant savings, the showing would have a compelling influence upon business generally. Quasi-public concerns, such as railroads and other public utilities, and the great corporations whose requirements can be quite accurately anticipated and charted, would be impressed that their interest could be served by a like procedure
One example of infrastructure spending being used to stabilize the economy arose in the 1950s, when President Dwight Eisenhower viewed the interstate highway system along these lines. Raymond J. Saulnier offers some explanation in his 1991 book Constructive Years: The U.S. Economy Under Eisenhower, describing how the authorization of the Interstate Highway system in 1956 was envisioned both for its own benefits, and also as a tool of economic stabilization. Saulnier writes (p. 74, and p. 233):
\”And although Eisenhower\’s interest in having authority to develop an Interstate Highway System was primarily for what it would accomplish toward improving the nation\’s infrastructure, he viewed it from the beginning (as he viewed all construction projects over which the Executive Branch had control) as a program that could be used to help stabilize the economy.\” … The undertaking–40,000 miles in its original format, to be built over 13 years–was the largest single U.S. public works project to that time or since. It as of immense interest to Eisenhower for what it would mean to national security (military experience had underlined the importance of transport) and, equally important, for what it would mean to the nation\’s economic development. He was acutely sensitive, also, to the possibility that its construction could if necessary be scheduled to help stabilize the economy.\”
A later Congressional Budget Office report on \”Highway Assistance Programs:A Historical Perspective,\” described in February 1978 how the federal highway legislation was soon used for countercyclical spending (p. 6 and pp. 30-31):
The Federal-Aid Highway Act of 1944 provided greatly expanded funding and established separate, proportional authorizations for three categories of highways—the primary system, the secondary system, and the urban extensions of the primary system—which became known as the ABC programs. … The Federal-Aid Highway Act of 1958, which was put forward as an antirecession measure, suspended the Byrd Amendment for 1959 and 1960, allowing apportionments to be made for the full amount authorized even though Trust Fund revenues were not expected to be sufficient. Thus, the \”pay-as-you-build\” principle established in the 1956 act was almost immediately suspended, albeit only temporarily. Additional authorizations were also made for 1959, and the funds were made available immediately (the original 1959 authorization had already been apportioned). For these additional funds, which were primarily countercyclical in nature, the regulations regarding the proportion of funds allocated to each of the ABC systems were suspended and the federal share was temporarily increased to two-thirds. The decision not only to continue Interstate authorizations but also to raise the levels was based on two reasons. First, it was argued that a general economic stimulus would derive from the increased authorizations. Second, much was made of the Congressional intent expressed in 1956 regarding the \”acceleration and prompt completion of the Interstate System.\”
However, the most recent US experience with trying to use infrastructure spending to stimulate the economy was at best a partial success, because even after such spending was authorized, it took so long to actually get underway that the recession had ended. President Barack Obama made this point in an interview with New York Times in October 2010, where he said:
Infrastructure has the benefit of for every dollar you spend on infrastructure, you get a dollar and a half in stimulus because there are ripple effects from building roads or bridges or sewer lines. But the problem is, is that spending it out takes a long time, because there’s really nothing — there’s no such thing as shovel-ready projects.
If we are going to take seriously the notion of using infrastructure, here are some thoughts.
1) You need to have a detailed plan of projects that really are shovel-ready, like the federal highways in the 1950s. Otherwise, it\’s just too slow to get such project underway when a recession hits. Perhaps the ideal approach is to have a long-term project happening on an ongoing basis, with the possibility for speeding it up if a recession hits.
2) Government is often focused on the infrastructure that it owns directly: like roads, bridges, and sewer lines. These areas matter, of course. But the future of the US economy will rely on a lot of other kinds of infrastructure, many of which are either privately owned or are some form of public-private partnership: including phone and cable lines, electricity generation and transmission, pipelines for oil and gas, railroad tracks, airport and seaport capacity, and water reservoirs and pipes. A broader focus on infrastructure would think about ongoing efforts to build infrastructure in these areas, and how some form of government support might accelerate them during a recession, too.
