Worthwhile Canadian Initiative

If you wanna run hot you gotta run steady

Canadian economist Richard Lipsey would always insist that the Phillips Curve is a curve, and not a straight line. Maybe because wages and prices are stickier down than up. Or maybe because unemployment can't go below 0%. Or both.

Here's why that matters for macroeconomic policy:

Suppose the central bank wants 2% inflation on average, over the longer term. One way to get that result would be to flip a coin, every year, or every decade, or whatever. If it's heads, the central bank "runs the economy hot", to get 3% inflation. And if it's tails, the central bank "runs the economy cold", to get 1% inflation. If the Phillips Curve were a straight line, you would get exactly the same average unemployment rate, over the longer term, as you would if the central bank kept inflation steady at 2%. But if the Phillips Curve is a curve, and curves the way we normally draw it, you would get higher unemployment on average with that random monetary policy than you would if you kept inflation steady at 2%. And the sharper the curvature of the Phillips Curve, the worse unemployment will be, on average, with a random monetary policy.

That's why macroeconomic demand stabilisation matters. Recessions are bad, and booms may be good, but the bad and good don't cancel out. Relative to where you would be if you stabilised demand, recessions are bigger than booms.

If you add "hysteresis" to this simple story, then macroeconomic stabilisation matters even more. Because a recession has costs that persist even after the recession is over, and those long term costs of the larger recession are bigger than the long term benefits of the smaller boom.

Now maybe 2% inflation is not the right inflation rate to target. Maybe it should be 3%. But that's a separate question, about the Long Run Phillips Curve and whether it's vertical or sloped, and the point I'm making in this post about the Short Run curvature still stands. It's better to target 3% every year than to flip a coin every few years between 2% and 4%.

And maybe inflation is the wrong thing to target. Maybe it's better to target a level-path of NGDP. But again that's a separate question. Or maybe only a partly separate question. Because if supply shocks cause the Phillips Curve to shift up and down, keeping NGDP on target would stabilise unemployment better than an inflation target. And the point of this post is that you need to stabilise unemployment if you want to keep unemployment low on average over the longer term.

And maybe it's not really about Phillips Curves at all. Maybe it's about Milton Friedman's "Plucking Model": there are no booms, only recessions. (What looks like a boom is just the absence of a recession, because recessions can be big or small but booms are all the same, because big recoveries follow big recessions, and small recoveries follow small recessions, but the size of the decline doesn't match the size of the "boom" it follows). Which is like an extreme version of my curved Phillips Phillips Curve story above, where booms are smaller than recessions. And Friedman's Plucking Model always reminds me of Frances' story about her old car: most of the time it ran OK, but if something unexpected happened it was always something bad. The only good news was absence of bad news. Which is how things are with designed systems: they sometimes break down and run worse than the Toyota designer intended, but rarely "break up" and run better than the designer intended. And market economies are a bit like that, though their "designer" is the invisible hand. There can be bad monetary shocks, but the only good monetary shock is no monetary shock.

You can read this post as a critique of "running the economy hot". What do you mean by that, and how can you do it sustainably over the longer term? Or you can read it as a comment on J.W. Mason's recent good post (which I partly agree with and partly disagree with, as always). Or you can just read it on its own.

More Thoughts on a Better Income Support System for the Next Crisis

This post was written by Mike Veall of the Department of Economics at McMaster University.

I appreciated the comments on my earlier post, where I suggested that a small monthly Basic Income system would have the advantage of being able to be scaled-up in a crisis.

Incenting participation in the tax/transfer system is responsive to the work of Anna Cameron, Lindsay Tedds, Jennifer Robson and Saul Schwartz pointed out by Frances even though those authors seek a different, automatic-enrolment approach.

(Advertising: More on nonfiling by Robson and Schwartz is coming out in September’s Canadian Public Policy/Analyse de politiques; CPP/Adp is also currently working on expedited publishing/special issues for pandemic-related articles.)

The skepticism in the comments on my post is well-taken, and if we can get a better emergency benefit delivery system by other means, better is better.

But I would hope it would end up monthly. Especially during an emergency, “monthliness” is much superior to the quarterly delivery of the GST/HST credit and the CWB.

However it is obtained, there is a need for an improved starting point. While COVID policy so far has been the economics equivalent of meatball surgery, it already appears that CERB take-up was under-predicted. I fear overpayment will also prove an issue. While an automatic system with 100% coverage is unrealistic, the alternative has been 7 million CERB applications. With that many, CRA had to rubber stamp, and follow-up has to be at least questionable.

