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I wrote recently that my mind was changed by the evidence on how much underwater homes were causing a decrease in mobility which in turn was causing higher unemployment. I believe it does not explain much of the current unemployment we are seeing. A new paper defends the connection between lower equity and lower mobility. The paper, by Ferreira, Gyourko, and Tracy is an update on an earlier paper of theirs that includes 2009 American Housing Survey data and improves some coding and econometric issues highlighted by another recent paper by Schulhofer-Wohl that was critical of their work.

One criticism that FGT makes of Schulhofer-Wohl is that some observations which they code as moves are in fact temporary moves, and not permanent moves.  It is strikes me as debatable as to which type of move is more relevant for labor markets, and the effects of both are worth knowing.

Another issue is that knowing who has moved today from AHS data is easier to know once future data arrives, and so you can be conservative and code censor observations where move status is unclear, waiting for future data to clarify the issue. Or you can can generate a more inclusive measure of moving and risk including false positives. As FGT state, these coding decisions are consequential for the results:

…it still is useful to understand that the potential fragility of our results (and, possibly, those who came before us) arises from the fact that it is difficult to properly measure mobility in a number of cases.

In the end, it seems likely that underwater homes are decreasing housing mobility defined as permanent moves. I also agree with FGT that the true extent of this won’t become clear until future data arrives.

However, this falls short of providing evidence that housing equity is affecting labor markets. Looking at other information from AHS data, FGT note that:

Most moves are for quality-of-life, personal/family and financial reasons, and do not appear to be primarily job-related. This is especially the case for local moves. In contrast, longer distance moves, particularly those that cross a state border tend to be job-related. One potential implication of these data is that financial frictions to household mobility are more likely to reduce local moves such as trade-up purchases that need not have any significant spillover effects for labor markets.

This, they point is, is consistent with other studies on the issue. I agree with the reasoning here, and so I think it remains safe to conclude that the evidence suggests housing equity led mobility declines are not a significant cause of unemployment.

Bloomberg reports on Alabama’s recent immigration crackdown:

When Tuscaloosa, Alabama, begins rebuilding more than 7,200 homes and businesses leveled by an April 27 tornado, it may find itself missing a workforce capable of putting the city together again… Tuscaloosa County’s 6,000-strong Hispanic population –including roofers, Sheetrockers, concrete pourers, framers, landscapers and laborers — is disappearing, he said, before a law cracking down on illegal immigrants takes effect.

The obvious question to ask is whether there be others who step in to take the jobs these immigrants would have taken at the wage that will be offered. This question, which I go into detail on here, does ignore one crucial aspect of the problem. The cost to employers is not simply higher wages per hour, but higher unit labor costs. That is, for a given unit of value-added output, what happens to the total cost of labor? Wages may only need to go up by 10% in order to find workers willing to replace illegal immigrants, but if the quality of work goes down -if the workers are slower, sloppier, etc.- then unit labor costs may double or more.

You can see this implied in the Bloomsberg article where a contractor says “It’s not the pay rate. It’s the fact that they work harder than anyone. It’s the work ethic.”

The lesson can be seen in Georgia’s attempt to replace illegal immigrants with probationers:

For more than a week, the state’s probation officers have encouraged their unemployed offenders to consider taking field jobs. While most offenders are required to work while on probation, statistics show they have a hard time finding jobs. Georgia’s unemployment rate is nearly 10 percent, but correction officials say among the state’s 103,000 probationers, it’s about 15 percent. Still, offenders can turn down jobs they consider unsuitable, and harvesting is physically demanding.

The first batch of probationers started work last week at a farm owned by Dick Minor, president of the Georgia Fruit and Vegetable Growers Association. In the coming days, more farmers could join the program.

So far, the experiment at Minor’s farm is yielding mixed results. On the first two days, all the probationers quit by mid-afternoon, said Mendez, one of two crew leaders at Minor’s farm.

“Those guys out here weren’t out there 30 minutes and they got the bucket and just threw them in the air and say, ‘Bonk this, I ain’t with this, I can’t do this,’” said Jermond Powell, a 33-year-old probationer. “They just left, took off across the field walking.”

Mendez put the probationers to the test last Wednesday, assigning them to fill one truck and a Latino crew to a second truck. The Latinos picked six truckloads of cucumbers compared to one truckload and four bins for the probationers.

This isn’t a knock on the probationers. Despite being labeled “unskilled” work, this is clearly an extremely difficult job that even healthy, able-bodied adults can’t just pick up and do. Yes, for a high enough price the probationers can probably be induced to stay out in the fields all day. But with wages moving up at the same time productivity is moving downward, it’s not hard to see how employers of illegal immigration might be forced to close up shop as business becomes unprofitable.

