Wednesday, June 26, 2013

Spain and Florida

Paul Krugman argues that the key difference maker in the economic fortunes of Spain and Florida is Florida's membership in a fiscal union. Scott Sumner notes that Krugman is correct, but that supply side factors play a large role as well.

This reminds me of an IMF paper on Spain's labor market that concluded:

"Spain stands out by the structure of its collective bargaining, which takes place at the intermediate level and greatly constrains wage flexibility, and by the very high severance payments for permanent workers, which accentuate the insider-outsider problem."


"The unemployment rate could be substantially reduced by effectively decentralizing collective bargaining, thereby reducing excessive wage demands and allowing more wage flexibility. Reducing unemployment benefits and lowering the tax wedge would also help reduce unemployment by lowering the cost of labor. Finally, deregulating product markets reduces unemployment including by boosting activity and labor demand."

Europe is suffering from low aggregate demand, which accounts for high cyclical unemployment. The ECB, not fiscal austerity, is almost entirely to blame for this.

Still, well before the cyclical downturn, many European economies had chronically high unemployment, thanks to bad labor market policies. As Scott Sumner often points out, Europe has both demand side and supply side problems that both need to be addressed if we are ever to see a real labor market recovery in places like Spain (and France, Italy, etc).

PS: The main reason the USA has weathered the recession better than Europe is better monetary policy (albeit still inadequate), but our more flexible labor markets are part of the story as well.

Tuesday, June 25, 2013

On Income Mobility

There's been a great deal of discussion about income mobility lately, largely stemming from Greg Mankiw's excellent essay. Many have responded by noting that most measures of relative income mobility put the USA below most other developed nations.

Somebody once explained income mobility to me by comparing it to a race. Relative mobility would measure how the ranking of the race participants changes over time. Absolute mobility (another way to look at mobility) would measure the absolute progress in the race that each of the racers make over time (ignoring the ranks).

I would caution against reading too much into relative income mobility data. It would make sense that societies with more equal income distributions would have higher relative income mobilities. To go back to the race analogy, the various racers are much closer in proximity to each other in a more "equal" race than in an "unequal" race. This means that much smaller changes could lead to larger changes in the various ranks in the race.

The point isn't to discount relative income mobility data. It is to say that data purporting to show that other countries have higher income mobility than the USA is really just more data showing that other countries have more equal income distributions than the USA. The supposedly higher mobility is really just a statistical artifact of greater equality. Of course, absolute mobility data has drawbacks as well, so I am not recommending looking at that in isolation either (namely the fact that it mostly reflects average income growth).

Income mobility is hard to measure. Instead of using very flawed methods of measuring, we should focus on institutional barriers to upward mobility. I would categorize licensing, high implicit marginal tax rates, and monopolies as such.