The rich world needs higher real wage growth
economist.com
economist.com
Oil is $75, about average over the last decade. It has almost nothing to do with employment, wage growth or GDP except inasmuch as all major economic measures affect eachother. A year ago oil prices were low, did that mean the opposite of this article (whatever that is) was true?
This kind of writing leans very heavily on its metrics, euphemisms and cliches. I have a feeling the journalists would not be able to unpack any of its abstractions.
"If slack were eliminated everywhere, pay might rise faster." _.._"hawks think there is little room to boost real wages by running labour markets hotter." _.._"structural changes in the economy, rather than weak demand alone, have stacked the deck against workers."
...If asked, would the writer be able to give a specific examples or instances for any of these? Are "labour market running hot" or "central bank tightening" references to actual things that are happening or are these just boilerplate sentences that get added to any article?
I really don't see how anyone is more informed of anything, even about the authors' opinions, from reading this.
Continued tightening in labour markets might yet boost workers’ bargaining power enough for that to happen, as was the case during the late 1990s and late 2000s, two unusual periods in which labour’s share of GDP rose across the rich world.
Labour’s share of GDP is a fraction. labour/gdp. you can make it bigger by having higher wages or lower gdp. Anyone remember 1999 or 2008? Anything "unusual" about those years?
And that increasing wages for labor is in fact capital's least-preferred option.
Which would be sad, but more or less jive with how the modern global, publicly traded economy works.
How do you measure this?
Recessions hit the lowest rungs of the economic ladder hardest, and those same rungs are last to fully get in on the recovery. Hence, labor's share of GDP tends to be highest at the end of the business cycle... which necessarily coincides with an imminent recession.
Yes. Unemployment is very low. That means if you need ten people, you may have to pay more or wait longer than you expected. That is what “labour market running hot” refers to. “Eliminating slack” means encouraging employers to raise wages (which can cause inflation) to fill productive jobs.
“Central bank tightening” refers to the Federal Reserve reducing its balance sheet and raising rates. There is a Fed meeting later this year when target rates are expected to be raised, partly in reaction to said labour market.
I agree that the financial press could afford to be less jargon heavy.
Is it telling me that when unemployment is low, central bank policy is to raise interest rates? If so, why not say that? What I meant is that generally I don't see how the sentences in this article add up to .. an article. It's a bunch of metrics, chosen by convention, expressed in cliche. It kind of sounds like it's telling us a theory or opinion about something, but it isn't really.
Raising rates aren’t the only way to solve the problem of (a) people who could be in the labour market but aren’t and (b) insufficient labour in the places it needs to be.
Whatever it’s trying to do, it got me thinking about barriers to hiring in New York City. Are there steps we could eliminate or consolidate? Last week’s primary just saw my former bartender and taco server effectively become a Congresswoman for Queens. An article about the central bank and unemployment would not have prompted me to consider discussing this with her.
Why not discuss it with her?
I would have never tried the pastrami taco if it hadn’t been for her!
> Why not discuss it with her?
She’s campaigning. Not sure distractions would help. In any case, these sorts of proposals benefit from specificity. Next steps are doing homework and proposing specific rule changes.
Let’s not take pastrami tacos for granted.
https://www.washingtonpost.com/politics/2018/live-updates/mi...
They’re actually a brilliant fusion of American Hispanic and American Jewish traditions. As it happens, her district has prominent populations of each.
Source? (Genuinely curious.)
Based on the wealth and income demographics of her community, democratic socialist policies would be net benefit.
The part where someone has to compete for ultra-scarce housing in and around NYC.
You may dimly recall from your undergraduate Macro courses a relationship between unemployment and inflation called the Phillips Curve [0], which is used to evaluate one of the "dual mandates" the Fed tries to fulfill with its interest rate setting policy.
The problem, of course, is that there is evidence from the Fed's own research that suggests that the Phillips Curve is balderdash [1]. That doesn't stop central banks (including the Fed) from pretending it's still true, though.
[0] https://en.wikipedia.org/wiki/Phillips_curve
[1] https://www.philadelphiafed.org/-/media/research-and-data/pu...
I can’t recall a major central bank basing a policy decision on the Philip’s Curve since the 1970s.
12:29 pm
The Philips Curve is alive, [Federal Reserve Chair Janet] Yellen says.
So the Philips Curve posits that there is a relationship between the degree of slack in the labor market and inflation, and it is an empirical relationship that, while not absolutely tight, has been a consistent relationship over time, and I believe that relationship still holds.
https://www.c-span.org/video/?406675-1/federal-reserve-chair...
> there's considerable support for the idea that an inverse relationship between unemployment and inflation exists at least in the short run
Would you care to cite some? I'm certainly familiar with the post-70's forms of Phillips Curve theory (it's discussed in the very Wikipedia article I linked). But I also cited a 2017 paper from the Philadelphia Fed that looked very hard for such a relationship and couldn't find one, and which itself cites prior research going back to 2001 that agrees.
If you reallocate money without creating new currency, what you get isn't really inflation. Prices may adjust because the demand for things lower income people buy increases and the demand for things higher income people buy decreases, and prices follow demand. But supply and demand isn't inflation.
And that effect is present for any method of reducing wealth inequality. If we had less inequality, people who are currently poor would then have more money and use it to buy things. If those things are scarce then their prices will increase.
It's like saying we shouldn't decrease homelessness because it may increase energy prices when the new homeowners have to heat their new homes. Even if it's nominally true, the implication that the cost outweighs the benefit is ridiculous.
And if you're really worried about high prices, the way to combat them isn't to denigrate efforts to increase middle class wages, it's to address artificial scarcity in markets like housing.
You’re forgetting about velocity. A dollar in a middle class earner’s hands gets spent faster than a dollar in a billionaire’s. That faster spending stokes both growth and inflation.
Billionaire's don't hoard cash. Money they don't spent is all invested. Billionaires know how to manage money, and don't pile it up in Scrooge McDuck cash vaults.
Velocity’s relationship with income is well documented. (Note, too, that velocity most properly measures the purchase of goods and services. Transaction velocity also includes investment. Even that goes down as income goes up.)
Even so, I seriously doubt wealthy people have non-trivial amounts of money in checking accounts, because the interest paid on them is nearly non-existent. Wealthy people know how to manage their money, and investing it in 0% checking accounts, stuffing it in mattresses, or burying it in tin cans are all terrible investments.
Drug dealers wind up with large blocks of cash because they have difficulties laundering it so they can invest it. The idea that anyone else has pallets of cash in their basements is sheer nonsense.
https://www.investopedia.com/articles/investing/022416/why-b...
Banks keep as little cash as possible, because (again) cash does not earn money. They try to lend out as much as possible. The people who borrow money don't sit on it, either, who wants to pay interest on money sitting in a pile?
The whole cash hoarding theory is nonsense.
https://www.frbsf.org/economic-research/publications/economi...
But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement.
You'd think that professional bankers would understand this.
