A Deeper Look at US Trade

The US Census Bureau is the main source for all trade related data. Previously I’ve looked just at our overall trading partners, but they also have some detailed datasets that go into detail regarding what kinds of things are being traded. Unfortunately, these only go back to 2006, but there’s still interesting stuff.

First, let’s look at what we export, by category.

exports1

The two biggest categories are capital goods and industrial supplies and materials. In a second we’ll dig deeper into what that means. Next is our imports:

imports1

Here there are three standouts: Industrial supplies, capital goods, and consumer goods. The 2009 recession is obvious here, and note the recent substantive decline in imports of industrial supplies. We’ll come back to that in a moment.

So what are the top US exports by sub category?

exports2

Things looks to be relatively stable (I should note I’m just working with nominal dollars here, but since this data only goes back 10 years and we’ve had stable and low inflation in that time, it shouldn’t make any big difference, just that slowly increasing trends mean about stable in real terms). What is very notable is the dramatic increase in aircraft exports after 2010.

Now imports:

imports2

Cell phones, cars, pharmaceuticals, and…oil, of course. Note here also the dramatic fall in oil imports. This is partly due to the collapse in oil prices at the end of 2014, but the decline began years earlier thanks to the shale oil revolution.

 

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Wages and the sectoral composition of the labor market

A fact often thrown around these days is that wages for the average worker have stagnated, but a really interesting short paper from the Chicago Fed, What Does the Changing Sectoral Composition of the Economy Mean For Workers?, by business economist Isaac Sorkin, reminds us that looking at a single number isn’t fully informative. The  basic idea here is that  we should take into account the changes in the types of jobs available as well as their pay and nonpay aspects when we look at the labor market.

To demonstrate why this is, imagine an economy with two types of jobs: Job 1 pays $50/hr and Job 2 pays $10/hr. At time t=0, Job 1 is 40% of the labor market and decreasing slowly over time via a random normal process with trend.

share1

If wages remain constant, the average wage in the economy will decrease due solely to compositional effects.

wage1

However, even if we allow for wages in both jobs to rise via a random normal process, the average wage in the economy can still decrease thanks to the sectoral shift.

Here’s the path of wages:

wage3

And here’s the average wage with the same change in the job share path as before:

wage2

So it’s possible to tell a story with across the board increases in wages declining/stagnant average wages.

Another aspect to focus on is the nonpay part of the job: this is things like schedules, working conditions, benefits, etc. If we focused solely on wages, and assumed Job 1 and Job 2 were the same in all other aspects, then the previous example would look unequivocally bad for workers. But imagine that the reason Job 1 pays so much more than Job 2 is that it is very dangerous – the high pay is to offset the low nonpay aspects. Could we still then easily say that the ending state of lower wages and safer jobs is is a worse situation than the starting state of higher wages and dangerous jobs?

This is the difficult question Mr. Sorkin begins to address in this paper. In previous work he has created measures of nonpay job aspects by sector and made an attempt to quantify them. By combining with wage data, he comes up with this graphic:

nonpay

The diagonal line is where the pay and non-pay aspects cancel out. Jobs above the line are more desirable, and those below are less desirable. So for example, we can see that the sector with the lowest nonpay dimension, mining, is more than compensated by the highest pay dimension. With this information, we can start to see how simply looking at wages is not telling the whole story as the economy evolves.

nonpaytrend

The second graphic shows how this has played out with the sectoral shifts in the labor market over the last 25 years. As the sectoral composition of the economy has changed, shifting away from manufacturing and toward more service related jobs (though not as much as we might have expected), pay has clearly decreased but nonpay value has increased. Overall though, the net trend is still negative.

It’s interesting to note that the trend in nonpay seems to be jumping during recessions and remaining pretty stable otherwise, whereas pay has been on a steady decline. My hunch is that the last two recoveries have been led mostly by those less desirable jobs, rather than a broad based increase in all jobs back to their previous level.

Now obviously quantifying nonpay aspects of work is difficult, and Mr. Sorkin doesn’t pretend to have a full grasp on the issue, but as a starting point this is a very interesting story and I hope to see more research along these lines in the future.

Work and Dignity

Listening to last week’s iteration of the Ezra Klein show, with Labor Secretary Tom Perez, gave rise to some thoughts about the minimum wage and related topics. I haven’t gelled everything into a cogent argument as yet, but want to get some stuff down anyway.

So during the show, Ezra attempts to delve into the idea of the dignity of work, which is a topic very near and dear to my heart. You don’t often hear it discussed in much depth in discussions about labor policy, though, probably because most people working in and around the relevant fields that study and communicate such things have pretty dignified jobs. But so to back up, there are as I understand it two ways to think about this dignity of work idea. One is that there is an intrinsic dignity to work: the very act of working itself, regardless of what it may be, is a good for people and the best way to enable human flourishing. This is a view I’ve heard from people like AEI president Arthur Brooks in books like The Conservative Heart. The other view is that the dignity of work comes from the outcome: the ability to support yourself and/or your family is the source of dignity. This is the view held by Secretary Perez during the conversation.

Understood in these terms, we can see why issues like the minimum wage can lead to such sharp disagreement. For those more inclined to the former view, anything that leads to unemployment should be avoided, whereas in the latter view tend to be more skeptical of the disemployment effects and focus on the living wage issue. Let’s expand on this for a moment.

