New Economist

Do immigrants reduce wages?

The surge in US immigration in recent decades has seen debate about the economic effects of immigrants on US natives, particularly on their wages, gain momentum. Tomorrow sees a noteworthy paper on the topic delivered at the NBER's International Trade and Investment Workshop. - part of week 4 of the NBER Summer Institute.

Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis have a topical new paper entitled Rethinking the Effects of Immigration on Wages (PDF). Unlike some of the other recent studies, they find a positive effect on wages of US-born workers. Here is the abstract:

This paper revisits the following important question: what is the effect of immigration on average and individual wages of U.S.-born workers? In particular we analyze the impact of surging immigration, on average real wages and on the increased wage dispersion during the period 1990-2004. Building on Borjas (2003) we emphasize the need for a general equilibrium approach to analyze this problem.

The impact of immigrants on wages of US born workers can be evaluated only by accounting carefully for labor market and capital market interactions in production. This requires to assume a production function, a mechanisms of physical capital accumulation and to derive labor demands for different types of workers (by education and experience). The usual ”reduced form” approach estimates the effect of immigrants on wages of US-born workers within the same skill group. Such method only provides estimates of a partial effect, usually negative and uninformative of the total effect of immigration on wages.

Using our general equilibrium approach we estimate that physical capital adjust promptly and fully to immigration (already within one year) and that immigrants are imperfect substitutes for US-born workers within the same education and experience group (because they choose different occupations and have different skills).

These two facts, overlooked by the previous literature, imply a positive and significant efect of immigration on the average wage of U.S.-born workers, already in the short run. They also imply a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers. Hence only a very small fraction of the increase in College/High School Dropout wage gap during the 1990-2004 period can be attributed to immigration.

NBER 2006, Week 4

Today sees the start of the fourth and final week of the NBER Summer Institute 2006, with three workshops featured:

* Corporate Governance Project Workshop (Bebchuk)
* International Trade and Investment workshop (Davis/Weinstein)
* Corporate Finance (Jenter/Fisman)

Trade talks won't restart for years

It will take years to revive trade talks, argues Larry Elliott in today's Guardian. in the meantime, "the poor countries will stay poor as protectionism wins the day again".

As with every trade round since the end of the second world war, there is never going to be a deal until Brussels and Washington can reach an agreement. But the changing economic geography of the world means that there is also no chance of a deal until the bigger developing countries are onside. China's exports, for example, grew by 24% in 2004 and 25% in 2005; it cannot be ignored, and nor can India or Brazil.

Lamy's idea was to try to get six of the key players to settle their differences before bringing in the rest of the membership. Inevitably this was a cause for a certain amount of discontent for those left twiddling their thumbs while the EU, the US, Japan, Brazil, India and Australia held their talks, but Lamy's argument was that there was no point broadening the discussions unless the G6 was in unison. In any event, putting representatives from 149 countries in a room is not a recipe for a trade deal; it is a recipe for paralysis.

The fact that the G6 could not agree means the Doha round is now in deep, deep trouble. The talks were suspended indefinitely last week after the US decided there was not enough on the table to justify the cuts in farm subsidies President Bush had offered as part of the attempt at the G8 summit in St Petersburg to break the logjam. Indeed, just as Lamy had feared, trying to give the talks a top-level political push was fraught with danger. What, Lamy asked repeatedly, would happen if the trump card was played and failed to clinch the rubber? Well, now we know the answer. Nobody has the slightest idea how to revive the talks and there is now "a period of reflection" for WTO members to take stock. This is likely to be pretty prolonged.

There will be no movement until after the US midterm elections in November, but at some point Bush will have to decide whether he wants to spend valuable political capital on securing an extension of the fast-track legislation that would allow him to ram a bill through Congress unamended. If, as is likely, Congress seeks to chuck billions more dollars at American farmers by renewing the 2002 Farm Bill, the president's free-trade credentials will be further tested.

The smart money is on the Doha round now being in cold storage until a new president arrives in the White House in early 2009 - and even then it's hard to imagine that securing a multilateral trade deal is going to be top of the list of priorities.

By that stage, the world may have been plunged into a new dark age of slump and protectionism. There may be soup kitchens on Broadway as the tariff barriers go up. This seems unlikely. Indeed, one of the other great myths about trade is that it was protectionism that caused the Great Depression. It was the other way round: the slump made countries protectionist.