Here's the salient quote from the paper:
"Surveys show low-income households tend to spend a larger share of their income than high-income households. Because of this, temporarily redistributing income from the rich to the poor could stimulate consumption and, through that, the economy as a whole."
Yup, that's the "rich people hoard cash" theory.
As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it?
I could certainly imagine situations where someone owns a lot of wealth but never developed the skill to manage it - classical example being inheritance.
Also (unrelated to the argument), "investing" != "put to good use". If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. (Except in an abstract "stimulating the economy" sense. But if that is all you want, you could just spend all your money continuously digging holes and filling them again.)
There's no rational reason to borrow money and make a pile out of it.
Even people who operate cash businesses (like casinos) rush to deposit the cash in a bank ASAP.
> If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else.
Actually, it does mean just that. An investment is giving someone else money to do something productive with that money. That person will take their cut, and so benefit.
Look at the Dairy industry in the United States. Wal-Mart has vertically integrated the dairy industry into itself, as a result, many smaller regional farmers no longer have a market at all since there is no way to compete with someone who is so well integrated that they can SELL AT A LOSS in dairy, yet compensate by making up for it with social engineering via loss-leading.
https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-f...
You CANNOT sit idly by and say that investment is ALWAYS a positive societal good when by definition, the "rational invester" (read: paperclip maximizer for ROI) will naturally tend to converge on creating monolithic structures, which, by their nature as "rational corporate actors" act as, again, paperclip maximizers for profits.
Balance sheets do NOT accurately convey the full story of economic processes at work creating tangible effects in the real world, any more than meteorological climate models do.
If you take into account side effects caused by collectively funded (via rational investment methodologies) creating monolithic industry-consuming behemoths, then the idea the rich are "hoarding money" makes perfect sense.
Wal-Mart in this case is doubling down on automation, and keeping what payroll it pays low, so it's not actually acting to distribute wealth back to those who are so strapped they can't even think of investing, because they need to put the next meal on the table.
EVEN if they could statistically speaking, the most wealthy are the most likely to be able to pick up what stock they'd have to sell, because stock doesn"t put food on the table.
This creates a situation where regardless of who's hand the money is actually in, the outcome is the same. Monolithic businesses will be invested in, they'll integrate until they start creating value deserts in their space, and in order to contribute to continuing growth figures, will optimize away liabilities by minimizing workforce or salary. The only one's benefiting being those already on board.
Does it "GENERALLY" work well though? Yes and no. Yes, given the absence of any actors large enough to create value deserts through excessive vertical integration? Yes! It does!
No. I'm the sense that that isn't what the market seems to produce though. Companies will diversify, merge, or employ externalization of negative outcomes EXACTLY to accomplish making themselves the best looking target for investors.
At some point, enough has to be enough. The economy is one of the few process spaces where eternal growth is EXPECTED. No living system constrained by finite resource and time CAN grow indefinitely without causing major systemic upsets.
An equivalent solution to what Wal-Mart is doing could be achieved with networks of smaller less "fiscally efficient" distribution centers doing business with fewer monolithic industrial behemoths. This keeps the barrier to entry lower, leads to more opportunities for job creation, and increases financial mobility overall. This is something that CAN't exist with uncontrolled maximization of ROI by investors, and profits by corporation. At some point enough HAS to be enough.
Maybe I'm not an economist, but I've seen enough complex systems to recognize when blind spots exist in current modeling. This is something I see never get addressed.
I didn't say it was. I was responding to "beneficial for anyone else".
> value deserts
I'm sorry, but this is nonsense.
There are some sound reasons for redistributing money from the wealthy to the poor. Benefiting the economy because the rich are hoarding money or are incompetent investors is not one of them.
Again, look at Wal-Mart and dairy. Alphabet\Google does the same with digital advertising.
I'm not saying people are crap investors either. I'm saying the definition of a "good investor" (maximize fimancial ROI) and a "good company" (maximize financial profit) leads inevitably to market behemoths forming which WILL degenerate the health of the economy as a whole, and drastically increase barriers to entry for smaller players. A company as a collective stands as much as a danger when it becomes too large as it does a benefit.
A "good company" should not grow infinitely. It should grow as much as is needed to do what it needs to. That is providing it's service to it's community. No living system constrained by finite time and resources can support unceasing growth. The economy is just such a system.
-1st degree:Real wage growth doesn't happen, because investor behavior wants the most money back to them from a company.
-2nd degree: A company will try to trim "waste" by cutting immediate liabilities to the lowest they can to maintain requisite Talent.
-3rd Degree: Talent is going to go where the biggest bucks can be made, and that will be the biggest market behemoth which exists currently. The infusion of investor capital exaggerates buying power to acquire and retain Talent which would be necessary for smaller competitors to get a leg up against the behemoth"s entrenched position. This leads to value deserts, which adversely effects industry as a whole.
-4th degree: Smaller competitors die in value deserts. supply goes down, demand stays the same or goes up. Prices go up, profit goes up, return to 1st degree.
Wal-Mart captured a great deal of investor capital. In order to keep itself looking tempting to investor's it has to grow (diversify), cut liabilities (minimize wage growth, decrease employment/payroll via automation, and minimize benefits expenditures through scheduling shenanigans), or do BOTH at the same time by vertically integrating their supply chain and using loss leading's attendant benefits to undercut small producers; this pushes them out of the market, jacks up prices on the commodity when supply goes down, thereby increasing profits, thereby drawing more investment capital. Start the cycle again with the next industry.
It's called a positive feedback loop, and in nature, if they aren't compensated for, bad things happen. It just so happens that this one has a multi-generational period, so no-one has lived long enough or paid enough attention to get upset about it. If they did, I just haven't found their paper, bit I have the feeling people are starting to notice, even if they can't articulate it.
It goes back to wage growth because of the link between 1 and 2. 3 and 4 are what cause the actual societal\market damage. You can't "solve" the problem without fundamental rethink on the axiom that kicks off all of this, which is "the best investment is to dump as much money as possible into the fastest growing company", which has a sub axiom of "growth without bounds is acceptable and to be encouraged".
It ain't straightforward, but nothing about economics seems to be. If there is a glaring flaw, please enlighten me. I REALLY want to improve my understanding.
Never in my life have I ever heard of anybody (other than criminals and a few mentally ill people) with a cash hoard. Nor have I ever known anyone to do this. I've never seen any newspaper article about anyone with a hoard. Never a magazine article profiling millionaires with cash hoards. No books about it.
And yet, it is apparently conventional wisdom that wealthy people hoard cash as a general rule.
Name one wealthy American with a cash hoard.
I don’t think anyone assumes anyone is hoarding cash. It’s just a time to deployment question.
A dollar flowing into a wealthy person’s account may take a week or two to get loaned out or fielded into an investment, and another week or two to pay the investment manager or begin facilitating the purchase of goods and services. A dollar dropped into an empty checking account may buy food that day from an establishment which will sweep it out to a supplier the next day.