And a pure application system seems to require a lowest common denominator approach with consequent sharp edges. If someone’s 2019 income = $5K, CERB = $8K. If 2019 income = $4.9K, CERB =$0.

Finally, I have been thinking about whether emergency income support to a family could and should be conditioned on rent. Particularly in an emergency, rent looms large, and it varies a lot across the country. I’d be particularly interested in learning the thoughts of others.

A postscript: Privacy concerns sometimes come up, as mentioned in one comment. I think most taxpayers would accept this rather modest incremental risk to their privacy if it means better effectiveness for the substantial tax dollars being spent on programs like CERB.

A Small Basic Income as a Solution to the Magic List Problem

This post was written by Mike Veall of the Department of Economics at McMaster University.

What if in a future crisis there is again a need to distribute money? As Jennifer Robson put it, “government doesn’t have a magic list with everybody’s name and addresses and bank accounts.”

I was reminded of this when thinking about transmitting money to someone in a less developed economy. How can I be sure it will work? I could send a small amount, confirm receipt, and then send more.

The same approach could create a magic list for Canada. Every month the government could send a taxable $20 or $30 to everyone (except children and seniors, already in the system with monthly benefits). It would be enough money that most people would check receipt, at least occasionally, and hence continually test the system. I think this is much more likely to work than an enrolment system or having CRA try to construct a list.

Then, in a crisis, the government can quickly scale up the amounts, put in clawbacks, whatever it decides.

$30 per month can easily be financed by reducing the personal amount on the personal income tax. If desired, implementation could be made pretty close to distribution neutral by also reducing the GST/HST credit and a couple other tinkers. It would be cheap crisis preparation.

This post is about how to make a magic list, not on the desirability of a more sizable Basic Income. But I note that if a sizable BI would be a good policy, a small one could pave an incremental path. And if it would prove a bad policy, trying a small one first could help avoid a mistake.

Boiling Frogs - Slow Recoveries are Deep Recoveries, with Flatter Phillips Curves

Andy Harless' tweet (about the US economy) got me thinking.

"There’s a frog-boiling aspect to this economy. The consistent lack of *rapid* improvement throughout the recovery is enabling us to reach levels of employment that might not otherwise have been attainable."

It reminds me of my old post "Short Run 'Speed Limits' on recovery".  The basic idea is simple: actual inflation (relative to expected inflation) might depend not just on the level of employment (relative to some unknown level of "full employment"), but also on the speed at which employment increases.

I've added an epicycle to the Phillips Curve that I think makes it fit the facts better. But I added that epicycle 10 years before the facts that Andy's tweet asks us to explain. And it's based on an idea that make sense, and goes back further still:

It's difficult and costly to increase employment quickly, and easier and cheaper to increase employment more slowly, even for the same cumulative increase in employment. So if demand for output suddenly increases by (say) 10%, individual firms will raise prices and wages relative to the prices and wages they expect at other firms, or raise them more than they would otherwise have done if demand for output had slowly increased by that same 10%. Even with no underlying trend growth in productivity. Even with the same average level of demand for output.

The search/matching approach to understanding the labour market gives us one reason to think that it's more difficult and costly to increase employment quickly rather than slowly. Workers and jobs are heterogeneous. It's a bit like the marriage market. Getting the right match is important, and difficult and costly. And getting the right match between workers and jobs is even more difficult if you have to find a match quickly.

If demand for your output increases, and it's too difficult and costly to increase employment to increase your output to meet that increased demand, you increase price instead. The more quickly demand increases, the more likely you are to increase price rather than increase employment.

Thinking about "discouraged workers" adds something important to this story.

An individual firm can increase employment by attracting workers away from other firms, by increasing its wage compared to other firms' wages. But that doesn't increase aggregate employment; it doesn't work if all firms try to do the same thing. The only thing that happens in aggregate is that wages rise; and so prices rise too. The only way we can get an increase in total employment from increased demand for output is if unemployment falls, or if discouraged workers (who had given up looking for work, or who didn't even start looking, because they thought they wouldn't find a job) are encouraged to enter or re-enter the labour force.