3) Pretty much everyone favors infrastructure in theory, but in practice, there are often some hard issues to work out. How does one focus on infrastructure that has the largest payoff, rather than just spreading out the spending to favored state and congressional districts, or contracts to favored political interests? How does one make sure the best deals get negotiated for the use of taxpayer support? Many kinds of infrastructure involve a mixture of user payments and taxpayer money, and how should those user payments be structured? Finally, how do we balance the need to give opponents of infrastructure projects a fair hearing, but also not give opponents an unfettered ability to use \”lawfare\” to block infrastructure projects?
Every year I feel a little defensive when trying to explain the intellectual contributions of the winner of the Nobel prize in economics. Non-economists want to know: \”What big discovery did he make or what big question did he solve?\” But professional economists are are more interested in questions like: \”In what ways did he develop the theory and the empirical evidence to increase our understanding of economic behavior and the economy?\” Here, let me start by quoting how the committee answered this broad question in the \”Scientific Background\” paper, and then let me try to disentangle the jargon a bit and offer a few thoughts of my own.
Over the last three to four decades, the study of consumption has progressed enormously. While many scholars have contributed to this progress, Angus Deaton stands out. He has made several fundamental and interconnected contributions that speak directly to the measurement, theory, and empirical analysis of consumption. His main achievements are three.
First, Deaton’s research brought the estimation of demand systems – i.e., the quantitative study of consumption choices across different commodities – to a new level of sophistication and generality. The Almost Ideal Demand System that Deaton and John Muellbauer introduced 35 years ago, and its subsequent extensions, remain in wide use today – in academia as well as in practical policy evaluation.
Second, Deaton’s research on aggregate consumption helped break ground for the microeconometric revolution in the study of consumption and saving over time. He pioneered the analysis of individual dynamic consumption behavior under idiosyncratic uncertainty and liquidity constraints. He devised methods for designing panels from repeated cross-section data, which made it possible to study individual behavior over time, in the absence of true panel data. He clarified why researchers must take aggregation issues seriously to understand total consumption and saving, and later research has indeed largely come to address macroeconomic issues through microeconomic data, as such data has increasingly become available.
Third, Deaton spearheaded the use of household survey data in developing countries, especially data on consumption, to measure living standards and poverty. In so doing, Deaton helped transform development economics from a largely theoretical field based on crude macro data, to a field dominated by empirical research based on high-quality micro data.
As just one example of how these different ideas come together, consider the problem of learning about consumption levels of households in low-income countries. Until just a few decades ago, it was common for researchers in this area to look at national-level data on patterns of consumption and income, and then divide by population to get an average. Deaton was at the front edge of the group of researchers who pushed for the World Bank to develop the Living Standard Measurement Study, which is a set of detailed country-level surveys that collect detailed data on a nationally representative sample of people in countries around the world. This would be an example of the third point in the committee\’s list above.
But an obvious practical problem has to be addressed in any such survey. If you want to know about how the consumption and savings decisions of households evolve over time–for example, it may take several years for a household to adjust fully to a sharp change in prices or incomes–it seems as if you need to follow the same group of households over time. Economists call this \”panel data,\” But it can be hard to collect panel data because tracking people over years can be hard for survey researchers to do. People move, or households split up, and especially in low-income countries, finding out where they went isn\’t easy. However, Deaton showed that if you had a series of surveys over time, you would have enough data to say how households with certain groups characteristics reacted over time. He showed that you could work with this data to draw empirical conclusions from a series of surveys of many different individuals to create a \”pseudo-panel\” that would work just as well as actual panel data. This would be an example of the second point made by the committee above.
Another analytical problem is how you combine all the data from the different households to draw overall conclusions about how consumption and saving shift in response to changes in prices or income. When Deaton first started writing about these issues in the 1970s, a common practice was to treat the economy as if it were one giant consumer, reaction to prices and income changes. Perhaps not surprisingly, such calculations didn\’t work well in describing how patterns of demand across goods shifted. Deaton, working with John Muellbauer, developed a more flexible way of looking at patterns of demand for the wide range of goods and services that allowed there to be some flexibility in patterns of household demand (for example, based on the number of people in a household and how many of them were children). It turns out that by allowing this extra flexibility, it becomes possible to draw sensible conclusions about consumption patterns from the data. This is an example of the first point made by the committee above.