To reiterate, support for an increase in the minimum wage up to $15 is rooted in the idea that people who work full time should not live in poverty. Why are people working full time living in poverty? It seems like a simple question, but actually many goods are pretty much the cheapest they have ever been. Spending on non durable goods, like food and clothing, as total share of household expenditures has dropped almost 20 percentage points since 1960:

fredgraph1

Think also of other luxuries like entertainment: for about $200/year you can get access to huge libraries of music and movies.  If we can buy most of the things we want for cheap, how can people be living in poverty?

(As an aside, it should be clear that poverty in the US is almost never the same as the extreme poverty we think of in developing countries. Generally, the issue is more that poverty inhibits human flourishing. To go back to the entertainment example, sure, you can stream tons of films for less than the price of a movie ticket, but you’re doing that alone or with a couple people at most. Humans are social creatures, and we like to be experiencing things with other people – movies, concerts, sports games, etc. And actually, the prices of these things have been increasing more than inflation. I’ll have to find the source, but I recall reading something once about how being poor in the US means you probably have access to the necessities of life, but are isolated from wider society because the cost of participating in most social activities is too expensive.)

The problem is the cost of the things we consider essential have risen. Housing, health care, and education are taking up increasing shares of expenditures.  When it comes to housing, as I’ve mentioned before, there are a lot of regulatory issues driving up the cost of housing in the areas of the country with the highest productivity. For a striking graphic, a recent Pew Charitable Trusts report shows a sharp increased in the share of income taken up by housing among the poor.

fig_6_expen

 

Health care is something we’re still trying to get a handle on, and here the solution to lower costs may end up being what many other countries do: the government simply decides how much procedures cost.  (There’s a strong case to be made that health care is not subject to the same incentives as other markets, and so we can’t rely on them to provide the outcomes we want). I haven’t read enough into the rising cost of education, but I get the sense that the necessity of college for a good paying job leads to increased and inelastic demand for education, and the incentive for colleges to compete on amenities leading to the country club-ification of the undergraduate experience in which universities keep adding expenses and administrative staff.

So it’s possible we’re thinking about this the wrong way; maybe we should be thinking about ways to make these things cheaper rather than distorting the labor market. In economics terms, we should focus on the supply side, rather than the demand side.

Let’s imagine thought that it’s not possible to lower the cost of these things, for whatever reason, and we decide we want to focus on getting people more money. What’s the best way to do this? The most popular suggestion is of course raising the minimum wage. I’m generally skeptical of federally mandated minimum wage increases because I think it’s a rather blunt tool, though this is certainly a contentious issue and one where there isn’t much slam dunk evidence on either side (though the recent spate of minimum wage increases in some states and localities will hopefully provide some good evidence). There are other ways, though, two of which are wage subsidies and a universal basic income (UBI).

Wage subsidies are a system where the government picks up some of the tab for paying employees, rather than the employer. So if we wanted a minimum wage of $15/hr, the government would pay the difference between what people were already getting and $15. The advantage of this system is that it isn’t distortionary on the employer side, and could plausibly increase employment if businesses were allowed to price labor where (in econ 101 terms) the marginal benefit of hiring an employee equaled the marginal cost. One problem is that these businesses would also have an incentive to game the system, and pay as little as possible to have government pick up most of the tab. There are ways to deal with this, but I’m not sure how well they would play out in reality.

The other way, UBI, has been getting a lot of press lately. Under this scheme, everybody in the country is guaranteed some income, say $10,000/year. The advantage is that this is pretty simple; really it’s just a scaled up Social Security. Obviously it would be expensive, but not prohibitively so; it also depends on which flavor of UBI is implemented, whether it augments or replaces the welfare state. Again, this is also less distortionary than a minimum wage.

Let’s go back to the whole reason I started discussing this: the dignity of work. The real worry for a lot of people is the employment disincentive effects of a UBI: why work if the government will pay me anyway? And if work is a moral good, won’t society be worse off? Those who believe in the outcome based dignity of work probably aren’t bothered too much by this, though they may be worried by the disincentive effects as leading to the unsustainability of the program.

So what do I think? Something I haven’t seen much in the UBI pieces that have been floating around is the aspect I actually think is most important – the establishment of an alternative to the labor market should force bad jobs to be better.

Based on my experience in the lower end of the labor market, jobs like retail salesperson and cashier (which are the most common professions in the US! ) are pretty lacking in dignity.

blschart

Part of that is the work itself isn’t very inspiring, but also that the big companies employing you don’t particularly care about you or investing in you or making your life pleasant. There’s no bargaining power at the lower end, nor do I think there really could be via traditional means like unionization. There’s no incentive for employers to make these jobs better; people work them typically because they don’t have any other options. What a UBI does is give people that other option. The only choices of jobs available to you are shitty jobs? So don’t take them! Employers then have to think of ways to entice people to take these kind of jobs.

While there’s been a lot of talk about the fear of automation taking away these jobs, there’s a pretty strong case that the current wave is over for now. Anecdotally, the company I work for has stopped putting in automated checkouts in stores, and actually takes them out when remodeling stores because people just don’t like them. So I’m not too worried that providing a labor market alternative will lead to companies just automating those jobs.

Furthermore, it’s my belief (maybe hope) that most people do like to work, they want to be engaged with society in some capacity, and so we wouldn’t see masses of people giving up and living on the government dime.

To recap: A UBI may be the best way to satisfy both views of the dignity of work, whether through the act itself or through the outcomes. By adding to people’s income, you give them expanded means to support themselves and their families. And by giving people an alternative to the labor market, bad jobs will get better and give people even more dignity in their work. The ultimate goal of maximizing human flourishing is accomplished in either case.