Worthwhile Canadian Initiative

Staghunt and (the) IRS

"IRS" stands for "Increasing Returns to Scale". It means if you double all the inputs, you more than double the output.

I first worried that US readers might think "IRS" stands for Internal Revenue Service (the US tax people). Then I realised that I want it to stand for that too.

Staghunt is a simple game with two players. Each player alone can catch one hare each; both players together can catch one stag, which they share. Staghunt has two Nash Equilibria: both hunt hare alone; both hunt stag together. (If the other hunts hare you want to hunt hare too, because you can't catch a stag alone; if the other hunts stag you want to hunt stag too, because half a stag is better than one hare.)

Staghunt exhibits increasing returns to scale technology, because two hunters producing one stag is more than double the meat of one hunter producing one hare.

Staghunt is also a model of society. We gain by cooperating, but it only works if we trust others to join in. It's different from Prisoners' Dilemma, the alternative model of society, because Prisoners' Dilemma has only one (bad) Nash Equilibrium, and so needs a Leviathan (which can be interpreted many ways) to enforce cooperation.

Staghunt is also a model of a "network externality". The individual who joins the network (hunts stag, buys a telephone) creates a positive externality for others already in the network, and increases the incentive for others to join the network. (That second effect should strictly be called "strategic complementarity", or "positive feedback", because it is not an "externality" in the strict sense. See my old post for the distinction.)

So Staghunt is a very good model with which to examine Brad DeLong's recent thought-provoking post.

Could you pass O-level economics in Pakistan?

The question: What causes unemployment?

The answer: Over the fold, taken from a textbook currently used for O-level (roughly grade 11) social studies in Pakistan.

Two Problems with Designing a Basic Income Experiment

WARNING: I don't do (micro) Public Finance. And I don't do experimental economics. Those who have read the literature may tell me they are well aware of these problems, or that I'm wrong about something.

Suppose someone asked me to design an experiment to test whether Basic Income would be a Good thing. (They wouldn't ask me, but let's suppose.) I can see two major problems.

1. Temporary experiment vs permanent policy.

Let us suppose that the worst fears about Basic Income were true. If you gave anyone (say) $10,000 per year whether they worked or not, everyone would stop working. Just suppose. Would the experiment be able to tell you that? Because if the experiment weren't able to tell you that, if it were true, it wouldn't be a very informative experiment.

If the experiment were temporary, and known to be temporary, it probably wouldn't be able to tell you that. Because getting $10,000 per year for one year is very different from getting $10,000 per year for life. (Colby Cosh tells me the Dauphin experiment did run for 4 years.)

If people do spend the extra money on taking time off work, that doesn't mean they spend it all immediately. If the average person in the experiment will work for (say) 20 more years, and people spread their extra time off work evenly over their remaining years ("consumption-smoothing"), the effects of a lifetime of basic income will be 20 times bigger than measured by a one year experiment.

It could be even worse than that, because people tend to bunch their leisure towards the end of their lives. We call it "retirement". Maybe the effect of getting $10,000 per year for one year will be that people will retire one year earlier. In which case, the experiment will show zero effect for everyone, except the small fraction of people who were planning to retire soon. If a one year experiment cuts working life from (say) 40 years to 39 years, the effects of a lifetime of basic income will be 40 times bigger than measured by a one year experiment.

You might need to run the experiment for three score and ten years to get some idea of the life-cycle effects. Which is a bit awkward.

2. Funded experiment vs self-funded policy

It's OK if experiments cost money. It's worth paying (sometimes) to get the information. But a basic income policy needs to be self-funding. Free ponies don't grow on trees. If you simply give everyone in the experiment a free $10,000 per year, then (as Stephen Gordon tweeted) good things will very probably happen. But what we want to know is whether good things will happen if we give a group of people $10,000 per year each and that same group of people have to somehow pay for that $10,000 per year each. What we want is a self-funding or revenue-neutral experiment (except for the cost of paying the researchers). The subjects would have to give up all other forms of support that the basic income is designed to replace, and pay the extra taxes that would be needed to make up the difference. Labour supply is not just about income effects; it's about substitution effects caused by changing the marginal (net) tax rate.

Almost any change in tax/transfer policy creates winners and losers. And with informed consent, the losers won't sign the Consent Form. Which would make it a bit awkward getting it past the Research Ethics Board.

It's the external validity of experiments that matters, not the damned T-statistics.

But, as a (moderate) supporter of Basic Income, I think I might just have a Cunning Plan. Which I will leave till later, if and when my head is clearer. But I think we are thinking about this Basic Income thing the wrong way.

What is Employment Insurance For?

 

If Canada's Employment Insurance program was designed solely to insure workers against the loss of employment, it would look very different.

For one thing, the premiums that employees and employers contribute would go towards paying benefits to people who have lost their jobs. But in 2013/14 - the most recent year for which I can find data - less than half the monies collected in EI premiums went to regular benefits for unemployed workers. The rest went to special benefits such as parental and sickness leave, to fishing benefits, to fund "Part II" benefits  (mostly labour market development agreements with the provinces), to cover administrative costs and to run a surplus.

