Another Look at Inequality: The Real Problem is Stagnant Wages

Thanks to my father and buddy Dan for pointing out some errors in my Wednesday analysis on inequality. Looking back I think the overall point stands, many/most people without a college degree have not seen wage increases for the last 25 years. I also agree with Dan’s assertion that we should care more about stagnant wages than inequality. So how do we address stagnant wages? That’s tough!

I think the wrong way is the current finger pointing of Barak Obama and Hillary Clinton to Nafta as the cause of stagnant wages. Looks like Greg Mankiw was right and the democrats are going too far left, perhaps now with the audacity of fear.


I think Glenn Hubbard had it right on Market Place last night, he says:

“We should make funds available to workers whose job loss is likely to be long lasting for whatever reason. Placed in a Personal Reemployment Account, such funds could be used for individualized training and income support, letting individuals keep the balance if they find a new job quickly gives a reemployment bonus.
We should also pursue tax reforms that would give all workers access to affordable health insurance that's portable. And, of course, we should redouble our efforts to ensure that all workers have the education and skills to compete in a global economy.”

To address some of Dan's points in his comments. The chart comes from a paper by Frank Levy linked here.

The figure includes health insurance, not sure about EITC and informal economy. But hours worked have not been going down so it is not a trade off for leisure. I'm not sure about specified skills, but that is a good point.

Now is it 70% of the population (or at least working age population). Another figure shows basically the same result for women's wages. But what about people with some college? It appears that women with some college have seen income growth, but not men. From the Economic Policy Institute


"The average hourly wage for men with "some college" education was no higher in 2005 than in 1973. Women's wages in this group rose only 20%, despite a 75% growth in national productivity. Wages for both men and women with "some college" have been stagnant since 2000."

So it may not be 70%, but the data suggests wages have been stagnant for a large part of the population. I do not think that is good. I’m not sure which programs are the right answer, but I think a few might exist. I think Hubbard’s proposal should be examined as a good first step.


On a perhaps less serious note, but why inequality might be important: over at Marginal Revolution there is a link on chimps and their response to inequality.

Wanna Bet! Intrade

Occasionally readers send me subjects to blog about. So for Emily in Minnesota here is a post on Intrade. Intrade is a betting website. Basically you sell someone the right to ten dollars if they are correct. Most of the predictions/bets involve politics. But you can bet on where the next Olympic Games will be, if the US will go to war with North Korea, or if Bird Flu will be discovered.

So for example right now people are paying around $8.25 to win $10 if Obama is the democratic nominee. In the last week that price has gone up from $7.90. The online magazine Slate tracks the price for political candidates. What does this information tell us, well this week people think Obama as an 82.5% chance at winning the nomination up from 79% last week.


So the next question is does this tell us anything meaningful? I think the answer is sort of. The idea of this type of markets is that of Malcom Gladwell’s Blink. That large groups of people with a limited amount of information are pretty decent and a lot of times better than experts at predicting outcomes.

The problem with Intrade as Tyler Cowen at Marginal Revolution are two fold. First, the market is not big enough. By my rough estimate the size of the total shares sold is a few million dollars. As this article in the New York times suggests there sometimes is money to be made betting against unlikely candidates like Ron Paul and Al Gore. Second, you have to keep your money sitting interest free in Intrade accounts so you would lose any interest you would gain from now until the nomination or election.

But, the market seems to be popular with Economist as Greg Mankiw another economist/blogger has cited Intrade in the past.


You want a hot tip, I think good bets right now our McCain at 33% to win the presidency. Really I think democrat or republican is closer to 50/50. And bet against S&P 500 to close above 1750, because if that happens I’ll be hedged with my investments.

But if I knew I was right wouldn’t I bet on it?

US inequality

I was lecturing about inequality in my development economics class yesterday. But it is also worth thinking about changes in inequality in the United States. Over at Dani Rodrik’s blog he uses data from Frank Levy to create the graph that goes along with this post.

What does the graph tell us? If you do not have a high school degree you earn less in real terms then you did 25 years ago (high school wages are the blue line). If you have a college degree you earn about 20% (pink line) more and 50% more if you have a graduate degree (green line) than 25 years ago. This also shows the gap between college educated and non-college educated is growing.

Given this data what would be good policy responses for those with no college degree? Getting more people to go to college would seem to be a good policy solution. This is happening as college attendance is increasing: 30% of adults aged 25-39 had completed college in 2007 compared to 22% in 1980.