So remember this when you read about low-paying jobs illegal immigrants are doing and people tell you that high school students or the unemployed would do them for a couple dollars an hour more: it is not hourly wages that matter, it’s wages per value added output.

I want to tie together two separate posts on Marginal Revolution that together make a point I’ve been meaning to make. Recently, Alex wrote about how Genetic Engineering may help humans compete against AI in future labor markets. He also points to other human advancing technologies as well:

…In the not so long run it’s not about computers substituting for labor or even complementing labor, it’s about designing labor to complement computers (and vice-versa). Think about how quickly the phone has migrated from the desk, to the hand, to the ear, to the ear canal. The technology to enhance humanity with access to the internet is literally burying itself into our heads, call it I-fi. There is more to come.

The problem is we are framing the question as being about how would we would compete with AI, and we see ourselves as quite helpless. But how would a librarian circa 1950 compete today against Google at the task of helping a student find relevant information quickly? Well they wouldn’t stand a chance, as they’d slowly shuffle through card catalogs based on the Dewey Decimal System. But, how does a librarian today, equipped with the all of their modern tools, databases, compete against Google? In many instances, Google serves the student best. But today’s librarians equipped with all their modern training and tools are still extremely useful resources for students doing research, despite the existence of Google and dozens of other similar tools. The point is we shouldn’t think about our current selves competing against AI, but our future selves and ancestors with all of the computer based knowledge and skills they will have.

This brings me to the second point from MR, this time from Tyler, about playing chess with and against computers:

If the computer is set at 2200 strength, “me plus the computer” (I override it every now and then) almost always beats “the computer alone.”  Often we beat “the computer alone” very badly.  If the computer is set at full strength, my counsel is worth much less, although it is not valueless.

The future will not be just you against AI in the labor markets, but you and AI against AI alone. One way to be more successful in the future will be to learn to work well with atomistic decision machines that are efficiently and logically maximizing some objective criteria in a raw emotionless matter. Both Tyler and Alex have a good head start, having spent so much time with Robin Hanson.

In the room for debate on “Why Blame the Teachers?” a high school teacher offers this:

“…college graduates are not going to be attracted to a profession that only encourages short stints. The majority of teachers did not choose their profession because of the vacation time, or the salary, or because they thought it would be easy. They chose teaching because they wanted to make a difference in children’s lives in the long term. Those teachers that entered the profession for the more mundane reasons don’t actually stay for very long.”

This very well may be true. This means that either teacher quality will suffer as a result of getting rid of LIFO or school will have to pay teachers more to compensate them for the now riskier profession. On the other hand, a little bit of this may be worth it. If this means on the rare occasion when layoffs happen they go to worst 5% of teachers (worst obviously measured with some error) then it may be worth the slight drop in overall teacher quality that results. After all, the net effect on teacher quality will be the decrease in quality from risk aversion but also the increase in quality by trying to get rid of the worst instead of just the newest teachers. But the fact of the matter is, whether LIFO or some other layoff policy is best may very well depend on local labor markets and other factors. Sure, if you have to pick one policy for all schools, LIFO is probably not the way to go. But the need to mandate policies like this at broad levels is one of the problem with the public education system: it does not allow flexibility and adaptation.

The real problem isn’t deciding which layoff policy to use. After all, the right one today may be the wrong in five years. And the right one in Town A may be the wrong one in Town B 30 miles away. The real problem is assuring that the people who run schools have the freedom to choose policies that best cater to their specific local labor market, and that they have the incentives to do so in a way that maximizes the educational value of taxpayers money. If schools are allowed freedom and accountability, then if a school gets rid of LIFO but the best employees value it, then the other school down the road can adopt it and lure talent away, and if the loss in talent causes the schools quality to suffer then they will be pressured to adopt it again.

It may also be the case that with the threat of change in the air a school system that promises stability will be able to lure the most talented teachers, and that a school that can promise tenure for life, LIFO, and no standardized testing will outperform all the rest in some places.

The problem, I think, comes because we can not provide local monopolies like school districts freedom without accountability. Yet without freedom, we must centrally plan. The education reform movement is hard at work finding good ways to measure success, and determine universal and objective rules for how people should be hired and fired, and figuring out what kinds of certifications should be required, etc. The other camp, (I don’t know what to call them but surely they don’t wish to be called anti-reform) scoffs at how difficult this proves and instead thinks we should have… um, smaller classrooms? Actually I’m not really sure what the alternative is other than to convince people of the limitations of education and talk them into applauding the system that we have.

