Regulation, Subsidy, and Wages

Much as I might like to I don’t find Edward Lazear’s argument pointing to regulation as the source of wage stagnation convincing enough. Here’s the kernel of his evidence:

First, the decline in the share of workers in financial activities from 2006-10 was about one-fifth as rapid as that between 2010 and 2014. Given that the financial crisis peaked in autumn 2008, one would have expected the earlier period to see the most rapid declines, not the reverse.

Second, the share of workers in hospitals increased rapidly from 2006 to 2010, placing it among the top 10% of industries in labor growth. That trend was reversed in the past four years. Nursing and residential care’s share of employment also grew in the early period and declined in the latter one. Ambulatory health-care services, whose share did continue to grow from 2010 to 2014, slowed to one-fourth the pace of growth that prevailed from 2006 to 2010.

Third, industries with educationally similar workforces to those in finance and hospitals, like professional and technical services, enjoyed continued growth in their share of the workforce during the latter period. Even the construction industry, which was at the center of the recession and saw substantial declines between 2006 and 2010, experienced slight increases in share between 2010 and 2014.

Still, wage declines did not occur merely or even mostly because of movements out of hospitals and finance to lower-paying jobs. Even without the changes, the economy would have witnessed about three-fourths of a percentage point decline in wages from 2010 to 2014. Wages tend to move with productivity—and tax hikes on capital, threatened or actual, were not helpful to business investment, which spurs growth in labor productivity. Higher taxation of dividends and capital gains, as has occurred under President Obama, reduces incentive to invest and makes it more difficult to attract capital to the U.S. The president called for even more such increases in last week’s State of the Union address.

Healthcare is highly regulated as is finance. One of the far from unintentional effects of the regulation is to limit entry.

Is he defining “regulation” too broadly? My observation is that industries that have been subsidized are prospering and those that haven’t are declining. That the net effect of subsidizing unproductive industries while disincentivizing capital investment in productive ones would result in less growth than might otherwise be the case is hardly a controversial insight.

21 comments… add one
  • steve Link

    Where else is capital going to go now? Europe has, generally, even higher taxes and more regulation. Russia is out now, and so are the other BRICs for their own internal problems. China? Seems to be falling out of favor. India? Corrupt and bizarre rules. Seriously. Where does it go now if not the US? Where in Africa or South America can it go without a huge risk premium?

    Steve

  • Mercer Link

    “Higher taxation of dividends and capital gains, as has occurred under President Obama, reduces incentive to invest and makes it more difficult to attract capital to the U.S. ”

    The US attracted a lot of capital under Bush which helped the housing bubble inflate. Does he think that was a good development? Most hospitals are nonprofits which makes the effect of investment taxes on hospital employment small.

  • TastyBits Link

    I cannot read the article, but since he uses “share”, I will assume he is playing with the numbers. My rule on numbers is that they lie. A corollary is that the person using numbers is a hustler or an idiot.

  • Guarneri Link

    This doesn’t seem to have the pay wall. I think readers would benefit from the full cob.

    http://www.wsj.com/articles/ed-lazear-solving-the-puzzle-of-stagnant-wages-1422231934

  • Guarneri Link

    I guess not. Search ed lazear for an article 8’hrsxagomand you will find the full text.

  • steve Link

    Whatever your conclusion, it seems like you should note that during this same period we have had record corporate profits.

    https://www.aei.org/publication/stock-market-rally-is-supported-by-record-corporate-profits/

    Steve

  • Guarneri Link

    That’s an outright dishonest equivalency that guy is making, steve. And he knows better. I could probably find some index like the price of toilet paper and, properly scaled, draw a similar cause and effect “conclusion.”

    There are two components and The earnings multiple component is excessive. That is, far above historical norms. Look at the multiples history and the last couple tumbles here:

    http://research.stlouisfed.org/fred2/series/WILL5000INDFC

    In the broadest equity index, the Wilshire.

    By the way, those profits are at super-normal levels because investment has been off, reducing the attendant expense and cash flow drain, and of course absence of wage pressure. The multiples? QE.

    Over on the private side, I have just returned from our winter partners meeting at which one of our guests was a prominent mm investment bank. We are thinking of unloading many companies in the portfolio to take advantage age of the froth. BTW – our earnings are relatively robust too.

  • steve Link

    The point remains that we have record profits and it is not going to wages and it is not going to investment. Where is it going?

    As an aside, someone told me the profits were a dead cat thing, that they would end quickly. They didn’t. I have to wonder, if you are making record levels of profits w/o investment, why would you take the risk? Assume there were no regulations. Assume tax rates were at record lows. How many people are willing to take the risk when you are making increasing profits absent that risk?

    Steve

  • PD Shaw Link

    Traditionally regulation refers to either government rules or adjudicatory oversight. By that metric, healthcare is quite unregulated relative to finance. Restrictions on entering the trade are a form of government rule, but I’m not sure anybody in the last few hundred years thought that medicine was not a skilled practice that the government has a responsibility to monitor. To put it another way, nobody thinks Henry VIII gave rise to the regulatory state, in the way (the U.S. thinks) either Woodrow Wilson or FDR did.

    Aside from that the medical profession is controlled by the reality that its largest customer is the government and appeasing the government is part of the job, and failing to meet government commercial expectations may result in a criminal prosecution for that which would simply be a breach of contract dispute with a private customer.

