The Unassuming Economist

From a new post by Timothy Taylor:

“The Aspen Institute Economic Study Group has published a collection of 12 papers on the theme Expanding Economic Opportunity for More Americans Bipartisan Policies to Increase Work, Wages, and Skills, edited by Melissa S. Kearney and Amy Ganz (February 2019). I’ll list the complete Table of Contents for the volume below. Here, I’ll just focus on four of the proposals that struck me as especially thought-provoking: caught

1) A Boost for Community Colleges

From “A Policy Agenda to Develop Human Capital for the Modern Economy,” by  Austan Goolsbee, Glenn Hubbard, and Amy Ganz:

The United States should make a bold and dedicated commitment to increasing the skills and productivity of its workforce by leveraging the potential of the community college sector. We propose a federal grant program to provide new funding to community colleges, contingent on institutional outcomes in degree completion rates and labor market outcomes. We believe a program of a similar scale to the 19th century Morrill Land Grant Program, which dramatically expanded access to higher education for working-class Americans, is needed to ensure our workforce meets the demands of the modern economy. …

In 1910, fewer than 10% of Americans had a high school degree. By 1935, nearly 40% of the population had earned their degrees. This inflection point came from substantial new investments in the nation’s education resources. We aim to achieve increases of a similar magnitude …by 2030:

1. Close the completion gap between two-year college students aged 18 to 24 and their peers at four-year institutions by increasing the average completion/transfer rate among 18- to 24-year-olds at community colleges from 37.5% to 60% by 2030.3 This would result in 3.6 million additional 18- to 24-year-olds with college degrees in 2030.
2. Increase the share of Americans aged 25 to 64 with a college degree or other high-quality credential from 46.9% to 65% by 2030, which reflects the expected share of jobs requiring advanced skills by that year. This goal would require 28 million additional workers to earn first-time degrees or high-quality credentials by 2030. …

We estimate an annual investment of $22 billion.

2) A Boost for Apprenticeships

From “Scaling Apprenticeship to Increase Human Capital,” by Robert I. Lerman

[T]he United States has lagged far behind other developed countries—countries like Germany and Switzerland, but also Australia, Canada, and England—in creating apprenticeships. In these countries, apprentices constitute about 2.5-3.0% of the labor force, or about 10 times the U.S. rate. Increasing the availability of apprenticeships would increase youth employment and wages, improve workers’ transitions from school to careers, upgrade those skills that employers most value, broaden access to rewarding careers, increase economic productivity, and contribute to positive returns for employers and workers. …

The experiences of Australia, Canada, and England demonstrate that scaling apprenticeship is quite possible, even outside countries with a strong tradition of apprenticeship. While none of these countries have the strong apprenticeship tradition seen in countries like Austria, Germany, or Switzerland, they have nonetheless grown significant programs. In fact, if apprenticeships as a share of the U.S. labor force reached the levels already achieved in Australia, Canada, and England (on average), the United States would attain over 4 million apprenticeships, about 9 times the current number of registered apprenticeships in the civilian sector. …

Overall, the federal government has devoted less than $30 million (per year) to the Office of Apprenticeship (OA) to supervise, market, regulate, and publicize the system. Many states have only one employee working under their OA. Were the United States to spend what Britain spends annually on apprenticeship, adjusting for differences in the size and composition of the labor force, it would provide at least $9 billion per year for apprenticeship. In fact, the British government spends as much on advertising its apprenticeship programs as the entire U.S. budget for apprenticeship. …

Today, funding for the “academic only” approach to skill development in the United States dwarfs the very limited amounts available to market and support apprenticeship. Yet apprenticeship programs yield far higher and more immediate gains in earnings than do community or career college programs and cost students and the government far less.

3) Sharing the Costs of Higher Minimum Wages with a Tax Credit

From “The Higher Wages Tax Credit,” by David Neumark

In recent years, there has been a torrent of state and local minimum wage increases. For example, as of the end of 2017, 30 states (including the District of Columbia) had minimum wages above the $7.25 federal minimum wage, with an average difference of 26%. At the state and local level, California, New York, Seattle, and the District of Columbia have or will soon have a $15 minimum wage; other localities may follow. Finally, a change in the national political alignment could result in a $15 national minimum. …

While the effects of minimum wage increases are contested, it is impossible to dismiss the sizeable body of evidence that suggests minimum wage hikes reduce employment among the least skilled (including recent research that addresses criticisms of earlier evidence). In addition, it is uncontested that higher minimum wages do not target low-income families very well, in part because of the large number of teenagers earning the minimum wage, and in part because poverty is more strongly related to whether or not one works and how many hours one works, rather than low wages ….