Once you have data and a theoretical framework in hand, you can seek out some interesting conclusions about consumption patterns in low-income countries. For example, in one of his papers, Deaton found that low income tends to lead to malnutrition, but that malnutrition doesn\’t seem to be an important factor in causing low incomes. In another paper, he found that household purchases of adult goods like alcohol and tobacco change in the same ways when either a boy or girl is born during normal times, but in adverse times the adult purchases are cut by less when a girl is born–providing evidence that in that setting fewer family resources are committed to raising girls. Another paper found that the costs of expenditures on children are about 30-40% of expenditures on adults–which implies that when comparing countries with higher proportions of children to countries with lower proportions of children, you need to avoid comparisons that just divide economic output by the total number of people. Deaton has been at the center of efforts to use the available data and theory to measure the global level of poverty.
Over the years, Deaton has appeared in the pages of the Journal of Economic Perspectives (where I work as Managing Editor), a number of times. Along with the materials from the Nobel prize committee, these articles would also give the interested reader a sense of Deaton\’s approach as well as his intellectual breadth into areas that didn\’t get much mention from the committee. (As always, all articles from JEP are freely available compliments of the American Economic Association.)
The \”economy\” measures what is bought and sold. Thus, it is standard in introductory economics classes to point out that if my neighbor and I both mow our own lawns, it\’s not part of GDP. But if we hire each other to mow each other\’s lawns, GDP is then higher–even though exactly the same amount of lawn-mowing output was produced. In a broader sense, what\’s would be the economic value of nonmarket family services if they were valued instead in monetary terms?
The McKinsey Global Institute provides some background on this issue in the September 2015 report: The Power of Parity: How Advancing Women\’s Equality Can Add $12 Trillion to Global Growth.\” The report offers some calculations that if women participated in the paid labor force at the same level as the leading country in their region (thus, not holding those in Latin America, Africa, or the Middle East to the standard of northern Europeans), it would add $12 trillion to GDP. However, the report also notes that these women who are not in the paid labor force are of course already working and producing at least $10 trillion in nonmarket output.
Beyond engaging in labor markets in ways that add to GDP, a large part of women’s labor goes into unpaid work that is not accounted for as GDP. Women do an average of 75 percent of the world’s total unpaid care work, including the vital tasks that keep households functioning, such as child care, caring for the elderly, cooking, and cleaning. In some regions, such as South Asia (including India) and MENA, women are estimated to undertake as much as 80 to 90 percent of unpaid care work. Even in Western Europe and North America, their share is high at 60 to 70 percent. Time spent in unpaid care work has a strong negative correlation with labor-force participation rates, and the unequal sharing of household responsibilities is a significant barrier to enhancing the role of women in the world economy. Applying conservative estimates based on available data on minimum wages, the unpaid care work of women could be valued at $10 trillion of output per year—an amount that is roughly equivalent to 13 percent of global GDP. In the United States alone, the value of unpaid care work carried out by women is about $1.5 trillion a year. … Data from 27 countries indicate that some 61 percent of unpaid care work (based on a simple average across countries) is routine household work, 14 percent involves taking care of household members, 11 percent is time spent on household purchases, and 10 percent is time spent on travel …
The amount of unpaid work that women do is closely related to female participation in the paid labor force. The horizontal axis shows the ratio of the labor force participation rate of women to that of men. The vertical axis shows the ratio of time spent on unpaid care by women to the time spent by men. Thus, in India, women spend about 10 times as many hours on unpaid care as men, and their labor force participation rate is one-third as high. In a number of high-income countries, women spend 1.5-2 times as many hours on unpaid work as men, and the labor force participation rate for women is about 80% of the level for men. (For the record, \”unpaid care\” is defined not just as care for other family members, but also includes housework and voluntary community work.) The MGI report notes: \”Globally, women spend three times as many hours in unpaid domestic and care work as men.\”
The two figures shows ratios of time spent on unpaid care by women relative to men: the left-hand figure is across regions; the right-hand figure is across countries divided by income level. The left-hand figure shows that the female-to-male ratio of time spent on unpaid care is nearly 7 in the Middle East and North Africa region and in the South Asia region, but is below 2 in Europe and North America. The right-hand figure shows that the ratio is roughly three in low-income, lower-middle income, and upper-middle income countries, but less than 2 in high-income countries.