Our financial system is efficient, but the last time I saw a statistic for the figure, it takes about two weeks for the average checking account deposit to get turned into a mortgage.
Same thing.
Imagine a world where everyone put 99% of his income into investments. There would be nothing to invest in, because nobody was consuming.
And by this definition the poor are definitely putting the money to better use because they cause the economy to grow by spending it all.
The rich are currently facing an asset price inflation because there is too much money wanting to be invested and not enough consumption for all those assets to be put to good use.
It's like saying that a formula 1 race isn't faster then a car parked on the start line because it ends up at the same place. It ignores the times the car goes around the track.
It also presumes that a choice of an investment is as good as the free market in distributing capital effectively.
At a fixed money supply, growth causes deflation. People want to engage in more transactions and they need money to do it, which increases demand for currency.
You often see inflation during periods of growth because when there are high returns to be had, people take out loans to expand and banks making loans creates new money. The new money causes inflation. But if you really didn't want that to happen, it's simple to prevent it by requiring banks to hold more reserves (so they won't make as many loans).
But it's not clear why preventing moderate inflation should even be desirable. If you get a 10% raise at the same time as prices increase by 4%, who's complaining? You're up 6% annually and your mortgage, credit card debt and share of the national debt are down 4%.
True. This is the problem with fixed money supplies.
We moved past fixed money supplies several decades ago. My statement stands true in any modern context. Rich households spend slower than poor households.
Raises aren't automatic, they often have to be fought for. Especially in the public sector. What tends to happen in tones of inflation is labour unrest; people find their food prices have gone up by 10% so they need a >10% raise urgently, taking to the streets if necessary.
For the present problems of overly high inequality and falling productivity, indeed, the correct solutions probably run opposite to the "solutions" to the '70s stagflation crisis (wage repression and deflationary monetary policy).
Real unemployment and under-employment are high because of the way unemployment is now measured. The definition of being unemployed has changed since the GFC to manipulate the statistics.
Some tricks to manipulate the numbers are:
- If you have been unemployed for more than 6 months you are no longer classified as unemployed.
- Work for one hour a month, say mow your neighbor's lawn or give someone a paid ride in your car and you are no longer unemployed.
- Give up an stop looking for work, and you're no longer unemployed.
Looking at different indices at different times is obviously going to skew the results, but that's the fault of the person doing the looking, not the BLS, Obama, or the Deep State.
I think you might be confusing cyclical and structural unemployment with your first point. I think it is valid to talk about the two numbers separately as they deal with pretty different problems (labour market liquidity/efficiency versus skills shortages).
The employment rate is at an all time high in many countries.
As for point 2: employment in the black economy is usually not included in official employment figures; people who want to work more hours are classed as underemployed although data on this is not as comprehensive as for the other measures.
I do not think the definition of employment has changed much in the last decade. Do you have a source?
Nah, this would be the labor force participation rate - and that one took a plunge since 2008 and never recovered since.
The OECD chart linked (if you play with the sliders) shows that both are increasing globally. I know that in the UK the employment rate is at an all-time high [3].
Your link seems like it might be using a strange measure of employment [4] which excludes agricultural workers and the military in the numerator and includes all people who are aged 16+ in the denominator, so as your population ages, the indicator would worsen.
[1] https://data.oecd.org/emp/employment-rate.htm
[2] https://data.oecd.org/emp/labour-force-participation-rate.ht...
[3] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwor...
[4] https://www.investopedia.com/terms/c/civilian-labor-force.as...
When Thomas Pickety won the nobel, and got so much coverage, the economist ran some article structured pretty much like this one. All jargonized, cliched & euphamised language.
I'm not upset at the economist's positions, political orientation or such. I'm upset with the "Quantum Healing" style of pseudo-argument that is now dominant in their economic writing. They are using economic terms. They are saying sentences that are true, just not meaningful in the context. Then they flavour this with vaguer, more abstract sentences which sound more meaningful while being less meaningful.
The problem is not with the reporting, it’s with the field. Economics is pseudoscience. It has all the trappings but none of the explanatory or predictive abilities. So you get articles like these that use a lot of jargon pretending like they’re making a strong case, but there’s no strong consensus position reached here beyond the bare observables.
Economics can’t be a science yet. It is a branch of sociology, modelling the economic behavior of people, and we lack the sociological insight to do that currently.
Macroeconomics, yes. Microeconomics is a proper science. It has theories which make predictions which can be demonstrated in experiments.
Theory of the firm is closer to a hypothesis. I’m not sure how one would experimentally verity its claims.
When Karl Popper criticised economics (and freudianism) for being a pseudo-science, there wasn't a real macro-micro divide. Adam Smith, Ricardo and the like were essentially micro-economists.
You can experiment in some very small (raise the price of a product on a shelf) ways. The bulk of economics is about how these small components interact as a large dynamic. When it comes to predictions like "increasing minimum wage will lead to increased unemployment," it's never been adequately demonstrated experimentally.
If I’m setting pricing and volumes at a firm, I don’t give a rat’s ass about the larger dynamics. I want to know how production variables will impact sales. For this, I can A/B test and rely on a deep corpus of research on queueing theory, supply and demand network and latency models, and logistical models.
But just because you don't, doesn't mean they don't exist/matter. You can do a lot on your individual micro-scale, but you will have a very hard time understanding how these changes affect the overall economy on a macro scale.
For all we know, "the market" is pretty much just a giant black box. It's not totally black, but we have a very hard time properly defining, or even quantifying, what's actually going on there.
We understand the relationship between the temperature and pressure of ideal gasses without a precise presentation of quantum mechanics. Similarly, we can produce useful production functions without comprehending the complexity of the bulk.
Economics, on the other hand, are usually considered part of the social sciences, due to the heavy sociological influences, which make modeling, predicting and testing extremely difficult.
For all the talk of "the market", especially in the financial sector and by glorifying certain successful individuals, the reality seems to be far less understood than many people would admit to. Probably has to do with these people usually trying to sell their services/financial products with a reputation for "understanding and mastering the market".
Hypothesis, experimentation, the ability to negate/falsify, some predictive ability ... Either these things are not true, or your bar for "being a science" is higher than most.
Economics is a social science, just like anthropology, archaeology, history, linguistics, political science, psychology, sociology, etc. etc.
It's never going to be something with Laws of Gravity or the like, because humans are never wholly predictable or rational creatures. But that doesn't mean we can't come up with models that explain markets a majority of the time, in a macro sense.
Why do you think central bank policy has been able to prevent a depression from occurring over the last 90 years, when in the past they were a regular occurrence? That's economics in action. Just because it lacks the certainty of computer science doesn't mean you can throw out the baby with the bath water.
Unlike those sciences there's a lot of money in economics invested in certain conclusions, though.
It does not help Walmart's bottom line, for instance, if everybody stops believing that raising the minimum wage causes unemployment.
There aren't equivalent controversies with money behind them like in other social sciences (and other social sciences don't get paid as much).
There is a strong school of thought that argues that central bank policy has created _more_ and _worse_ depressions than before.
