Minimum wage doesn't destroy jobs!

What a change!

In one of most revisionist texts on economics yet, the Economist argues that minimum wages do not necessarily destroy jobs based on a number of studies for the US and the UK. It goes on to say that "today the consensus is that Britain’s minimum wage has done little or no harm".

Most surprisingly, there is evidence that in the UK the minimum wage "not only pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality". Wow!

The article concludes by saying that:

"This new evidence leaves economists with lots of unanswered questions. What exactly is going on in labour markets if minimum wages do not hurt employment but reduce wage gaps? Are firms cutting costs by squeezing wages elsewhere? Are they improving the productivity of the lowest-wage workers? Some of the newest studies suggest firms employ a variety of strategies to deal with a higher minimum wage, from modestly raising prices to saving money from lower turnover.

Policymakers face practical issues. Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good. Their definition of moderate is 30-40% of the median wage. Britain’s experience suggests it might even be a bit higher. The success of the Low Pay Commission points to the importance of technocrats rather than politicians setting wage floors. Britain’s small, regular changes may be easier for firms to absorb than America’s infrequent but hefty minimum-wage increases. Whatever their flaws, minimum wages are here to stay."

Background papers are here:

^{Sources
"Minimum wage channels of adjustment", by Barry T. Hirsch, Bruce E. Kaufman and Tetyana Zelenska, IZA Discussion Paper No 6132, November 2011
"Minimum wages and wage inequality: Some theory and an application to the UK", by Tim Butcher, Richard Dickens and Alan Manning, October 2012
"Why has the British national minimum wage had little or no impact on employment?", by David Metcalf, CEP Discussion Paper No 781, April 2007
"Minimum wage effects across state borders: estimates using contiguous counties", by Arindrajit Dube, T. William Lester and Michael Reich, The Review of Economics and Statistics, November 2010
"Minimum wage: Maximum impact", by Alan Manning, Resolution Foundation, April 2012
"Revising the minimum wage-employment debate: Throwing out the baby with the bathwater?", by David Neumark, J.M. Ian Salas and William Wascher, forthcoming
"Do minimum wages really reduce teen employment? Accounting for heterogeneity and selectivity in state panel data", by Sylvia A. Allegretto, Arindrajit Dube and Michael Reich, Industrial Relations, April 2011
Economist.com/blogs/freeexchange}

Denmark 2020 Vision

I have just come across this very nice report by the Danish Government, which could serve as a useful blueprint for a lot of countries in the EU and elsewhere.

The report gas 10 explicit goals for 2020 (see below) and a set of detailed policy actions to achieve it.

1. Denmark is to be among the world’s wealthiest countries
2. The Danish supply of labour is to be among the 10 highest in the world
3. Danish schoolchildren are to be among the cleverest in the world
4. At least one Danish university is to be in Europe’s top 10
5. Denmark is to be among the 10 countries in the world where people live the longest
6. Denmark is to be a green, sustainable society and among the world’s three most energy efficient countries
7. Denmark is to be among the best at creating equal opportunities
8. Denmark is to be among the freest countries and among the best in Europe at achieving integration
9. Danes are to be among the world’s most trusting and safe people
10. The public sector is to be among the most efficient and least bureaucratic in the world

Prosperity without growth?

I have recently read a thought-provoking book on "Prosperity Without Growth: Economics for a Finite Planet" (Earthscan, 2009) by Tim Jackson.

Now I found that the book is based on a report, which is available online here, for free. Its summary is below:



"Our economy is geared, above all, to achieving growth. In times of recession especially, economic policy is all about returning to growth. But a financial crisis can also be an opportunity for some basic rethinking about what the economy is for, and how through some fundamental restructuring of our financial system we can safeguard our economic stability in the future, as well as achieving wider social and environmental benefits.


In recent years, other objectives such as sustainability and wellbeing have moved up the political agenda. Over two years, the SDC's Redefining Prosperity project looked into the connections and conflicts between sustainability, wellbeing and growth. Following a series of seminars and commissioned thinkpieces, we published the report Prosperity without Growth? The transition to a low carbon economy, written by Professor Tim Jackson, the SDC's Economics Commissioner.

