A century of labor leisure tradeoff

Licensure

Medical licensing only became important 100 years ago with the publishing of the Flexner Report.  Other occupations have been catching up since then.  Due to licensing requirements in Illinois, it took longer to "become a master plumber than for a newly graduated physician to become a Fellow of the American College of Surgeons." Alan Kreuger says licensing is growing in many sectors of the economy:

Morris M. Kleiner, ...questions whether occupational licensing has gone too far. He provides much evidence that the balance of occupational licensing has shifted away from protecting consumers and toward limiting the supply of workers in various professions. A result is that services provided by licensed workers are more expensive than necessary and that quality is not noticeably affected.... Professor Kleiner conservatively estimates that 20 percent of workers in 2000 were in an occupation that was covered by a state licensing requirement, up from 5 percent in the 1950's.
He said that licensing has mushroomed because the service sector, where licensing is more prevalent, has grown rapidly and because more occupations have started requiring licenses.
...A state-by-state list of the occupations covered by licensing requirements is available from www.acinet.org/acinet/licensedoccupations.... Perhaps as many as 3 of every 10 workers nationwide are required to obtain a license to do their job.... Kleiner and a colleague, Robert T. Kudrle, found that stricter state licensing requirements for dentists did not noticeably affect the dental health of 464 Air Force recruits. Other studies have found at best weak evidence that students in classes taught by licensed teachers performed better than those taught by unlicensed teachers.
Summarizing the literature, Professor Kleiner concludes, "there is little to show that occupational regulation has a major effect on the quality of service received by consumers."
At the same time, the hurdles imposed by occupational licensing reduce the supply of workers in many regulated professions, which drives up wages in those jobs and the price of services. Dentists, for example, were found to earn and charge 11 percent more in states with the most restrictive licensing requirements. While tough licensing standards may help higher-income consumers avoid low-quality providers, it also appears to prevent lower-income consumers from gaining access to some services.
Professor Kleiner said that a frequent pattern was for workers who have common interests and provide a homogeneous service to form an association. That association then seeks regulation to restrict the number of people who can work in the occupation. The state legislature and governor have little incentive to resist this pressure because the state gains revenue from license fees.
The most notable opposition to licensing comes from large buyers like hospitals, which object to the monopolization of their suppliers. In most cases, however, consumers are diffuse and have little individual incentive to oppose licensing.
Another factor driving the growth of occupational licensing is the decline of labor unions. Apparently, the labor market abhors a vacuum; it needs some institutions and rules to function. Occupational licensing has replaced unions as the main labor market institution. There are now more than twice as many workers covered by occupational licensing provisions as are covered by a labor union contract.
"There is a lot more flexibility with unions than occupational licensing," Professor Kleiner said. Unions, he pointed out, negotiate at the company level and can be decertified, whereas occupational license requirements are typically statewide and rarely repealed.

Women Earned The Majority of Doctorates In 2009

Chronicle

Impact of Recessions on Earnings

People who get laid off during a recession lose their skills because they cannot get another job quickly and skills depreciate.  Plus, employers discriminate against people who have been unemployed (or underemployed) for an extended time.  These factors and others like the depression that often haunts the unemployed have long-lasting effects.  Kevin Drum:

Here's a gloomy chart from a new Brookings paper. It shows the average wages of men under 50 who lose their jobs in a "mass layoff" event.

• The red line is for men who are laid off during good economic times. On average, these men have steeply rising earnings in the five years before the layoff and then experience a big earnings plunge. They eventually get back to their old earnings level, but that's it. Their earnings never again get above that.
• The blue line is for men who are laid off during recessions. They also have steeply rising earnings in the five years before the layoff and then experience a big earnings plunge. However, they never even come close to their old earnings level. They max out at about $36,000 compared to peak earnings before the layoff of $45,000.

The steeply rising earnings before the layoff are a little perplexing to me, and I wonder if this is related in any way to the probability of being laid off in the first place. The main takeaway, though, is that if you lose your job during a recession, you are probably screwed for the rest of your life. Even ten years later you'll earn about 20% less than you did before. This price has been paid needlessly by hundreds of thousands of workers because our political leaders have never had the courage to take action strong enough to get our economy moving again.