...A bigger danger is that the WTO and multilateralism as a whole will be endangered. In the absence of a new round, countries will seek to use existing trade rules to prise open protected markets. There will be many more disputes going through the machinery in Geneva, and this will strain loyalty to a rules-based, legally binding system. Yet, however frustrated Washington and Brussels get with the WTO, it is unlikely that they would cancel their subscriptions to the club. Iraq and now Lebanon have demonstrated the limitations of unilateralism.

Global labour market imbalances?

What effect is globalisation having on US labour markets? Is there a 'global glut of labour' alongside Bernanke's global savings glut? These issues were addressed in a paper given last month to a Boston Fed conference, Global Imbalances – As Giants Evolve by the NBER's Richard Freeman: Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories? (PDF).

The paper got some attention at the time, but its worth another spin around the block. Freeman raises in his characteristically provocative way several fundamental issues for economists, pundits and politicians. He puts forward "two competing narratives about the how the labor market in the US will develop over the next decade or two":

The Impending Shortage narrative, which has attracted attention from business and policy groups, is that the retirement of baby boomers will create a great labor shortage. Slower growth of new entrants from colleges and universities, an increased proportion of young workers from minority groups, and inadequate training in science and math will produce a shortage of the skills the country needs to maintain itself as the leading economy in the world. The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from offshoring or low wage imports. Instead policy should focus on helping business find workers in the coming shortage.

...The Globalization Surplus narrative, which has attracted attention as part of discussions of the current mode of globalization, takes the opposite tack. It holds that the spread of global capitalism around the world, particularly to China and India, has generated a labor surplus that threatens wages in advanced and higher wage developing countries. Trade, offshoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable
services in advanced countries and in moderate income developing countries.

Freeman finds stronger support for the second thesis than the first.

I conclude that the forces of globalization associated with the doubling of the global work force will trump demographic developments associated with slower population growth in determining supply/demand balances in the labor market.

This process could take a long time:

How long might it take the global economy “absorb” the huge work forces of China, India, and potentially other developing countries? ...If China maintains its successful development and wages double every decade, as they did in the 1990s, Chinese wages would approach levels in the advanced countries today in about 30 years. India would take longer. My assessment is thus that the transition will take 40 to 50 years.

What about other workers? Freeman notes that although globalisation "has improved the economic position of workers in China and India", workers in many other developing countries "have not done well in the 1990s-early 2000s". And those of us working in the OECD countries?

How workers in the advanced countries will fare in the transition depends upon a race between the improvements in global productivity and reductions in prices that the new giants will bring to the world economy vs the labor market pressure for wage concessions to compete with them. Ideally, the increased number of scientists and engineers and spread of high tech worldwide will accelerate the rate of technological advance enough to raise living standards in all countries; the US and other advanced countries will retain comparative advantage in enough leading sectors to remain hubs in the global development of technology; and the world savings rate will rise so that the global capital labor ratio increases rapidly.

What are the implications for government policy? For Freeman, it is two-fold: to ensure a smooth transition, and tilt the balance more towards labour than capital:

If I am right, the overriding goal of labor market policy around the world in the next decade or so should be to assure that the absorption of China, India, and the ex Soviet bloc into world capitalism goes as smoothly as possible.

The bent of policy in the US and elsewhere should be in the direction of favoring labor rather than capital, which ought to be able to take care of itself in a global economy with twice as many workers, many available at low wages.

There should be sustained international pressure on developing countries to raise their labor standards and to distribute the benefits of growth to workers. And there should be efforts to maintain or improve living standards if not wages of all workers in the advanced countries so that even the less skilled gain some from the movement to a global labor market.

Unorthodox thinking from the head of the NBER Labor Studies programme! And there's more:

"Trust me, I'm an Economist"

Coming soom, to a station near you - Economics TV! Hamish McRae informs us in the Sunday Independent that Tim Harford's new book The undercover Economist is being turned into a television programme: The dismal science gets into our heads

"Trust me, I'm an economist." Really? Well, yes.

One of the great things that has been happening to the study of economics in recent years has been the focus on the micro rather than the macro. We used to worry mainly about the big issues: GDP growth, interest rates, inflation and so on. We still do, of course. But beside that has been a new interest in what economics can tell us about the small things. Why do people behave as they do? What makes people happy? How do we fix the NHS? Actually those do not sound small at all, but they are concerned with the detail of the behaviour of millions of people, rather than the mass of an economy.