Prosperity without Growth? analyses the complex relationships between growth, environmental crises and social recession. In the last quarter of a century, as the global economy has doubled in size, increases in consumption have caused the degradation of an estimated 60% of the world's ecosystems. The benefits of growth have been distributed unevenly, with a fifth of the world's population sharing just 2% of global income. Even in developed countries, huge gaps in wealth and well-being remain between rich and poor.

Our report proposes a twelve step route to a sustainable economy, and argues for a redefinition of "prosperity" in light of our evidence on what really contributes to people’s wellbeing.

Taxes on the rich and economic growth

A very interesting paper on "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities" by Piketty et al. argues that:

"There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed."

which in plain English means that (i) cuts in personal taxes in the past thirty years have led to higher income inequality without accelerating economic growth and that (ii) higher personal taxes might not necessarily stymie growth.

Controversial, no?

Why China will dominate the world sooner than we expect

Arvind Subramanian wrote an excellent book on "Eclipse. Living in the Shadow of China’s Economic Dominance", which is available in electronic form for free, where he argues that, contrary to common belief, China's economic dominance is much closer to become a reality than we expect. That includes the renminbi's takeover of the dollar as the world's reserve currency in the next decade or so. He discusses what impact these changes would have on the global economy.

A good review of the book is here.

Rodrik on the future of economic convergence

Dani Rodrik from Harvard has just published a really interesting paper on "The Future of Economic Convergence", where he argues--against very optimistic expectations of other pundits--that emerging markets are not likely to grow as fast as expected and--fully in line with what I have been arguing before--that predictions of high future growth rates for emerging markets "are largely extrapolations from the recent past and they overlook serious structural constraints"

Some useful quotes from the paper (a long list):

“Yet I find much of the optimism regarding the prospects for rapid convergence misplaced. In practice most of the convergence potential is likely to go to waste – just as it has since the world economy first got divided into a rich North and a poor South. As the empirical literature on growth has documented, convergence is anything but automatic. It is conditional on specific policies and institutional arrangements that have proved hard to identify and implement. Indeed, the recipes seem to vary from context to context. The experience of highly successful Asian countries is difficult to transplant in other settings”.


“It is true that the policy and institutional setting has improved across the developing world – at least as judged by conventional criteria. Developing countries have opened up to the world economy, place greater emphasis on macroeconomic stability, and are for the most part better governed. These changes have led many observers to think ―this time will be different.‖ My reading of the evidence is that these are improvements that serve mainly to enhance these economies‘ resilience to shocks and help avert crises, which often interrupted economic progress in the past. They do not necessarily stimulate ongoing economic dynamism and growth.”

“So generalized, rapid convergence is possible in principle, but unlikely in practice. Our baseline scenario has to be one in which high growth remains episodic. Sustained convergence is likely to remain restricted to a relatively small number of countries.”

“Easterly‘s bottom line is that empirical evidence gives little reason to have confidence that moderate changes in policies will yield systematic or sizable growth effects. Another way of putting the same result is to repeat the point made above: avoiding truly awful policies can prevent a country from turning into an economic basket case, but ―good‖ policies of the conventional type do not reliably generate high growth”

“In other words, the economy may be a mixture of activities that are already on the escalator up and activities that are going nowhere. Economies that grow rapidly are those that are able to push their resources into the escalator sectors. And those that grow in a sustained fashion are those that can accomplish this on an ongoing basis.”

“In other words, once a country begins to export something, it travels up the value chain in that product regardless of domestic policies or institutions.

“So convergence can be easy if an economy is able to push its resources (labor in particular) into the ―convergence sectors‖ – the industries on the automatic escalator up.”