Gender, Height, Intelligence, and Status

 Unlike the psychologist below, I do not endorse the idea that men are more intelligent than women on average because it is really hard to define intelligence.  Men are more intelligent than women on some kinds of tasks and clearly less intelligent than women on other kinds of tasks.  Given that men largely created the IQ tests, it should not be too surprising if they selected tasks that felt they were good at to put on the IQ tests.  It is impossible for me to say which kinds of intellectual tasks are the most important parts of intelligence, so I do not claim that one gender is more intelligent than the other.  However, I have never seen a behavioral quality where men have less variance than women.  No doubt some exist, but all the (somewhat limited) studies I have seen have demonstrated that men are more variable.  That is important for explaining differences in extremes between men and women. For example, most mentally retarded people are men and most geniuses are too.   Psychology Today:

The orthodoxy in intelligence research for the second half of the 20th century had been that men and women had the same average intelligence, but men had greater variance in their distribution than women.  Most geniuses were men, and most imbeciles were men, they said, while most women were in the normal range.  This conclusion, however, was manufactured out of political expediency.  Not wanting to discover, or a priori denying, any sex differences in intelligence, psychometricians simply deleted from the standardized IQ tests any item on which the performance of men and women differed.
More recently, however, especially since the turn of the millennium, there have been an increasing number of studies that cast doubt on this politically correct conclusion.  Studies with large representative national samples from Spain, Denmark, and the United States, as well as meta-analyses of a large number of published studies throughout the world, all conclude that men on average are slightly but significantly more intelligent than women, by about 3-5 IQ points.  So this has now become the new (albeit tentative) consensus in intelligence research.
...Psychometricians have known since the end of the 19th century that height is positively correlated with intelligence:  Taller people on average are more intelligent than shorter people.  And men in every human population are taller than women.  So one possibility is that men are more intelligent than women, not because they are men, but because they are taller.
... In fact, once we control for height, women are slightly but significantly more intelligent than men.  Further controlling for health, physical attractiveness, age, race, education, and earnings does not alter this conclusion.  Height has exactly the same effect on intelligence for men and women:  Each inch in height increases the IQ by about .4 point.  The partial effect of height on intelligence is more than three times as strong as the partial effect of sex.
So it is not that men are more intelligent than women, but that taller people are more intelligent than shorter people, but net of height women are more intelligent than men.  Women who are 5’10” are on average more intelligent than men who are 5’10”, and women who are 5’5” are on average more intelligent than men who are 5’5”.  But, more importantly, people who are 5’10” are significantly more intelligent than people who are 5’5”, and most people who are 5’10” are men and most people who are 5’5” are women.

Kanazawa continues:

why are taller people more intelligent than shorter people? ...we don’t know for sure, but there are two possible explanations.  First, both height and intelligence may be indicators of underlying health.  According to this view, people who are genetically and developmentally healthier simultaneously grow taller and become more intelligent than those who are less healthy, producing the positive correlation between height and intelligence.

Kanazawa has evidence that health and intelligence are uncorrelated and he believes that intelligence and height are correlated because both are sexy!  His only evidence is the correlation between the three:  

...Taller people are on average physically more attractive than shorter people; physically more attractive people are on average more intelligent than physically less attractive people; taller people are on average more intelligent than shorter people... But the issue is far from resolved.  While there is no doubt that taller people are indeed more intelligent than shorter people, the question of why this is so is one of the remaining puzzles in evolutionary psychology.

 So, maybe the reason that tall people and beautiful people earn more than the rest of us is that they are smarter on average.  If so, then work hard on your schoolwork because smarts can be developed by exercising your brain.  An alternative hypothesis is that height, and beauty, are correlated with self-confidence and status and that leads to higher achievement on intelligence tests and higher earnings.  Again, confidence and status can be developed by working hard to achieve mastery.  Social support helps increase learning, confidence, and status.  Encourage your friends to work (and think) hard. 
Society awards status to tall, beautiful people and that increases confidence.  One study found that it is one's relative height in adolescence that increases later smarts and earnings rather than one's height at other ages.  It is hard to think of a biological reason why height in adolescence would increase later earnings and smarts, but it is easy to see why it would increase status and confidence during an extremely socially awkward time in most people's lives.  Similarly, several studies have found that it is relative height that gives a lifelong advantage to soccer players (in Europe) and hockey players (in Canada).  The kids who have birthdays near the youth league cutoff dates typically end up as the professional athletes.  That is because the older kids are relatively tall compared with other kids in their leagues growing up and that creates status and confidence and helps them get a lot of practice and love of the game.   