The subject has been moving along steadily but two best-selling books have suddenly brought this sort of work to public notice. One is Freakonomics, written by two Americans, Steven Levitt and Stephen Dubner. The other is The Undercover Economist by a British author, Tim Harford. In rather different ways, the two books relate economics to how people behave - from drug dealers in Chicago (Freakonomics) to supermarket shoppers or coffee drinkers at Starbucks in London (The Undercover Economist).

And now there is a treat in store for British TV viewers interested in this area, for the latter book has been transformed into a TV series called Trust me, I'm an Economist, which starts on BBC2 on 18 August. And the first programme is about love.

No, it will not tell you how to capture the heart of the man or woman of your dreams (though it does show some things you clearly should not do). It will, though, help explain the extent to which we are rational economic beings and the extent to which we are not. And it will explain how the market can be harnessed to all sorts of socially beneficial aims.

With a bit of luck, it might also help economically illiterate policy makers to understand why their policies so often fail. We could do with a bit more of that.

Recent additions to my blogroll

The discussion over at Greg Mankiw's weblog on favourite blogs reminded me that I have added seven weblogs to my Economist Weblogs links in the last week or two. In no particular order, they are:

1. Economics and... (knzn.blogspot.com) by US blogger KNZN, a frequent poster of comments on other econoblogs; "I do have a Ph.D. in economics, but aside from that, I won't admit to having any identity at all..."

2. CoRE Economics (economics.com.au) by Melbourne Business School academic economist Joshua Gans, a regular co-author with fellow Aussie econoblogger Andrew Leigh (whose blog is also worth visiting)

3. Johan Norberg (www.johannorberg.net), "a Swedish writer devoted to globalisation and individual liberty", best known for his book In Defence of Global Capitalism

4.  Philippe Legrain (www.philippelegrain.com/legrain), a London-based journalist and writer, author of Open World: The Truth about Globalisation; he is writing a second book, which makes the case for freer international migration

5. Innovation Online (www.ncsu.edu/iei/io/blog/) by Karl Smith from the Institute for Emerging Issues NC State University

6. Environmental Economics (www.environmental-economics.blogspot.com) by Brad Ewing, a senior at The Ohio State University, is the second weblog of this name - not to be confused with the Environmental Economics blog by academics Tim Haab and John Whitehead (I assume ignorance, rather than plagiarism)

7. The Everyday Economist (everydayecon.wordpress.com): libertarian Josh Hendricksen's blog, "explaining the economics of everyday life"

It's a mixed bag, to be sure, and none of the above can rival the justifiably popular econoblogs of Brad DeLong, Greg Mankiw, Mark Thoma or Marginal Revolution. But let's give them their due - they are mostly quite new to the blogosphere.

A notable trend is the growing number of authors setting up weblogs. Once they were mostly vanity sites, but these days they often have plenty of content (think Malcolm Gladwell, Freakonomics and Tim Harford). There is also a fairly strong libertarian bias - though this is hardly new - Jane Galt and Virginia Postrel started that trend years ago.

“So, like, you pick the fonts?”

Most readers of this weblog can imagine what a book cover designer does. But an book interior designer - what on earth is that? India Amos explains in a recent post: Making castoff

Last week I attended a reunion of people who used to work at a certain nonprofit literary organization. Some are in publishing now, many are writers, and all are bookish people who buy and read books—past page 18—regularly. Yet I was asked several times, while catching up with folks, what it is that a book interior designer does. “So, like, you pick the fonts?”

I am used to being asked this question by normal people, civilians, but I expect more from those who read and promote literature. One friend who asked if I pick the fonts is now the executive director of a literary organization whose mission is to promote reading, an organization that publishes its own series of books. I attacked him—”You, of all people! Haven’t you ever looked at a book from Knopf and noticed that it looks nicer than one from [earnest but tasteless poetry publisher]? Haven’t you ever noticed that some books are more inviting or more readable than others?”

Apparently not.

I’m feeling my way around at the new job and having to actually think about what I’m doing from time to time, so now seems like a good moment to try to put into words what I do. I learned to do what I do from reading books (crazy!) and Just Fucking Doing It, so my methods may not be the most scientific and I may not be able to explain them very succinctly, but I’ll try to touch on the basics.

castoff

When I’m designing a book now, the most important thing I have to do is make castoff. This means figuring out a way to fit enough words on a page so that the book comes out to the number of pages that were budgeted for. The page count is determined very early on, by people who’re more concerned with profit and loss than with beauty, and it’s intimately tied to the price of the book and the projected sales. Some books need to be stretched so the publisher can justify charging a certain price; many, many more need to the crammed so that they don’t cost more to produce than sales are likely to recoup. I do not have any input into this decision-making process. I just receive a stack of manuscript and a standardized worksheet showing how the page count was estimated. This worksheet shows not only the total number of pages but also the number of characters per page that will be needed to hit said length.