While I applaud the work of the reformers and think it is a drastic improvement over the status quo, I am increasingly worried they may not be able to find the perfect set of rules that allows centrally planned education systems to succeed at the varied and difficult tasks we require of it, and that anti-reform critics may be, in part, correct. Unfortunately for anti-reformers, this does not mean we simply learn to love the status quo, but instead we need the freedom and experimentation that markets and choice provide. This doesn’t necessitate a fully privatized education system, and can include charters, public school choice, and vouchers. It’s also important to remember that, as Rick Hess emphasizes, choice by itself also does not guarantee success. But competition can allow reformers and anti-reformers to test their policy recommendations out and see what works, and it can allow space where the right rules for the right places can evolve.

I hope the reformers succeed in developing better measures and policies so that public education can thrive. I sincerely do. In the meantime, we should be continuing to push for more choice and competition, and work hard to understand the conditions under which that can be successful.

The debate over public sector unions has been lacking in economic arguments, and the justifications argued on unions behalf have not been of the kind one usually finds in these debates among labor economists. The two main economic arguments for unions are to provide workers with voice, and to counteract monoposonies. My main concern here is the latter, but I’ll briefly address both with regard to teachers unions in particular.

With respect to the voice function of unions, a standard reply of labor economists is that the National Labor Reform Act should be changed to allow more non-union types of voice. For instance, the act prevents  firms from supporting any type of labor organization. That means a firm is unable to organize a non-union way for  workers to voice complaints, settle disputes, negotiate over working conditions. As Barry Hirsch argues, these parts of the NLRA, while not without legitimate purposes,  “restrict development of nonunion vehicles for employer-employee, cooperation and productivity-enhancing voice.” Canada, in contrast, does not bar employer-initiated or supported labor groups. And every progressive loves Canada, right?

The second economic argument for unions is to help counteract the power of monopsonies. In the public sector, this is certainly a plausible complaint. Given that governments are often the only ones providing some services, they may have large degrees of labor market power, also called oligopsony power. While few may be explicitly making this economic argument, the common concerns about teacher powerlessness in the face of fickle administrators certainly reflects this problem. In a well-functioning and competitive market, administrators would face repercussions for firing good teachers. For one thing, parents would be upset, and competitive enterprises suffer consequences when customers are unhappy. In addition, competitive labor markets would mean teachers would demand a risk premium to work at firms where they could be fired for political or illegitmate reasons. When there is no competitive check on a school, neither of these repercussions is as important.

Thus if we are concerned about the oligopsony power of schools, and we want teachers to be treated as other comparable professionals are treated, then one possible solution is to make schools more competitive by allowing more school choice, either through charters, vouchers, or simple choice among public schools. This way, if an administrator has a reputation for firing good teachers, there are consequences. This will not prevent unjust firings from happening ever, as no system could, but it will make it less likely. After all, we don’t worry too much that about good accountants getting fired, do we?

On the other hand, the lack of competition for government, and schools in particular, also provides the opportunity to earn so-called economic rents just as lack of competition does in the private sector. These rents may be shared in an organization among administrators and teachers, meaning that less competition means higher pay for teachers. So while more competition can mean more labor market power relative to administration, it may also theoretically mean lower pay.

In order to shed some empirical light on this issue, a recent paper (I can’t find an ungated version) by Lori Taylor at Texas A&M looked at teacher pay in Texas. Importantly, Texas is a right-to-work state so collective bargaining does not confound her analysis. What she found was that in a handful of very uncompetitive markets, teacher salaries actually would decrease as a result of more competition, meaning that they were sharing in some of the economic rents. In most markets however, oligopsony power meant that increasing competition among schools would actually increase teacher salaries. Here is how Taylor summarizes her results:

More than 88% of the teachers with less than 20 yr of experience would benefit from increased competition. Seventy-nine percent of the highly experienced teachers would also benefit. Only 2% of beginning teachers, 5% of experienced teachers, and 6% of highly experienced teachers could expect increased competition to lower their pay.Profits and Rent-Sharing.

To provide one example, she highlights the Houston, Dallas, and San Antonio areas, home to more than 70% of the charter schools in Texas. Prior to the existence of these charter schools, a 1% increase in competition would increase teacher salaries by 2.5%. Given these increases in salaries, it seems likely that non-wage power of teachers is increased as well, meaning it’s harder to fire a good teacher for bad reasons.