It seems plausible to me that the quickest way for an individual firm to increase employment and output is to raise wages to attract workers who are currently employed at other firms. There's a lot of them, you know where to find them, and you know they can do the job and hit the ground running. Increasing employment by hiring the unemployed will be slower. There's fewer of them, and finding the ones who can do the job will take time, and they may need on-the-job-training to get them up to speed. And increasing employment by hiring discouraged workers will be even slower. Discouraged workers are like unemployed workers, except they are harder to find than unemployed workers, because the unemployed workers are trying to find you.

What this suggests to me is that a quickly-increasing demand for output, following a recession, will result in more inflation than slowly-increasing demand for output, even if you compare those two paths at the point where they cross and have the same demand for output. And a slow recovery in demand will pull more discouraged workers into the labour force, resulting in a bigger labour force and higher total employment, before the central bank needs to stop demand increasing to prevent inflation rising above target.

Do Chinese Canadians struggle in the labour market?

Update: A revised version of the paper discussed in this blog, with results close to those obtained using the PUMF, is available here. Thanks to Feng Hou for taking my concerns seriously and responding to them promptly.

Hopefully, Tomorrow Won't Be Yesterday

A short quick post.  Yesterday’s job numbers for Canada were greeted with surprise.  With 55,900 jobs added in February, the sentiment as best summarized by Doug Porter, Chief Economist with BMO Capital Markets is that: “The economy clearly is not falling off a cliff by any means, arguably quite the opposite”.  This is despite what seems to be a slowdown in the Canadian economy as indicated by consumer spending, exports and capital investment by business in 2018.  The more entertaining headline was by BNN Bloomberg which led with the Canadian labour market is off to its best start since 1981 as “The two-month gain is the best start to a year since 1981.” Of course, if the economy is doing so well one wonders why we are holding off on interest rate increases but I digress.

More to the point is what those of us with more historical memory remember about 1981.  Take a look at Figure 1 which plots seasonally adjusted monthly employment gains from January 1980 to December 1982.  January and February 1981 were certainly the two biggest consecutive gains in that period and quite impressive at 66,500 and 76,800 jobs respectively.  But look at what happened next – employment shrank in March of 1981, growth resumed for a few months afterwards and then – well, the economy fell off a cliff into the 1981-82 recession which saw unemployment rates soar to peak at 13.1 percent in December of 1982.

 

 

If we compare monthly employment in the year leading up to January February 1981 to a similar range for January-February 2019 as in Figure 2 one sees that it is not inconceivable that we are again about to fall off a cliff especially given the accompanying aforementioned economic indicators for 2018.  However, a big difference between now and then is monetary policy and interest rates which peak at their post war high about this period.  We are currently still at pretty historic lows for interest rates.  However, based on what happened to employment in 1981, we should know by the end of summer if we are in store for some employment drops.

"Are we at full employment yet?"

I vaguely remember having seen this movie before, the earlier British version. And it's a frustrating movie to watch, because nobody knows where full employment is, except maybe when we've driven past it and can see it in the rear-view mirror. And the question itself always gets confused between asking where full employment ought to be, according to someone's map of an ideal world, and where it actually is, given the world as it is, and what can be achieved with aggregate demand policy alone.

If deviations of inflation from target responded instantly and consistently to deviations of employment from full employment, we wouldn't need to ask the question. Just keep inflation on target, and employment will look after itself. And if you think that "full employment" thus defined isn't ideal enough for your world, then OK, tell us what microeconomic (non aggregate demand) policies you would like to use to try to improve things.

But deviations of inflation from target don't respond instantly and consistently to deviations of employment from full employment. Inflation is a lagged and noisy signal. And inflation targeting itself, it seems to me, has made inflation an even more lagged signal, with an even lower signal/noise ratio. Divine coincidence doesn't work very well, and basing your policy on it seems to make it work even less well. So we still ask "Are we at full employment yet?" in order to try to keep inflation on target.

The main cost of overshooting full employment is not the inflation that results from doing so. The main cost is the cost of the extra unemployment when you bring inflation back down again. I've seen that movie before, in the 1980's, and I don't want to see it again.

Set aside the other benefits of switching from an inflation target to an NGDP level path target. If switching targets meant we wouldn't need to ask "Are we at full employment yet?" in order to figure out whether monetary policy is too tight or too loose, that would be a major advantage. Because it's a question we can't answer until it's too late. Instead we would simply hope that we are not at full employment yet: we would hope that target NGDP growth would in future be composed more of real GDP growth and less of inflation. And we would be forced to concentrate instead on microeconomic policies that might improve that composition.