Cynical Thoughts On The Minimum Wage | ThinkProgress

Cynical Thoughts On The Minimum Wage | ThinkProgress:

Arindrajit Dube surveys the post-Card/Krueger minimum wage literature and concludes that their study basically holds up. My general view, with apologies to empirical econometricians doing policy-relevant work everywhere, is that one can generally Google up a study supporting whichever conclusion one prefers.

Consequently, I’ve always thought the most persuasive evidence on this was simply the big picture:

It’s clearly not the case that the high real minimum wage of the 1960s led to unusually elevated unemployment during that decade. And the fact is even more striking when you consider that the real wages of folks in the top quintile were way lower back then.

Zero Marginal Product Workers

Worthwhile Canadian Initiative: ZMP workers and output quotas:

Imagine, just imagine, that the government put a quota on the total output of, say, cars. Because some rabid environmentalists told them to. The result would be a drop in employment of auto workers. Some of those workers, who had skills useful in other sectors, would be able to find jobs elsewhere. Others, who had little or no alternative skills, would be unemployed.

Would we describe those unemployed car workers as being Zero Marginal Product workers? Not really. They are still exactly as capable of producing extra cars as they were before. It's just that their potential employers are no longer able to sell any extra cars.

Would we describe those unemployed workers as being Zero Value Marginal Product workers? Yes and no. Depends what you mean. The extra cars they could produce would have zero value to the firms trying to sell them, because they aren't allowed to sell any extra cars. But those extra cars would have exactly the same value as before to the people who wanted to drive them, but who now can't, because of the output quota on cars.

Would wage cuts help employment of car workers? Not really. An individual car worker who was willing to work for lower wages might get the job that would otherwise have gone to another worker, but that doesn't help aggregate employment of car workers. Maybe if they all cut wages their employers would use more labour-intensive methods of producing cars. That could help employment of car workers. But it would hurt employment of all the other factors used to produce cars. If all factors used in producing cars cut their "wages", that wouldn't help aggregate employment of all factors (not just workers) used in producing cars.

Now imagine, just imagine, that the government put a quota on the total output of everything, not just cars. Because the environmentalists told them that GDP is bad, and needs to be controlled. Now it's not just car workers who are unemployed. All sorts of workers are unemployed. And the unemployed workers who have skills useful in other sectors can't get jobs in those other sectors. Because there are no other sectors.

Are the unemployed workers Zero Marginal Product workers? No. Are they Zero Value Marginal Product workers? Yes and no. Depends what you mean. The extra output they could produce is still valued by the people who don't have it (who are mostly the unemployed workers themselves), but it's not valued by the firms producing it, because they aren't allowed to sell it. Would wage cuts help? Maybe a little, but not really. If wages of labour fell relative to the wages of land and machinery, firms would maybe use more labour-intensive methods of producing the same total output. But that would simply replace unemployed labour with unemployed land and machinery. If the wages of all factors fell, it wouldn't help total employment of all factors.

Let's push this analogy further. Suppose the rabid environmentalists have heard about tradeable quotas, and that they are a good idea. They issue a fixed number of "GDP permits" to households. Each household can spend its permits on whatever good it likes, at whichever firm it likes.

The Statistics Canada employees who normally measure each firm's contribution to GDP are asked to check that each firm actually receives from households the requisite number of GDP permits. And because of the standard value-added intermediate goods problem in measuring GDP, the Statistics Canada employees convince the environmentalists and government that it's much easier if each firm collects GDP permits equal to the value of its sales, and in turn pays its suppliers with those same GDP permits. So the GDP permits flow all the way down the supply chain to the owners of the ultimate factors of production, and then those households in turn use the GDP permits they earn to buy goods from firms. This makes enforcement a lot easier, since the firms will want to ensure they get the GDP permits when they sell goods, because they need those permits to pay their own suppliers, workers, and owners. It's a bit like the GST (VAT), only in reverse.

