The Unassuming Economist

A new IMF working paper “uses a DSGE model to simulate the impact of technological change on labor markets and income distribution. It finds that technological advances offers prospects for stronger productivity and growth, but brings risks of increased income polarization. This calls for inclusive policies tailored to country-specific circumstances and preferences, such as investment in human capital to facilitate retooling of low-skilled workers so that they can partake in the gains of technological change, and redistributive policies (such as differentiated income tax cuts) to help reallocate gains. Policies are also needed to facilitate the process of adjustment.”

“Policies can change the impact of technological change. Depending on societies’ preferences for growth versus income equality, governments may want to distribute the gains from technology more evenly. Certain policies, if well designed, could mitigate the trade-off between both objectives. For example, illustrative model simulations show that higher education spending would not only allow low-skilled workers to participate in the gains of technological change, it would also increase output; this holds even when taking into account that higher spending will require higher rates of taxation. More generally, while the use of the tax/benefit system to redistribute the gains from technological advances tends to come with some loss in efficiency, the resulting loss in output tends to be relatively small.”

From a new VOX post:

“The most widely available measure of underemployment is the share of involuntary part-time workers in total employment. This column argues that this does not fully capture the extent of worker dissatisfaction with currently contracted hours. An underemployment index measuring how many extra or fewer hours individuals would like to work suggests that the US and the UK are a long way from full employment, and that policymakers should not be focused on the unemployment rate in the years after a recession, but rather on the underemployment rate. ”

“Figure 2 shows our estimates for the UK of the number of desired hours of those who want more hours (the underemployed) and those who want less (the overemployed) at the going wage.  The latter series was broadly flat until recently but was always above the fewer hours series before 2008.  That suggests there is still a good deal of under-utilized resources in the labour market available to be used up before the UK reaches full-employment.  There has been a rise both in the number of hours of those who want more hours and those who want less in the post-recession years. ”

From a new Microeconomic Insights post by Charles Jones and Pete Klenow:

“Economists are often accused of focusing excessively on GDP, with the result that government policies make GDP a priority to the detriment of other contributors to well-being. This research proposes a broader summary statistic that incorporates consumption, leisure, mortality and inequality. While the new statistic is highly correlated with GDP per capita, cross-national deviations are often large: Western Europe looks considerably closer to the United States; emerging Asia has not caught up as much; and many developing countries are further behind. Each component of the statistic plays a significant role in explaining these differences, with mortality being the most important. While still imperfect, the statistic arguably provides better guidance for determining public priorities and evaluating policies than does GDP alone.”

From a new IMF working paper:

“Financial technology (fintech) is emerging as an innovative way to achieve financial inclusion and the broader objective of inclusive growth. In addition to improving the speed, convenience, and efficiency of financial services, fintech has potential to promote financial inclusion. More specifically, it can enhance access to affordable financial services for unbanked populations and underserved small and medium sized enterprises (SMEs); reduce delays and costs in cross-border remittances; foster efficiencies and transparency in government operations, which helps reduce corruption, and facilitate social and humanitarian transfers in a manner that preserves human dignity.”

“For the Middle East, North Africa, Afghanistan and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions, fintech has a particularly valuable role to play as these potential benefits are aligned with the regions’ policy priorities. Both regions have countries with large unbanked populations, SMEs whose growth is constrained by limited access to finance, high youth unemployment, large remittance markets and informal transfers (Hawala), undiversified economies, vulnerabilities to terrorism, large income disparities, large displaced populations, and endemic corruption. Fintech innovations and underlying technologies can contribute to the solutions for many of these challenges.”

“The scale and pace of fintech in MENAP and CCA countries, however, lags other regions, and fintech is yet to foster an inclusive digital economy. Although there is significant diversity in the pace with which countries in both regions are adopting fintech, overall investment into fintech and the uptake of fintech and mobile financial services have been low compared to other regions. There also continues to be a strong preference for cash payments in the Middle East, despite the growth of e-commerce transactions. Consequently, the potential gap remains large in key areas such as financial inclusion, access to SMEs, diversification, reducing informal sector and the broader objective of inclusive growth.”

From a new post by Steve Maas:

“New Evidence that Unions Raise Wages for Less-Skilled Workers: Tapping into eight decades of private and public surveys, a new study finds evidence that unions have historically reduced income inequality.

For Unions and Inequality over the Twentieth Century: New Evidence from Survey Data (NBER Working Paper No. 24587), Henry S. Farber, Daniel Herbst, Ilyana Kuziemko, and Suresh Naidu assembled a household-level database on union membership dating back to 1936.

The U.S. Bureau of the Census has tracked wages and education consistently since 1940. Aggregate data on union membership goes back to the early 20th century, but data on individual workers were not readily available until the Census Bureau started asking about union affiliation in 1973. By that time, unions were already in decline, and higher-skilled workers accounted for an increasing share of their membership.

The researchers draw on more than 500 surveys conducted by Gallup and other pollsters from 1936 through 1986, extending their dataset into the present day with information from government surveys and other sources.

Their study finds that the salary premium for union members compared to workers with comparable skills and demographic characteristics has remained relatively steady over the last 80 years despite large swings both in the overall number of union members and in their education levels. The less skilled the workers were, the greater the wage premium associated with their union membership. The researchers find a negative correlation between unionization rates and measures of inequality such as the Gini coefficient.

Between 1940 to 1970, when unionization peaked and income inequality narrowed, unions were drawing in the least-skilled workers. Before and after that period, unions were smaller and a higher fraction of their members were drawn from the ranks of high-skill workers. The 1940 – 1970 period also coincided with the highest share of union members drawn from minority groups.

The clear implication of the researchers’ analysis is that, because unions offer a larger wage premium to less-skilled workers, unions have an important equalizing effect on the income distribution to the extent that they are successful in organizing the less-skilled. Recent decades have seen growth in educational attainment in the workforce, and, importantly, not only has the overall share of workers who are unionized declined, but unions have also become relatively less successful in organizing less-skilled workers. The remaining unionized workforce is more highly educated than it was earlier. The combination of the declining presence of unions in the labor market and the increased skill level of the remaining union workers means that the important equalizing effect of unions on the income distribution that was seen in the middle of the 20th century has diminished substantially.”