“Why then do the conventional policies of macroeconomic stability, liberalization and openness not do the trick? After all, their objective is precisely to ensure that markets can work better and generate the requisite incentives. As a practical matter, however, creating well-functioning market economies requires considerably more than tinkering with specific policy instruments. It is a process that involves deeper institutional transformation measured in decades rather than years. Laws and regulations can be rewritten quickly, but that is not by and large where a nation‘s institutions reside. The rules of the game that we call ―institutions‖ are cognitive constructs that shape expectations about how other people behave (North 1990, Pistor 2000). These expectations are difficult to modify and replace, short of wars, occupation, revolutions, or other cataclysmic events. Furthermore, as long as the beneficiaries of the established order remain politically strong, they can easily circumvent reforms that undercut their privileges. As Daron Acemoglu and James Robinson have emphasized in their various writings, sustainable economic growth ultimately requires political change (Acemoglu and Robinson, forthcoming).”

“Consequently, structural change can remain too slow even when markets are liberalized, opened up, and made to work ―better‖ in the conventional manner. Growth requires remedies targeted at these ―special‖ sectors rather than general policies.”

“Of all methods of subsidizing modern tradables, perhaps the most effective is currency undervaluation. Growth-promoting structural change is greatly assisted by a highly competitive real exchange rate. In Rodrik (2008b) I show that there is a systematic and robust association between undervaluation and economic growth, a relationship that seems to work through undervaluation‘s positive effects on industrialization.”

“In fact, it is rather difficult to identify instances of nontraditional export successes in Latin America and Asia that did not involve government support at some stage”

“Currency undervaluation is often preferred for its non-selective nature, but that is actually a big problem in this context: undervaluation ends up subsidizing a lot of activities – traditional commodity exports, in particular -- that do not need to be subsidized while also unnecessarily taxing imports across the board.”

Here is also Rodrik's op-ed in FT on the same subject.

What do you mean by "the government is too big"?

I have just read this interesting text by James Kwak in The Atlantic on the fallacy of measuring the government's spending to decide whether "it is too big". It all depends, as James documents.

OECD's paper on structural reforms to raise growth

I have just come across a new and interesting paper by the OECD on "Raising Potential Growth
After the Crisis. A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond", which projects how much OECD countries could benefit in terms of higher GDP levels after introducing product and labor market reforms.

The conclusion is that "The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis".

This is a useful exercise, although results for Poland are quite doubtful: it is projected to benefit from product and labor market reforms to the tune of almost 18 percent of GDP within the next ten years largely through reforming the supposedly very rigid product market regulations.

But when you look closer, Poland's low position in the product market regulation (in fact, the last one in the ranking) is largely due to to a slightly larger share of state ownership in the economy than elsewhere. The underlying assumption is that state ownership by definition has to always be worse/less efficient than private ownership and by simply privatizing these companies Poland would develop much faster. I am not so sure: private ownership in the long run is indeed more efficient than state ownership, but in a short run and under additional assumptions, partial state ownership (as is the case in Poland for most state-owned firms) may be equally efficient.

OECD's projections for the impact of PMR reforms on Poland's GDP are therefore overestimated. The PMR index on its own has also be taken with a grain of salt, as most international rankings for that matter.

The UK is almost as socialist as Sweden is!

A chart above taken from the Economist's recent article on the Swedish economy, fittingly entitled "The North Star", shows that the size of the UK's public sector as measured by the share of public spending in GDP is virtually indistinguishable from that in Sweden and much higher than in Poland (not on chart - in 2010, public spending represented only about 45% of GDP).

The message? First, there has been an unbelievable convergence of economic models in the past 10 years: liberal countries became more socialist, while socialist countries became more liberal. Second, a larger role of the state in the economy has not prevented the world's economy (both developed and developing countries) from growing faster than in previous decades, the global crisis notwithstanding. Finally, it seems that modern societies, which live not only on GDP, but increasingly care about well-being and standards of living going beyond GDP, need relatively significant public intervention to fulfill the new social needs. Large public sector (which doesn't mean that it necessarily needs to be inefficient) is likely to stay.