The level of unpaid care matters for several reasons. The most obvious, perhaps, is the McKinsey calculation that women moving into the paid labor force could raise world GDP by $12 trillion. But there are a number of more subtle ways in which the inclusion of unpaid work alters one\’s sense of social output. Ferrant, Pesando and Nowacka point out (citations omitted):
\”It leads to misestimating households’ material well-being and societies’ wealth. If included, unpaid care work would constitute 40% of Swiss GDP and would be equivalent to 63% of Indian GDP. It distorts international comparisons of well-being based on GDP per capita because the underestimation of material well-being would be proportionally higher in those countries where the share of housewives and home-made consumption is higher. For instance, by including Household Satellite Accounts the GDP per capita of Italy reaches from 56% to 79% of the USA’s GDP, and 98% to 120% of that of Spain.\”
In a broader sense, of course, the issue is not to chase GDP, but to focus on the extent to which people around the world are having the opportunity to fulfill their capabilities and to make choices about their lives. Countries where women have more autonomy also tend to be countries where the female-to-male ratios of time spent on unpaid care are not as high. The share of unpaid care provided by women highly correlated with women\’s ability to participate in the paid workforce, as well as to acquire skills and experience that lead to better-paying jobs, as well as participating in other activities like political leadership. Ferrant, Pesando and Nowacka write:
\”The unequal distribution of caring responsibilities between women and men within the household thus also translates into unequal opportunities in terms of time to participate equally in paid activities. Gender inequality in unpaid care work is the missing link in the analysis of related to gender gaps in labour outcomes in three areas: gender gaps in labour force participation rates, quality of employment, and wages.\”
In a similar vein, the MGI report notes: \”Beyond GDP, there could be other positive effects. For instance, more women could be financially independent, and there may be intergenerational benefits for the children of earning mothers. In one study of 24 countries, daughters of working mothers were more likely to be employed, have higher earnings, and hold supervisory roles.\”
What are the pathways by which the time spent on unpaid care activities might be reduced? Many women are familiar with the feeling that a large part of their take-home pay is going to childcare, a housecleaner, lawn care, takeout food when there was no time to cook, and the like. Having people pay each other for what was previously unpaid work will add to GDP, but it may not add to total output broadly understood.
Thus, the challenge is reduce unpaid work in ways that don\’t just swap unpaid work around, but actually free up time and energy. Both the McKinsey report and the OECD authors have similar comments about how this has happened in practice. Historically, one major change for high-income countries has been the arrival of labor-saving inventions. The MGI report notes:
Some of the routine household work and travel time can be eliminated through better public services and greater automation. For example, in developing countries, the time spent on household chores is increased by poor public infrastructure. Providing access to clean water in homes can reduce the time it takes to collect water, while electricity or solar power can eliminate the time spent hunting for firewood. Tools such as washing machines and kitchen appliances long ago lightened much of the drudgery associated with household work in higher-income countries, and millions of newly prosperous households in emerging economies are now adopting them, too. Innovations such as home-cleaning robots may one day make a leap forward in automating or streamlining many more tasks.
A number of other issues that affect the balance between unpaid and paid labor: the prevalence of workplace policies like family leave and flex-time; the availability of high-quality child care and elder care; the length of school days along with preschool and post-school programs; and the extent to which money that women earn in the paid workforce is reduced by government tax, or by the withdrawal of transfers that would otherwise have been available. And of course, social attitudes about the role of women are central to these outcomes.
