The Unassuming Economist

From Financial Post:

“While economies work better when entrepreneurs and others are allowed to satisfy their greed, big gaps between the richest and the rest can cause chronic problems

Our collective share of the pie shrunk last year.

You might have seen reports that the trade deficit remained an expanse of misery in January. The same day that Statistics Canada released those dreary numbers, it also published its annual report on the distribution of household wealth, or, if you prefer, “Distributions of household economic accounts for income, consumption, saving and wealth of Canadian households, 2018.”

The net worth of households was $10.7 trillion in 2018, compared with $10.9 trillion in 2017; the first decrease since at least 2010, which is when Statistics Canada began publishing this particular set of data.

Collectively, we’re 60 per cent richer than we were a decade ago, so keep that in mind before you take to Twitter to vent about Stephen Harper’s austerity or Justin Trudeau’s taxing of the rich. Still, the good times rolled a little slower last year. That’s partly because the housing bubbles in Toronto and Vancouver started to deflate. But it’s also because a group of wealth creators on which the country has relied since the Great Recession had a tough time in 2018.

Statistics Canada diced household wealth into five income segments. It also divided the aggregate data into five regions. There wasn’t a lot of change in distribution. Nationally, the richest 20 per cent of households controlled about 55 per cent of total wealth, roughly the same as 2010. One shift stood out, however.

(…) “Inequality and fragile growth may be two sides of the same coin,” Ostry, a Canadian who trained at Oxford, the London School of Economics, and the University of Chicago, says in Confronting Inequality: How Societies Can Choose Inclusive Growth, along with co-writers Prakash Loungani and Andrew Berg.

(…) The Trudeau government and the business community keep talking past each other. The latter should recognize that the federal government’s coddling of the middle class isn’t entirely about electioneering. And Trudeau and Morneau should be wary of taking the leaders of the country’s biggest companies for granted. As David Lipton, one of Ostry’s bosses at the IMF once said, “a larger slice of the pie for everyone calls for a bigger pie.”

From a new VoxChina post on China’s rising income inequality:

“China has witnessed persistent increases in economic inequality since the early 1990s when the urban labor market began its transformation — from centrally-controlled to market-driven. Using the Urban Household Survey data, this paper (Feng and Tang, 2018) documents the trends in income inequality over the period of 1992-2009 and decomposes changes in income inequality by considering three main factors: the labor market, human capital, and marriage market. We find that labor market factors account for approximately three-quarters of the overall increases in income inequality while the falling marriage rate has contributed the other quarter. Changes in human capital levels and marital assortativeness have not contributed to the rising inequality.”

“Our results suggest that labor market factors are most important to the increases in family income inequality during the 1992-2009 period. Figure 1 shows that if allthree of the factors are held unchanged at the levels of 1992/93, the Gini coefficient would only increase from 0.266 to 0.298, instead of to the actual 0.407. Therefore, labor market factors collectively contribute more than three-quarters of the total increase in inequality. Further, labor market factors are more important in affecting the upper part of the income distribution as they account for almost all of the changes in P90/P50, the ratio of the 90th percentile to median family incomes.

A more careful examination suggests that each labor market factor plays an important role. Changes in employment and returns to education both contribute about 16 percent of the change in inequality over the study period, while within-education-group inequality accounts for around 37 percent of the overall increase in inequality. Therefore, within-education-group inequalities are not only crucial in changes to individual income inequality, as many previous researchers have noted, but are also important in the rise in regards to family income inequality.”

From a new Social Europe post:

“Traditionally, higher productivity has benefited workers through reductions in working time, among other things. When the TUC was founded in 1868, average working hours were 62 per week. Now (including those who work part-time), average weekly hours have almost halved, to around 32.”

“That change didn’t happen by accident, but was the result of union campaigning. Robert Owen, the socialist pioneer who had popularised the demand for an eight-hour day at the beginning of the 19th century, coined the slogan: Eight hours’ labour, Eight hours’ recreation, Eight hours’ rest.

Following trade-union agitation, the Factory Acts of 1874 were the first kind of legislation to put clear limits on the working day—though back then, at ten hours, they fell short of union demands. The May Day demonstration of 1890, which drew hundreds of thousands of people to Hyde Park in London, was centred around the demand for an eight-hour day—following a call from the international trade-union movement for ‘a great international demonstration’ so that in all countries and all cities, on the appointed day, ‘the toiling masses shall demand of the State authorities the legal reduction of the working day to eight hours’.

And in 1919, when the International Labour Organisation (ILO) met for the first time in the wake of World War I, its initial convention was on working time. The preamble explicitly adopted ‘the principle of the 8 hours day or of the 48 hours week’ (though there was a long list of carve-outs—including the entirety of India).

So trade unions have an eye on history when they see predictions about the potential for extra wealth to be generated from robotics and artificial intelligence. The consultancy firm PWC has estimated that UK gross domestic product will be up to 10 per cent higher in 2030 as a result of artificial intelligence, equivalent to a boost to GDP of more than £20 billion, or extra spending power of up to £2,300 a year per household. One way that wealth could potentially be shared more equitably with workers is through a reduction in working time—as we saw in the last century.”

From a new VOX post by David Autor:

“Labour markets in US cities today are vastly more educated and skill-intensive than they were 50 years ago, but urban non-college workers now perform much less skilled work than they did. This column shows that automation and international trade have eliminated many of the mid-skilled non-college jobs that were disproportionately based in cities. This has contributed to a secular fall in real non-college wages.”

“Figure 2 depicts the aggregate relationship between population density and occupational structure at the level of 722 commuting zones (CZs) covering the contiguous US states between 1970 and 2015.

The three panels of this figure report the CZ-level share of employment among working-age adults into the three broad occupational categories described above: traditionally low-education, low-wage services, transportation, labourer, and construction workers; traditionally mid-education, middle-wage occupations made up of clerical, administrative support, sales, and production workers; and high-education, high-wage, professional, technical, and managerial workers.

The horizontal axis is the natural log of population density (the number of residents divided by CZ land area). For consistency, I used each zone’s population density in 1970 throughout, and the data are weighted by the count of working-age adults in each CZ. Each plotted point in the bin-scatter represents approximately 5% of all workers in each year.

The rising set of upward-sloping curves in the right panel show that while denser CZs have traditionally been more intensive in high-skill work, the level and slope of this relationship between density and skill-intensity has risen consistently over multiple decades. The overlapping downward-sloping curves in the left panel show that the fraction of workers engaged in low-skill occupations has historically been much smaller in high-density CZs, and this pattern has changed little over decades. In the middle panel, the fan-shaped set of curves show that the denser CZs were exceptional in the 1970s for having far more middle-skill work than suburban and rural CZs. But this exceptional feature attenuated. By 2015, the densest CZs had less middle-skill work than the suburbs or rural areas.”

From a new IMF working paper by Reda Cherif and Fuad Hasanov:

“Industrial policy is tainted with bad reputation among policymakers and academics and is often viewed as the road to perdition for developing economies. Yet the success of the Asian Miracles with industrial policy stands as an uncomfortable story that many ignore or claim it cannot be replicated. Using a theory and empirical evidence, we argue that one can learn more from miracles than failures. We suggest three key principles behind their success: (i) the support of domestic producers in sophisticated industries, beyond the initial comparative advantage; (ii) export orientation; and (iii) the pursuit of fierce competition with strict accountability.”