FX interventions can work

IMF admits that FX intervention can be effective (a significant change in Fund's views - heretofore FX interventions were anathema), as argued in an interesting paper and an accompanying article on the efficiency of FX interventions in Latin America published on the IMF's blog.

The article's conclusions are that while "results do not detect an immediate impact of interventions on the rate of appreciation, but do find statistically significant effects on the pace of appreciation: on average, increasing interventions by 0.1 percent of GDP will produce—in one week and in comparison to a country that does not intervene—a 0.3 percent slowdown in the pace of appreciation."

In addition, authors find that FX "effectiveness is not dependent on the use of rules or discretionary frameworks, or on the degree of transparency. However, greater financial integration may significantly reduce the effectiveness of interventions. In fact, intervention is more effective in Asia than in Latin America, which is consistent with the differences in financial integration across the two regions" and that "interventions are most effective when there are signs of the currency being overvalued compared to its recent history. This is especially noticeable in Latin America and highlights the importance of intervening “when the time is right,” and never “too early”."

Something for our policymakers to ponder?

On happiness and GDP

Samuel Brittan, a columnist at the Financial Times, has an interesting take on the issue of happiness and the role of economic growth. Worth reading. Conclusions below:

What then is the alternative? It might come as an anti-climax; but I still think it is the choice utilitarian one of maximising the range of opportunities open to each individual. And I see the task of policy largely in negative terms; to remove obstacles to the exercise of individual choice rather than lots of fussy interventions on our behalf. But I must be frank and say that even such negative policies involve in my view a degree of income transfer towards the poor and less fortunate, which not everyone in this audience might welcome.

For about three quarters of the world's population a measure of success will still be real GDP per head, corrected for the worst absurdities, and supplemented by a few simple social indicators. But for the more affluent populations of North America and western Europe, economic growth in this sense is no longer a sensible objective of policy. It is much better that the growth rate should emerge from peoples own choices. So it would not be a disaster if after the recent traumatic events Americans adopted a quieter lifestyle with more emphasis on leisure and reflection, and working to live rather than living to work.

We should not throw out the baby with the bath water. GDP statistics will still remain useful for economic management and for looking at the way the national product is divided between different activities and different groups. Information on these matters should not take us along the road to serfdom. Indeed I have heard American friends observe that the social scientists who have been least tempted by collectivism are those who have the most detailed knowledge of the relevant facts and figures.

My conclusion is that the pursuit of happiness is and should remain a personal matter; and the people most likely to achieve this are not those who keep on asking themselves whether they are happy or unhappy, but who find worthwhile purposes and activities and concentrate on them. By all means make use of attitude surveys and similar devices; but let us do so first and foremost to satisfy our curiosity and not imagine that we have found the magic lodestar which has eluded thinkers of the past.

CSR - Corporate Social (Ir)responsibility?

I have recenttly come across a number of publications/conference/seminars enthusing over the idea of CSR.

Now, I am in favor of any corporate actions that improve social welfare. But I have doubts at the same time whether by focusing on CSR we are not actually losing track of something else.

Specifically, can companies be considered "socially responsible" when they "optimize" taxes, thus reducing tax revenue, undermining productive public spending (roads etc) and--ceteris paribus--increasing tax rates for consumers, who need to pay more because of lower CIT revenue? Just read this shocking NYT's story on General Electric, which despite having earned almost $15 billion dollars in profits in 2010 have not only paid nothing to the US Treasury, but even claimed a $3.2 billion refund! Given the nominal 35% CIT rate in the US, GE should have paid some $5 billion of taxes on its worldwide income. This compares with $160 million that GE spends on CSR per year, that is 3% of the amount that it should have paid in taxes. How socially responsible is this?

And what about companies that may be spending on a lot on CSR but focus their business on selling overpriced products that consumers do not need, often on the basis of misleading information? Let's take Danone, a French food company and one of the global CSR leaders. It produces Actimel and Activia, dairy products with added bacteria, which cost a multiple of a price of regular milk and yoghurt and--against the claims of the company--have no proven impact on health whatsoever? The company recently lost a case in the US and had to pay $21 million in damages (read this and that). How socially responsible is this?


