Category Archives: Inequality

Tipping Rules and Inequality

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Tipping and inequality.  Danny Meyer, a premier New York restauranteur is abandoning tipping.  He will put a flat 20% on bills.

Danny Meyee owns 13 restaurants including The Modern, said the tipping system was unfair as it only benefited a few restaurant workers.

Waiting staff in the US typically receive most of their wages in tips, but cooks and other workers do not.

Mr Meyer plans to start the policy at four of his restaurants next month.

“We believe hospitality is a team sport, and that it takes an entire team to provide you with the experiences you have come to expect from us,” Mr Meyer said in a statement.

Menu prices will increase 25% to 35% to account for the changes.

Restaurants in the US are rethinking how they compensate their employees for a number of reasons.

In major US cities like New York, Chicago and San Francisco, restaurants are finding it hard to retain kitchen staff as the cost of living in those areas increases.

Because of tips (typically 20% of each bill), servers sometimes end up earning much more than highly skilled cooks.

Restaurant workers across the US have also been lobbying for better wages in recent years. New York City and other cities and states have increased their minimum wage in response.

Some high-end restaurants in the US have already stopped accepting tips, but Mr Meyer’s empire is the most prominent restaurant group to date to embrace the move.

Melissa Fleischut, president and CEO of the New York State Restaurant Association, said Mr Meyer’s decision could have a ripple effect in the industry.

“I think that because it is Danny Meyer and he is considered a leader in the restaurant industry, that a lot of people are going to look at this move,” she said.

Tipping

Updating the Social Safety Net

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Laura Tyson and Lenny Mendonca write:  Today’s labor markets are undergoing radical change, as digital platforms transform how they operate and revolutionize the nature of work. In many ways, this is a positive development, one that has the potential to match workers with jobs more efficiently and transparently than ever before. But the increasing digitization of the labor market also has at least one very worrying drawback: it is undermining the traditional employer-employee relationships that have been the primary channel through which worker benefits and protections have been provided.

The ecosystem of digital labor platforms is still in its infancy, but it is developing rapidly. Large popular platforms like LinkedIn have so far mainly been used to match high-skill workers with high-end jobs. But these platforms are already expanding to accommodate middle-skill workers and jobs. Nearly 400 million people have posted their resumes on LinkedIn, and in 2014 the site facilitated more than one million new hires worldwide.

Meanwhile, other types of digital platforms are emerging, linking workers with customers or companies for specific tasks or services. Such platforms play a growing role in the market for “contingent” or “on-demand” workers, broadly defined as workers whose jobs are temporary and who do not have standard part-time or full-time contracts with employers. Well-known digital platforms that link contingent workers directly to customers include Lyft, TaskRabbit, Uber, and Angie’s List. Freelancer.com and Upwork are examples of platforms that help companies find and hire contingent workers for a range of specialized tasks such as software or website development. Freelancer.com has more than 17 million users worldwide.

The trouble is that even as these sites provide new opportunities for workers and companies, they are bypassing the traditional channels through which the US and many countries deliver benefits and protections to their workforce. In the US, in particular, the “social contract” has long relied on employers to deliver unemployment insurance, disability insurance, pensions and retirement plans, worker’s compensation for job-related injuries, paid time off, and protections under the Fair Labor Standards Act. Although the Affordable Care Act has made it easier for workers to acquire health insurance on their own, most workers continue to receive health insurance through their employers.  How To Reweave the Social Safety Net in the Age of Digital Platforms

Low Income Means Shorter Life in US

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Income inequality is real and life threatening.

Joseph E. Stiglitz writes:  The Nobel Memorial Prize in Economics went to Angus Deaton “for his analysis of consumption, poverty, and welfare.”  Deaton has published some startling work with Anne Case in the Proceedings of the National Academy of Sciences – research that is at least as newsworthy as the Nobel ceremony.

Analyzing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less. Among the causes were suicide, drugs, and alcoholism.

