The Unassuming Economist

From VOX post by Jennifer Hunt and Ryan Nunn:

“Over the last five decades, middle-wage jobs diminished in the US as wage inequality increased. This column investigates the relationship between these two phenomena, and finds no evidence that either computerisation or automation (often cited as a source of both trends) produced employment polarisation or increased wage inequality. By examining wages at the individual level (rather than occupation-average wages), the column suggests that the evolution of wages can be better explained by distinct causes—ranging from changing labour market institutions to globalisation—than by observable demographic factors.

Middle-wage jobs in the US are gradually diminishing while wage inequality has been rising. But are the two related? Does the decline in middle-wage jobs represent polarisation of employment, and is the decline a good or a bad thing for workers?

Inequality between top and middle hourly wages has increased steadily for the last 50 years in the US. By contrast, inequality between middle and bottom wages rose sharply in the 1980s; then, after a slight decline, it remained stable for the next 30 years. These gaps are commonly measured as the ratio of the 90th and 50th percentile wages (the wage of the worker earning more than 90% of workers relative to the wage of the worker earning more than 50% of workers) and the ratio of the 50th and 10th percentile wages, as shown in Figure 1.

Note: Difference between 90th and median log hourly wages (90-50) and median and 10th percentile wages (50-10), weighted by weekly hours work. Non-self employed workers 18-64 without missing values for covariates used elsewhere in the paper, but including imputed values.
Source: CPS MORGs 1979-2018 and CPS Mays 1973-1979.

Economists have investigated many potential explanations for these changes, including the decline of unions (Fortin et al. 2019); the inflation-adjusted minimum wage (Lee 1999); the spread of outsourcing and temporary-agency labour (Feenstra and Hanson 1999); reduced competition and dynamism (Furman and Orszag 2018, Shambaugh et al. 2018); and increased international trade, off-shoring, and technological progress (Blum 2008, Feenstra and Hanson 2003). The first two factors played an important role in the 1980s, and many researchers believe that technology has played an important role throughout.

A complementary analysis focuses on employment shares of low-, middle-, and high-wage workers rather than wage inequality. One of the most striking findings from this work is that the share of middle-wage jobs has declined. This decline can be measured in different ways, one of which is to examine shifts in the occupational composition of employment. Some research foregrounds the role of technology in its examination of these shifts, because in addition to a decline in the employment share of middle-wage occupations and a rise in employment share of high-wage occupations, the share of low-wage occupation employment share has been rising (e.g. Autor 2015a,b and Autor and Dorn 2013 for the US; Goos et al. 2009 and Goos et al. 2014 for other countries).”

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From the IMF’s latest WEO analytical chapter:

“The pace of structural reforms in emerging market and developing economies was strong during the 1990s, but it has slowed since the early 2000s. Using a newly constructed database on structural reforms, this chapter finds that a reform push in such areas as governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term. A major and comprehensive reform package might double the speed of convergence of the average emerging market and developing economy to the living standards of advanced economies, raising annual GDP growth by about 1 percentage point for some time. At the same time, reforms take several years to deliver, and some of them—easing job protection regulation and liberalizing domestic finance—may entail greater short-term costs when carried out in bad times; these are best implemented under favorable economic conditions and early in authorities’ electoral mandate. Reform gains also tend to be larger when governance and access to credit—two binding constraints on growth—are strong, and where labor market informality is higher—because reforms help reduce it. These findings underscore the importance of carefully tailoring reforms to country circumstances to maximize their benefits.”

From a VOX post by Stefania Albanesi:

“The US economy has been hampered over the last four decades by three trends: the productivity slowdown, the Great Moderation, and jobless recoveries. Economists seeking to explain these phenomena have generally looked to the impact that technological change has on labour demand. This column proposes an alternative explanation: the rise and stabilisation of women’s participation in the workforce, one of the most notable developments in the post-war US. Excluding gender differences in aggregate models of the US economy obscures our understanding of business cycle behaviour and economic performance.

The rise in women’s market work is one of the most notable economic developments in the post-war United States. Female participation rose from 37% in 1960 to a peak of 61% in 1997, and then flattened out, as shown in Figure 1. This phenomenon contributed substantially to the rise in aggregate hours per person in the US in the 1970s and 1980s. While a large literature has studied the determinants of the rise in women’s employment, the implications of this phenomenon for the aggregate performance of the US economy have been left largely unexplored. At the same time, several key properties of US business cycles changed over this period, and economists have yet to provide a comprehensive explanation of those changes. Three particularly puzzling phenomena stand out:

• the productivity slowdown in the 1970s (Jorgenson 1988) and the decline in the cyclical correlation between aggregate per capita hours and productivity (Gali and Gambetti 2009);
• the decline in the cyclicality of output and aggregate hours starting in the early 1980s, known as the Great Moderation (Stock and Watson 2002); and
• the sluggish growth in employment in the aftermath of recessions starting in the early 1990s, often referred to as jobless recoveries (Graetz and Michaels 2017).”

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From a new paper by Alberto Alesina, Davide Furceri, Jonathan D. Ostry, Chris Papageorgiou and Dennis P. Quinn:

“We assemble a unique database of reforms in domestic finance, external finance, trade, product markets and labor markets which covers 90 advanced and developing economies from 1973 to 2014. In the 66 democracies which we consider in this paper, we show that these reforms have medium run benefits thus they are electorally more successfully when introduced at the beginning of a new term of office. Liberalizing reforms shortly before elections are costly to incumbents. However, the effect depends on the state of the economy at the time of reform: reforms are sharply penalized during contractions, reforms undertaken in expansions are not punished and sometimes rewarded.”

A new IMF paper by Frederic Lambert and Hyunmin Park  highlights the role played by social spending to reduce poverty and inequality:

“We analyze microdata from Mexico’s survey on household income and expenditures (ENIGH) to study the evolution of income inequality in Mexico over 2004-16, identify its sources, and investigate how it was affected by government social policy. We find evidence of only a small decline in inequality over this period. The observed decline may be attributed to government transfers, notably targeted cash transfers (Prospera) and non-contributory pensions. In 2016, those two programs accounted for more than two thirds of the reduction in the Gini coefficient due to government transfers. Other transfer programs such as farmland subsidies (Proagro), government scholarships, and non-monetary transfers for medical expenditures have not been as effective.”