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us real wages rose during depression

Source: Barry Eichengreen, “The Origins and Nature of the Great Slump Revisited”

So U.S. real wages rose more or less throughout the Great Depression. During the Hoover years, you can write this phenomenon off as sticky wages plus the Federal Reserve’s disastrous policy of deflation, plus some of Hoover’s jawboning of executives to get them to keep wages high. But during FDR’s administration, the federal government actually mandated higher wages several times. Of course, that is the last thing you want to do during a depression, because you will just make unemployment higher and therefore production lower than it could have been. And that’s what happened:

weak recovery

Despite the fact that money supply growth and price inflation were robust after 1933:

money supply grew

inflation rose

So after 1933, the U.S. economy’s woes must have had origins in microeconomic policies, not macroeconomic policies.

By the way, I saw Scott Sumner at a recent conference, and he is writing a book about this. About time someone did!

Update: On Twitter Mike Konczal points me to this paper by Gauti Eggertsson, making the case for the National Industrial Recovery Act on zero-lower-bound grounds. Fair enough – it’s a theoretical paper, and you can make a theoretical case for just about anything. But all of the countries in the figures above were at the zero lower bound at some point. Two things stand out: 1) In general, countries that went off the gold standard first saw more inflation, which was associated with lower real wages, which was associated with better industrial recovery. 2) The U.S. underperformed on industrial recovery and had bigger increases in real wages than everything else despite high inflation after 1933.

On the relationship between real wages and unemployment, Bob Lawson points me to Vedder and Galloway’s Out of Work. See also this negative review of the book by Brad DeLong.

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Here are quarterly data on “usual weekly earnings” in current dollars from the Bureau of Labor Statistics. The first graph shows the first (lowest) decile of wage earners. The second shows the ninth (why not the tenth? BLS does not make that an option). These data should be relevant to the debate over whether most unemployment we’re seeing in the U.S. is structural or cyclical.

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I teach my undergraduates that trade has no long-run effect on aggregate employment. I teach it because it’s right, and very few economists would disagree. Tyler Cowen’s recent postings on MR about the negative employment effects of trade have the potential to mislead. To the extent that trade and technology correlate with persistent disemployment in local areas, this is a reason to think that there are structural inefficiencies in the labor market. If these structural rigidities exist, then it can be hard for people who lose jobs to get new ones. Anything that disrupts existing employment patterns — trade, technology, macroeconomic changes like price shocks — will then associate with employment declines.

What are these structural inefficiencies? For market monetarists, the “zero lower bound” is a favorite. But we’re now five years out from the NGDP shock that plausibly caused the big increase in U.S. unemployment. The rise in the minimum wage, the extensions of unemployment insurance, the expansion of welfare programs like food stamps, and perhaps most importantly, housing lock-in due to the collapse of the real-estate bubble are all plausible candidates. But these structural rigidities deserve the real blame for disemployment, not trade and technology. Blaming trade and technology is a bit like blaming the weather. Labor markets will always be disrupted by something or other. Policy makers cannot insulate an economy from shocks. What they can do is gum up the works so that the economy cannot respond nimbly to these shocks.

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That’s the subtitle of a new working paper from Peterson, Pandya, and Leblang. Here’s the abstract:

Skills are often occupation-specific, a fact missing from existing research on the political economy of immigration. Although analyses of survey data suggest broad support for skilled migration occupational licensing regulations persist as formidable barriers to skilled migrants’ labor market entry. Regulations ostensibly serve the public interest by certifying competence but are simultaneously rent-preserving entry barriers. We analyze both the sources of US states’ licensure requirements for international medical graduates (IMGs), and the effect of these regulations on migrant physicians’ choice of US state in which to work over the period 1973-2010. Analysis of original data shows that states with self-financing state medical licensing boards, which can more easily be captured by incumbent physicians, have more stringent IMG licensure requirements. Additionally, we find that states that require IMGs to complete longer periods of supervised training receive fewer migrants. Our empirical results are robust to controls for states’ physician labor market. This research identifies an overlooked dimension of international economic integration: implicit barriers to the cross-national mobility of human capital, and the public policy implications of such barriers.

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As you likely know, the Paycheck Fairness Act died in the Senate earlier this week, with strong GOP opposition. (see coverage here). The key provisions of the bill are nicely summarized in the Christian Science Monitor:

The legislation…would require employers to prove that differences in pay are based on qualifications, education and other “bona fides” not related to gender. It also would prohibit employers from retaliating against employees who ask about, discuss or disclose wages in response to a complaint or investigation. And it would make employers who violate sex discrimination laws liable for compensatory or punitive damages. Under the bill, the federal government would be exempt from punitive damages.

Of course, introducing the bill that stood no chance of passage was largely a symbolic act designed to document the Republican “war on women.”