Despite the theoretical ambiguities discussed above, these really are common sense results: the more labor market opportunities you have, the less power your bosses have over you, and the more competition there will be to hire the best teachers. The only place this isn’t going to be the case is areas where teachers are earning rents and schools are very uncompetitive. In these areas teachers are already likely to be overpaid, and the other benefits from competition, like better student outcomes, are likely to be the greatest. Long story short: more competition helps the teachers who need it.

Readers of this blog don’t need to be told about the awfulness of occupational licensing, but it is heartening to see the issue get a lengthy treatment in the Wall Street Journal today. I always find it humorous, if depressing, to read and write about licensing, in that you’ll get absurd gems of regulatory self-parody like this:

A shampoo specialist in Texas, for instance, learns about neck anatomy and must practice skills such as regulating water temperature.


In Michigan, for instance, it will soon be a felony to practice massage without a license… But a grandfather clause exempts most current massage therapists, including those who may never have taken a class at an accredited school.


In Kentucky, the Board of Hairdressers and Cosmetologists has eight full-time inspectors who spend much of their time responding to anonymous tips about unlicensed manicurists. The inspectors rarely catch the alleged offenders, says Charles Lykins, the board’s administrator, because “they take off running.”


If Kimberly Raisanen has anything to say about it, cat groomers might one day make it onto the list, too. Ms. Raisanen, a groomer in Fairview Park, Ohio, helped found the Professional Cat Groomers Association of America in 2008 to establish better education standards for the animal specialists who trim, clip, style and fluff felines.

On the plus side, the WSJ reports that McKinsey has a large report on occupational licensing coming out where they will call for reforms to get rid of “unnecessary regulatory barriers that limit competition in pockets of the economy.” Contra Tyler Cowen, this is low hanging fruit.

Overall the article is excellent and even discusses labor mobility issues. You couldn’t ask for a better story on this issue in a major newspaper, and the reporter Stephanie Simon deserves praise for this. The title of this post is “Occupational Licensing on the Rise”, but perhaps this article and the upcoming McKinsey report are heralding in a new era of skepticism and reform of licensing.

I want to write a quick micro-rebuttal to David Leonhardt.  Here is how he answers the question of why our recovery, and other recent economic recoveries have tended to be jobless:

Economists are now engaged in a spirited debate… about the causes of the American jobs slump….

…But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth.

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

I find the explanation that a lack of labor market rigidities explains our slow jobless recovery very unconvincing. One could make the case that labor market rigidities prevent firms from laying off more workers, which would make for a less steep rise in unemployment during a recession, and could also keeps it from reaching as high of a peak. But lack of labor markets as a cause for a slow recovery? There’s just no story there.

So is our labor market characterized, relative to international comparisons, as being particularly deep or just slow to recover relative to economic growth? I think it is the latter.  According to OECD data, in 2009, the year when the average unemployment was highest, the U.S. ranked 10th among OECD countries by unemployment,  at 9.3%. This is compared to the Euro area average of 9.4% and the European Union average of 8.9%. Doesn’t exactly make the U.S. sound like an outlier here.

So if David is right, and our GDP recovery is outperforming our unemployment recovery, it doesn’t sound like it’s mostly about the depth unemployment, but rather the slowness of job growth. Does he really think that too little union power explains this and that if we had more unionization firms would be hiring faster? Maybe he does, but nowhere in his article does he explain why this would be the case, and I find it hard to imagine how it could be so.

ADDENDUM: It occurs to me that I should obviously be looking at changes in unemployment rather than levels before dismissing the theory that unions prevented deeper job cuts. I’m open to that possibility, but still don’t find it plausible that unions are causing more job growth, which is what Leonhardt was arguing. Also, to address some commenter criticism I’ve expanded the Leonhardt quote above to illustrate more clearly that he was explicitly referring to job growth and not just job losses. I’ll write more on this later.

There are two important questions in the economy today that may be related: 1) is negative equity causing a decrease in geographic mobility? and 2) why is the Beveridge Curve breaking down? Wait! Don’t stop reading yet, I can explain it in non-econo-jargon, I promise.

House prices have obviously fallen a lot since the peak of the bubble, and this has left many homeowners “underwater”, so to speak, meaning they owe more on their mortgages than their house is worth. This is potentially causing a big decrease in people’s willingness to move, which includes moving for a job. This, in turn, is potentially causing higher unemployment by preventing people from moving away from places where their labor isn’t demanded to places where it is. The question is, how big of a deal is this?