I propose a Higher Wages Tax Credit (HWTC) to partially offset the costs imposed by minimum wage increases on firms that employ low-skilled labor. Following a minimum wage increase, the HWTC would provide a tax credit of 50% of the difference between the prior minimum wage and the new minimum wage, for each hour of labor employed; the credit would phase out at wages higher than the minimum wage, and as wage inflation erodes the real cost of higher nominal minimum wages. The HWTC would reduce the incentive for employers to substitute away from low-skilled workers in the face of minimum wage increases, thus mitigating the potential adverse effects of minimum wage increases while simultaneously preserving and possibly enhancing some of the benefits of minimum wage hikes.

4) Minimum Zoning to Ease Movement to Higher-Cost, Higher-Wage Locations

From “How Minimum Zoning Mandates Can Improve Housing Markets and Expand Opportunity,” by Joshua D. Gottlieb

Dramatic differences in income, productivity, and housing costs within the United States make geographic mobility important for spreading prosperity. But Americans’ ability to move to places like San Francisco, Boston, and New York in search of economic opportunities is limited by severe restrictions on new housing supply in these productive places.State-level Minimum Zoning Mandates (MZMs) allowing landowners to build at a state-guaranteed minimum density, even in municipalities resistant to development, would be an effective means of encouraging denser housing development. These MZMs would improve housing affordability, spread economic opportunity more broadly, and limit the environmental impact of new development. …

I propose that state governments adopt Minimum Zoning Mandates (MZMs). These MZMs would be explicit zoning codes that provide a baseline minimum density that land owners, such as developers, can invoke when municipal zoning and permitting processes prevent useful development.

The MZMs should provide all land owners with a meaningful right to build housing up to a certain density significantly beyond single-family houses. Medium-density rowhouses and small apartment buildings should be allowed in every location where any sort of development is allowed. This is the type of density that is associated with some of America’s most-loved neighborhoods: Greenwich Village and other parts of Lower Manhattan, Boston’s North End and South End, the Mission in San Francisco, Lincoln Park in Chicago, and much of historic Philadelphia. It meshes well with existing single-family homes, as we see in places like Cambridge, Massachusetts. MZMs need not enable high-rise condo towers that would change the character of leafy, low-density neighborhoods. Even medium-density zoning rules could generate interesting new neighborhoods and resolve the housing shortages in productive cities.”

From VoxEU:

“There has been considerable criticism of the general reliance on GDP as an indicator of growth and development. One strand of criticism focuses on the inability of GDP to capture the subjective well-being or happiness of a populace. This column examines new growth models, paying particular attention to Bhutan, which has pursued gross national happiness, rather than GDP, since the 1970s. It finds evidence of the Easterlin paradox in Bhutan, and draws out lessons for macroeconomic growth models. 

New Zealand’s Prime Minister, Jacinda Arden, recently proposed the idea of a ‘wellness budget’ for the country, and suggested that wellbeing should be incorporated into their growth agenda (Arden 2019). In a similar vein, William Nordhaus incorporated climate change into traditional growth models, efforts for which he was awarded the Nobel Memorial Prize in Economics (Gillingham 2018). In a famous article, Easterlin (1974, revised 1995) asked whether “raising the incomes of all will raise the happiness of all?”. This question was raised following the observation that reported happiness levels remained flat over the long-run in countries which had experienced high rates of real income growth. This anomaly was subsequently dubbed the Easterlin Paradox. How relevant is this in today’s times? The following table provides some interesting clues.

 

Table 1 World Happiness Rankings

Source: Helliwell et al. (2018)

 

In Table 1, the World Happiness Rankings for different years are compared with their respective real GDP per capita outcomes. According to the Easterlin Paradox (ceteris paribus), the change in World Happiness Scores should not be proportional to the change in real GDP per capita (year-on-year difference) in any given year. If this is the case, then the country with the highest per capita income will not necessarily be that with the highest levels of happiness.