There are the obvious debates about the empirical record (e.g., if women make 77 cents on the dollar for the same employment, does this reflect genuine gender discrimination or some other factors such as time taken out for child rearing?). One might also question whether adding a new set of regulations makes sense in the current economic climate. But there is another debate about whether such legislation can be justified. For many libertarians, the answer is obvious.

The Economist blog, Democracy in America, takes up this issue and uses it to  excoriate Rand Paul for his rejection of the Paycheck Fairness Act. The critique hinges on Paul’s efforts to draw some parallel between the aspirations of the law and central planning:

“Three hundred million people get to vote everyday on what you should be paid or what the price of goods are,” Paul told reporters on Capitol Hill. “In the Soviet Union, the Politburo decided the price of bread, and they either had no bread or too much bread. So setting prices or wages by the government is always a bad idea.”

The Economist notes that wages are set by the employer, not a central planner. The only question is whether the employer has violated the provisions of Title VII of the Civil Rights Act of 1964 (prohibiting discrimination in employment) and the Equal Pay Act of 1963 (which prohibits sex-based wage discrimination), and this is a decision that should be left to the courts.

The piece moves on, then, to a thought experiment:

But should it be illegal to offer different pay for the same work based on an employee’s sex? Maybe not. Mr Paul’s argument here implies he thinks it should be okay. So, let’s try a thought experiment. How would you react to seeing a job advertisement that read: “Associate lawyer in patent firm, 3 years’ experience required, salary $100k for man, $77k for woman”? Is that okay? If not, why not? How about this: “Associate lawyer in patent firm, 3 years’ experience required, salary $100k for Christian, $70k for Jew”? How about “Salary $100k for white, $65k for negro”?

I don’t think there is evidence that Rand Paul thinks discrimination is “okay,” rather, I am assuming he believes—as most libertarians—that market forces are sufficient to limit the extent of discrimination.  But let’s take the thought experiment seriously. How would you react to the above job ads?

My first response is simple: I would not do business with firms that adopted these policies.  I assume that many others—perhaps even a majority—would have a similar response. Businesses might freely adopt any employment practices they wish, but it they could face a significant backlash from consumers. One might also assume that these employment practices would limit the effective labor market for these firms, further reducing their competitiveness and potentially driving them out of business.

So if we believe if freedom of association and the right of individuals to engage in voluntary economic transactions, we might be content to allow markets to sort things out without the intervention of the state.

But is this sufficient?

If the forms of discrimination noted above are universalized—e.g., every firm chooses to pay women less than men—the market would not impose much in the way of discipline.  Moreover, even if the market would impose discipline, none of this would provide much satisfaction for those who were discriminated against in the first place. Those of us who believe in a higher power have faith that God will ultimately judge the quick and the dead. But we nonetheless also seek justice in the temporal realm.

One response to this last point is evident. An individual has no entitlement to a particular job, and so the denial of employment (or the offer of employment at a particular wage) does not fall into the realm of justice. For those who wish to see a more elegant development of this argument, see our own James Otteson’s fine book, Actual Ethics.

The question of whether the state has exceeded its bounds by moving beyond the protection of life, liberty and property seems to me to be a separate issue (even though it is of great interest to many of us). Discrimination in employment and wages is already illegal. Given the laws currently on the books, is there great harm in facilitating access to information and reducing the legal transaction costs faced by those who have legitimate claims?

Someone make the argument.

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Political Math’s piece on Texas’ amazing job growth has been getting a lot of attention around the ‘Net. As regular Pileus readers know and as Political Math’s piece confirms, job growth is largely a consequence of population growth, and population growth is largely a consequence of warm climate, low cost of living, low taxes, and high personal freedoms. Since Texas enjoys all four of those characteristics in spades (personal freedoms maybe a little less so), it is unsurprising that Texas has grown so much. To what extent can Rick Perry claim credit for that job growth? I think he can claim a bit of credit to the extent that he can point to a record in which he has supported policies that have kept cost of living and taxes low and personal freedoms fairly high.

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Matthew Slaughter and Robert Lawrence have an interesting little proposal in the NY Times: abolishing Trade Adjustment Assistance (TAA), rolling it into unemployment insurance, and reforming the program so as to reduce its work disincentives. They also advocate special tax treatment for unemployed workers’ expenditures on job retraining. They sell the plan, which they say will cost about $20 billion, as a way of building public support for trade agreements, which has dissipated in recent years.

On the whole, the reforms make sense to me. Nevertheless, they are still just tinkering. I am not sure that these relatively arcane changes will be enough to change the public’s fundamentally hostile attitudes toward globalization these days, and I think we need to consider far more radical reforms to achieve rapid reductions in unemployment.

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