The second question relates to the Beveridge Curve, which shows the relationship between the unemployment rate and the number of job vacancies. The idea is that when unemployment is high, job vacancies should be low, and vice versa. If people are having a hard time finding work, then employers shouldn’t be having a hard time finding workers, since there are plenty of unemployed people looking for work. However, as the graph below shows this relationship has broken down somewhat over the recent recession. This is suggestive of some sort of friction in the labor markets that is preventing employers from finding hires among the vast numbers of unemployed.

A recent study investigates whether house price induced immobility is causing the breakdown in the Beveridge Curve. This is an intuitive and plausible mechanism.  House prices fall, homeowners are underwater and can’t move to jobs, so there are unemployed people in one area and job vacancies in another, and negative equity prevents them from moving to those jobs. Supporting their hypothesis, the authors cite a 2010 study by Ferreira, Gyourko and Tracy which found that having negative equity reduced the probability that a homeowner would move by 35%.

The study uses a structural VAR (which is a big regression with multiple dependent variables) to estimate the dynamic relationship between 3 housing market variables and 2 labor market variables. They find that their model predicts 30% of the increase in unemployment observed during the great recession, and in generates a flat or slightly upward sloping Beveridge Curve as observed in reality. The authors are then able to run a counterfactual where they removing shocks to housing preferences, meaning that they see what would have happened to unemployment without the housing bubble.  They find that the unemployment rates are in line with the Beveridge Curve, and thus conclude that underwater homeowners can explain the breakdown of the Beveridge Curve. The graphs below show the counterfactual unemployment rates in two scenarios: a high leverage economy, and a low leverage economy.

The authors do caution that their model is a simple one, but the results suggest that housing markets are holding back labor markets. What is also important to note however, is that the model only explains 30% of the increase in unemployment during the Great Recession, leaving plenty of room for aggregate demand led unemployment.

A new NBER working paper from Morris Kleiner and Kyoung Won Park looks at the struggle between dentists and dental hygienists, both of which are covered by occupational licenses. Here is the abstract:

….In this study, we examine dentists and dental hygienists, who are both universally licensed and provide complementary services to patients, but may also be substitutes as service providers…. We find that states that allow hygienists to be self-employed have about 10 percent higher earnings, and that dentists in those states have lower earnings and slower employment growth… Our estimates are consistent with the view that winning the policy and legal battle in the legislature and courts on the independence of work rules matters in the labor market for these occupations.

As I’ve argued before, occupational licensing that benefit dentists at the expense of dental hygienists should be an issue that motivates liberal opposition. After all, this is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. Yet aside from tireless occupational licensing critic Matt Yglesias, occupational licensing receives relatively little attention. It’s not just liberals though, conservatives also don’t seem to care about this issue as much as they should.

Morris Kleiner has done much to try and focus labor economists on the institution of occupational licensing, but for the most part the research in this area is done by a handful of economists, and it still receives vastly less attention than the much less prevalent and economically important minimum wages.

I don’t know what the regulatory answer to occupational licensing is, but I’d be interested in proposals to subject these laws to more anti-trust scrutiny, or perhaps legislation requiring state and locally mandated licensing to be subject cost-benefit analysis.

The question of how immigration affects the wages and employment of natives is a frequent topic of research in the U.S. With respect to wages, a simple model of course suggests an increase in supply will decrease prices, thus more immigrants bring down native wages. Some research, notably the work of George Borjas, supports this. Another model is one where immigrant labor is complimentary to native labor, and thus more immigration increases native wages. Other research supports this model, which was described recently by Tyler Cowen in the New York Times. Similar stories are told for employment. Unsurprisingly, a similar question of immigrant and native complementarity exists in other countries. A new paper sheds some light on this issue with respect to China:

Hundreds of millions of rural migrants have moved into Chinese cities since the early 1990s contributing greatly to economic growth, yet, they are often blamed for reducing urban ‘native’ workers’ employment opportunities, suppressing their wages and increasing pressure on infrastructure and other public facilities. This paper examines the causal relationship between rural-urban migration and urban native workers’ labour market outcomes in Chinese cities. After controlling for the endogeneity problem our results show that rural migrants in urban China have modest positive or zero effects on the average employment and insignificant impact on earnings of urban workers. When examine the impact on unskilled labours we once again find it to be positive and insignificant. We conjecture that the reason for the lack of adverse effects is due partially to the labour market segregation between the migrants and urban natives, and partially due to the complementarities between the two groups of workers. Further investigation reveals that the increase in migrant inflow is related to the demand expansion and that if the economic growth continues, elimination of labour market segregation may not necessarily lead to an adverse impact of migration on urban native labour market outcomes.