The MGI report gives a sense of how these forces have evolved in the US economy in recent decades:
In the United States, for example, labor-force participation by women of prime working age rose from 44 percent in 1965 to 74 percent in 2010. Over this period, the time women spent on housework was cut almost in half, but the hours they spent on child care actually rose by 30 percent, reflecting evolving personal and familial choices. Both housework and child care became more equitably shared. Men’s share of housework rose from 14 percent in 1965 to 38 percent in 2010, and their share of child care from 20 percent to 34 percent.
The ultimate constraint which rules us all is that a seven-day week has 168 hours. A gradual reduction in the time spent on unpaid care activities, which have traditionally been primarily the job of women, is part of what makes society better-off.
The economy of the eurozone makes the US economy look like a picture of robust health by comparison. Richard Baldwin and Francesco Giavazzi have edited The Eurozone CrisisA Consensus View of the Causesand a Few Possible Solutions, a VoxEU.org book from the Centre for Economic Policy Research in London. The book includes a useful introduction from Richard Baldwin and Francesco Giavazzi, followed by 14 mostly short and all quite readable essays.
What went wrong in the eurozone? Here\’s the capsule summary from the introduction by Baldwin and Giavezzi:
The core reality behind virtual every crisis is the rapid unwinding of economic imbalances. … In the case of the EZ [eurozone] crisis, the imbalances were extremely unoriginal. They were the standard culprits that have been responsible for economic crises since time immemorial – namely, too much public and private debt borrowed from abroad. Too much, that is to say, in relation to the productive investment financed through the borrowing.
From the euro’s launch and up until the crisis, there were big capital flows from EZ core nations like Germany, France, and the Netherland to EZ periphery nations like Ireland, Portugal, Spain and Greece. A major slice of these were invested in non-traded sectors – housing and government services/consumption. This meant assets were not being created to help pay off in the investment. It also tended to drive up wages and costs in a way that harmed the competitiveness of the receivers’ export earnings, thus encouraging further worsening of their current accounts.
When the EZ crisis began – triggered ultimately by the Global Crisis – cross-border capital inflows stopped. This ‘sudden stop’ in investment financing raised concerns about the viability of banks and, in the case of Greece, even governments themselves. The close links between EZ banks and national governments provided the multiplier that made the crisis systemic.
Importantly, the EZ crisis should not be thought of as a sovereign debt crisis. The nations that ended up with bailouts were not those with the highest debt-to-GDP ratios. Belgium and Italy sailed into the crisis with public debts of about 100% of GDP and yet did not end up with IMF programmes, while Ireland and Spain, with ratios of just 40%, (admittedly kept artificially low by large tax revenues associated with the real estate bubble) needed bailouts. The key was foreign borrowing. Many of the nations that ran current account deficits – and thus were relying of foreign lending – suffered; none of those running current account surpluses were hit.
In working through their detailed explanation, here\’s are a few of the points that jumps out at me. When the euro first came into widespread use in the early 2000s, interest rates fell throughout the eurozone and all the eurozone countries were able to borrow at the same rate; that is, investors were treating all governments borrowing in euros as having the same level of risk–Germany the same as Greece. Here\’s a figure showing the falling costs of government borrowing and the convergence of interest rates across countries.
The crucial patterns of borrowing that emerged were not about lending from outside Europe to inside Europe, but instead about lending between the countries of the eurozone, a pattern which strongly suggests that the common currency was at a level generating ongoing trade surpluses and capital outflows from some countries, with corresponding trade deficits and capital inflows for other countries. Baldwin and Giavezzi write:
To interpret the individual current accounts, we must depart from an essential fact: The Eurozone’s current account as a whole was in balance before the crisis and remained close to balance throughout. Thus there was very little net lending from the rest of the world to EZ countries. Unlike in the US and UK, the global savings glut was not the main source of foreign borrowing – it was lending and borrowing among members of the Eurozone. For example, Germany’s large current account surpluses and the crisis countries deficits mean that German investors were, on net, lending to the crisis-hit nations – Greece, Ireland, Portugal and Spain (GIPS).