America prides itself on being one of the world’s most prosperous countries, and can boast that in every recent year except one (2009) per capita GDP has increased. And a sign of prosperity is supposed to be good health and longevity. But, while the US spends more money per capita on medical care than almost any other country (and more as a percentage of GDP), it is far from topping the world in life expectancy. France, for example, spends less than 12% of its GDP on medical care, compared to 17% in the US. Yet Americans can expect to live three full years less than the French.

The racial gap in health is, of course, all too real. According to a study published in 2014, life expectancy for African Americans is some four years lower for women and more than five years lower for men, relative to whites. This disparity, however, is hardly just an innocuous result of a more heterogeneous society. It is a symptom of America’s disgrace: pervasive discrimination against African Americans, reflected in median household income that is less than 60% that of white households. The effects of lower income are exacerbated by the fact that the US is the only advanced country not to recognize access to health care as a basic right.

The Case-Deaton results show that America is becoming a more divided society – divided not only between whites and African Americans, but also between the 1% and the rest, and between the highly educated and the less educated, regardless of race. And the gap can now be measured not just in wages, but also in early deaths. White Americans, too, are dying earlier as their incomes decline.  Impact of Income Inequality in America

 

Stimulating Global Growth?

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Michael Spence writes:  The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level. Indeed, even the current anemic pace of growth is probably unsustainable. The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.

For starters, governments must recognize that central banks, however well they have served their economies, cannot go it alone. Complementary reforms are needed to maintain and improve the transmission channels of monetary policy and avoid adverse side effects. In several countries – such as France, Italy, and Spain – reforms designed to increase structural flexibility are also crucial.

Furthermore, impediments to higher and more efficient public- and private-sector investment must be removed. And governments must implement measures to redistribute income, improve the provision of basic services, and equip the labor force to take advantage of ongoing shifts in the economic structure.

Generating the political will to get even some of this done will be no easy feat. But an honest look at the sorry state – and unpromising trajectory – of the global economy will, one hopes, help policymakers do what’s needed.  Stimulating Global Growth

 

When One Job Isn’t Enough

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Many people have to work two jobs to get by in US.  At present, multiple jobholders account for around five percent of civilian employment. The survey captures data for four subcategories of the multi-job workforce, the current relative sizes of which are illustrated in a pie chart below. The distinction between “primary” and “secondary” jobs is a subjective one determined by the survey participants.  Multiple job holders as a percentage of total employment have declined by more than 20% since the late 1990s.

Multiple Job Holders

Multiple Job Holders 1194 to Present in US

Are Economists Responsible for the End of Liberal Democracy?

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Part of the reason for the rise of extremism is economics; the failure in recent decades to generate real income gains for workers and the financial collapse of 2007-2008. Economists argue about the causes for these developments – skill-biased technological change, globalization or political capture (a wealthy elite funds politicians who then devise policies that help the elite). If the first two factors are to blame, then we really need to worry since there is little we can do about it (read The Rise of the Robots, the book that won the FT Business book prize if you want to get depressed).  On the most pessimistic view, one can see such diverse trends as the rise of Le Pen in France, the debate over free speech in American universities and the challenge of Islamic fundamentalism as signs that liberal democracy is in remorseless decline. But history suggests it is more likely to commit suicide (by electing a party that does not believe in it) than to be murdered by outsiders. In the end, one has to hope that the broad mass of the public will turn away from the extremes when faced with the prospect of them getting into government. But someone, somewhere, may even now be finishing the first draft of “The Strange Death of Liberal Democracy”.

End of Liberal Democracy

Is a National Basis Income Around the Corner?

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Is national basis income the answer?  FInland may become a laboratory test of the idea.

The Finnish government is currently drawing up plans to introduce a national basic income. A final proposal won’t be presented until November 2016, but if all goes to schedule, Finland will scrap all existing benefits and instead hand out 800 euros per month—to everyone.

It sounds far-fetched, but it’s looking likely that Finland will carry through with the idea. Whereas several Dutch cities will introduce basic income next year and Switzerland is holding a referendum on the subject, there is strongest political and public support for the idea in Finland.

