Beep Beep

Tim Worstall, reviewing one chapter of a forthcoming Economic Policy Institute book on Sweden, plays Wile E. Coyote; Miracle Max Sawicky plays the Road Runner.

The topic is a graph comparing incomes of the rich and poor in the United States and abroad.  Here are dueling soundbites:

Tim Worstall:

In the USA the poor get 39% of the US median income and in Finland (and Sweden) the poor get 38% of the US median income. It's not worth quibbling over 1% so let's take it as read that the poor in America have exactly the same standard of living as the poor in Finland (and Sweden). Which is really a rather revealing number don't you think? All those punitive tax rates, all that redistribution, that blessed egalitarianism, the flatter distribution of income, leads to a change in the living standards of the poor of precisely ... nothing.

Max Sawicky, slyly quoting the book:

"To the extent that these countries provide more social and economic support to their citizens than the United States, these numbers provide a somewhat incomplete comparison regarding the living standards of low-income people."

Troubling - since the book pretty clearly states that a direct comparison of after-transfers income can not be made from this chart, we have to score this one for Max.

MORE:  If I were to tackle this chapter, I would attack right here - the topic is labor market flexibility and "Euro-sclerosis" (p. 15 of 36):

Table 8.12 assesses an important claim about the causes of higher unemployment rates in some European countries; specifically, the claim by some economists that Europe’s labor market institutions—such as strong unions, high minimum wages, and generous benefits— have priced less-skilled workers out of jobs. If this were the case, one would expect the unemployment rates of less-educated workers and better-educated workers to be relatively close to one another in the United States, where relatively weak unions, low minimum wages, and poor benefits would have less of an effect on the employment prospects of less-educated workers (in other words, where compensation can fall so as to promote more jobs for the
less-skilled). Conversely, one would expect the unemployment rates of less-educated and better-educated workers to be relatively farther apart in Europe, where labor market institutions would, by conventional thinking, disproportionately hurt job creation for less-educated workers. Yet the data in Table 8.12 run completely counter to this expectation.

Is that what we would expect?  Well, we might expect that - if we figured that (a) there has not been any international migration of labor to the US that is large by European standards, (b) the welfare reform in the US did not produce an influx of unskilled workers, and (c) the current job market conditions are so new that no one here or in Europe has adjusted to them.

But who believes any of these propositions?  As part of the immigration debate, it has been widely publicized that (don't hold your breath for this) the US has been a bit of a magnet for legal and illegal unskilled immigrants.  One might expect that to push up unemployment and push down wages amongst folks at the lower end of the educational spectrum.  George Borjas says so, anyway - let me quote Krugman quoting him:

The most authoritative recent study of this effect, by George Borjas and Lawrence Katz of Harvard, estimates that U.S. high school dropouts would earn as much as 8 percent more if it weren't for Mexican immigration.

That study also noted that workers can attract capital, so it is possible that the availability of more workers simply prompts employers to scale up.  Still, if the EPI folks want to play hunches, I will play mine - welfare reform and an influx of legal and illegal unskilled workers into the US in the 90's have depressed wages and increased unemployment among the unskilled, relative to what it might otherwise have been in the flexible US labor market.

And abroad, folks have been muttering about the inability of Europe to create jobs for at least twenty years.  One might think that, in all that time, that Euros would have figured out the importance of going to college and honing the old skill set.  And if they have made that adjustment, then the ratio of college grads to high school grads will be rising in Europe compared to the US, given the relatively better employability of a high school grad in the US.

On the other hand, there are some pretty obvious caveats to that - the flexible US labor market provides plenty of low-paying jobs but also a wider range of outcomes.  If incomes (across jobs and after taxes and transfers) are more equal in Europe, the financial incentive to go to college will be reduced.  On the third hand, college may be less expensive in Europe, thus promoting attendance.

So on balance, what do we expect?  Will the proposed EPI measure of labor market flexibility - the ratio of unemployment of high school versus college grads - make any sense?  I have no idea!  But this EPI chapter is not providing enlightenment on these seemingly-obvious objections, so I am going to have to say I am utterly unconvinced by their charts and graphs telling me that Euro-sclerosis is not a problem.  A better starting point might be something simpler, like jobs created and work-force participation by country.

Comments

[Patrick R. Sullivan]

'To the extent that these countries provide more social and economic support to their citizens than the United States...'

Since I know Max won't miss an opportunity to talk about himself here, just exactly what does the above mean?

[Paul Zrimsek]

The object of a big revenue system is not to buck up pre-tax income, but post-tax, post-public expenditure well-being.

cc: Paul Krugman.

Your suggestion of job creation as a standard for comparison should find plenty of takers among the EPI-minded; I seem to recall that they considered it the sovereign measure of good economic management back in 2003. Then again, they scorned the unemployment rate back in 2003-- what about all those discouraged workers?-- and here they are using it. So what do I know?

[Patrick R. Sullivan]

Remember this surrender monkey:

'French President Jacques Chirac scrapped his government's hotly contested youth jobs scheme Monday, handing a major victory to unions and students after one of the country's biggest political crises in decades.

'Chirac announced after a high-level meeting that the youth contract, which would have made it easier to fire young workers, would be "replaced" with new measures to help disadvantaged young people into work.

'...The decision is a serious blow to Prime Minister Dominique de Villepin who had championed the scheme as a cornerstone of efforts to fight unemployment.'

[geoff]

I believe the report used pre-tax income, so that all the services offered would have to be "purchased" out of one's tax burden. To the extent that countries offer different service values for a tax dollar, no direct comparison can be made, but presuming that service value scales with purchasing power, the comparison isn't that outlandish.

[nittypig]

"the claim by some economists that Europe’s labor market institutions—such as strong unions, high minimum wages, and generous benefits— have priced less-skilled workers out of jobs."

I don't really understand the whole hypothesis here. While minimum wage clearly has more effect on low-skill unemployment than on high-skill unemployment, and unions should have a similar effect, many of 'euro-sclerosis' polcies should hurt high skill employment as well. Certainly high payroll taxes (or whatever they are called in Europe), burdensome regulations on dismissal, generous unemployment for highly paid workers and so on are policies that are typical of euro-sclerosis and should have a big effect on emplyment among highly skilled workers.

[Miracle Max]

Paul Z -- our focus on job creation was inspired by the Bush Administration's very specific claims of ginormous job growth resulting from their proposed tax cuts, growth not realized by a country mile.

Ordinarily we would focus on the unemployment rate, but with large and sudden changes in labor force participation, the distinction between an unemployed person and one "not looking for work" is more murky. So we have taken to talking more about the employment to population ratios.

geoff -- since pre-tax income is gross of direct taxes paid and this varies, comparison of pre-tax income glosses over differing service levels, even if they are provided on equal per-dollar basis. So your point does not follow.

patrick -- you're wrong again.