Has Canada's female employment rate maxed out?

In their 2018 Budget, the Liberal government committed to increased full-time employment of women as part of its gender equality agenda. Is that goal attainable?

The employment rate of women in Canada increased steadily from 1976 up until the 2008 financial crisis. Since that time, the percentage of women over 25 who are employed has been stable or decreasing. Have we reached a plateau, where further increases in female employment rates are unlikely? Or is it possible to do more, and further increase women's economic opportunities?

Are education attainment levels the root cause of all good earnings news?

An earlier post noted that the real earnings gains over the past 20 years were as clean an example of a composition effect as you're likely to see. Earnings among full-time workers with a given level of education have shown some modest growth over time, but average earnings growth for all full-time workers has been stronger than it has been for each of its components:

The Meaning of Life, Labour Supply, and all that

Here are the results of my Twitter poll:

This post is my interpretation of those results.

I recognise all the usual caveats. I am more concerned about bias in the sampling method than in the small size of the sample (because it's not that small). The people who follow me on Twitter (or who follow those who follow me and reTweeted it) are probably richer than average, so less in need of the extra $50, so more likely to choose B. But they are also more likely to be economists, or to "think like economists", and maybe think it might be a trick question, because why would anyone leave $50 on the sidewalk, and if there's no trick then A is the obvious answer. Plus the normal caveat that how people answer any survey might not be the same as their revealed preference in any real choice. (But it's an anonymous survey, so there's no point in signalling a socially-approved answer.)

I would have answered "B" myself. And I wanted to find out how many people thought the same way, and how strongly they felt about it. (I would have switched to "A" if I had been poorer and needed the money more, but I would still have switched back to "B" if the $50 had been raised closer to but still less than $100.)

It's not easy explaining my choice in terms of economists' standard means-end dichotomy. And it wasn't easy constructing a poll question that would get at what I was trying to get at (and I'm not satisfied I've got it right). I find doing something more satisfying when I think it has a purpose than doing the exact same activity when it doesn't have a purpose and so isn't a "real job". And it's not (just) about altruism vs egoism; I get satisfaction out of chopping wood for my fireplace, or my Mother's fireplace, that I don't get out of chopping wood for no reason at all (except exercise), that is separate from any satisfaction I get later from the firewood itself. And I think most people think like me, at least to some extent. And my little poll was intended to try to find out how many people and to what extent.

If I'm right about this, it will matter for labour supply curves. People (or some people) will choose jobs they think need doing over otherwise identical jobs they think don't need doing, unless there's an offsetting wage difference. It will also matter for comparing programs like Basic Income (Negative Income Tax) vs wage subsidies vs job guarantee.

[A few years back I installed a heat pump in my home. The salesman said I would get a subsidy from the Quebec government as an incentive to install a heat pump to reduce electricity consumption. Filling out the forms to collect that subsidy got stuck on my "To Do" list, because it was a pointless job I would get no satisfaction from doing, just to transfer some money.

And I'm recently retired, so I'm still adjusting to a life where I don't really need to do a lot of the things I used to need to do.]

But how could I have asked my question better, to measure what I am trying to measure?

Why do we care about the labour share of income?

And by 'we', I mean 'Canadians'.

A lot has been said and written about the decline in the labour share of income, usually calculated as total employee compensation divided by nominal GDP. This decline is generally regarded as a negative development: the reduction in the share of income going to workers is interpreted as a symptom of suppressed wage growth and of increased income inequality.

I don't doubt that this is a useful narrative for understanding what has been happening in many countries, the US in particular. But I can't see how it fits the Canadian experience. Movements in the Canadian ratio of wages to national income  appear to be a story of the denominator, not the numerator.

A very simple model of too much city

100 identical individuals choose to live in one of two identical locations. The only thing they care about is how many people live in the same location. Let W individuals choose to live in the West, so 100-W choose to live in the East. The Utility of living in the West is U(W), and the Utility of living in the East is U(100-W), but it's the same U(.) function for both locations. Individuals have zero moving costs, and choose the location with the highest Utility.

Draw a curve for U(W). Then take the mirror-image of that curve (so East and West are transposed) and superimpose it on the first curve. Any point at which the two curves cross is an equilibrium, with the same Utility of living in each of the 2 locations, so no individual has an incentive to move. There is always an equilibrium at W=50, but it may be a stable or unstable equilibrium, and there may be other equilibria.

