Lower unionization associated with increased inequality: IMF F&D

Florence Jaumotte and Carolina Buitrom report “strong evidence that lower unionization is associated with an increase in top income shares in advanced countries during the period 1980-2010”. Read all about it in this issue of Finance & Development, the IMF’s quarterly magazine.

Jobs & Inequality: Special Feature in Finance & Development

• Declines in unionization have been associated with increases in inequality. The conjecture that the rise in inequality is not just due to trade & technology but to changes in bargaining structures has often been made, including in a very recent NYT column by Nick Kristof. My colleagues Florence Jaumotte and Carolina Buitron present systematic cross-country evidence to show that declines in unionization are associated with increases in the share of income going to the top 10 percent.

• The installation of ATMs did not lead to a decline in the number of bank tellers. At a time when we are told robots may replace us all, Jim Bessen’s article offers this concrete example of hope that technology does not lead to widespread unemployment. Technology however can be associated with increased inequality.

• “Wages are set to grow faster than productivity, at least over the medium term”. That’s the bold prediction from the ILO’s Ekkehard Ernst. But again, inequality’s the rub: “the bulk of that [wage] increase will accrue only to a small group of skilled workers, no more than 20 percent of the global workforce.” 

• The share of immigrants has been quite stable at about 3 percent of the world population since 1960. The World Bank’s Caglar Ozden offers an excellent reminder of the benefits of immigration to society. He contrasts this with the fact that, despite the perception, immigration has remained stable. The result is wage differentials for fairly similar work: “Nurses make seven times more in Australia than in the Philippines; accountants six times more in the United Kingdom than in Sri Lanka; and doctors five times more in the United States than in Egypt—in purchasing power parity terms”.

Near-term outlook:

• The global unemployment rate has returned to its pre-crisis level of 5.6%. But employment growth remains sluggish—about 1.5 percent a year instead of over 2 percent a year before the crisis. See “Picture This” and my article “Seven Lean Years” for details on the global labor market outlook. The labor market outlook for Europe remains dismal. 

• “Without strong growth, it will be difficult to make a sizable dent in (European youth) unemployment.” My colleague Angana Banerji shows that “changes in economic activity explain on average about 50 percent of the increase in youth unemployment; in the case of Spain, poor growth accounts for 90 percent of the increase in the youth unemployment rate during the crisis. Also read the poignant stories of four young people from Bosnia, Egypt, Japan, and the United States.

• Sharan Burrow, General Secretary of the ITUC: “It is time to get the global agenda back on track, making job creation the foremost priority. Another six years of global employment stagnation, accompanied by outright depression in some countries, is unacceptable.”

Global Housing Watch Newsletter

The February issue includes:

1. IMF's latest assessment on Canada's housing market and a new working paper on differences in house price behavior across advanced and emerging markets.
   
2. Experts views on how diverging monetary policy rates and currency volatility will affect housing markets.
   
3. Was fraud a cause of the U.S. housing crash of seven years ago? Yes and no, says new research.
   
4. Other views and analysis on housing markets:
   
• Cross-country work: two reports from a World Economic Forum initiative on detecting when and why housing bubbles emerge and how consequences can be mitigated. Another report from McKinsey Global Institute that examines the evolution of debt across countries and assesses the implications of higher leverage in the global economy. Also, a tool that map the institutional components of property markets and evaluate their effectiveness, developed by Center for International Private Enterprise and the International Real Property Foundation. Finally, the latest house price developments by the BIS.
  
• A new book: Zillow Talk: The New Rules of Real Estate by Spencer Rascoff and Stan Humphries
  
• Country specific: Australia, Belgium, Canada, China, Denmark, Germany, Hong Kong, India, Israel, New Zealand, Peru, Sweden, Singapore, Spain, Switzerland, United Kingdom, and United Sates.

Read the full newsletter here. 

Uncertainty and U.S. Unemployment

My new paper with Sam Choi updates (through 2014:Q3) estimates of how much uncertainty has contributed to U.S. unemployment (particularly long-term unemployment) during the Great Recession. Our measures of aggregate and sectoral uncertainty are both back to pre-crisis levels. Consequently, the contribution to uncertainty to long-term unemployment has diminished considerably since 2010.

Our aggregate uncertainty measure is the realized volatility of S&P 500 index returns, similar to Bloom (2009). We find that aggregate uncertainty contributed to long-term unemployment in 2009 and again in 2012. Our sectoral uncertainty measure is the cross-section dispersion in industry excess returns. We show in the paper that this measure of uncertainty tends to have more persistent impacts on unemployment than aggregate uncertainty. The contribution of sectoral uncertainty to U.S. long-term unemployment peaked in mid-2010 and has declined steadily ever since. The main reason for the decline in long-term unemployment form 4 percent in mid-2010 to 2 percent in 2014 is the resumption of growth (the contribution of growth is shown as part of the other factors in the chart above).

