Wednesday, February 15, 2012

Assault of Thoughts - 2/15/2012

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- A great article by Mark Thoma on income distribution. He also provides links (on his blog post about this) to Tim Taylor and Jacobson and Occhino on the declining labor share of national income. I need to really go back to the data, but what I remember from looking at this question a year ago was that labor share of compensation has been more steady, it's just that the earnings share has declined. Perhaps I'm remembering this wrong. The idea is that benefits make up an increasing portion of compensation. This still can have big implications - when I was looking at it, what I was primarily concerned about was the financing of unemployment insurance. Unemployment insurance (and Social Security and Medicare, for that matter) is financed through taxes on wages and salary. If these are making up a smaller and smaller share of total compensation, that means the tax base for these programs is shrinking. This is all something of an aside - the links above deal more directly with the distributional issues.

- Here's a very well written post on the relationship between social science and natural science. Normally I'm skeptical of crude discussions of this issue by natural scientists who don't really have much of a concept of social science, but this is very carefully worded and has some good thoughts. The issue motivating the post is how each talks about race. My interest in race is entirely consequentialist and not ontological at all (which I interpret as being just fine according to this post). I study how the human species makes resource allocation decisions (just like many biologists study resourc allocation by other species - I'm just a biologist that studies a highly evolved primate). The way humans sub-divide each other into races plays a crucial role in many of these allocation decisions, so I work with "race" as it is popularly understood a lot. It doesn't matter, from my perspective, whether there is a genetic foundation for race groups at all. I operate on the assumption that it isn't, based on my weak understanding of the biology of the question, but I'm happy to defer on this point to the biologists either way. In most cases when I work with questions of race, the genetics of it is entirely beside the point for me.

Note especially in this post how he talks about the relationship between social science and biology as analagous to the relationship between biology and chemistry. He talks about a "hierarchy of disciplines" (I cringed when I first read that), but he clarified that in this hierarchy chemistry is more "fundamental" than biology, and biology is more "fundamental" than social science. This is the critical point. This does not mean we need to build economics up from chemistry, the way some people pre-occupied with "microfoundations of macroeconomics" might suggest if their views were taken to their logical end. What it does mean is that biologists are dealing with fundamentally chemical systems, and social scientists are dealing with fundamentally biological systems. Reconciliation of theory and observation can work in both directions, of course.

- Simon Wren-Lewis talks about teaching minimum wages and immigration. As most of you know, the empirics and the theory on this are not as clear as some people would like to pretend. What's fascinating to me is that there are some people who are insistent on what a downward sloping labor demand curve means for the minimum wage, but are willing to very quickly write it off for immigration. A bigger problem is that these discussions rarely take the general equilibrium impact of the minimum wage or immigration into account.


  1. A good post, Daniel Kuehn. I have a few questions, however...

    Regarding income distribution, do you think the clout of the financial services has adversely affected income distribution not just in the United States, but around the planet? Do you think the financial services need to be downsized, like Steve Keen, to result in a more equitable distribution?

    Regarding the hierarchy - physics could be said to be at the top of it. There's a reason for this, and a reason for physicists to be arrogant. Do you think that some econophysicists, notably Jean-Philippe Bouchaud and Joseph L. McCauley, are stuck up *without really* having the right to be arrogant?

    I don't have much thoughts on the minimum wage/immigration issue, other than that I generally agree with Simon Wren-Lewis.

  2. The other side has this problem as well.

    1. Thanks for this - I might post more on this tomorrow or Friday. What "other side" do you have in mind? I'm not sure exactly what the sides are here.

      This seems to be the side I was talking about - "Card is right on immigration but wrong on the minimum wage".

      I think it's quite plausible for him to be right on both, contra Caplan. I'm guessing neither of these has a huge effect on wages (although as Borjas has shown - the more you zero in on direct competitors, the bigger of an effect you'll see).

  3. Card and Krueger's view on the minimum wage is dubious, many other investigations on that issue have confirmed the generally accepted view that the minimum wage costs jobs.

    Immigration is a different issue though because all capital can't be said to be truly mobile. When labour is more scarce in a vicinity the price it commands rises, and similarly when capital becomes more scarce the price it commands rises. Of course, highly specific capital and highly specific labour may behave differently.

    What I find really interesting here is that this relates to how Card and Krueger produced their "surprising" result: they studied the fast-food industry. That industry is capital intensive, all that stainless-steel cooking equipment you see behind the counter costs a fortune. That specialised equipment can't be cheaply repurposed. When labour costs increase selling fast-food remains a viable proposition because the value of the specific capital falls.

    To put it another way, when an entrepreneur starts a fast-food restaurant he is making a bet on the future price of labour. If it remains low then he can make a profit. But, if it rises he can only sell his capital equipment to other fast-food entrepreneurs and they face the same labour cost increase as him, they have committed themselves by buying specific capital. So, what changes is the share between capital and labour.


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