People on third base claiming they hit a triple, or marginal product theory at work…not!

July 3rd, 2015 at 12:01 pm

One of the less defensible assumptions of microeconomics is that people get paid their “marginal product,” i.e., their wage equals the value of the output they produce. Thus, according to the theory, if the last worker hired is being paid an hourly wage less than the value of the firm’s output per hour, if would make sense to hire additional workers and vice versa, to the point where the value of the last unit of output equals the wage.

Now, it would be unduly persnickety to insist that this formulation holds exactly, and there’s certainly solid evidence that wages correlate positively with education, so the theory isn’t completely batty.

But it is way too easy to find egregious exceptions, as in this article for this AMs WaPo about the earnings and income of Jeb Bush and his family. To be clear, this is a non-partisan rant, as it’s extremely easy to find e.g.’s of people of all political stripes being paid in ways that have little to do with their marginal product.

But the article does an excellent job of taking you through the interaction of how Bush cashed in on his public service, brought his family along for the ride (as in added them to the payroll), gamed the tax code (by writing off generous pensions and compensation packages), with little evidence of “marginal product.” EG, there’s the part about advising Lehman which…um….arguably didn’t turn out so well.

Now, the boneheaded response to all this is that by assumption, he (and somehow his wife and kid) were being paid their marginal product, because if they weren’t, then they wouldn’t have been…paid their marginal product, that is (that’s supposed to be word salad, just to be clear).

But, in fact, that’s often what we hear, and beyond, “really?…seriously??” it’s hard to disprove unmeasurable assumptions (we can “back out” productivity outcomes in the case of the Lehman collapse, but that’s rare).

Some notable research, such as the work on financial markets by economist Thomas Philipon, finds that the sharp rise of compensation in that sector has not been match by productivity gains, while it quite nicely tracks financial market deregulation, clear evidence of rent-seeking versus marginal product.

No question, skills and your ability to contribute to firm output often plays some role in pay setting. But here’s what else matters, and increasingly so as you go up the pay scale, and even more increasingly so in our era of heightened inequality: power, connections, your race, your gender, and vast amounts of money in politics and policy.

What’s more, those who benefit from the arrangement just described love to cite the “rules” of economics and markets, like marginal product, to fend off the justifiable disbelief with which such self-aggrandizing BS should be met.

In other words, cutting through the theory, there are a lot of people out there who were born on third arguing that they hit a triple. Do not believe them. Most of them never even swung a bat.

June jobs: continued, solid gains, but that 5.3% unemployment rate makes the job market look tighter than it is

July 2nd, 2015 at 9:26 am

Today’s jobs report was a bit weaker than expected, and a bit weaker than it looked at first blush. While payrolls were up 223,000 in June, in line with expectations, and the unemployment rate fell to a record low in this recovery of 5.3%, mitigating factors include:

–downward revisions in payrolls for April and May of 60,000 combined;

–the fall in unemployment was exclusively due to people leaving the labor force, not jobseekers finding work;

–thus, the labor force participation rate ticked down a significant 0.3 percentage points to 62.6%, its lowest level since the late 1970s, though see below re this important trend;

–hourly wage growth was flat in June, and is up 2% over the past year, a slight deceleration from last month’s report;

–average weekly hours worked were also unchanged, so weekly earnings were also up 2%;

–factory employment growth remains weak, up 4,000 and little changed over the past five months (construction was also a weak spot in June, adding no net new jobs).

On the upside, the payroll gains continue to be solid, with employers hiring north of 200,000 workers per month on average (see smoother analysis below), and hiring was robust across much of the service sector. The number of involuntary part-timers continues to decline, and is now down about a million from last year. Long-term unemployment continues to decline as well.

The decline in June’s labor force could, of course, be monthly noise, and in fact, the BLS noted that this variable tends to volatile this time of year, as more people than usual are churning in and out of the job market. There’s also an important structural dimension to the decline in the LFPR, as the older age composition of today’s workforce renders comparisons to the 1970s not particularly valid. But as the job market has gradually tightened, I’ve expected to see some upward movement in the LFPR, as labor demand pulled more people into the workforce. The fact that this has yet to occur suggests that there is much more slack than the 5.3% unemployment rate suggests.