New Results on Capital Account Liberalization and Inequality

My talk at the New School today included an update of results on the impact of capital account liberalization on inequality (with Davide Furceri and Florence Jaumotte). In past work, we had shown that liberalization leads to an increase in inequality in advanced economies -- see this F&D article and VoxEU blog and the discussion of these results by Paul Krugman. The results for a broader group of countries are given in this paper; a Cliff's Notes version of the paper is given here, with an associated PPT.

House Prices in Slovenia

House prices are are still declining in Slovenia, according to the latest IMF economic report on Slovenia.

Tom Sargent on U.S. and Europe: A Blast from the Past

Nobel-Prize winner Tom Sargent has an op-ed in the WSJ. Some of it was in an interview he did with me a couple of years ago.

Loungani: Europe’s fiscal challenges are foremost on minds here. This is something you have worked on in the past—the interplay of monetary and fiscal policy. 

Sargent: Yes. I think Europe can learn from the U.S history. In the 1780s, the U.S. consisted of 13 sovereign states and a weak center. The states could levy taxes, the federal government could not. Government debt, federal plus state, was 40 percent of GDP, very high for a poor country. It was a crisis. Creditors worried that they could not be repaid. 

Loungani: How was it resolved? There wasn’t an IMF … 

Sargent: Well, in the end the outcome was that the U.S. founding fathers rewrote the constitution so that it gave better protection to creditors. The constitution reflected a grand bargain: the central government bailed out the states, and the states gave up the power to levy tariffs. Knowing that the federal government had the power to raise tax revenues gave creditors reassurance that their debts would be repaid. 

A fiscal union 

Loungani: You’re saying the present U.S. constitution was adopted to give better protection to creditors? 

Sargent: Yeah, makes me sound like a Marxist, doesn’t it? But it’s all there in our history. Alexander Hamilton was basically creating a fiscal union—bailing out the states in return for a transfer of tax-levying authority to the center. And the point of a fiscal union was to change the expectations of creditors about the chances of being repaid now and in the future. Note, by the way, that the U.S. had a fiscal union before it had a monetary union. 

Loungani: So what are the lessons for Europe today? 

Sargent: Don’t some aspects of the EU today remind you of the historical experience I’ve described? The member states have the power to tax, not the center. Many EU-wide fiscal actions require unanimous consent by member states. But reforms that could lead to a fiscal union are being proposed, as they were in the U.S. in the 1780s. I think at the very least the historical episode—not just the one I described but several others that I could—shows that many configurations of fiscal and monetary arrangements are possible, and some of these work to provide assurance to creditors that there will be enough tax revenues to service the debt. I offer this as hope, but I must say that I am not an expert on day-to-day European economics or on their politics. 

Curing U.S. unemployment 

Loungani: You are an expert on the U.S., and particularly on unemployment, which you’ve also worked on over the years. What would you do about the high U.S. unemployment rate? 

Sargent: I would deal with the fundamental causes of financial crisis—the housing market particularly, where there are debts that haven’t been settled and people can’t yet see how they will be settled. And then to the extent that uncertainty about the course of government regulations is holding things back, I’d tackle that. 

Loungani: That could take time. How would you ease the pain of the unemployed in the meantime? 

Sargent: Some of the European countries, Germany and the U.K., have the right idea. They seem to do better on what’s called welfare-to-work programs—ways of helping the unemployed get into new jobs. We could have done more of that here in the U.S. 

Loungani: We extended unemployment benefits many times. Were you in favor of that? 

Sargent: I worry that can be a trap—we could end up with persistently high unemployment. 

Loungani: Why? 

Sargent: You have to go back to the basic ideas in the work that I’ve done with colleagues over the years. Our work builds on the finding that after about 1980 something changed. The [adverse] hits that people suffered to their incomes became more permanent in nature. In the jargon of our profession, the volatility in the permanent component of earnings increased; workers were more likely to suffer permanent shocks to their human capital. Tom Friedman’s The World is Flat has many examples of all this and the reasons why it happened. So we talk about the Great Moderation at the macro level but for individual workers it was just the opposite. 

An unemployment trap 

Loungani: How does this lead to the trap? 

Sargent: Well, think about what can happen when workers suffer a permanent hit to their incomes, and you offer then the alternative of generous and long-lasting unemployment benefits. For older workers, particularly, the benefits become an attractive option relative to looking hard for another job, which is not going to pay as much because your human capital just took a hit. And getting retrained is hard. I mean I was just 30 when my human capital was hit. You know I went to Harvard, right? I actually got pretty good at playing around with the IS/LM model, which is what I learnt there. And then a new thing—rational expectations—came along and I had to learn all this math and it was hard. Well, if you’re in your 50s you’re not going to be eager to try out the hard things. You’ll try to get by with the unemployment benefits. You end up with lots of workers who are detached from the labor force. I think that’s what happened in Europe in the 1980s. They’d always had more a generous welfare system but the impact of that wasn’t felt until the nature of the shocks to incomes changed in the manner that I described. 

Loungani: Yes, the interaction of shocks and institutions. Olivier Blanchard once said when the shocks changed Europe became like someone wearing a winter jacket in the summertime—the labor market institutions curbed flexibility when it was needed. 