Still this means that 70% of the country that did not go to college* has not seen an increase in wages from the economic growth of the last 25 years.


* See my father's note in the comments, Rodrik does not include some college, so my 70% figure is not quite right.

No Two Buck Chuck: Screwy Maryland Alcohol Sale Laws

I was reminded of a Maryland law the other day that grocery stores cannot sell beer or wine except those grandfathered in. This means Trader Joes cannot sell two buck chuck and that I have to go to another store to purchase beer. I guess the side benefit is that there are lots of mom and pop corner stores that sell beer and wine. Some of these places are interesting like the one a few blocks away with Ethiopian dry goods, although the one on my block is basically a glorified keno (video bingo) parlor at least it has Sam Adams.

If you want to buy hard alcohol you have to go to the state liquor store that also sells beer and wine. Only as a local Silver Spring blog points out, you cannot buy a bottle opener, mixers, or cork screws. Currently, a law is being proposed which would allow those items, but to make the local mom and pop lobby happy state liquor stores would have to stop selling pretzels and soft drinks.

As someone who hates to go to multiple stores and likes cold beer and pretzels I oppose this bill. As an economist I would like to see more on if the banning of super markets from selling liquor actually has a positive impact.

Nudge! Nudge! How to Get Americans to Save.

In the New Yorker there is a good article this week on behavioral economics one of economic's newest fields. What makes the field different is it basically assumes people are irrational. For example even though people say and know they do not save enough in their 401k they don’t change their savings rate, because they keep meaning to go to their benefits office, but do not get around to it. One way to fix this problem is to automatically enroll people in a 401k and have their default option be targeted retirement date index funds. If someone wants to change then they go down to the benefits office and opt out. That might just be the nudge they need.

The Federal Government seems to have figured this outt as my wife’s retirement savings provider said the new default option will be target date retirement funds as opposed to a money market.

Austria has taken this nudge in another direction. Now everyone is assumed to be an organ donor until they state otherwise, greatly increasing the amount of donations.

Savings Spree!

I know spending sprees are more fun than savings sprees, but we need to think about some simple economic principles. Any model of economic growth suggests that long term growth is determined by investment. Simply put to make more stuff in the future we need more education and machines, which we get through investment. We cannot invest money if we use it instead for consumption. I have been thinking about this a lot in terms of the proposed fiscal stimulus, which would send everyone a check. My father, also an economist, provides his own take on the stimulus checks [link]. He concludes his article by saying

“The economic slowdown is a more immediate, transitory and solvable problem with the proper medicine having been administered. The longer-run problems await a real response.”

It is unclear if the stimulus is the proper medicine or if we’ll be over the short term dip before the check gets in our pockets. One long run problem is that Americans do not invest enough. The US’s investment rate is 15.6% (CIA FACTBOOK) ranking it 135 out of 148 countries with data. 134th Guatemala and 136th is the Philippines.

Perhaps a graph would also demonstrate the problem. The US is the red dot on the graph of investment as percentage of GDP and GDP per capita (PPP adjusted). The US is below most of Europe with 10 being about where Easter Europe and low GDP Western Europe GDP PPP (ln) fall.

So as the New York Times suggests, perhaps it is time to go on savings spree.


*** I wish I could make the graph bigger, but if you click on it you can look at it closer. I left out a few countries, but it is 110 minus a few where the formatting messed up my conversion.

How much for your Kidney?

Last night and this afternoon I will be lecturing about price ceilings and floors. There is the classic example of the minimum wage for price floors. Rent controlled apartments is the classic example for price ceilings, but my students did not seem to be familiar with rent control. So a new classic example for price ceilings: organ donation.

Right now the price ceiling is zero, you cannot sell your organs but you can give them away. As of 8am this morning there were 98,049 people waiting for a kidney, so there is a shortage of kidneys.
It is not just economist who are advocating kidney sales, but also physicians [link].
As one surgeon put it

"There's one clear argument for sales," Dr. Matas told a gathering of surgeons earlier this year. The practice, currently illegal in the U.S., "would increase the supply of kidneys, save lives and improve the quality of life for those with end-stage renal disease."

Dr. Matas and others will be speaking at the Cato Institute at noon today on this very subject [link].

There may be other unintended consequences of selling kidneys that should be considered, but the standard economic theory holds price ceilings can create shortages.