Labour Bargaining Power: Its Different At The Top

Last month I highlighted a working paper on calculating the optimal tax rate, especially with reference to top income earners.

One of the channels identified by the authors in which top income earners have increased their share of the income pie over the past few decades is through their stronger wage bargaining power – when marginal tax rates are low, it pays for CEOs and senior managers to supress income gains in lower pay grades. This maximises “shareholder value” by boosting profits, and earns them nice bonuses for being “aligned with shareholders’ interests”.

And here we can see this channel in action (excerpt):

Wall Street Said to Weigh Freezing Pay Bumps for Junior Bankers

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Do Teachers Matter?

According to this new paper at the NBER, yes they do (abstract):

The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood
Raj Chetty, John N. Friedman, Jonah E. Rockoff

Are teachers’ impacts on students’ test scores (“value-added”) a good measure of their quality? This question has sparked debate largely because of disagreement about (1) whether value-added (VA) provides unbiased estimates of teachers’ impacts on student achievement and (2) whether high-VA teachers improve students’ long-term outcomes. We address these two issues by analyzing school district data from grades 3-8 for 2.5 million children linked to tax records on parent characteristics and adult outcomes. We find no evidence of bias in VA estimates using previously unobserved parent characteristics and a quasi-experimental research design based on changes in teaching staff. Students assigned to high-VA teachers are more likely to attend college, attend higher- ranked colleges, earn higher salaries, live in higher SES neighborhoods, and save more for retirement. They are also less likely to have children as teenagers. Teachers have large impacts in all grades from 4 to 8. On average, a one standard deviation improvment in teacher VA in a single grade raises earnings by about 1% at age 28. Replacing a teacher whose VA is in the bottom 5% with an average teacher would increase students’ lifetime income by more than $250,000 for the average classroom in our sample. We conclude that good teachers create substantial economic value and that test score impacts are helpful in identifying such teachers.

Petrol Subsidies: Time To Go

I read this last night, and I wholeheartedly agree (excerpts):

For Global Gasaholics, Ending Subsidies Is the First Step: View

Jan. 10 (Bloomberg) -- Fuel subsidies are the crack cocaine of global economic development: easy to get hooked on, hard to give up. And as every addict knows, there are good and bad ways to try to kick the habit.

Consider Nigeria and Iran. In Nigeria, the government’s recent decision to remove fuel subsidies and more than double the price of gasoline has led to riots and now a nationwide strike. Two years ago in Iran, an initiative to cut subsidies and almost quadruple the price of gas (as well as boost the price of food and water) provoked little unrest, lowered oil consumption and bolstered the economy and the government.

The differences between the two efforts offer valuable lessons about the best ways to eliminate fossil-fuel subsidies - - a staggering global misallocation of resources that does little to help the poor, distorts markets and pumps more greenhouse gases into our atmosphere.

Markets In Everything: What Determines The Supply Of Politicians?

And now for something completely different…fresh from the NBER is this seriously scholarly paper, but which I had to read with my tongue firmly in my cheek (abstract):

Labor Supply of Politicians
Raymond Fisman, Nikolaj A. Harmon, Emir Kamenica, Inger Munk

We examine the labor supply of politicians using data on Members of the European Parliament (MEPs). We exploit the introduction of a law that equalized MEPs' salaries, which had previously differed by as much as a factor of ten. Doubling an MEP's salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.

Oh my, what fun…most of it conforms to intuition (raising salaries increases supply; politicians from more corrupt countries tend to put in less effort), but that last bit is priceless. Raising salaries, all things equal, reduces the quality of electoral candidates.

Singapore must be on the right track then, as they’ve just proposed cutting ministerial salaries by more than a third. Malaysia’s Budget 2012 on the other hand has offered to raise parliamentarians’ pay (*cough*).

Does this mean politicians are a type of inferior good?

Remember, I didn’t say anything.

Technical Notes

Fisman, Raymond and Nikolaj A. Harmon, Emir Kamenica & Inger Munk, "Labor Supply of Politicians", NBER Working Paper No. 17726, January 2012

November 2011 External Trade: Within Expectations

Mean reversion, here we come. As expected, November export numbers tripped up a bit (log annual and monthly changes; seasonally adjusted):

Horror Stories In Education: A Cautionary Tale

From the World bank blogs (excerpts; emphasis added):

Seeing a child like a state: Holding the poor accountable for bad schools
Guest post by Lant Pritchett

In the early 20th century Helen Todd, a factory inspector in Chicago, interviewed 500 children working in factories, often in dangerous and unpleasant conditions. She asked children the question: “If your father had a good job and you didn’t have to work, which would you rather do—go to school or work in a factory?” 412 said they would choose factory work. One fourteen year old girl, who was interviewed lacquering canes in an attic working with both intense heat and the constant smell of turpentine, said “School is the fiercest thing you can come up against. Factories ain’t no cinch, but schools is worst.”

November 2011 IPI: A Setback

The November industrial production numbers provides some ammunition for pessimists regarding Malaysia’s economic prospects (log annual and monthly changes; seasonally adjusted; 2000=100):

The Costs of Inequality

If you can spare just 16 minutes of your time, watching this video will be worth your trouble:

Spare me from all those who think we need to be like Singapore.

What’s interesting to me from a policy perspective is that Wilkinson mentions that societies have approached achieving greater equality by either having incomes not too different, or through welfare-state-style tax and transfer.

That’s a fundamental question we have to answer – we kind of economic organisation do we want to have? An Anglo-Saxon style free market based one, or something along the lines of a Euro-style welfare state? And that’s something we need to work out, if we are at all to make any headway against inequality. That and what price we’re willing to pay to get there – because there will be costs.

(H/T Din Merican)

Demographics And Development

World Bank Chief Economist Justin Lifu Yin writes a concise article on the demographic transition and development policy (excerpt; emphasis added):

Youth Bulge: A Demographic Dividend or a Demographic Bomb in Developing Countries?

The youth bulge is a common phenomenon in many developing countries, and in particular, in the least developed countries. It is often due to a stage of development where a country achieves success in reducing infant mortality but mothers still have a high fertility rate. The result is that a large share of the population is comprised of children and young adults, and today’s children are tomorrow’s young adults...

“More Schooling, But Too Little Learning”

From the World Bank’s Education for Global Development blog (excerpt, emphasis added):

When an exclamation point is warranted

At the High-Level Forum on aid effectiveness (known as HLF4) a few weeks ago in Busan, South Korea, I had the pleasure of participating in a panel on education and aid...what we saw in our panel on aid for education, and in the one-day pre-conference that informed it, was very encouraging: it showed how Korea’s lessons about student learning are influencing international education policy.

LTV and DTI: Taming Housing Speculation

Now that BNM’s revised guidelines on consumer lending are now in force, the question arises as to how effective they will be. The reduced loan to value (LTV) ratio of 70% for a third housing loan (implemented in 2011) appears to have had some effect on housing speculation, if house prices are any indicator – price increases have moderated across the board in 3Q 2011.

In KL for instance, house prices increased 7.9% in 3Q 2011, compared to 12.7% in 2Q 2011. The problem is 7.9% is still a fairly fast pace of appreciation – the average for the past decade (2001-2010) is just 3.5%.

So based on the new guidelines, credit decisions will take into account net income as against gross income, as well as limits on the debt to income (DTI) ratio. Will that work?

November 2011 Monetary Conditions

Quite unlike October, money supply in November rose largely based on higher FD’s but saw currency in circulation and current deposits fall (log annual and monthly growth; seasonally adjusted):