As I’ve said before, I think people who are sympathetic to more restrictive immigration regime in the U.S. should ask themselves, especially in the face of such contrary evidence, whether they think China should restrict immigration to possibly preserve the wages for the relatively well-off at the definite expense of poorer immigrants from rural China or from immigrants from other countries.

Steve Pearlstein’s recent article suggesting that we need wage cuts to correct unemployment have gotten a lot of attention. To the extent that this is sold as a way to fix the general problem of unemployment, I agree with Yglesias that because this will increase the real value of household debt it’s probably not the best way of going about it. If we were in an inflationary environment, or even getting a normal level of inflation, and unemployment were persisting due to structural issues, then wage cuts could help as a general solution.

On the other hand, to the extent that wage cuts lead to more hiring it is identical to job sharing that so many progressives seem so fond of. I’m guessing those that support job sharing but not wage cuts are worried that the link between cuts and hiring will be broken if it is optional for employers. But then the problem isn’t debt deflation per se, but debt deflation without enough of an employment increase to offset it. In this case it’s really an empirical question that can’t be waved away by theory alone.

Overall I think the case of wage cuts as a general solution is not strong, but I agree with Pearlstein when it comes to particular industries. The auto industry for example is clearly undergoing structural changes; GM and Chevy did submit restructuring plans  after all. You can point to an undervalued Yuan as a cause for our lack of overall global competitiveness, but anywhere that tradeable goods industries have wages above domestic market levels devaluing the dollar will only get you so far.  Industries with strong labor presence will be among these- and yes there are fewer and fewer union workers but 13% of the private labor force is nothing to sneeze at. Minimum wages, other labor market restrictions, and non-regulatory labor frictions like debt induced labor immobility would apply here as well.

We’re not just concerned about employment in tradeable goods however, which is why, as Dean Baker points out, we should be looking to high skilled service industries for places where wages are above market level (although he overstates the case with banks).  We should be looking harder at the laws that cause these high wages and finding ways to loosen or repeal them.

We shouldn’t just be talking about private labor markets either. Matt Yglesias asks how we know when public sector workers are overpaid, and suggests a lack of a general problem, e.g. “[w]hether or not Michigan is overpaying janitors at state office buildings has no logical relationship to the appropriate compensation level of federal bank regulators.”

But we do know that a union wage premium exists in public sector just like it does in the private sector, so that anywhere that public employees belong to a union, wages are going to be higher than they otherwise would. Well how high would they otherwise be? This will be a function of how much local politicians can convince voters that they should be willing to pay for the services they receive, and what kind of wage/quality tradeoff the bureaucrats responsible for the particular public service decide. This won’t be perfect, but I can’t see any convincing reason why this would be systematically too low such that unions would improve it. Also, keep in mind here that unionization doesn’t just come with a wage premium, but a union preferred wage setting mechanism which can undo any quality increase that the wage premium might get you. Teachers unions come to mind here.

Finally, I’ve noticed that we are now talking about taking energy subsidies designed to ameliorate climate change out of the hands of the democratic system that brought us ridiculous ethanol subsidies and other debacles, and placing into a technocratic evidence based institution like the National Institute of Health. Maybe states will get desperate enough to bring solutions like this to labor markets, and appoint technocratic institutions to design labor market policies. Democracy fundamentalists will shudder at the notion, but governance is getting worse just when we need it to be getting better. Drastic measures seem in order. I’m not suggesting this is necessarily the best way to go, but it’s something we should be considering.

A common perception is that people who hire illegal immigrants are necessarily exploiting them with below minimum wage pay and horrible working conditions. The story I linked to yesterday about the effects of illegal immigration crackdowns on some restaurants serves as a useful reminder that this need not be the case:

Mr. Malecot is an active philanthropist in San Diego, contributing to causes including Alzheimer’s and cancer research and education to help victims of torture. His employees describe him as a father figure who has paid for their dental work and babysitting, charters a fishing boat for the annual company party and provides every employee with a week’s paid vacation, extremely rare in restaurants.

Because of his financial troubles as a result of the case, he said, he can no longer afford some of these perks. The next court date is Nov. 29.

“He’s very generous,” Asunción Gallardo, a Mexican immigrant who has cooked at the restaurant for 16 years, said in Spanish, out of earshot of Mr. Malecot. “It’s like we’re all a family. We eat — he gives us three meals a day and food to go. And then he gives out food for the poor.”

