Archive for the ‘Labor Markets’ Category

Incentives Matter

January 20, 2018 1 comment

I have stated on this blog that if the social science of economics is about anything, it is about the powerful economic effects of incentives. The recent media reports about Apple and other firms building new plants in the U.S., raising money wage rates, and increasing employment, are extraordinary examples of how powerful incentives can be in changing economic behavior. All of these stories stem from the tax reform recently passed.

  1. Real Wages. I stated that reducing the corporate tax rate would increase the demand for labor and cause real wages to rise. We have already had announcements about higher money, and thus real, wages paid by firms.
  2. New Plant and Equipment. Apple announed that it will build new plant in the U.S. as other firms have stated as a result of the tax reform.
  3. Tax Revenue. Much has been written about the fact that firms refused to bring money back to the U.S. to avoid double taxation of their income. Apple will pay $38 Billion in taxes once it returns funds to the U.S. so the federal government gets a one-time windfall of revenue due to the tax reform from Apple.
  4. Employment. Apple and other firms are planning to increase employment, with Apple stating that it will hire 20,000 people.

There are other examples (yes they are anecdotes) that I can give but those above make the point. What is most entertaining is to watch Democratic politicians pretend that these effects are nonexistent when, in fact, they should set off a growth boom of the sort that we have not seen in many years. First quarter GDP numbers should be most interesting when they are released. Stay tuned.

But another lesson from these events is how easy it is for government to reduce economic activity or economic growth when it imposes its policies.

All of this provides a wonderful set of examples of economics in action. This is why I got interested in economics when I was a student because it has so much to offer for understanding the world around us.


Real Wages

January 2, 2018 Leave a comment

In two recent posts, I pointed out that the new tax bill should cause real wages to rise for two reasons. One is that the reduced corporate tax rate increases the after-tax profitability of labor which will increase the demand for labor. Second, the expensing of new capital goods reduces the cost of capital goods which should cause firms to add to their capital stocks and thus increase the productivity of workers. This also should increase the demand for labor. As a result, we would predict that real wages for workers should rise. Here I thought I would provide some data on real wages to be used for assessing our predictions about the effects of the recent tax reform. Read more…

Expensing New Capital Goods

December 28, 2017 Leave a comment

My last post described a simple story about the new tax reform passed by the federal government regarding the effect of the corporate tax rate and labor demand. There is another aspect of that story which involved the capital stock and the tax rate on corporations and I pointed out that the reduced corporate tax rate would stimulate capital investment which would also increase real wages. But another provision of the new tax bill also affects real wages and the capital stock. That aspect of the bill is the expensing of new capital goods. This feature of the tax bill has the effect of reducing the cost of new capital goods. Read more…

Tax Rates and the Firm

December 27, 2017 Leave a comment

Congress just passed a tax code reform reducing tax rates for firms. Firms announce they will increase the minimum wage rate that they pay workers. What’s the connection between these two events?

Tax Rates and Factor Productivity

Econ 101 students are told a very simple story about the behavior of firms, namely they are told that firms want to maximize profits when they choose their inputs in production. This isn’t literally true but it is a simple story designed to illustrate insights about labor and capital demand and how they generate the demand for inputs in factor (labor and capital) markets. That story leads to the condition

Marginal Revenue = Marginal Costs

for inputs like labor and capital used to produce output. Marginal revenue in this simple story is not taxed but suppose that it is. Then we would amend the story to state that

After-Tax Marginal Revenue = Marginal Costs

which is similar but now the condition recognizes that the government taxes away part of the marginal revenue earned by the firm when using labor and capital. Both of these conditions can be used to generate the demand for inputs in production. Read more…

Minimum Wages: A Survey of the Evidence

January 3, 2017 4 comments

With the new year, minimum wages are rising in many cities and states, including Michigan where I live. I have written before on this subject (a link is given below) but I ran across a nice article containing a very readable summary of the evidence on this subject. It is a nice read for non-economists because it has no equations (gasp!) and it is not very long but it does provide an accessible summary statement of the empirical scientific evidence on the effects of the minimum wage. But I have another motive in providing this summary of the evidence.

The nature of scientific inquiry is that not all studies on a subject produce the same answer. As a result, more than one study is necessary because, as the evidence emerges, hopefully a consensus forms about the problem that is being studied. So undoubtedly there are studies suggesting that there is no connection between smoking and cancer but it seems quite likely that the preponderance of the evidence, and the highest quality work, reveals a link between smoking and cancer. I once saw Barack Obama “cherry-pick” evidence, citing one particular study indicating that minimum wages do not cause unemployment. But one study isn’t important; the entire literature is and here is a summary of what that literature shows.

An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.

This statement is taken directly from the article linked above. The Neumark and Wascher (2007) article is a scholarly study providing a more thorough analysis of the evidence.