Sitting here in 2015, it seems implausible that policymakers around Europe weren\’t watching these emerging imbalances with care and attention, and planning ahead for what actions could be taken with regard to government debt, private debt, banking reform, central bank lender-of-last-resort policy, and other issues. But of course, it\’s not uncommon for governments to ignore potential risks, and only make changes after a catastrophe has occurred. Baldwin and Giavezzi note wryly:
It is, ex post, surprising that the building fragilities went unnoticed. In a sense, this was the counterpart of US authorities not realising the toxicity of the rising pile of subprime housing loans. Till 2007, the Eurozone was widely judged as somewhere between a good thing and a great thing.
And what has happened in the eurozone really is an economic catastrophe. Baldwin and Giavezzi conclude:
The consequences were and still are dreadful. Europe’s lingering economic malaise is not just a slow recovery. Mainstream forecasts predict that hundreds of millions of Europeans will miss out on the opportunities that past generations took for granted. The crisis-burden falls hardest on Europe’s youth whose lifetime earning-profiles have already suffered. Money, however, is not the main issue. This is no longer just an economic crisis. The economic hardship has fuelled populism and political extremism. In a setting that is more unstable than any time since the 1930s, nationalistic, anti-European rhetoric is becoming mainstream. Political parties argue for breaking up the Eurozone and the EU. It is not inconceivable that far-right or far-left populist parties could soon hold or share power in several EU nations. Many influential observers recognise the bind in which Europe finds itself. A broad gamut of useful solutions have been suggested. Yet existing rules, institutions and political bargains prevent effective action. Policymakers seem to have painted themselves into a corner.
For those looking for additional background on eurozone issues, here are links to a few previous posts on the subject:
The report begins with some graphs about US union membership that, while their shape is familiar to me, have not lost their power to shock. For example, US union membership peaked back in the 1950s and 1960s, and has been on a downward path as a share of total US employment since then. (The two different colored lines show that two different sources of data are being used.)
The share of US private sector workers belonging to unions is even lower, while public sector unionization rates are much higher.
What effects do unions have in modern labor markets and job conditions? The report notes: \”Unionized workers still command a sizable wage premium of up to 25 percent relative to similar nonunionized workers, but that premium has fallen slightly over the past couple of decades. … After controlling for observable differences between union and nonunion workers, research finds that workers who are represented by a union are about 30 percent more likely to be covered by health insurance at their job than similar nonunion workers. In addition, union workers are about 25 percent more likely to have retiree health benefits than similar nonunion worker …\”
The reason for this wage premium is a subject of some controversy. One possibility is that unionized workers with firms that have large and ongoing profits can negotiate in a way that gives the workers a larger share of those profit–which is a model that fits fairly well with the auto and steel unions of a half-century ago. Otherwise, union workers get paid more because they have higher productivity. This could happen in various ways: less worker turnover, better training, and the like. It could happen because even among workers who look the same based on observable characteristics in the data, the more motivated and productive workers are more likely to join a union. The possibility barely mentioned in this report is that employers react to a union by investing more heavily in capital equipment and in outsourcing to non-union firms, and increasing the pay of union workers in that way but reducing the number of union jobs over time.
Although this report has lots of useful information and embeds links to a number of relevant academic studies, reports from the Council of Economic Advisers are inevitably both economic and political documents. The main place the influence of politic shows up here is in the very brief (four sentences, one paragraph) discussion of \”Union Impact on Firm Performance.\” You will be relieved, as I was, to read that unions always have a positive effect on firms. There was apparently no need to mention the possibility that unions might create inflexibilities: for example, in the size of the compensation bill, in a burden of retiree benefits, in job assignments, in limits on incentive pay, or in adapting new organizational or technological approaches. From the discussion in this report, unionized workforces bring nothing but benefits to firms, and so it would seem that every US employer should be lining up to unionize its workforce. I do think one can make a strong case that unions have bolstered productivity and benefited firms at certain companies and in certain countries, at various places and times. But the possibility that unions at other times and places have had negative effects on firms is not not discussed here.
But on a number of other subjects, the report gives a more balanced overview. For example, on the question of whether unions improve job safety, the report points out that while one might be predisposed to believe this claim, in fact unionized workplaces seem to suffer more injuries. There are a number of possible reasons for this pattern. Perhaps workplaces with a lot of injuries are more likely to end up with unions. Perhaps unionized workplaces are more likely to keep a true record of workplace injuries. Perhaps the main gain of unions is not primarily a smaller number of workplace injuries, but that the injuries which occur are milder and less harmful. Work on sorting out these issues is still underway.