Musical chairs with heterogeneity

There are two problems with musical chairs:

1. The obvious problem: there aren't enough chairs for the kids that want to sit on them.
2. The less obvious problem: chairs and kids are heterogeneous, so if kids grab any chair they can get, some tall kids will be sitting on short chairs and some short kids will be sitting on tall chairs. The tall kid sitting on a short chair won't swap seats with a short kid sitting on a tall chair, because they fear some kid without a chair will grab their seats if they try to change places.

Reforming Government: Do We Need a Human Investment Super-Ministry?

From time to time, I like to ruminate on what could be done to better develop or improve the delivery of government services especially given the tendency of government ministries to overlap when providing services. This gets a further push when I am teaching public finance - as I am this term. There is of course not only overlap between federal and provincial governments but within the respective tiers. This is especially the case within provincial governments when it comes to spending on what could broadly be termed the human investment function.

The simple macroeconomics of monopsony power

If you loosen monetary policy in a standard macro model, you get an increase in output and employment in the short run, and an increase in the price level in the long run.

That is not what happens if you assume monopsony power. The same loosening of monetary policy will cause a decrease of output and employment in the short run, (but the same increase in the price level in the long run).

So if you want to assume monopsony power, to justify minimum wage laws for example, you need to stop and think about the macro-implications of your micro assumptions. Do they sound reasonable to you?

The intuition is simple. Monopolists pick a point on the demand curve; so if prices are sticky, quantities traded are demand-determined. Monopsonists pick a point on the supply curve; so if prices are sticky, quantities traded are supply-determined.

Trouble is, that's a very partial equilibrium intuition. We need a simple minimalist general equilibrium model with monetary exchange to explain it properly.

Labour market flows revisited

It's been a while since I've looked at patterns in gross labour market flows; the last time was here. The basic methodology is taken from Stephen Tapp's  CJE article, in which he extracts labour market transitions from the Labour Force Survey Public Use Microdata Files. Not all transitions are covered by the LFS questionnaire, but we can get recover some of them:

1. Hires: People who are employed, and who have been at their current job for one month or less.
2. Layoffs: People who have been unemployed for 4 weeks or less, and who were laid off from their previous job.
3. Leavers: People who have been unemployed for 4 weeks or less, and who left their previous job of their own accord.

Lumbering Along in the Finding Data Process

Well, all I was trying to do was introduce a set of lecture slides on the nineteenth century timber trade with a simple overview of the Canadian logging industry's employment in the twentieth century.  Well, three hours later it has proven to be a more frustrating exercise than I would have expected but here is what I have.

The efficiency wage case for maximum wage laws

I think Larry Summers is wrong, on a point of theory. He commits a fallacy of composition. (That's a brave way to start the day.)

He says (HT John Cochrane):

"Businesses will raise wages to a point where the cost is just balanced by the reduced bill for recruiting and motivating workers. At that point, a further increase in wages does not appreciably change their total costs but higher wages certainly makes their workers better off. So there is a strong case for robust minimum wages."

Suppose wages were set by an omniscient social planner, who took into account the effect of higher wages on recruitment and motivation. Now consider the point of view of an individual employer, who contemplates what he would want to do, if he could set his wages higher or lower than the social planner allows. By raising his wages relative to other employers' wages, he could increase recruitment and motivation at his firm, but would reduce recruitment and motivation at other firms. The individual employer would ignore the negative externality he imposes on other firms' recruitment and motivation of workers. But the social planner would not ignore it. The social planner would prevent the individual employer raising wages at his firm.

Nope. That makes a strong case for robust maximum wages.

We don't call it "the efficiency wage theory of unemployment" for nothing.

I look forward to those who like government intervention to eagerly adopt the efficiency wages case for maximum wage laws, to help eliminate the scourge of unemployment that results from individual firms' profit-maximising behaviour in setting their relative wages too high.

The Growth of the Local Public Sector

The rising expense of local government services is increasingly capturing the attention of pundits and policy makers alike.  The rising cost of policing and fire services in particular and their effects on local budgets and ratepayers, has drawn the attention of Canadian municipal leaders.  What is also interesting is the overall growth in local government employment in general over the last decade at rates much greater than the growth in total employment.

A Resource Bust and Yet...

The OECD has cut its growth forecast for Canada citing the drop in oil and commodity prices.  With all the talk about the slowdown in the Canadian economy picking up steam and slow growth as a result of the drop in oil prices that began last spring, one might expect some job losses to start emerging in places like Calgary or Regina.  Interestingly enough, most Canadian CMAs have continued to grow their employment over the course of the last twelve months.

Lump of Labour, Say's Law, and the slope of the AD curve

I wrote this partly for Sandwichman, and mostly I wrote it because this same question crops up time and time again. It's a very old question, but it always looks like a new question if the technology is new enough. People in caves were probably arguing about whether 3-D printing robots flints would cause mass unemployment. And my answer is an old one too. There's nothing new in this post.

Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour.

Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours.

Suppose technology changes, so that productivity doubles. Labour now produces 2 apples per hour. What happens? Will employment stay the same, so output doubles? Will output stay the same, so employment halves? Or something in between?

Is mass unemployment a possibility?

"Involuntary" unemployment as worsening trade-off

This is what I think an increase in "involuntary" unemployment looks like:

"Human Capital" and "Land Capital"

Branko Milanovic (HT Mark Thoma) misses the point about the usefulness of the concept "human capital". To explain the point, let me talk about "land capital" instead.

Raw land, in it's natural state, often isn't very productive. Before you can grow wheat on it, you usually need to clear it, or drain it, or fertilise it. There's an up-front investment, which is costly in the "opportunity cost" sense, because it uses resources that could have been used elsewhere to produce something else.

What we call "land" is as much capital as land. The rents on "land" are as much a return to capital as they are a return to raw land.

Some land needs very little investment to make it productive; other land requires a lot. Some land gives a high return on investment; other land gives a low return. It's all different.

Comparing Manufacturing Employment Growth: Canada and the USA

According to the employment numbers just released, the United States is doing quite well with the preliminary Bureau of Labour Statistics numbers pointing to the addition of 252,000 jobs in December and an unemployment rate now at 5.6 percent. Meanwhile, Canada exhibited a much weaker performance with Statistics Canada reporting that Canada lost 4,300 jobs in December and had an unemployment rate of 6.6 percent.  What is also interesting in this differential performance is what is happening in manufacturing – both recently and with some reference to the past.

How to test whether the LMI (LMCI) is a good indicator

The Bank of Canada calls theirs the "Labour Market Indicator". I now learn from Tim Duy (HT Mark Thoma) that the US Fed has one too, and calls theirs the "Labor Market Conditions Index". I think that LMI and LMCI are roughly the same sort of thing. It's an index number that is supposed to measure the amount of labour market slack [or tightness, for the LMCI], that is based on more than just the unemployment rate. (The Bank of Canada reports an LMI for the US too, and I don't know how much it agrees or disagrees with the Fed's LMCI.)

I read Tim as asking, quite reasonably, how we can know whether the LMCI is a useful indicator for the Fed to watch. Simon van Norden asked basically the same question about the LMI in a comment on my post. In particular, does the LMI/LMCI add any useful information for monetary policy that is not already in the unemployment rate?

Here's how to test whether the LMI is a useful indicator:

Are stagnant incomes a statistical artifact?

The American middle class hasn't got a raise in 15 years. Median household incomes aren't moving.

Canadian numbers tell a similar story. The market income (earnings, private pensions, investment income) of the median Canadian household is lower now, in real terms, than it was in 1976:

Labour market slack in Canada and the US

Paul Krugman says:

"My guess is that there’s considerably more slack [in the US labour market] than the unemployment number might lead you to suspect, but the truth is that I don’t know."

Timothy Lane, deputy governor Bank of Canada, has an estimate that agrees with Paul's guess. He says (in a talk at Carleton University):

"Chart 11: There's more labour market slack than the unemployment rate suggests in Canada and U.S."

[Now how do I copy and paste Chart 11 from a PDF into Typepad? Stephen? Please help!]

Konrad Zmitrowicz and Mikael Khan explain how the Bank of Canada's Labour Market Indicator (LMI) is constructed (pdf):

"To consolidate the information contained in the various labour market measures shown in the preceding section, we construct a labour market indicator (LMI) for both countries using a statistical technique known as principal component analysis. This technique extracts the common movement across the eight labour variables to create a simple summary measure of labour market activity. The LMI is scaled to be comparable with the unemployment rate, and thus provides a simple benchmark against which to judge whether the unemployment rate is evolving in a manner consistent with broader labour market conditions."

Now, the Bank of Canada's LMI doesn't necessarily tell us what we need to know either. But it's probably better than looking at the unemployment rate alone.

That's all folks.

How big has the effect of increases in the minimum wage been on youth employment?

One of the more puzzling features of the Canadian labour market in the last few years recovery has been the stubborn refusal of youth employment rates to recover from the recession:

There may a relatively simple (partial) explanation. This is taken from a recent Statistics Canada study on trends in the minimum wage:

There seems to be a broad consensus around "small increases in the minimum wage will have small effects on employment", but this is not a small increase: the CPI-corrected Canadian minimum wage increased by 12.9% between 2008 and 2013. So in this post I'm going to try to put together some back-of-envelope numbers about what sort of effect this increase has had on youth employment.

The counterfactual I'm going to consider is: What would have happened to youth employment if Canadian real minimum wages had simply increased in line with the CPI since 2008? That is to say: what were the effects of that extra increase of 0.1215 ( = log[1.1292]) in the log of the minimum wage between 2008 and 2013?