The fact that we can now debate if a central bank is a good thing or a bad thing is evidence that it's all pseudoscience.
I was cranky at The Economist when I wrote that and I guess from the upvotes other people were too. It's a crappy article, and they shouldn't publish crap... I like the Economist, on balance.
Anyway, interesting that you bring up pseudoscience. I think most good economists, or economists on good days prefer to think of economics as just not science. Some of the founders of modern economics were also the founders of modern anti-scientism. They were the generation that experienced bloody wars between marxism, liberalism, and a highly pseudoscientific nazism. They were all backed by pseudoscientific "theories," with key elements leaning heavily on economics. ..actual wars. Karl Popper is IMO, the iconic guardian of the fine line.
These are the same intellectuals that The Economist's position alway alludes to when they get ideological themselves. open society, liberalism. It's actually not ironic. Even Hayek & Popper were sort of confused cases, having been drawn into all sorts of utopian stuff. I think it was the time. Even libertarians/anarchists became obsessed with boring technical philosophy, and all the schismatic flavours hate one another.
Sociology is a science, and so branches of it are also science. There are differences between the hard/soft or natural/social sciences but that doesn't mean that soft science isn't science.
Or is it one of those phrases that can be used to mean absolutely anything at all?
In this case, I think "structural" is a euphemism for "equilibrium state," what would happen in the economy if everything stays as it is now long enough for things to settle down.
It's nonspecific even for a euphemism. "Structure" could mean "the type of products now made in the economy." It could mean "the fact that labour markets are internationalised," as the article stops short of alluding to a paragraph earlier. It could mean "the fact that we the economy is made of fewer, larger companies."
The meaning depends a bit on the political orientation of whoever is uttering the phrase. In the neoliberal nomenclature presently used throughout Europe, "structural changes" are an euphemism for cuts to public spending (healthcare, social security, pensions, services), reduction of worker rights and wage depression.
For example, France is currently undergoing "structural changes". Ireland, Spain, Greece underwent "structural changes" as a response to the global economic crisis of 2008.
"The magazine is written by young people pretending to be old people... If American readers got a look at the pimply complexions of their economic gurus, they would cancel their subscriptions in droves."
He doesn't like the economist at all.
I don't agree in general, the economist is often good. This article (and economics generally)... I have to agree. Heavy on Oxbridge feel, light on actual ideas.
Most of what these kind of articles convey is a feel, justified by technical sounding babble that a friendly reader will assume is adequate.
Ironically, the iconic example of this kind of carry on is marxism. 93.6% of all communist/marxist writing was a sharp tongued criticism. Moral critiques of capitalism. Critical reporting on the state of the urban working class in Europe. But, Marx (and his Bougie Oxbridge readers) needed more than that though. They needed to refute "Bourgeoisie Economists" and "Liberal Political Scientists." That's why Das Capital was so important. No one read it, but owning a copy added intellectual weight to one's marxism.
Without the steady subscription revenue of the past, you can't afford to hire big name writers with decades of experience anymore.
The zip code you're born in predicts future success better than any other attribute, including IQ!
If your parents can take you in when your business attempt falls, you're in a different world than of your parents are a single mother of three, through no fault of your own.
Aristocracy is hereditary, always has been, seems to remain that way. This, is what "stacked" really means.
Whether you think this is actually bad for America or not is a different question.
- "labour markets have tightened"
- "unemployment rate"
- "unemployment was much higher"
- "fall in union membership"
- "rising offshoring"
- "outsourcing"
- "workers’ bargaining power"
- "tightening in labour markets might yet boost workers’ bargaining power" "as was the case during the late 1990s and late 2000s"
- "number of part-time workers who want full-time jobs"
- "unemployment rates that are far higher"
- "pockets of slack might constrain wages everywhere"
- "firms that are struggling to find workers"
- "If slack were eliminated everywhere, pay might rise faster"
- "boost real wages by running labour markets hotter"
Now, I'm no economist, but the picture I'm getting is that they are describing labor relations as a "market", where prices (wages) are affected by demand (companies seeking employees) and supply (workers seeking jobs). So the idea would be that when the supply of potential workers increases (because unemployment is high, or because new sources of labor are available, e.g. by outsourcing and offshoring) that tends to drive wages down, and when the supply decreases it tends to drive wages up.
The fly in the ointment of my interpretation is that there is at least one other obvious source of increased labor supply in rich countries, yet the Economist does not mention it anywhere. So I must be misunderstanding it, after all.
The interesting fact is that the loss of labor's share of GDP to capital is less than you'd imagine, and a much bigger reason for stagnant real wage growth has to do with inequality regarding compensation. Automation is real and is taking jobs, but it's executives that have been soaking up the financial gains from productivity.
If someone has $100M income after taxes, they might invest $50M reducing the ROI of the capital in economy during the economic boom when there is enough capital and cheap credit already.
What to do with the remaining $50 million? It's hard to eat, travel or use services to spend $50 million per year. It's possible, but it takes some real effort. Helicopter ride every day barely registers.
You can always buy a bigger house. $50 gets you a nice one. If you put $150 million you get even better. Property prices increase.
Also if you did suddenly get 50mil say you invest for the long term 50% the balance gives you an income < 1,000,000 a year
And that's not assuming you don't spend 10-15 mill or so on a really nice house or two one in London and one in the country.
Right now we have an unprecedented amount of capital sloshing around. When you increase the supply of capital, two things happen: The total income returned to capital goes up, and the rate of return goes down.
If you care about wage growth, look at wage growth. Looking at labour's share of GDP is going to give you a wildly misleading view in the context of large capital flows.
https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
"even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts"
One, we're all living much larger than before. i.e., our average home sizes have doubled in about 50 years, while the number of people per household dropped. [0] That's a sign of wealth more than anything else.
And two, we've all decided to live next to each other. That's a choice. It's a choice coerced by reality, e.g. jobs being in population centres like cities, but it's a tradeoff between affordability and proximity to an economic, cultural, political and social centre.
Housing in and of itself is not unaffordable, only in certain conditions. Affordable housing today would become unaffordable if we decided we wanted homes twice as big with fewer people living there. Or it'd be unaffordable if we all decided to want to live on the same tiny piece of land.
For a little context, if you look at population density in the US, it's 33 per km2 on average. That's about 5.5 football fields per person, or in other words, about 22 football fields of space for parents with two kids. Compare that to a city block in in Washington which holds 38.000 people per km2, more than 1000x the population density of the US. It looks like this [1]. This shows how concentrated we really live in some places we call unaffordable.
Most of the cost of housing actually isn't the home itself. Homes are pretty cheap to build. A 1200 square feet home for two people costs on average about $150k to build, or $75k per person. That's about 2 years of the median personal income in the US. The big expense is in the land, but only in some places. It's unaffordable because we choose to live at 1000x the population density of the average in the country. If you've got 1000 plots of land, and we all decide to live on one of them, and across 50 years double our home size and reduce number of people we share our homes with, no wonder it's unaffordable.