People who favor crackdowns in illegal immigration often argue as if they are really looking out for the best interest of illegal immigrants, who are victims being exploited by greedy employers. And this may be true some of the time, but it is clearly not true all of the time. It is important to remember this when people try to overgeneralize about the working conditions faced by illegal immigrations in order to justify kicking them out.

Imagine if there were some productive input, say for example a source of energy, that was cheaper than all of the other alternatives and allowed many businesses to operate with lower costs. Say this productive input was also illegal, but did not cause any externalities. Would right now, in the midst of a terrible recession, be a good time to crack down on this illegal input that many businesses depended on? This is what the Obama administration is doing with their crackdown on illegal immigration, and it is hurting businesses.

A recent story from the New York Times highlights how economically damaging this can be to successful businesses. Michel Malecot, a restaurant owner, faces 30 years in prison, $4 million in fines, and the seizure of his assets for hiring illegal immigrants at his restaurant. The governments indictment is causing him serious economic distress:

Since the indictment, Mr. Malecot said, he has lost at least $500,000 in catering jobs. Catering accounts for about 70 percent of the French Gourmet’s revenues, which so far this year amount to roughly $4.5 million, Mr. Malecot said.

In an industry with that employs an estimated 500,000 illegal immigrants, Mr. Malecot is not alone:

In June, the owner of two Maryland restaurants who pleaded guilty to hiring and harboring illegal immigrants was ordered to forfeit to the government more than $700,000 in assets — in addition to his motorcycle — and faces up to 10 years in prison. In November, a restaurateur in Mississippi who had pleaded guilty to hiring illegal immigrants was sentenced to a year in prison and a year of supervised release. Combined fines in the case, shared among several defendants, amount to $600,000.

I understand the rule of law is important and all that, but is there some pressing reason why choose now, of all times, to crack down on illegal economic activity? Note this is not just Obama fighting illegal immigration as previous presidents have, but “[u]nder a policy that went into effect in April 2009, the Obama administration is taking a much tougher stance on employers who hire illegal immigrants than any administration in decades”.

Now would actually be a good time to be really lax with illegal immigration, not crack down on it. People seem to understand that limitations on international flows of capital, aka protectionism, is a bad idea in a recession. This is true of international flows of labor as well: preventing labor from moving to it’s highest use will reduce global economic growth.

Will make our lives less worth living until our eventual death anyway.

Paul Krugman complains that its not only the Austerity crowd but the Tight Money crowd that’s switching its tune on the bond markets

So will the OECD call for a drastic shift toward expansionary [monetary] policies, since the clear and present danger, at least according to the bond market, is disinflation (and possibly deflation)?

No, it won’t. The bond market only rules if it tells people what they want to hear.

The odd thing isn’t that people only hear what they want. Confirmation bias is ubiquitous. The odd thing is that so many in positions of authority only want to hear that which justifies greater indifference to human suffering.

Others will see more cynical causes but, my current explanation is that this is a transfer of logic from the way certain body tissues operate. Its clearly the case that skin, muscle and connective tissue respond to stress by growing:  a process known as hypertrophy. This might also be the case with nervous tissue and some other, though importantly not all, tissues. This is an interesting and important phenomenon that details the power of highly complex evolutionary systems. Yet, it is a fool’s errand to apply this to the world writ large.

When you stress most things they don’t grow back stronger, they break. When you apply job losses to an economy people don’t become hardier, they become poorer.  The idea that tough love will lead to a better economy in the long run is just wrong. Not mean. Not heartless. Not insensitive. Wrong.

Monetary policy doesn’t work that way. Fiscal stimulus doesn’t work that way.

More importantly, I want people to question whether or not you believe in economic toughness primarily because you are extrapolating from your experience with muscle fatigue. Human bias is elusive and works in mysterious ways. You may have learned from an early age that “no pain means no gain” and at a minimum that’s a good rule of thumb when dealing with sarcoplasm. However, this phenomenon is deeply dependent on the nature of sarcoplasm and the metabolic process generally. It does not carry over to the world or equilibrium systems on the whole. You will make deep logical errors if you believe that it does.

And getting the right answer matters. What’s important is not whether what you are saying “feels” true. Unlike Paul, I don’t doubt your sincerity. What matters is whether it is true. The world operates on objective facts and their relationships. The world does not operate on whether you subjectively feel like you did the right or responsible thing. We can talk more later about how responsibility  - or compassion for that matter – are mental interpretations. Real world events are the result of the interaction of subatomic particles. Responsibility or irresponsibility can’t cause anything to happen they can only provide an interpretation of events that have actual physical causes. But, like I said more on that later.