If the curve always slopes down, U'(W) < 0, the W=50 equilibrium is unique and stable. People dislike crowding, so move away from the more crowded location, until both locations are equally crowded. But that equilibrium does not fit the fact that cities exist.

If the curve always slopes up, U'(W) > 0, the W=50 equilibrium is unstable. People like crowding (there's some sort of Increasing Returns for jobs or amenities), so move towards the more crowded location, until everyone lives in the same location. There are two "corner solution" equilibria: one where everyone lives in the West; a second where everyone lives in the East. But those equilibria do not fit the facts either, because not everyone lives in the city.

So assume the curve initially slopes down, then slopes up, and is upward-sloping when W=50, and then eventually slopes down again, as W gets bigger. We get 3 equilibria: one unstable equilibrium where W=50; and two stable equilibria -- one in which most people live in the West, and one in which most people live in the East. Those two stable equilibria fit the facts; a city exists, but not everyone lives there. So that is the version of the model I will stick to.

The two stable equilibria are identical, except that East and West are transposed. They have the same level of Utility.

Here is the important question: Does the stable equilibrium (where the city exists) have a higher or lower level of Utility than the unstable equilibrium (where half the individuals live in each location)? It could go either way. It all depends on how you draw the curve.

Here is an example where cities are Bad Things, even though most people choose to live in the city:

Here is the intuition: Start in the unstable equilibrium where W=50. Now suppose that one individual randomly moves from East to West. That creates a positive externality for those already living in the West, and a negative externality for those remaining in the East. So that encourages a second individual to move West.

It is the (positive) sign of the difference between those two externalities that determines whether or not there is strategic complementarity (so the second individual wants to follow the first). Which depends on the sign of U'(W). But it is the (positive or negative) sign of the sum of those two externalities (weighted by populations in West and East) that determines whether it is a Good Thing or a Bad Thing for individuals to move West. Which depends on the sign of U''(W).

"Network externality" is a term that fudges that important distinction: the kid who gets a cellphone may create a positive externality for other kids who have cellphones, but a negative externality for other kids who don't have cellphones. Following the herd might be individually rational but collectively irrational. And following the herd might even create a negative externality for those in the herd, but an even bigger negative externality for those not in the herd, which induces others to join the herd but makes everyone worse off. It depends.

The biggest flaw in my very simple model is not that everyone is identical and the locations are identical; it's that I have ignored land rents. Land rents are a way to transfer utility from those who live in the city to those who live outside the city (because you don't need to live in the city to own land in the city).

Thanks to Robert Waldmann on Twitter for fixing my mathos. Robert has a related but more complicated post, but Photobucket has lost his pictures. Alex Tabarrok on Twitter notes that my model is related to one used to allocate cars between two roads. The difference is that drivers always prefer the road to be less crowded (U' < 0), and so the two roads problem is only interesting if the roads are not identical (one road is longer than the other). I don't know how original my model is; because as I keep telling myself, I don't do Urban economics.

The (In)efficiency of Perfect Price Discrimination

I have always thought, and taught, that Perfect Price Discrimination leads to an efficient allocation of resources. I now think that is wrong. It only seems to work if we use partial equilibrium reasoning, for a single monopolist that practices PPD, holding constant consumers' income and the monopolist's Marginal Cost curve. It doesn't work in general equilibrium. And the easiest way to see this is to construct a counterexample where all consumption goods are produced by monopolists who practice PPD, while the labour market is perfectly competitive.

A PPD monopolist captures 99.99% of Consumers' Surplus by setting a different price for each apple for each consumer, that is 99.99% of that consumer's Willingness To Pay for that apple, down to where the marginal price equals the Marginal Cost of producing an extra apple. So the consumer buys all the apples up to the point where his marginal Willingness to Pay (Marginal Benefit) equals Marginal Cost, but is almost at the point of walking away from the deal and not buying any apples at all. It looks like it works to get an efficient allocation of resources (where Marginal Benefit equals Marginal Cost) if we think partial equilibrium.

But it doesn't work in general equilibrium. If all producers of consumption goods practice PPD, this is like the government imposing a 99.99% marginal tax rate on labour income. It reduces the marginal incentive to work extra hours to earn extra income to buy extra consumer goods to enjoy extra Consumer Surplus by 99.99%, because the monopolists will raise your individual price schedules in response to your increased income to capture 99.99% of your increased Consumer Surplus.