The solution in part has to do with building more homes, zoning laws, construction red tape. But mostly, it has to do with the fundamental fact that we live larger and more concentrated. We need an economic and cultural shift against that. Urbanisation is great, I live in a city, but we have to do away with the model of a few hotspots and decentralise more, invest more in smaller cities, remote working, and infrastructure that connects cities. There's no zoning law that keep ultra-concentration affordable.
[0] https://2static1.fjcdn.com/comments/House+size+and+family+si...
Plenty of similar sources. This occurs in many countries outside the US, too. It occurs in many countries outside the US, too.
Given the large errors I have observed in measurement of electronics and wireless plans (biased towards overstating inflation) it wouldn’t necessarily surprise me if the CPI or PCE erred in measuring the prices of housing, healthcare etc in the opposite direction (biased towards understating inflation). That said, the whole point of such measures is to record the prices of these services over time, and the measurement seems much more straightforward than for personal electronic devices(no need to account for large quality changes or changing product categories except in medicine). So if the CPI were mismeasuring such areas, it would be a fairly embarrassing mistake.
Both indexes take into account tuition, for example, but not student loan obligations, which are absolutely massive in comparison to things like electronics and wireless plan obligations. The same is true for medical expenditures, but not medical debt. And of course a huge issue is that any national measure of inflation is not accurate for people who live in places outside the median, such as cities in California where rising costs of living routinely push local CPI increases far beyond national levels (BLS does provide more local numbers, but they're rarely discussed).
I don't doubt that your data is correct, I just don't think it's very important in the scope of the overall contributing factors to real-world inflation for most people.
In the U.S CPI calculation uses hedonic adjustment in many item categories, including smartphones.
Bringing up quality when talking about wages does not seem relevant. Wages are important relative to the size fo the economy because they turn into consumption. CPI tracks that just fine. When trying to estimate economic growth quality may be more important.
Contrarians often claim "the old version was better!" It's not clear that more features is a substantial quality improvement.
Remember when you could quickly FTP a file, toss up a web page, email someone a zipped file. Can’t do any of that now without jumping through hoops.
Computers have become very slow for tasks that used to be fast. Everyone always seems to “waiting on the computer”; that’s screwed up. It should be the other way around.
Oh I remember all right. I've spent weeks of my life yelling into a phone "no PASV. You have to find where it says PASV and check it"
Toss up a web page? On what, Geocities? (back to the ftp thing are we?)
Email a file? Great. I hope its less than 2mb or it might just vanish somewhere along the way...
Dropbox. Wordpress. Slack. This stuff is 100x better for the average user than a decade ago. 1000x better than 2 decades ago.
The real trouble is all of this means just about nothing when you're afraid to go to the doctor because your deductible is more than a decent used car.
There are more rigorous ways to account for the fashion effect, but this thought experiment shouldshow that a significant part of the price difference is because of quality improvements.
Of course, I don't actually have the option to get the same experience from an iPhone 5 today that I could have 6 years ago. As an alternative, consider a budget Android smartphone manufactured today. It's possible to spend significantly less than 41% of the price of an iPhone X (or an iPhone 8, for that matter) for a device whose quality is, I suspect, better in every way than an iPhone 5. If 16%/year is taken as the true rate of quality improvement, doesn't that imply that the fashion effect has an impact on consumers who continue to purchase iPhones?
My argument is people would not pay that much for an iPhone 5 that looked like an X to other people and hence conferred its status. If people really were willing to pay close to the price of the X in such a situation it would be an argument that the fashion effect plays a significant role. I don’t deny it has some influence, only that technical improvements are the main influence of prices.
If you are still willing to pay more than 41% of the price of an iPhone X for an iPhone 5 that everyone thought was a X, I think that would make you pretty unusual. Used versions of the iPhone 5 seem to be going for under $100 on eBay. Even assuming a discount for new vs used, that would mean you value the iPhone 5 about $200-300 more than a typical eBay buyer.
In response to your Android hypothetical I would argue that Android phones have advanced more rapidly than iPhones over the past 5+ years, and that there is some system lock in. Also I don’t really want to get into the quality debate in this area, though I would note that Android phones exhibit year over year price depreciation similar to iPhones.
>Used versions of the iPhone 5 seem to be going for under $100 on eBay. Even assuming a discount for new vs used, that would mean you value the iPhone 5 about $200-300 more than a typical eBay buyer.
An iPhone 5 purchased today would run poorly with current software, and the battery life would probably have deteriorated due to age. I took your question to mean that I’d get the same experience that I’d have gotten from purchasing a new iPhone 5 in 2012.
Why not though?
Meanwhile a higher percentage of new cars are lasting to those higher mileage ranges. Here[1] is the first Google result on the issue from 2015 that says that average age of cars on the road is up despite new cars sales also being up. Those stats would also seem to dispute your last point about repair costs. For repair costs to really be up enough to counteract the savings from longer lifespans, the entire auto market would have to be functioning irrationally to keep cars on the road past the break even point. That is certainly possible, but it is unlikely that could sustain itself as long as this older car trend has been occurring.
[1] - https://www.usatoday.com/story/money/2015/07/29/new-car-sale...
But it's remarkable how different two pieces of reporting can be around the same basic metrics. For most of the past year, the story as read on mainstream outlets has been that unemployment in the US (the U-3 metric) is historically low, and outlets contextualized this as "the economy is strong", which people are left to interpret to their own devices. And the complicated interdependence of factors, like how tight labor markets drive wage growth, how we're simultaneously showing signs of a tight and slack labor market, and how wage growth drives price-inflation or the other way around, makes the impact of a "strong economy" difficult for the average person to conceptualize.
The reductionist view is that for large segments of the society in the US and Europe, rising cost of living are interacting adversely with their low gains in real wages. There's broad overlap between the people whose budgets are most crunched, and the people whose anxieties caused them to bring into power anti-globalization, domestically-focused administrations. It's ironic, then, when metrics whose correspondence to real workers' observed conditions are being touted as measures of success.
[1] https://www.nytimes.com/interactive/2018/02/01/business/econ...
At the other extreme, Japan imports essentially all its oil, as does the UK. Both import most of their natural gas.
In theory, the surplus profit is enjoyed by Texan oil producers, as opposed to Gulfy producers. This is increasingly dubious as the economy globalises. Gulfies own an interest in Texan oil wells. Texans own an interest in Gulf oil wells.
The Texan putting petrol in his ute... I'm not sure it matters to him that the US is a net exporter. Petrol costs him more. Oil derived products cost him more. His income does not increase.
This is not true in the reverse. In most oil producing nations, people do not pay the export price for oil. The local market price is usually lower.
- Nonfarm Business Sector: Real Compensation Per Hour [1]
- Nonfarm Business Sector: Real Output Per Hour of All Persons [2]
- Real Median Personal Income [3]
Nonfarm business sector is defined as "a subset of the domestic economy and excludes the economic activities of the following: general government, private households, nonprofit organizations serving individuals, and farms. The nonfarm business sector accounted for about 77 percent of the value of gross domestic product (GDP) in 2000."