On the question of whether unions lead to improved skills and training, the report cites strong evidence from a number of other countries that this connection exists. But for the US, the report notes: \”Other work examining unionized workers in the United States and Canada also finds that unionized workers tend to develop skills that are relatively job-specific. However, some work suggests little to no difference in training between union and nonunion firms, while other research suggests that employers in unionized workplaces offer less training than those in nonunionized workplaces.\”
Finally, there is the issue of how much the decline in unionization has contributed to the rise in inequality. The graph shows the basic observation suggesting a connection here: the bottom 90% of the income distribution had a higher share of total income when unionization rates were at their highest, and the share of income going to that group has declined as unionization rates have fallen.
Of course, this correlation doesn\’t prove causation. It\’s easy to imagine that certain factors in the economy–say, the rise in information and communication technology together with an increase in global trade–might account for both the fall in unionization and rising inequality of the income distribution. But more detailed studies that try to take these other factors into account do suggest that the decline in unionization is part of the story, too: \”A recent paper finds that declines in unionization explain one-fifth of the increase in wage inequality between 1973 and 2007 for women and one-third of the increase for men. For men, the effect is comparable to the effect of the increasing stratification of wages by education (for women, the effect of deunionization is about half that of education).\”
However, give the changes in who is a union member over time, it\’s not clear that a rise in unionization right now would have a substantial effect on inequality. Today\’s union members are less likely to be low-wage workers; indeed, union workers are now more likely to be college-educated than the average US worker.
The report notes:
\”Union membership has also become more representative of the population, with the share of members who are female or college-educated rising quickly. Studies have shown that union wage effects are largest for workers with low levels of observed skills and that unionization can reduce wage inequality among workers partially by increasing wages at the bottom of the distribution and by reducing pay dispersion within unionized firms and industries. Since both the union wage premium and the coverage of low-skilled workers, who receive the highest wage premium, have fallen, unionization’s ability to reduce inequality has very likely been limited in recent years.\”
During the last few decades, I\’ve seen occasional articles about how US unions are just about to make a comeback. Maybe they will, although after decades of ongoing decline I\’m skeptical. But the report also points to other organizations that can offer a voice for workers. For example, Germany is well-known for its \”works councils\”:
Works councils, groups of workers that represent all employees in discussions with their employer but are not part of a formal trade union, are a common form of worker voice outside of trade unions in Germany and, under the authority of the German Works Constitution Act of 1952, can be set up in any private workplace with at least five employees. Works councils ensure that workplace decisions, such as those about pay, hiring, and hours, involve workers – they have both participation rights (where works councils must be informed and consulted about certain issues) and co-determination rights (where the works council must be involved in the decision). Works councils are separate from trade unions: trade unions exist to protect their members, while works councils exist to integrate workers with management into the decision making process.
In the US, there are some organizations forming that represent independent contractors and freelancers.
A similar organization for workers not covered by the National Labor Relations Act, and that operates closely with the organized labor community, is the New York Taxi Workers’ Alliance. Formed in 1998, the New York Taxi Workers’ Alliance helps advocate for taxi drivers, who are primarily independent contractors rather than employees. The organization expanded nationally in 2011 as the National Taxi Workers’ Alliance, and became the first charter for non-traditional workers since the farm workers in the 1960s, and the first one ever of independent contractors; they are recognized by the AFL-CIO as an affiliate organization. The group advocates for its members in much the same way as a traditional union, but their right to collectively bargain is not protected under the National Labor Relations Act due to their non-employee status.
I don\’t know if these kinds of non-union worker-voice organizations have a real future in the US context. But I do think that worker voice offers potentially valuable input, and that many workers want a voice that can speak on their behalf to management. If workers don\’t have workplace-related organizations to provide such a voice, they will inevitably turn their voices to politicians who promise legislation to address their concerns.
