Sunday, 2 June 2013

Insiders, Political Economy and The Reset

Tyler Cowen has a reminder for us:
It is a common observation that nominal wages are sticky but let’s not forget that real wages are often sticky too (and in fact nominal stickiness tends to matter much more when accompanied by real stickiness, but that is a point for another day.)  That means many labor market changes will be slow to manifest themselves in the real world.  Furthermore you often will see them first for new jobs, for the young, and for new labor market entrants (usually but not always the young)...Fear the reset.  The world will continue to produce much more value, and much more gdp, but who will capture that value is already changing dramatically and will continue to do so.
The consequence of real wage stickiness is that changes in the position of labour might be slow to manifest themselves, leading to a painful ‘reset’ where insiders lose their cushy priviliges.

Isn’t this a good thing? We don’t look at the examples of Greece and Italy, wring our hands and say, ‘Oh, if only the labour market was more heavily regulated and there were more insiders who could protect themselves from economic disruption.’* We see rather that labour markets are not flexible enough – and I think we’re right in that observation.

Similarly, the fact that insiders got health insurance and the outsiders didn’t was the exact problem that Obamacare sought to solve. Companies offering less generous plans or leaving their employees to buy coverage on exchanges was the intention of the legislation. The goal was to move healthcare away from the corporate-centric model, because that model doesn’t control costs properly and screws over anyone with a pre-existing condition.

The classical view, therefore, would be to say the reset is great! Move resources to productive activities! Cut unemployment! Increase efficiency! Bryan Caplan wants the reset and he wants it now.

But Cowen offers a reason why real wage flexibility might be a bad thing – the declining labour share of income. There’s a lot of discussion of a future in which the labour share of income is minimal, but maybe the problem of the deteriorating position of labour relative to other factors of production is worse than we think. If change is only taking place gradually, at the expense of a population of outsiders which grows only slowly while a shrinking but substantial fraction of insiders remain insulated, then the rate of change of labour share of income is sticky and there could be lots more negative distributional consequences on the way.

The argument goes thus: maybe the current system isn’t economically efficient, but it’s better at keeping what resources there are in the hands of the workers. Neoliberal wonks don’t like insider-dependent ways of helping the poor, like unions or the minimum wage, because they’re economically inefficient. They tend to argue for dismantling these kinds of protections in favour of better policies like tax credits.

The problem is that insider-centric policies have a political constituency, and the wonks’ policies don’t. Unions lobby for more union power. Big corporations which already pay above minimum wage like to make life harder for the competition. On the other hand, no-one wants to pay extra taxes in order to fund the EITC, or capital endowments. Therefore, it may be that pareto-efficient labour market flexibility is impossible, because once the protections are dismantled there’s no political constituency for helping the poor. With rising inequality, the political clout of the rich can only increase, helping them to entrench themselves as a new class of insiders, while ensuring that the poor are left out in the cold –  they lose the suboptimal redistributive policies that were helping them before, but don’t gain any optimal redistribution in return.

There’s a compelling case that this is exactly what’s been happening in recent years.
Resets show up more quickly in some sectors than others, most of all they come quickly when buyers and sellers have only sporadic and perhaps even anonymous contact with each other.  In other words, the reset comes more slowly for the mistress than for the street prostitute.  And when you see youth losing relative ground in labor markets, that is another signal that you should be worrying about resets.
Cowen’s ‘reset’ argument also casts the problem of labour market bifurcation in a wholly new light. The last few decades of economic growth have been much kinder to academics than they have to burger-flippers. But maybe what we’re really seeing is that there are more insiders at the high-skilled end of the labour market, who are better equipped to forestall their inevitable reset.

This is obviously true in some sectors. Cowen uses the great example of tenured professors, but you can look at public employees like teachers, or credentialist cartels run by doctors and lawyers. Maybe it’s not a coincidence that these have been the sectors most resistant to productivity growth. The ‘Great Stagnation’ hypothesis assumes that the reason developments in technology haven’t made much difference to retail or healthcare or transportation productivity is that we haven’t found ways to make tech work in these industries (yet). But perhaps the real reason is that there are powerful upper-middle-class insiders holding back MOOCs and Watson and Uber and tooth whitening. Part of the reason insiders are able to entrench themselves is low turnover and this is true of firms as well as individuals. A large fraction of productivity growth comes from low-productivity firms going out of business and resources being reallocated to high-productivity firms.

After all, it’s not obvious that there has been a wholesale deterioration of labour’s position in many of the ‘flexible’ sectors, and tech is a great example of this. It still provides lots of upper-middle-class jobs** and if wages aren’t soaring that’s not because the surplus is being appropriated by corporations but because it’s being taken by a) new entrants to that labour market and b) consumers.

Of course, maybe the causality goes in the other direction. Maybe tech is a ‘flexible’ sector because there’s lots of disruptive innovation going on in that industry. Maybe academics still have tenure because MOOCs haven’t really got off the ground yet, rather than the other way around. Maybe doctors can run their cartels because medical productivity growth is so slow.

If that’s the case, though, we should still celebrate the deteriorating position of insiders because it would mean productivity growth. Maybe insiders are dwindling because there is no Great Stagnation and prosperity is just around the corner.

*This might provide a useful window into the sometimes impenetrable thinking of people who use the word neoliberal a lot.

**(and might provide a lot more of them if insiders would let more people live in San Francisco)