I think many of these articles were influenced by an earlier Pew study which showed a sharp disconnect between income and productivity. But their study excluded supervisor positions and only counted wages - not overall compensation. The data I'm presenting here seem to show relatively strong wage growth over time. Interestingly enough median personal income, by contrast, has not grown nearly as rapidly. I present these data as a question more than an answer.
But we do live at a time when developers, engineers, and many other 'normal' white collar jobs are going into 6 figures early in their career. And on the other end I know there are also plenty of people making healthy 6 figure salaries doing things like working on offshore rigs (not to mention getting schedules like 2 weeks on, 2 weeks off). And for general low skill work you have fast food/coffee managers making $40-$50k. It could be that all of these sharp increases in wages are somehow being offset by other jobs having seen substantial decline in wages, or it could be that somehow the market dynamics have changed in ways that certain measurements might not accurately reflect. I'm not really sure, though I'm increasingly leaning towards the latter.
[1] - https://fred.stlouisfed.org/series/COMPRNFB
[2] - https://fred.stlouisfed.org/series/OPHNFB
[3] - https://alfred.stlouisfed.org/series?seid=MEPAINUSA672N
https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8y
https://fred.stlouisfed.org/graph/fredgraph.png?g=ki8A
https://fred.stlouisfed.org/graph/fredgraph.png?g=kipg
Healthcare, education, and housing have all doubled since the turn of the century compared to median incomes. There are a few sectors of the economy that are absolutely crushing people who make a median wage.
- it's a consumer-driven market, higher prices made a lot of ordinary citizens rich. It's not money that disappeared into a few rich shareholders' pockets like say in the medical industry.
- [0] mortgage rates have gone down from a peak of 18% to below 3%. That's the money that you'll never see again. Suppose you bought a home 3x your income, you used to be paying 54% of your income on interest alone, now it's 9%. Prices went up, but there was also downward pressure on your actual monthly expenses due to interest rates plummeting.
- 'houses' aren't fungible over time. Home sizes are way bigger and household sizes slightly smaller. On average each individual has roughly twice as much home space as before. [1] We choose to live bigger and sharing our space with fewer people. That's at least a sign of shifting preferences, and at best a sign of wealth, not poverty.
Caveats can be made about healthcare, too. We've added 8 years of life to each individual since the 1970s. That's insane.
I'm less excited about education. I see signs of credentialism. Education still has positive returns for individuals, but the story isn't as strong as for societal returns (i.e., at some point the abundance of degrees become a positional good or in other words a zero-sum game).
[0] https://i.stack.imgur.com/eKqLH.gif [1] https://azgolfhomes.com/wp-content/uploads/2016/07/American-...
- Wage inequality (the average wage is growing faster than the median wage)
- Growth in benefits like pensions and health insurance which are not part of wages but are part of compensation
The inequality and benefits effects are about equally strong. Once you control for these 2 factors, compensation has risen at almost exactly the same rate as productivity growth, which is what you would expect of the economy in long run equilibrium.
[1] https://www.resolutionfoundation.org/app/uploads/2014/08/Dec...
The hivemind of Trump supporters would have you believe the latter, and while I'm decidedly not one of them, that explanation definitely strikes me as more plausible. Though I'd contend that there are probably 3 buckets, not 2:
- Those who work in highly-paid fields that aren't vulnerable to automation or outsourcing, including those who are driving the automation and outsourcing of other fields. These people see real wage growth.
- Those who work in relatively low-wage jobs (e.g., in the service sector) that are prone to automation and/or outsourcing, but for whom automation has been gradual because their low wages mitigate the benefits of automation and outsourcing. For these people, I suspect that real wages are more or less stagnant - they have no leverage since their jobs could be at least partially automated if it were worthwhile to do so, but it hasn't been worthwhile yet.
- Those who work in highly-paid fields that are susceptible to automation and/or outsourcing. Many of these jobs have been automated and/or outsourced due to the significant cost savings from doing so, pushing these people into lower-wage jobs. These are the coal miners and skilled tradespeople who form the core of Trump's voting base.
Of course, there are jobs that don't fall cleanly into any of these buckets - lawyers are a good example - but my impression is that this is still a good model for understanding wage levels for many jobs. Obviously I'm speculating quite a bit here (though BLS projections seem to support my argument [0]), so please let me know if you know of any evidence that contradicts this.
[0] https://www.bls.gov/emp/tables/industries-large-grow-decline...
Not really fair to compare it that way.
It's also a bit better than wages as a measure of average citizen's purchasing power. After all, wages are linked to having a job. The 20th century saw substantial emancipation and the end of high degrees of exclusion of minorities, particularly women. As they entered the workforce, real wages may have decreased slightly on average, i.e. men were earning slightly less per job, and women were earning significantly more, which is why you can see average wages decline while average personal income increases.
Was Nixon's complete split from the gold standard a factor at all?
No, it wasn't.
TL;DR 3 Things, in increasing order of magnitude:
- The increasing share of GDP going from labor to capital
- The "terms of trade", ie, how labor's share is measured, FTA: "the same growth in nominal, or current dollar, wages and output yields faster growth in real (inflation-adjusted) output (which is adjusted for changes in the prices of investment goods, exports, and consumer purchases) than in real wages (which is adjusted for changes in consumer purchases only)."
- a much bigger slice of the pie: inequality in compensation, ie, average compensation has risen dramatically, but median compensation has stayed flat. Basically executives have gobbled up a healthy portion of the income.
The controls, liquidity of global capital, and action of the central banks that maintain price stability, end up suppressing wage growth.
So we have a world in which rather than the debtor’s paradise we had in the 70s, we have a creditor’s paradise now.
They need investment predictability, and can make up the difference with scale and global arbitrage.
From the other perspective, if your wages don’t rise, and your debts are there and your debts — particularly the student debts — are guaranteed by God himself that you can never default on them — you’re a debt peon.
Productivity in jobs that are amenable to automation exploded, concentrated in fewer jobs than would exist without automation. Productivity in jobs that are't (or are less) amenable to automation didn't explode but there are plenty of people competing for them.
Caveat: I have a degree in Economics and learned about this stuff, but I am not a historian and could probably do well to be corrected at some points below.
Pre-1971, the only way to create more currency was for the president to issue a new gold peg, which caused chaos when people would be trying to exchange USD for gold before the new peg came on. FDR literally made holding gold illegal because of the issues this caused.
What you see pre-1971 to post 1971 is a large increase in the money supply, allowing more investment and higher inflation, along with easier exchange with foreign currency (easier for them to invest here, too). Other factors are the advent of technology making human labor less necessary and a transition to a knowledge economy (fewer employees earning more money). On the other end, due to the end of gold convertibility, foreign steel and the oil shocks were also caused by a move toward free trade (the embargo had as much to do with Israel as it did with a change in oil pricing from USD to gold coupled with a surge in inflation of the USD).