As can be noted in the table, countries such as Iceland, Switzerland, and Australia seem to be in line with the Easterlin Paradox. Bhutan seems to follow a similar trend. Interestingly, the US seems to be following the Easterlin Paradox. This has been largely attributed to the reduction in America’s social capital and the fact that “…certain non-income determinants of US happiness are worsening alongside the rise in US per capita income, thereby offsetting the gains in subjective well-being that would normally arise with economic growth” (Helliwell 2018). As such, it is quite apparent that there is a discrepancy at some level between the perceived positive proportional relationship between the notion of incomes (input) and happiness (outcome). Not only does this introduce the need to look beyond income levels, it also reasserts the need to look at other well-being measurements, such as happiness, as key measures of growth outcomes.

How can this discrepancy be bridged? More importantly, how can these elements be incorporated in a systematic manner into the policymaking ecosystem, rather than merely being proclamations from higher moral ground?”

Continue reading here.

From a new VOX post on the role of immigrants:

“The response of labour supply to negative shocks is different across regions due to varying levels of labour mobility. This column shows that the elasticity of labour supply in response to economic shocks is lower in the euro area than in the US, suggesting that a lack of labour mobility may be an obstacle to labour market adjustments in the euro area. Policies aimed at reducing the complexities of migrating for jobs could help ease this mobility gap.”

“The higher mobility of migrants implies that they can act as a buffer and reduce the fluctuations of the employment rate in response to regional shocks to employment. A simple counterfactual exercise can help appreciate the magnitude of such contribution. We first simulate the impact of a 1.9% decrease in the level of employment on the employment rate in each euro area country using the elasticities estimated for natives and foreign-born (the value is equal to one standard deviation of the series of overall employment variations). In this status quo scenario, the employment rate falls in all countries by 13% on average (the green dots in Figure 2). We then focus on two alternative scenarios, and simulate the same impact assuming that all individuals had the natives’ (low) elasticity or the foreigners’ (high) elasticity.

Comparing the first (lower bound) scenario to the status quo informs us on the current contribution of mobile foreign-born individuals in absorbing the shock – our estimates suggest that they help reduce its impact on employment rates at the country level by around 7% (to 1.4% on average, see the blue dots). And if all individuals had the same propensity to move as foreigners (as in the second, upper bound scenario), the impact of the negative employment shock would be halved (orange dots). These patterns are common to all euro area countries.”

From a new VOX post:

“Growth in life expectancy during the last two centuries has been attributed to environmental change, productivity growth, improved nutrition, and better hygiene, rather than to advances in medical care. This column traces the development of medical care and the extension of longevity in the US from 1800 forward to provide a long-term look at health and health care in the US. It demonstrates that the contribution of medical care to life-expectancy gains changed over time.”

“Researchers agree that there is a recent slowdown in national health expenditures across all age groups (Figure 4), but there is little agreement on exactly why and when it started. Cutler and Sahni (2013) considered the role of the recession and estimated that it accounted for 37% of the slowdown between 2007 and 2012. They noted that a decline in private insurance coverage and cuts to some Medicare payment rates accounted for another 8% of the slowdown, leaving 55% of the spending slowdown unexplained. Researchers who asked whether the Affordable Care Act could explain part of the slowdown reached mixed conclusions about the importance of its contribution (McWilliams et al. 2013, Song et al. 2012, Colla et al. 2012).

Whatever the case may be, the slowdown began in the early 2000s, prior to the implementation of the Affordable Care Act. Chandra et al. (2013) argued that the three main causes for the slowdown were the rise in high-deductible insurance plans, state-level efforts to control Medicaid costs, and a general slowdown in the diffusion of new technology, particularly for use by the Medicare population.

The diffusion of technologies previously used among the elderly to the non-elderly population (e.g. elective hip or knee replacement for people with severe arthritis) might explain some of the relative change but is not the full story. The recent reduction in the relative growth of medical spending on people over 65 and the slowdown in the real growth rate of spending for all citizens remain to be fully understood. ”

From a new VOX post:

“The sudden rise in trade between China and the US – known as the ‘China shock’ – has been the subject of numerous studies, but the even more dramatic increase in trade between China and developing countries in Asia has been somewhat overlooked. This column studies the impact of the China shock on income inequality in Vietnam. It suggests that increased trade with China reduced income inequality. It resulted in income growth for the lowest income quantiles while higher income groups saw their income decline.”