A poll commissioned by the government agency planning the proposal, the Finnish Social Insurance Institution or KELA, showed that 69% support (link in Finnish) a basic income plan. Prime minister Juha Sipilä is in favor of the idea and he’s backed by most of the major political parties.

 

Equalizing?

Dubai Initiative to Heal and Empower

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Dubai has launched a global foundation, with an initial budget of AED1 billion ($272 million), which aims to combat poverty, unemployment and education challenges in the region.

The Mohammad Bin Rashid Al Maktoum Global Initiatives will bring together the work or 28 organizations under one umbrella body. The program will co-ordinate over 1,400 human development programs in more than 116 countries around the world.

“The world today is facing great challenges on all levels; in terrorism, wars and mass immigration and the only solution lies in human development which can be achieved by educating people and helping them build their future,” Sheikh Mohammed said launching the new foundation.

The foundation will have four key objectives: spreading knowledge, combating poverty, empowering communities and encouraging innovation for the future. The Dubai Media Office on Sunday issued the list of objectives and goals which the foundation is aiming to achieve by 2025:

– Print and distribute 10 million books

– Provide educational support for 20 million children

– Invest AED1.5 billion in education and knowledge projects

– Provide 500 million books to students for reading

– 30 million people to be treated for blindness and eye diseases

– Two million households to be provided with support

– AED2 billion to be invested in the establishment of research centres and hospitals

– AED500 million to be invested in water research in the region

– 5,000 innovators to be supported and incubated across the region

– AED5.5 billion to be invested in innovation and creating incubators

– 500,000 new job opportunities to be created

– 50,000 young entrepreneurs to be trained and supported

– One million participants to take part in awards and forums to help empower communities

– AED150 million to be awarded to encourage creatives, intellectuals and journalists

– 25,000 books to be translated into Arabic

– AED600 million to be invested to promote a culture of tolerance

Curing Poverty in Dubai

Warren Tackles Women’s Pay

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Elizabeth Warren proposes a women’s economic agenda.

“Achieving pay equality for women isn’t enough,” Senator Elizabeth Warren, D.-Mass., said.  “We have to make sure that all workers – men and women – are earning enough to live on.”

A recent Economic Policy Institute study shows that the gender pay gap has closed some 40 percent. It’s not because women are earning more. It’s because men are earning less.

Wages for all workers have been suppressed, because of national policies consciously adopted to guarantee that most of the wealth being created through increased productivity goes to those who are already the richest, most powerful people in America.

It hasn’t always been this way. For decades following the end of World War II, Gould said, pay for the vast majority of American workers went up as productivity rose.

Then economic policies turned against workers. Productivity grew 72.2 percent between 1973 and 2014, but hourly pay for the typical worker rose just 0.20 percent annually. From 2000 to 2014, the gap between productivity and pay grew faster and wider. Productivity rose 21.6 percent but pay increased only 1.8 percent for the typical worker.

If the fruits of higher productivity had been shared with those who had produced the wealth instead of being lapped up by the top one or two percent, Gould said, no one with a full time job would be living in poverty today. Overall, wages would be up 70 percent.

However, because of current economic policies some 35 million working Americans are living in poverty. Many are working two or three jobs.

In presenting the Women’s Economic Agenda, Senator Warren pointed out that more than half of low wage workers are women and that some 14 million children are being brought up in poverty.

“This is an economic issue,” Warren said, “but it is also an issue of American values. No one who works full time should be living in poverty.”

Schedules That Work bill

Warren discussed her Schedules That Work bill. If passed (which is unlikely in today’s Republican-controlled congress) it would prevent employers from calling workers in at the last minute. It would also stop managements from calling workers in, deciding they aren’t needed and sending them home without pay.

“Women especially need some control over their work schedules,” Warren said, “because a large number have sole responsibility for children. How can you plan for childcare if you don’t know what your schedule will be day to day?”

“Congressional representatives such as myself,” DeLauro said, “can take off as many days as we want to. Yet, one quarter of all workers have been fired or threatened with being fired for taking just one day off to take care of their kids.”