The good news for an economist like me is that what we tell students in Econ 101 is correct: minimum wages cause unemployment. Some workers gain and some lose and the tragedy of the policy is that it harms those in our society who are the least-able to deal with a job loss and the loss of skill-accumulation that goes along with working. Namely, the policy harms people at the low end of the income distribution. This is just another example, in a long list of examples, of how a government can harm some of its citizens while the politicians, implementing the policy, claim that it helps those citizens. As long as the public is unaware of the evidence, politicians can get away with this destructive behavior.

Previous Post on Minimum Wages: minimum-wages-to-rise-in-2013

Equal Pay and Occupational Choice

September 28, 2016 Leave a comment

It is election season and the bombast is relentless about the so-called problems that politicians need to fix. Equal pay is one such issue. Hillary Clinton contends that, if she is elected President of the United States, she will work to ensure that women are paid equally to men. But the “evidence” that is often offered to support the existence of this problem is simply the incomes of men and women which I have argued in a previous blog post is worthless (that post is here). The reason is that income data must be adjusted for hours worked, occupations, and possibly other reasons to make the comparisons sensible. These adjustments are typically not made and so one wonders if there is really any problem to be solved.

Here I thought I would provide an example of occupational differences which I suspect is at the heart of measured pay differences. The Bureau of Labor Statistics ( provides data on incomes by occupation. To illustrate the point that occupations matter in equal pay discussions, consider two occupations: chemical engineers and elementary and middle school teachers. BLS reports a mean (average) income for chemical engineers of $103,960 and teachers in elementary and middle schools is $58,060. Now consider the following table.

Teachers Engineers
Man $58,060 Man $103,960
Woman $58,060 Man $103,960
Woman $58,060 Woman $103,960
 Total Incomes
Men $265,980
Women $220,080

In the table, there are three people in each occupation. In engineering, there are two men and one woman and, in teaching, there are two women and one man. Note that within each occupation, each person makes exactly the same income so there is no evidence here about discrimination by employers. But men, in the aggregate, make 21 percent more than women ($265,980 is about 21 percent larger than $220,080). So while there is no discrimination by employers, there is a 21 percent aggregate income gap due to occupational differences between men and women.

The point of this example is that if one is to argue for gender bias, the evidence must involve the choices made by men and women, not just the wages paid by firms employing them. I doubt seriously that this would ever happen. What is more likely to happen is that another layer of bureaucratic oversight will be imposed, involving data that must be provided by the private sector to government searching for discrimination. That raises the supply price of the goods and services we buy, thus raising their prices.

I am willing to believe that discrimination exists in our society but I am not willing to believe it on the basis of worthless analysis.

Equal Pay

April 8, 2014 1 comment

The Bureau of Labor Statistics (BLS) has issued a report, entitled “Highlights of Women’s Earnings 2012.” The President has decided to seize on this report ( to claim that there is a disparity in the earnings of women compared to men. Like many issues addressed by politicians, the claims made by politicians don’t follow from the source document. Here I want to mention two reasons why typical claims about the “evidence” backing up these unequal pay claims are bogus.

Adjusting for Hours Worked

Suppose that I told you that a woman earned $150.00 last week and that a man earned $300.00 in the same week. Does this imply unequal pay? Superficially it does but suppose further that the woman worked 10 hours to earn her income for the week but the man worked 30 hours. The woman was paid $15.00 per hour while the man earned $10.00 per hour. When we look at hourly wages, the impression conveyed by weekly earnings is clearly reversed. Any claims about unequal pay should be based upon hourly wages so that account is taken of hours worked. Advocates of the unequal pay viewpoint typically look at weekly earnings to support their claims but, as our simple analysis shows, weekly earnings are not informative. Hourly wages are the better measure. My point is simply that hours worked must be taken into account for a useful analysis of pay differences.

Adjusting for Occupations

Wage rates vary across occupations. BLS provides data for various occupations (to find this data, use the phrase “wages by occupation” to search the BLS web site). You will turn up data on incomes for many occupations and you will see how different incomes can be. Suppose that a woman works as an Community Health Worker (BLS reports mean wages 0f $37,640 for this occupation) and a man works as a Computer and Information Analyst (BLS reports an income of $86,100 for this occupation). The income difference is substantial but does this reflect discrimination or unequal pay? Of course not. Wage differences across occupations occur for many reasons, including the risk of the job and the scarcity of workers with the skills needed for the occupation. So to look for some sort of discrimination, it is important to look at the same occupation to search for pay disparities.

Is There Pay Discrimination?

The examples given here make two simple points about how to go about searching for evidence of labor market biases against women; adjustments need to be made for hours worked and occupations. There are reports in the press (see this article for a discussion of evidence on incomes by gender) that once appropriate adjustments are made permitting valid comparisons, pay differences narrow enormously. And there may not even exist statistically significant differences in income. Thus inappropriate use of data provides wildly inaccurate implications about labor market pay differences between men and women.

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A blog by John B. Taylor

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