Without any strong, organized resistance to Capital owners, they were free to redirect more and more of the profits from productivity gains to themselves. The resulting disparity created a kind of feedback loop that further entrenched the power of Capital owners, as some of the excess wealth they now possessed could be put to use subverting the American political system to serve their interests.
And, if so, what is special about the American workforce in particular that they have such an effect on the entire world?
A lot of people forget several billion people have been lifted out of extreme poverty over the past 45 years. These people compete against you in the global marketplace and affect the prices we pay for goods and services.
All of this is being greatly exacerbated by climate change. As people consume more things and the worlds' resources are reduced there is a greater incentive to automate as once previous costs in production become too much. As fewer people are hired because of automation, there is less money to buy quality long lasting goods, so manufacturers aim to make cheap disposable products at scale to sell to the poor, thus exacerbating climate change.
All of this I think is pretty obvious. What I've just shown is only one of any number of negative feedback loops that are growing worse and will probably cause huge social conflicts and war. The interaction between poverty, populist governments, tariffs which increase in trade wars and more poverty is another good example.
Most people in the first world (>50%) by my estimation, will be net economic drains on society within 20-30 years because of technological advancement and globalization. We will also start to see mass starvation in the third world as climate change makes potable water rare and changes to regional climates disrupts food supply chains. We could very well see mass migration and conflict that will appear similar to what happened around the time of the Mongol invasion of Rome (again, migrants searching for food are obviously not bad people).
The issue is that in order to solve these problems we need to address root causes that are impossible to stop. Knowing the solution does not make enacting that solution any easier. The only steps that I can see that would solve these problems would be the following:
- People voluntarily stop having (as many or any) children worldwide.
- People stop eating meat. It is the number one greenhouse contributor, and it shameful that people eat meat (which requires farm animals to consume food in order to be made), while any other people go hungry.
- There is a basic needs allowance. We have enough resources to feed, cloth, and shelter everyone in the world and the lack of these resources is what causes the poor to take up arms. Show me a conflict and I'll find the people going hungry.
- The benefits of capital and technological automation have to be widely distributed. That means the profits as well.
But these are hard problems to solve, because it means convincing people to share. I don't think most people ever really learn how. The alternative to doing the hard work of sharing is to keep going down the path we're on now. Eventually there will be enough reports that all the increases to productivity only go to the rich for people to stop believing that hard work matters.
I don't know man. When I was younger I thought knowing the solution was enough, but as I get older I'm more and more convinced the world is a bad place because some people just suck.
They already did.
Brexit particularly is a good example of keeping a monty python esque giant foot down on real wage growth.
Rent is high because everyone wants to move to certain dense areas, while moving away from more spacious/rural areas. This is unsustainable. Offer incentives for people to move elsewhere, including jobs programs and subsidizing mass transit to less dense/rural areas. Offer mass transit everywhere to reduce transport costs.
Just transporting food is a huge cost. Get transport costs down and you reduce food costs.
I don’t own a car, offload a bunch of concerns into City infrastructure, walk to a corner grocery store, and go from idea to meetings inside a single day, thereby letting me dance circles around competitors who have to schedule a call or flight out.
Cities don’t make sense for everyone. But they do for a lot of people. They make so much sense for enough people, that those people will pay a premium to have everything else nearby.
Having the population located in dense urban areas is more efficient and therefore cheaper in terms of the real resources that are required: infrastructure is cheaper to build, distances are smaller so that less time is wasted commuting and transport is cheaper (not to mention that highly efficient public transport becomes viable).
So in real resource terms, urban sprawl is more expensive.
But since land is still a limitation and zero-sum, competition can drive up housing costs in attractive dense urban areas to the point where it more than cancels out the efficiency gains of the urban density, and the cost of living in the urban area to the individual becomes higher than the sprawl.
This is why some sort of collective planning is required to make sure that as much as possible of the efficiency gains of urbanization are actually realized. This means having proper infrastructure mostly in terms of public transport.
(Of course, the other part of it is that you need to be careful not to look at just housing costs in the first place. For example, I don't even have to pay for a car, and I benefit from city infrastructure in many other ways.)
For the efficiency factor to overcome the desirability factor, we would have to actually issue the building permits to allow thriving urban areas to overtake some of their surrounding lower-density neighborhoods.
We've decided as a society that this is unacceptable, so urban areas will probably maintain their premium indefinitely. In a sense you're right. But only for self-inflicted public policy reasons.
A 40 minute walk and a 40 minute train ride are both reasonable commutes, but added together are nightmarish. I’ve tried.
i.e. staying within the radius you can traverse on foot. Our oldest villages may be small, but they are unthinkably dense compared to midcentury American suburbia.
I’m not convinced. I think people are more driven by status symbols and glamor. Living in a city is considered relatively more “high status” and a “glamorous” lifestyle. Even poor people in cities are glamorized as having greater access to sex, subculture groups, participation in civic functions like meaningfully large protests, proximity to celebrities or wealthy people.
I think it’s plausible to argue that as developed societies progress, competition between people becomes increasingly focused on intangible social status, and one side effect is that people become more and more willing to sacrifice material comforts to crowd into cities for the chance to possibly compete for higher social status.
It wouldn’t matter if you incentivized people with cheaper housing, “jobs programs,” or anything else, “Ruralness” itself would be such a direct negative thing, in terms of social convention, that people would pay to avoid it, in the form of impossible rents, overcrowded infrastructure, etc.
I conjecture you’d need a generational propaganda campaign to glamorize rural living, combined with some huge changes in how employment is structured, before anything could even start to incentivize meaningful redistribution of population to rural areas.
The jobs programs thing is especially tricky, because there is a chicken and egg problem with modern employment and rural areas. It’s not just a matter of retraining people, because they’ll still want to move to cities independently of jobs, and then employers will want to be located in cities to have high-status clans of employees and to be colocated with other high-status people.
Jobs training doesn’t really solve anything unless you change the underlying culture such that employers can participate in some virtue signalling by locating there.
It’s why you might see start-ups in Grand Rapids, MI, but you don’t see Google opening a new 500-engineer research lab there. The people who want those engineering jobs want a life with status signalling only found in big urban centers associated with cultural progressiveness.
I’m not saying any of this to argue one way is better or is right. Only that I think any theory about why people accumulate in dense cities has to be primarily based on social status effects that exist by convention and not by any material factor.
“I enjoy walking to my local shops...” is the same as saying you like being high-status and commanding the existence of a local bazaar that caters to the tastes that you and other city-dwellers have glamorized.
> “These are not status symbols, these are the essence of a joie de vivre.”
I can scarcely think of a stronger appeal to status-seeking than this.
(I don’t say any of this to be critical of you. I live in a large city and am fully aware that part of why I enjoy it and identify with it is all based on deep-seated, culturally-ingrained, and even subconcious emphasis on status-seeking. I just mean that it’s so deeply woven into our lives that we don’t realize and often think we’re somehow “better” than that, which is just more virtue signalling.)