TLDR: if you make the rich pay more, because they are willing to pay more, nobody will do any work to produce anything.

Soldiers of Fortune goes to Hollywood

There are six identical men, who must choose one of them to do an unpleasant job. They could hold an auction and pay one of them to volunteer to do the job. But if they have diminishing marginal utility of consumption, they will prefer instead to roll a die to decide which one of them does the job. Their expected utility is higher. If the job is unpleasant because it has a risk of death, then state-contingent preferences (the marginal utility of consumption when dead is zero) strengthen the argument for a lottery.

That's the intuition behind a paper I read 25 years ago, about lotteries and the draft for the Confederate Army. I think the title was "Soldiers of Fortune", but I don't remember the author, and I can't find it on the internet. Sorry. by Ted Bergstrom.

Now imagine that a seventh man controls the die, and can offer deals to the other six. He can collect rents in exchange for tilting the die. But there is a limit to how much rent he can collect, or the six will instead auction the job among themselves.

Now change the model, reversing the sign, so the job that one of them will do becomes pleasant. One of them will become a movie star. With diminishing marginal utility of consumption, they will prefer to roll a die to decide who gets to be the star. And with state-contingent preferences (being a star increases the marginal utility of consumption) that strengthens the argument for a lottery.

And again, if a seventh man controls the die, he can collect rents. But there's a difference, because in this case the seventh man need only make a deal with one of the six, not with five of the six. If the other five don't know about the secret deal, they won't revert to the auction.

[Trying to answer a question raised by Steve Randy Waldman's tweet.]

Migration, Wages, and Corner Solutions

I'm trying to get my head straight on something. Macro farmboy lost in Urban Economics again. Read at your own risk.

If immigration always increases real wages (or well-being), do we end up in a "corner solution", where everyone bunches together in one location leaving other locations empty? If so, that's a reductio ad absurdam, because we do not observe everyone living as close together as is physically possible, like sardines in a can.

Start with the simplest model. Everyone is identical, they only care about wages, and there are no moving costs. Divide the country up into two regions (East and West), and assume an initially arbitrary distribution of the population between the two regions. Suppose that wages are higher in the West than in the East, so people move from East to West. What does the equilibrium look like?

If we assume Diminishing Returns (think of an agricultural economy where land and labour produce food, so wages are a decreasing function of the labour/land ratio) we will (usually) get an interior solution -- an equilibrium where some live in the East and some live in the West. Because East to West migration causes West wages to fall and East wages to rise, until they are equal and migration stops.

If instead we assume Increasing Returns, so wages are an increasing function of population, we get a corner solution. People migrate West, which causes West wages to rise, East Wages to fall, which increases the incentive to migrate West. The whole population moves to one of the two regions. (There is a third equilibrium where wages are exactly equal between the two regions, so nobody moves, so wages stay equal, but we only get to that equilibrium if we start there by sheer fluke, plus it's unstable, so I will ignore it.)

Now divide the country into three regions. Everyone moves to one of the three regions.

Now divide the country into four regions. Everyone moves to one of the four regions.

You can see where this is going.

Divide the country into an infinite number of regions. Everyone moves to one infinitesimally small region.

Which is not what we observe.

Upward-sloping Demand curves for Labour and Housing

I have a simple thought-experiment ("model") that helps me think about the relationship between: migration; planning restrictions; wages; and house prices (or rents).

Assume all workers are identical, all houses are identical, and it's strictly one worker lives in one house. The government of a small city/state controls both immigration and the number of houses that are built. Because the city/state is small, relative to the world, it has no effect on the rest of the world. There's a perfectly elastic supply of labour from the rest of the world at a real wage w*.

There is some sort of economies of scale or agglomeration effect that causes labour productivity in the city/state to be an increasing function of the number of workers who live there. And self-employed workers earn the Average Product of Labour (there are no other inputs).

There are four types of equilibrium: 1. Where the migration constraint is binding because the government allows in fewer workers than it allows houses to be built; 2. Where the housing constraint is binding because the government allows fewer houses to be built than it allows workers to enter; 3. A kife-edge equilibrium where the government allows exactly the same number of houses and workers; 4. An equilibrium where the government allows free entry and free building and the limited land of the city/state is the binding constraint.