I leave it to you to decide.

IMF debate on the lessons from the crisis

Here is a link to a summary of a recent IMF conference on the lessons from the crisis featuring the luminaries of global economics, Blanchard, Stiglitz, Spence, Romer, Rodrik and others.

Here is the conference program, with video recordings.

Finally, here is Blanchard's, IMF Chief Economist, view on what we should learn from the global crisis going forward.

M. Gandhi - perceptions vs reality

A friend of mine suggested reviewing a riveting article by Sulman Rushdie on Mahatma Gandhi. What a joy to read for such a contrarian like me! You will know why when you read it, but just let me give you a couple of more saucy quotes below for you as a foretaste:

"He believed passionately in the unity of all the peoples of India, yet his failure to keep the Muslim leader Mohammed Ali Jinnah within the Indian National Congress's fold led to the partition of the country"

"His entire philosophy privileged the village way over that of the city, yet he was always financially dependent on the support of industrial billionaires like Birla. His hunger strikes could stop riots and massacres, but he also once went on a hunger strike to force one of his capitalist patrons' employees to break their strike against the harsh conditions of employment."


"The creator of the political philosophies of passive resistance and constructive nonviolence, he spent much of his life far from the political arena, refining his more eccentric theories of vegetarianism, bowel movements and the beneficial properties of human excrement."


"Forever scarred by the knowledge that, as a 16-year-old youth, he'd been making love to his wife Kasturba at the moment of his father's death, Gandhi later forswore sexual relations but went on into his old age with what he called his "brahmacharya experiments," during which naked young women would be asked to lie with him all night so that he could prove that he had mastered his physical urges. (He believed that total control over his "vital fluids" would enhance his spiritual powers.)"

"It is probable, in fact, that Gandhian techniques were not the key determinants of India's arrival at freedom. They gave independence its outward character and were its apparent cause, but darker and deeper historical forces produced the desired effect."

Nationality of banks matters; the IMF's psychodrama

Vox.eu has published two interesting articles.

The first one argues that nationiality of foreign banks matters, something which only now after the crisis is closer to mainstream thinking.


The second one provides a nice overview of the recent report by the Independent Evaluation Office on why the IMF failed to anticipate the crisis. Fascinating read. As former IMF staff member, I couldn't agree more.

PWC's "The World in 2050"

Following HSBC, PWC published its own economic predictions in the report on "The World in 2050"

All my objections to the HSBC report equally apply to the PWC report (see the previous post).

I am getting tired of this baseline and standard thinking, which is condemned to be wrong.

Open world's databases to everyone!

The World Bank has just opened its vast database to the public, creating an ultimate global public good (youtube movie).

All countries in the world should do the same. There is no reason to hide anything. In Poland, the infamous GUS, the national statistical office, should take the lead.

HSBC's forecast for "The World in 2050"

Jealous of Goldman Sachs, HSBC has just published its own sweeping report on "The World in 2050"

The report is quite good, well written and argumented and based on a broadly correct model.

Alas, the report, like many others, is wrong about Poland and New Europe.

It projects that in 2050 Poland's economy will be ranked only in the 24th place globally in terms of its size, no change relative to today, behind Egypt, Argentina, Malaysia, Thailand and even the Netherlands.

The projections are based on a Barro-inspired macro model, which takes into account the starting level of GDP per capita (since it is easier for poorer countries to grow faster than it is for richer ones) and assumptions as to the demographic trends, the quality of human capital and economic governance.

Let me explain why these projections for Poland are wrong.

The main reason why Poland is projected not to do too well in the future is the expected demographic decline. The model assumes that the fertility rate in Poland will remain low at 1.3 and that there will be no immigration. Both assumptions are incorrect.