To get a better feel for the underlying trend in net job creation, we turn to our patented smoother chart showing monthly averages over 3, 6, and 12 month intervals. Over the past three months, payrolls are up about 220,000 per month, about the same as June, and a slight deceleration from 12-month trend.


Source: BLS, my calculations.

As noted, that 220K trend represents a solid pace of job growth that will eventually, if it persists, help to squeeze out the remaining slack in the job market. But the relatively weak wage growth, the strong-dollar induced weaker manufacturing sector, and the lack of growth in the labor force tells that this is not a “5.3% job market.”

That rate happens to be just about what the Fed considers to be the unemployment rate commensurate with full employment, and based on the bullet points above, that can’t be right. For example, surely, if we were this close to full employment, we’d see more pressure on wage growth. The fact that we clearly do not tells us that a) the measured unemployment rate is biased down, and b) the Fed is having trouble figuring out the natural rate.

That, in turn, implies that talk of raising interest rates is simply premature, full stop. I understand that rates have been very low for very long, and that many Fed critics (and a few Fed governors) are champing at the bit to raise. But when Chair Yellen says they’re “data driven,” I believe her. And the data—while not bad by any means—are not yet consistently strong enough to warrant a change in interest rate policy.

Jobs day…on Thursday?? Really???

July 1st, 2015 at 6:31 pm

Really. When our revolutionary founders defeated the British, they declared that when people work a short week due to our nation’s birthday, the BLS should release the jobs report a day early. So we’ll get June’s jobs numbers tomorrow instead of Friday.

Here’s the Bloomberg consensus.


Source: Bloomberg

Barring a surprise, I expect a payroll number between 200 and 250K, though I might shave expectations to the downside a bit, based on the type of headwind factors I note here. I’ll be watching for:

–is the strong dollar still holding back factory jobs, or has the $’s recent plateau dampened this effect?
–there was maybe a touch of wage acceleration in the last report…anything there?

First impressions shortly after the release, though these non-Friday reports seriously mess up my circadian rhythms.


Yeah, baby–new OT rule is out and it’s strong!

June 29th, 2015 at 11:38 pm

I’ve got a longer piece up on PostEverything, but here are the key ‘grafs from the POTUS’s announcement on this tonight (my bold):

We’ve got to keep making sure hard work is rewarded. Right now, too many Americans are working long days for less pay than they deserve. That’s partly because we’ve failed to update overtime regulations for years — and an exemption meant for highly paid, white collar employees now leaves out workers making as little as $23,660 a year — no matter how many hours they work.

This week, I’ll head to Wisconsin to discuss my plan to extend overtime protections to nearly 5 million workers in 2016, covering all salaried workers making up to about $50,400 next year. That’s good for workers who want fair pay, and it’s good for business owners who are already paying their employees what they deserve — since those who are doing right by their employees are undercut by competitors who aren’t.

That’s how America should do business. In this country, a hard day’s work deserves a fair day’s pay. That’s at the heart of what it means to be middle class in America.

That’s the threshold Ross Eisenbrey and I thought made the most sense, as we explain here.

The WH says they expect the change to reach as many as 5 million middle-wage workers. Believe me, you’d be very hard pressed to come up with a rule change or executive order—i.e., non-legislation—to lift the pay of this many folks.

That’s important, because we live in a time when the bargaining power of many who depend on their paychecks is much diminished relative to the clout and power of those whose income derives from their wealth portfolios.

Of course, this isn’t the first time in our history when such conditions prevailed. In fact, the Fair Labor Standards Act that introduced the national OT rule was born of the notion that one role of government was to help reset the imbalance in bargaining power–to stand up for those who, absent rules like OT, risked exploitation, overwork, and inability to claim their fair share of the productivity growth they themselves were helping to generate.

President Obama just put his thumb on the scale on behalf of working people. And for that he deserves our thanks.