Here is what the four types of equilibrium look like:

1. House prices and rents are the same as in the rest of the world (houses can be imported from abroad and erected on the city/state) but wages are higher. Small relaxations on entry (not big enough to make the building constraint binding) cause wages to rise (because productivity rises due to agglomeration effects) but do not affect rents.
2. House prices and rents are higher than in the rest of the world, and so are wages. But the wage differential exactly equals the rent differential, so that real wages (adjusted for the higher cost of housing) are exactly the same as in the rest of the world (otherwise it can't be an equilibrium because more workers would try to enter, pushing up house prices and rents). Small relaxations on building cause house prices and rents to rise and wages to rise but real wages to stay the same because both rise by the same amount.
3. An indeterminate mix of 1 and 2 above.
4. Exactly like 2 above, except that it is landowners who capture the benefits from the high rents, rather than the government auctioning off the building permits (or the government's friends who get given the new building permits for free). Real wages (adjusted for the higher cost of housing) are exactly the same as in the rest of the world.

(I would like to relax the simplifying assumption of one worker one house, but it's too hard for me.)

This post is for Open Borders YIMBYs. Your stories about whether standard Econ 101 supply and demand apply to labour and to housing have got to be consistent.

Monopoly/monopsony power and hungriness for sales/purchases

This is actually about the minimum wage debate. And I'm more asking you a question than giving you my answer. Bear with me for a minute.

You are a seller. You sell a good for money. You have some degree of monopoly power over the good you sell. You face a downward-sloping demand curve, you set a price somewhere along that demand curve, and the buyers decide how much you will actually sell at that price. You always want to sell more at that price, because the price you set is above your marginal cost. If you set your price, and then demand unexpectedly increases, you are pleased to sell more. The seller with monopoly power is always hungry to sell more at the posted price; buyers are not hungry to buy more.

You are a buyer. You buy a good for money. You have some degree of monopsony power over the good you buy. You face an upward-sloping supply curve, you set a price somewhere along that supply curve, and the sellers decide how much you will actually buy at that price. You always want to buy more at that price, because the price you set is below your marginal benefit. If you set your price, and then supply unexpectedly increases, you are pleased to buy more. The buyer with monposony power is always hungry to buy more at the posted price; sellers are not hungry to sell more.

A composition effect in earnings growth and education attainment levels in Canada

I came across this post by Mickey Kaus a while ago, on trends in US earnings broken down by education attainment levels. From about the mid-70s to the mid-90s, earnings growth diverged sharply: increasing strongly for those with high levels of education, and falling for people with lower levels of education. Earnings growth has been more balanced since then, but the gaps carved out by this divergence have not been filled in.

This isn't an exercise we can repeat for Canada; this kind of earnings data only start in 1997. But I was curious to see what it would look like, and I found as neat an example of composition effects as you'll ever see.

Job tenures and the gig economy

A few weeks ago, Alex Usher drew my attention to this post by the Pew Research Center, on job tenure patterns of 18-35 year-olds in the United States. The takeaway point was that, contrary to an oft-repeated narrative about the "new gig economy", job tenure patterns among millennials resemble those of the generation previous.

Of course, Canada is not the United States: what do job tenure data look like for younger cohorts up here? It turns out that this may be one of those rare cases where Canadian data are richer than American data: the Labour Force Survey has been asking about job tenure since 1976, and we can focus on more tightly-defined age groups.

I've calculated three job-tenure measures:

• Median job tenure
• Proportion with job tenure of one year or less
• Proportion with job tenure of five years or more

These are broken down by age group (25-29 and 30-35), by sex, and by educational attainment (high-school graduates and university graduates). I've also limited attention to full-time workers, and excluded the self-employed. I've put everything in an excel file you can download here. The excel file also includes average job tenures, but I won't be talking about them here.

The Mary Tyler Moore Effect

In 1970, every Justice on the Supreme Court of Canada was male. Prime Minister Pierre Elliott Trudeau had an all-male cabinet. Canada had never had a female premier - or even a female television newsreader. Little girls across the country were starting to feel the faint stirrings of ambition, often encouraged by mothers who wanted their daughters to live life to the fullest. But they had no idea - how does one be a "career woman"? What does a professional woman even look like?

Then the Mary Tyler Moore Show came along. It showed a woman who was smart, and independent, and made mistakes - and won out in the end. She was successful. She was likeable. She opened up a world of possibilities.

The Mary Tyler Moore Show first aired in 1970, and went off the air in 1977. This is what happened to US female labour force participation rates during this period.