The Statistics Canada employees recognise that the tradeable GDP permits are themselves valuable, so measure the prices of goods to include the value of the GDP permits received in exchange. A tradeable permit is just like a tax, and Statistics Canada decides to measure GDP inclusive of indirect taxes like VAT and the GDP permits. So firms compete for those GDP permits, by trying to offer low prices for high-quality goods. And the lower the price, the fewer GDP permits the firm needs to collect when it sells the goods. Eventually the GDP permits become so valuable that the firms are willing to give away their goods for free, except for the GDP permits. And households too are willing to give away their labour for free, except for the GDP permits. "You can drive this car off the lot for 15,000 GDP permits!". "Staff wanted; pay is 15 GDP permits per hour".

Now, the environmentalists in my story may be a bit rabid, but they do understand the stock-flow distinction. They know that a fixed stock of GDP permits may permit many different levels of GDP, which is a flow. It all depends on how quickly GDP permits circulate from households to firms, and back to households again. They introduce the concept of the "velocity of circulation" of GDP permits. Since it's too hard to put a "use by" date on each GDP permit, they decide to adjust the stock of GDP permits in circulation to try to offset changes in velocity. If velocity rises, so GDP rises above the environmentalists' target they reduce the stock of GDP permits in circulation by buying them back. They create a special "Central GDP Permit Bank" just for this purpose. And if velocity falls, so GDP falls below the environmentalists' target, the central bank increases the stock of GDP permits in circulation.

And the environmentalists in my story may be a bit rabid, but they also understand the distinction between nominal and real GDP. Since all goods and labour are now free, except for the GDP permits you need to pay in exchange, all prices are now measured in terms of GDP permits. If the stock of GDP permits is too small, individual firms and households will cut prices in terms of GDP permits, trying to compete for GDP permits against other firms and households. So the value of each permit will rise. And if the stock of GDP permits is too large, individual firms and households will raise prices in terms of GDP permits, since they worry less about competition from other firms and households. So the value of each permit will fall. So the environmentalists use their central bank to adjust the stock of GDP permits in circulation to try to prevent their value rising or falling too quickly.

Then one day the system breaks down. Something causes the velocity of circulation of GDP permits to fall. The central bank fails to respond quickly enough to increase the stock of GDP permits. (Because environmentalist hawks are afraid this would cause the value of GDP permits to drop). So the value of those permits starts to rise, so people hoard even more GDP permits against an uncertain future, which reduces velocity still further.

So we end up with a lot of apparently Zero Value Marginal Product unemployed workers.

Everything changes when you don't just use barter to trade stuff, but have to use money/GDP permits instead.

(This started out as a response to Bryan Caplan. But then I got carried away.)

Also see Tyler Cowen's article in Foreign Policy where he argues that high unemployment is caused by a decrease in the productivity of American workers:

...Many conservatives in the United States have placed the blame for high unemployment on the shoulders of President Barack Obama, arguing that his administration's liberal agenda has complicated the recovery. But the statistics suggest otherwise. Again, corporate profits and consumer spending are fine. Indeed, it's the sector in which the government has most directly intervened -- health care -- that has maintained the most robust job growth over the past two years, adding 20,000 new jobs in November alone. And don't go blaming job losses on illegal immigrants taking jobs from documented workers: Latino immigrants have left the country in large numbers since the start of the financial crisis.

As time passes, it is harder to avoid the notion that a lot of those old jobs simply weren't adding much to the economy. Except for the height of the housing boom -- October 2007 through June 2008 -- real GDP is now higher than it has been in the entirety of U.S. history. The fact that the United States has pre-crisis levels of output with fewer workers raises doubts as to whether those additional workers were producing very much in the first place. If a business owner fires 10 people and a year later output is almost back to normal, it's pretty hard to make the argument that they were doing much in the first place.

The story runs as follows. Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble -- plus it would have involved some morale costs with the more productive workers, who don't like being measured and spied on. So firms simply let the problem lie.

Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving. (Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.)

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.

...the U.S. economy is going through some major structural shifts. It's not a question of getting back to where we were, but rather that the economy must solve a new problem of re-employing a lot of people who were not, in reality, producing very much in the first place. That's a steeper challenge than we had realized early in the stages of this recession -- and so far policymakers have failed at meeting it.

Analysts still disagree on how rapidly the U.S. economy will recover. But they're missing the point. The era of low unemployment may be in our rearview mirror for a long time to come.