I live in Canada. The traditional cuisine is bland, and fresh produce grows only a few months of the year. I see my love of sushi as a product of globalization and urbanization as much as is my ability to get decent fruit from the grocery store in the heart of winter. Sure I could have a root cellar and eat potatoes and beef all winter, but sushi is delicious.
It cannot be just status. High demand and low supply has a tendency to price the best cultural products in high status territory.
Or the fact aluminium used to be extremely expensive and thus used for the most precious cutlery, ornaments etc. Until of course it became dirt cheap to produce.
Some things really are related to the ideas we hold, not reality itself. You can see this in blind tests of foods or drinks like wines, the blind ratings often don't correspond with their reputation or price.
Bourdieu's book la distinction is quite a good treatise on this topic. Taste and what we consider artful or high quality is much more constructed by our environment than by any innate or objective measure, we tend to fool ourselves on this point.
Status plays a part but is not the primary driver behind satisfaction from urban life.
Google doesn't open an office in Denver so that Bay Area engineers have a slightly cheaper place to work, they do it to tap into the talent of folks who already live there.
Edit: I am basing these claims off of my own experience. I work at a satellite office of one of the big tech co's, and the vast majority of my coworkers are people who are either fresh out of a local university, or already lived here for many years before joining the company.
This is super false. Google doesn’t open an office in Denver because there is already a sufficient talent market in Denver to staff the whole place. There isn’t.
They open an office in Denver so that when a person passes the interviews and will need relocation they can be relocated more cheaply and paid a relatively lower salary in Denver.
They can only get away with this for certain cities that are granted high-status, like Austin, Seattle, Denver. Companies are trying to create similar status facades for e.g. Pittsburgh and Atlanta too.
It absolutely is wage arbitrage for the company— has nothing to do with the preexisting talent base in the given city, except insofar as that talent base confers some type of mitigating high-status effect.
For Denver it’s access to glamorized nature and skiing. For Pittsburgh it’s centralized around the presence of CMU. And even with these effects, these cities are not looked at as all that desirable for many, many candidates.
1. The cost of relocation is minuscule compared to the total cost of employing someone, so I don't buy that argument.
2. Do you have data to back up that Google engineers in Denver get paid less than their Mountain View counterparts? I believe this is true when comparing US to non-US salaries, but at least where I've worked, engineers get paid the same everywhere within the US (and indeed, you can relocate from the Bay Area to cheaper locales without taking a pay cut).
Relocating without a pay cut would be uncomparable, since it would involve pay cut dynamics for an established worker. Google is probably atypically generous in all these areas though, and I don’t think it counters the points about status. They want wage arbitrage to alleviate some headcount, doesn’t mean all headcount, and very likely Google would be among the least worried since revenue per headcount is so ludicrously higher than what they pay in total comp anyway. It still doesn’t suggest they open these office locations for some other reason than urban status or co-location with academic center status. Google US locations look mostly exactly like that’s what they are doing.
In fact, the status effect difference between Ann Arbor and Grand Rapids is a perfect example of my point. What differentiates the two places when thinking of where to locate a new campus? Exactly status effects and network effects from secondary status effects. The talent pool in the two places and costs of living, etc., are not meaningfully different. The choice is down to what places carry a premium in status that is more attractive to workers.
On what basis do you make this claim? I would have thought the opposite to be true.
Everyone wants to live in New York or San Francisco, but the jobs are going to be distributed around the country.
How are people going to construct a bridge in Ohio if everyone is in New York City?
Jobs are still a local thing.
A good example would be tourism, where companies draw people to places with no population.
Also, companies that decide to build a factory in the middle of nowhere to take advantage of something else, like cheaper land or electricity.
And suddenly you need to build a bridge in Ohio to get to that factory.
If wages don't rise for those jobs, then they weren't needed.
If you want a successful economy, you have to plan for it: find where resources are going to be utilized, and build from there.
Urban sprawl is extremely expensive, and the high costs on infrastructure effects the poor the most.
If housing and infrastructure were cheaper, because we've built more stuff in cities, then the poor beneift the most due to the lower housing costs (which makes up most of their expenses).
Why have two cities of New York and San Francisco? Why not just one city of New York?
Increasing commodity prices raises the price of all good, not just some goods, because that's how economics works. Every cost is transferred somewhere else.
So, not sure why you want to raise the price of all goods...
But the status quo of what we are currently in is way way to far on the wrong end of thing.
So once San Francisco and new york rent prices aren't literally 5 time larger than rent prices in the countryside THEN we can worry about the issues you bring up.
But as long as rent prices ARE 5 times larger in the city, I will not worry a single ounce about the issues you brought up.
You are engaging in the extremism fallacy. It would be like if a bunch of people were in the desert, and everyone was dieing due to dehydration, and then you came along and said "Well, you know, if you drink too much water, then you can die of water poisoning! Why aren't you worried about water poisoning!?!?!?".
Yes, water poising can kill people if you drink 10 gallons of water every day. But we are in a freaking desert and people are dying due to dehydration, so why the hell are you talking about something so ridiculously as water poisoning!?!
(Does anyone call for new primary industry jobs these days, or is that basically robots first now, with the jobs being mostly service and some manufacturing?)
Let's very much make it so living in the city is just as cheap as living in the countryside. That way everyone can decide for themselves which life is better, instead of being forced to live in the countryside, because the city is unaffordable.
[0] https://medium.com/by-the-bay/financing-suburbia-6076dae990f...
[1] https://johnhcochrane.blogspot.com/2018/06/cross-subsidies.h...
Why's that? At the margin, at least, it seems unlikely that this is the case - it's probably quite a bit cheaper to add an additional floor to a 50 unit/floor high-rise (when it's being constructed, not after the fact) than to build 50 detached single-family homes in an exurb, for example.
It's true that externalities can be, well, externalized, but that doesn't mean the difference in absolute costs shouldn't be considered. At the end of the day, someone still has to foot the bill.
Adding more houses in a place nobody wants to live is worth very little.
Adding more apartments to a place EVERYONE wants to live is VERY valuable.
I want developers to be doing the thing that everyone wants.
I know food prices vary a lot from place to place, but in the UK right now (at current exchange rates) you could eat for a bit over $1 per day, never mind per meal. I’ll grant you that’s student meals, a balanced mixture of rice lentils and vegetables, but it’s all your protein, vitamin and caloric needs.
Lentils: 3530 kcal/258g protein for £1.75
Together they form a complete mix of all the important protein subtypes. Mix 9:1 because lentils have a lot more protein and rice is a lot cheaper. Scale down intake to match calorie requirements. @2500 kcal/day: £0.29 rice, £0.125 lentils.
Vegetables: 5 portions for £0.45
(Government recommends 5 portions per day for healthy diet).
Total: £0.855 per day for recommend daily male calorie consumption. £0.76 for women.
$1.13 for men. $1.00 for women. Close enough.