  • TastyBits Link

    RE: AEI link.

    I content the 1995 inflection was largely due to the Clinton millionaire tax.

    Here is another case of somebody playing with numbers. The S&P is an index. He decided to use it instead of the Dow or NASDAQ or some averaging methodology. Furthermore, these indexes change over time, and the money plus credit supply is changing. Do I even need to go into my favorite year?

    I have not considered the implications, but investments types were shifting, and I suspect the S&P was not catching these shifts.

    For the last six years, the system has not functioned properly, and this has been intentional. Feedback mechanisms and safety systems have been diverted or shut off. Other people are receiving the wrong feedback. Some are receiving positive, but they should be receiving negative. Others are the opposite.

    They are acting rationally within an irrational system, and for the past six years, the system has been intentionally rendered irrational by those running it (politicians, regulators, Fed). Who are the bad actors?

  • Andy Link

    “The point remains that we have record profits and it is not going to wages and it is not going to investment. Where is it going?”

    Should be an easy question to answer for any public company. I haven’t done the research so I don’t know the answer.

  • ... Link

    I see the NBER is crediting the “surge” in job creation to the end of extended UE benefits. I guess they’re ignoring that millions started running out of EUC back in 2010. I wonder where that job surge went?

  • Guarneri Link

    Steve

    There is no single answer. Some sits as cash on balance sheets. Some repurchased shares in buybacks or was distributed as dividends. Some is servicing debt that was used to do buybacks. Further, profits as you are citing are measured as a stock of dollars ( or perhaps per share on fewer shares) and as such the absolute stock of dollars paid as wages has increased, but per capita or per hour are stagnant. Lastly, I don’t know how significant cash vs acctg earnings are.

    TB correctly observes that there are a number of complicating factors that also make the AEI a liar with an agenda. (Obviously to try to use the stock market as a proxy for the economy and Obama success). That said, all those factors get implicitly impounded in the PE ratio, which the professor ignored. I always prefer the Wilshire Index because of its cap weighting and broad nature. However…..

    It is very dangerous to try to create one to one linkages in an index, but if one uses the professors choice of the S&P my point is illustrated in spades. In the current up cycle (I choose Jan 2012 but pick your own date if you think I’m choosing just to make a point) the earnings multiple was 14.9 at start while earnings increased from about 90 to 104. Applying a constant PE multiple would have us with an S&P index of 1550. But until two days ago it was 2050. That’s about a 33% premium. Why? The actual multiple stands at about 19.5. In perspective, the earnings multiple increase dominated the earnings increase.

    The professor lies like a dog. He knows everything I just wrote, but chose intellectual dishonesty just to make a political point with those not possessing some rudimentary financial knowledge. BTW – you can get all the raw data you need to do this yourself from the link I put in the previous comment.

  • Guarneri Link

    Steve

    On your second paragraph… Because they are public. They are simply adopting a cash cow posture right now, and when warranted to do what most businesses do – attempt to grow. In closely held corporations owners often do just as you say, ride the wave and do not maximize their potential. That’s where my firm comes in….

    As for profits, as always, they will cycle. You might want to turn on your radio.

    Ice

    I think because they are not as absolutist as you.

  • steve Link

    “Obviously to try to use the stock market as a proxy for the economy and Obama success).”

    I guess you don’t know Mark Perry. Fairly hard core libertarian not prone to saying anything nice about Obama. (He does have a long history of being positive on our economy.)

    Steve

  • TastyBits Link

    I do not know this Mark Perry nor do I have time to learn about him, but I do know numbers lie. I also know that people can intentionally or unintentionally cause this to happen. Furthermore, I know that most people have little understanding of numbers, and subsequently, they give them far too much power.

    More than likely, he believes that numbers are scientific, and he may not understand the subject matter well enough to be able to manipulate the data competently.

    What the politicians, academics, regulators, economists, and the Fed do not understand about the financial system is stunning. For one thing, the financial system is more than just the corner bank and Jane’s checking account. Apparently, they all learned about private banking in 2009, and I am not being a smart ass.

  • Guarneri Link

    No, I don’t know this guy. But whatever his supposed leanings his observation was just dismal and uninspiring as to reading anything else he might say. If not to make a political point what possible reason would have possessed him to write something any first year investment or Econ student exposed to discounting knows was only half the story and numerically, well, a sleight of hand.

  • ... Link

    Drew, if the end of EUC drove people back into workforce, instead of out, why didn’t employment surge when people hit their 99 weeks of UC? That started happening in numbers in 2010. It’s not the case that the extended benefits were extended indefinitely, unlike QE. My supposed absolutism has nothing to do with that observation.

  • steve Link

    Drew- The guy is a full professor of economics and finance at U of Michigan. Got his PhD from George Mason. I suspect you know who they are. (Basically a Hayek, von Mises guy.)

    Steve

  • TastyBits Link

    Reading a few of his posts, he is a textbook libertarian. He would seem to be in the Austrian camp, but he does not have a clue about finance. This is an Austrian’s nightmare as have been the last 20 years.

    His blog posts are typical “regulations are best done by the consumer” type nonsense. I have a question. Would he fly his family on one of these third world airlines? They must be safe. Otherwise, the customers would regulate with their money.

  • ... Link

    Would he fly his family on one of these third world airlines? They must be safe. Otherwise, the customers would regulate with their money.

    LMAO!

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