Women’s Economic Agenda

EPI’s economic agenda for women addresses the issues Sen. Warren and Rep. DeLauro discussed. It calls for equal pay that’s also a living wage. It stresses the importance of fair scheduling and paid family and medical leave.

“Women in unions are more likely to be paid higher wages and have access to needed benefits and protections. When unions are strong, those benefits and protections spread to nonunion workers as well.”

The agenda also calls for raising the minimum wage for all workers and eliminating the subminimum wage;  the nation must protect and strengthen Social Security and pensions.

The agenda ends by calling for national monetary policies that “prioritize wage growth and very low unemployment.”

Women's Pay?

 

 

Relationship Between Capital and Labor?

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Since capital and labor tend to be complementary in the production of goods and services, the same factors that have slowed down capital accumulation since the early 2000s may have weakened businesses’ labor demand and may have decreased the labor share.

The Cleveland Federal Reserve reports:  The labor share of output – the ratio of labor compensation to output – has trended downward for decades, but it has declined at a faster rate since the early 2000s. The labor share in the nonfarm business sector hovered around 64 percent in the 1950s, declined to 61.4 percent in 2002, and dropped more rapidly thereafter. It is currently close to 57 percent.

Figure 1. Labor Share

A declining labor share means that wages grow less than productivity. Since the early 2000s, wages have risen much more slowly than productivity. Since 2002, real compensation per hour in the nonfarm business sector has grown at an average annualized rate of 0.74 percent, while productivity has grown at an average annualized rate of 1.79 percent.

Figure 2. Real Wage and Productivity

The causes of the long-term decline of the labor share are debated but likely include changes in the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies.

According to Karabarbounis and Neiman (2013), the decrease in the relative price of investment goods, partly due to progress in information and communication technologies, has induced firms to replace labor with capital, thereby reducing the labor share. Elsby, Hobijn and Sahin (2013) find that part of the long-term decline in the labor share may be explained by the offshoring of labor-intensive production processes, which has led to a higher capital-labor ratio in U.S. production, and a lower labor share.

Lawrence (2015a and 2015b), however, points out that the labor share decline may be connected with a lower, rather than a higher, capital-labor ratio. Most estimates suggest that capital and labor tend to be complementary in the production of goods and services, which means that production requires the use of both capital and labor together, and it is difficult to substitute capital for labor or labor for capital. When capital and labor are complementary, a decrease in the capital-labor ratio is associated with a contraction in businesses’ demand for labor, which leads to a plunge in the wage rate and to a decline in the labor share. Lawrence then connects the labor share decline with a lower effective capital-labor ratio induced by labor-augmenting technological progress – a type of technological progress that raises the productivity of labor relative to capital and encourages businesses to substitute labor for capital.

Lawrence’s argument suggests that the steeper decline of the labor share since the early 2000s may be connected with the slowdown of capital growth in those years. Capital services, which grew at an average rate of 4.3 percent annually before 2002, have since grown only 2.2 percent annually on average. Capital services per hour, an indicator of the capital-labor ratio, grew at an average rate of 2.89 percent annually before 2002, but have since grown 2.05 percent annually on average.

Figure 3. Capital Services

Depending on the strength of the complementarity between capital and labor, a given decrease in the growth rate of the capital-labor ratio can be associated with a sizeable decline in the labor share. For instance, if we use an empirically plausible value for the strength of complementarity (an elasticity of substitution equal to 0.5), then a decrease in the capital-labor ratio of, say, 10 percent translates into a decrease in the labor share of approximately 2.5 percentage points, all else constant.

This suggests that the same factors that have slowed down capital accumulation since the early 2000s may have also weakened businesses’ labor demand, leading to a faster decline in the labor share and a wider gap between wage growth and productivity growth. One such factor could be the deceleration of multifactor productivity. Since 2005, multifactor productivity has grown 0.58 percent annually on average, more than a percentage point slower than in the previous 1996-2004 period, which was characterized by fast productivity growth.

Figure 4. Multifactor Productivity