First, the fertility rate in Poland is already increasing, exceeding 1.4 in 2009, up from 1.3 in 2003. What is more important, pressed by the society and rising future pension costs, the Polish government will have no choice, but to enhance its pro-family policy (I admit though that some serious pushing will be needed). It is already happening, with, for instance, the new law on infant care, but much more is to come soon. As a result, fertility rates will increase, although I am convinced that for social reasons (the fact that the social role of women in Poland has permanently changed), the fertility rate will never exceed 2.0 again.

Second, Poland is set to become a big recipient of immigrants, reversing the 300 year old trend. This is because with rising income Poland will become more and more attractive. When Poland's GDP per capita rises above 70% of the EU average, similarly to Spain in the mid-1990s and the Czech Republic recently, it is likely to start receiving substantial immigration flows. I bet that by 2030 at least two million immigrants will have arrived to stay. More immigrants will come later, legal or illegal.

As a result, the projected demographic decline in Poland will not happen.

There are also other reasons why the projection for Poland is too pessimistic.

First and foremost, HSBC model understates the historically unprecedented increase in the quality if human capital in Poland and the permanent improvement in the quality of governance, owing to the EU accession.

As to the former, the model ignores increasing returns from the fact that already today almost 20% of population has a tertiary education degree, up from 7% in 1989, and that the ratio will steadily increase as Poland continues to churn out 2 million of graduates a year (maintaining 18-24 scholarization ratio above 50%). These millions of newly educated people only now enter the labor market; and they will be there for another 50 years to come, producing the Polish growth miracle and its real XXI century Golden Age. Separately, I also think that the used data on average years of male schooling taken from Barro and Lee database are off the mark (mostly outdated). It would be better to take the most recent PISA OECD data, measuring educational outcomes rather than inputs, which shows that functional literacy of Poland’s 15-year olds is higher than the OECD average, despite Poland’s GDP per capita and educational spending being at the very bottom of the group (you could say that we are producing pretty intelligent young people on the cheap).

As to the latter, the quality of economic governance (including rule of law etc), the soulless HSBC model does not take into account the much lower risk of policy reversals in Poland relative to other emerging markets, courtesy of the EU straitjacket (just see what happens to Orban’s Hungary...). The historical, structural and permanent break in governance scores is ignored, understating the projected growth rates for Poland and overstating these for other emerging markets. Finally, it is simply wrong for HSBC to crunch numbers based on the assumption that Poland’s rule of law is of the same quality as in Turkey and that it is weaker than in Saudi Arabia or China (really?). But this is a minor quibble relative to all other objections, which--granted--would apply to most/all long-term macroeconomic models (with the HSBC model likely being one of the best).

See more arguments in my Golden Age paper. I will also write more about it in the upcoming sequel soon.

Kolodko's forecast for 2011 and beyond

Prof. Grzegorz W. Kolodko, my boss at TIGER economic think-tank and Poland's former Deputy Premier and Minister of Finance (1994-97 and 2002-03) gave an interesting video interview to "Puls Biznesu", a Polish business daily. Recommended for the Polish readers of the blog.

He talks about the prospects for Poland's accession to the euro zone, the turbulence in Western Europe, growth prospects for Poland, Europe and the world, the inevitability of tax increases in Poland and the virtues of Wikileaks.

Why Americans have it easy and why they should be more humble

The Economist has an interesting debate on whether "the language we speak shapes how we think". The conclusion seems to be that this is indeed the case, at least to some extent.

If so, English-speakers have it so much easier to succeed in today's world since it monopolized by English and--perhaps even more importantly--by the English-language, Anglo-Saxon media (The Economist, Financial Times, WSJ, NYT plus all the movies, music etc etc).

English-speakers, mostly Americans, have shaped the world and the global debate in their own linquistic, cultural and philosophical terms. This gives them an unprecedented advantage over other nations, whose citizens need to not only learn to speak English as well as native speakers do, but additionally they also need to change the way they think to be understood properly in the new language.

The bottom line is that I understand the frustration of the French, who struggle to "express themselves" in so many ways. Americans, in turn, should acknowledge that some of their global achievements are not due to their inherent "genius", but simply to that fact that the world is stacked in their favor, including in linguistic ways.