The issue today is: what series of logical steps is telling you that we should listen to bond markets when they suggest tighter polices but not when they suggest loose ones?

Calculated Risk tells us the key to fixing the housing market:

The key to the housing market is to absorb the excess inventory. That means more households and fewer new housing units. Luckily housing starts are very low right now, but unfortunately there is very little job growth (and therefore little new household formation).

But job growth is not the only way to get new household formation, as I’ve argued again and again, we have immigration at our disposal. Of course, there are the usual complaints about jobs. But the weakness of this argument can be seen in a new paper Felix Salmon directs us to:

Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

It is well understood that the removing capital tariffs and protectionism would increase overall efficiency and incomes. Since immigration restrictions are labor market protectionism we shouldn’t be surprised to see that is has similar positive effects.

Unfortunately, journalists and pundits don’t seem to oppose labor protectionism nearly as much as they oppose capital protectionism. We would see an outcry among op-eds and pundits if we were seeing a worldwide rise in capital protectionism, because they recognize that beggar-thy-neighbor policies make everyone worse off. But no similar reaction has come from the rise in global labor protectionism. Here is how a recent report from the Migration Policy Institute describes the situation:

Confronted with the most severe economic crisis in decades and rising unemployment, governments in locations across the globe embraced a range of policies to suppress the inflow of migrants, encourage their departure, and protect labor markets for native-born workers.

From Malaysia and Thailand to Kazakhstan, Taiwan, Australia, South Korea, and Russia, many governments have sought to restrict access to their labor markets by halting, or at least decreasing, the numbers of work permits for foreigners. Others, such as the United Kingdom, tightened admission requirements. And while the policy focus of many of these countries was on reducing the entry of low-skilled workers, the United States placed restrictions on some companies seeking to bring in the highly skilled.

In addition to the results from Felix above, the wider literature on the issue tells us the quantifiable impact on wages is likely to be minimal compared to the impact on house prices. For instance, research from economist Albert Saiz found

“…a very robust impact on rents and housing prices that is an order of magnitude bigger than the estimates from the wage literature. Immigration inflows equal to 1% of a city’s population were associated with increases in average or median housing rents and prices of about 1%.”

Emphasis his. In previous research, Saiz used a classic example of exogenous immigration from the literature and found effects of a similar magnitude. Looking at the Mariel boatlift, a sudden inflow of immigrants from Cuba which increased the population of Miami by 4%, Saiz found that rents in Miami increased 8%. Overall, there appears to be a robust relationship between immigration and housing prices.

Calculated Risk tells us that “Usually housing is a key engine of recovery, especially for jobs. But this time housing is going to follow the economy.” But this is not because of economics, but politics. Instead of waiting around for the labor market to lead housing recovery, let’s use the tools we have to help housing recovery lead.

It has apparently become a complaint that the Obama administration has not been arresting and deporting enough illegal immigrants. According to Suzy Khimm, subbing in for Ezra Klein, while workplace raids have gone up 50% since the Bush administration, arrests and deportations have gone down 80%. This apparently has at least one former Bush official saying that Obama’s policy is “de facto amnesty” and they are “turning a blind eye to entire categories of aliens”. But no matter what Obama is doing, you would expect arrests and deportations to be going down right now, since immigrants are already deporting themselves, so to speak.

Contrary to the popular perception that illegal immigrants come here to lay in the shade and grow fat off of our generous welfare state that is freely available to illegal immigrants, they actually come here to work. Labor markets are thus a key determinant of immigration, and when labor markets get tight illegal immigrants leave.  This inexplicably colored chart from the Office of Immigrant Statistics tells the story:

Between 2000 and 2008 the illegal immigrant population grew by 3.1 million, from 8.5 to 11.6. From 2008 to 2009, the latest year for which I could find numbers, the population decreased by 800,000, from  11.6 million to 10.8 million. These numbers are as-of January 2009, and I’m betting that downward trend has continued over the last 19 months since this measurement was done.

While the decrease may not be huge percentage-wise, especially compared to the 80% decrease in arrests and deportations,  it is an indicator that the illegal population is currently experiencing a large amount of unemployment or underemployment.  This decrease in illegal immigrant employment would also partly explain why arrests and deportations are going down: since the raids target workplaces,  it’s harder to find them if more of them aren’t working.

It’s a lot easier to arrest and deport illegal immigrants when they are flowing into the country by the hundreds of thousands than when the population is decreasing by the hundreds of thousands. So maybe critics can lay off Obama on this and stop demanding that he actively destroy jobs in the middle of a recession.

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