Sargent: Exactly. So I think the people who want to keep extending U.S. unemployment benefits have the right motives but we can end up in the wrong place—a world of persistent high unemployment. So, while in the case of fiscal institutions Europe could look to early U.S. history, in the case of labor market institutions, the U.S. should keep in mind the European experience of not so long ago. 

Oil Prices and Employment: Some Evidence from US States

A new IMF working paper finds that an addition of an oil rig "results in the creation of 37 jobs immediately and 224 jobs in the long run, though our robustness checks suggest that these multipliers could be bigger." 

Is Manufacturing Still a Key to Growth?

In a new OCP Policy Center paper, Uri Dadush of Carnegie and OCP writes: "The paper has shown that, over the last thirty years, many economies have been able to double their per capita income and achieve large improvement in other development indicators without relying principally on manufacturing. The main policy implication is not that the manufacturing sector should be shunned or ignored, but that the view that a large manufacturing sector oriented towards world markets is essential to a rapid advance in living standards is mistaken. Instead, policy needs to recognize that, in a globalized economy, all sectors can improve by learning from those at the technology frontier, that many possible sources of comparative advantage exist, and that careful macroeconomic management and flexible exchange rates are a preferable way to maintain external balance than interventions in specific sectors."

International Jobs Report: It's Not Just About US

The U.S jobs report to be released today is expected to show strong job creation. How do things look outside the U.S.? The new International Jobs Report shows that the global unemployment rate has returned to its pre-crisis level. But emerging economies are doing better than advanced economies; and within advanced economies, the U.S is doing better than the rest.

The Secret of the (Economic) Universe

According to Krugman, the secret of the universe is:

It’s like the sign you see outside some restaurants: “Come in and eat or we’ll both starve”

Labour mobility in the EU: dynamics and policies

"Labour mobility between countries within the European Union, and within the euro area, is relatively low, especially compared to mobility between States in the United States. Nevertheless, the enlargement of the EU over the previous decade led to substantial migration from new Member States of Eastern Europe to Member States in the west. Furthermore, since the crisis, there have been significant migration flows, as unemployment rose in the hardest hit countries and unemployment rates diverged widely within the euro area." Continue reading here. 

See my presentation here that gives some background on this discussion.

Persistent Overoptimism about Economic Growth

Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Continue reading the FRBSF Economic Letter here.

On Groundhog Day, Honoring A Forecasting Giant

       

This Groundhog Day I want to honor economic forecasters—and one in particular, Herman Stekler—rather than make fun of them, which is what I’ve tended to do on past Groundhog Days. Herman has had a 60-year career in forecasting and is still making predictions on everything that moves, including Super Bowl games. He recalls that the interview for his first job at Berkeley “occurred during the famous NY Giants–Baltimore Colts championship football game of 1959. I was a Giants fan, and when I left my hotel room they were ahead; I forecasted the final outcome incorrectly.”

Herman believes that forecasters should predict recessions early and often: “… the cost of a recession is so great that a forecaster should never miss one … Some people argue that turning points are unpredictable. I disagree. I have never had trouble predicting recessions. In fact, I have predicted n+x of the last n recessions.”

Herman’s colleagues and friends organized a conference on his 80th birthday and the proceedings have just been published in a special issue of the International Journal of Forecasting. The conference versions of the papers are available here.

The issue has an article by Fred Joutz, Tara Sinclair and me, which summarizes Herman’s extraordinary career—the early work on forecasting turning points and why forecasters seem to miss nearly every one of them; the first forecasting assessments of the Fed’s Greenbook forecasts; and much more.

Forecasting is difficult and I honor the people who have to do it. My own interest in the topic was triggered by my awful forecasts for growth in the Asian crisis economies in 1997-98. I have continued my own “astonishing record of complete failure” by completely failing to forecast the recent sharp decline in oil prices. I did call the Patriots-Seahawks outcome correctly.

Global Housing Watch Newsletter

This newsletter aims to present a snapshot of the month's news and research on global housing markets. If you have suggestions on new material that could be included, you can send it by clicking here. The January 2015 issue includes:

• IMF issues report on housing markets in Denmark, Ireland, the Netherlands and Spain

• The impact of decline in oil prices on housing

• Housing affordability emerging as an issue

• News and research for the following countries: Brazil, Canada, China, Germany, Hong Kong, Israel, Netherland, Norway, Philippines, Singapore, South Korea, United Kingdom, United States, and cross country research. 

Read the full newsletter here.

House Prices in Advanced and Emerging Economies

In a new paper, Alessandro Rebucci (Johns Hopkins University) and his co-authors have assembled a database that expands the availability of historical house price data for emerging markets.The authors used this database to study the impact of increased global liquidity—an increase in the international supply of credit—on house prices. The paper finds that an increase in global liquidity by 1 percent of world GDP raises house prices in emerging markets by 3 percent, over three times the impact in advanced economies. Read the paper here and the FT article on paper here.