Because of the way printing is done, pages ideally come in groups—signatures—of thirty-two. Theoretically you can tack a sixteen-, eight- or four-page signature onto the end of a book, but it costs more to print 8 pages than to print 32, so many publishers won’t allow it. So a book might have 304 or 320 or 352 or 384 pages, but not 316. And most publishers avoid leaving more than four blank pages in the back, because blanks make the buyer think he’s being cheated. There are certain pages in the front of a book that can be added, reshuffled, or deleted in a pinch, but the goal for the designer is to make everything fit just so without reorganizing anything...

Ther's plenty more in her post.

A freer People's Bank of China?

When I wrote back in May about IMF proposals for a freer People's Bank of China, I didn't think Chinese officials would be proposing similar reforms only two months later. But it appears they may be, according to a report by the Financial Times' Richard McGregor: China mulls freer hand for central bank

A Chinese central bank official has suggested economic policymaking could be more effective if the institution were free to manage interest rates independent of other ministries and direct central government oversight.

Liu Lida said in a little-reported speech to a conference at the weekend that the ability of the People’s Bank of China to adjust interest rates on its own would make such decision-making more effective and faster.

“Of course, the decision-making mechanism will be more balanced if a decision of the State Council is needed and the opinions of more ministries are taken into account,” said Mr Liu, the head of the monetary policy research department.

“But this may to some also lead to a loss of efficiency; while an immediate adjustment could have very positive impact on the market . . .” 

A spokesman for the central bank said Mr Liu’s comments as recorded in the transcript of the conference speech did not accurately represent the bank’s views nor those of Mr Liu himself. However, they do reflect longstanding internal discussion within the central bank and policymaking circles in China about the need to give the PBoC a freer hand in monetary policy, economists in Beijing said.

At the moment, significant monetary policy decisions cannot be taken by the PBoC without the approval of the State Council, China’s cabinet.

“The Chinese system is anachronistic,” said a Beijing-based economist, compared with the central banks of large economies, which had greater autonomy or, in some cases, legislative independence.

The International Monetary Fund, in a staff report last year, said the PBoC needed “more discretion to independently set interest rates”.

“While consultation within the government may be beneficial in building support for an interest rate change, policy actions can be unduly delayed,” it said.

India outsources itself

Ah the irony. Half a million Indian bank workers went on strike today - at proposals to outsource some of their jobs. The FT's Amy Yee in New Delhi has the story: India bank workers walk off their jobs

Nearly 500,000 bank workers in India, home to one of the world’s most robust outsourcing industries, walked off their jobs on Friday to protest against the planned outsourcing of their work to private domestic companies.

The one-day strike was in response to “continuing attacks on the banking industry and bank employees’ jobs and job security,” said the All India Bank Officer’s Association (AIBOA), one of the three labour unions organising the protest. Outsourcing in India’s banking industry would threaten 250,000 jobs, the unions said.

The rally is ironic given that India’s software and business process outsourcing industry is one of the country’s biggest engines of growth. Companies such as Infosys, Tata Consultancy Services and Wipro together generate billions of dollars annually from multinational companies shifting work overseas to cut costs.

But bank labour unions say their outcry is different from that of workers in rich countries who have lost jobs to India. “We are an impoverished nation,” said RJ Sridharan, general secretary of AIBOA. “India is a labour-oriented country so we need more jobs that are secure. Developed countries have fewer hands to work.”

The Reserve Bank of India has proposed letting banks use outside agencies in India for tasks such as processing loan and credit card applications, supervision of loans and data processing.

“The world over, banks are increasingly using outsourcing as a means of both reducing cost and accessing specialist expertise,” the RBI said in a circular that contained guidelines on outsourcing financial services.

Mr Sridharan said that outsourcing “does not lead to more efficiency. It creates complications in rendering good customer service.” He claimed that India’s banks are trying to outsource jobs with a view to offset low-cost lending to corporate sectors.

The taxi cost me 4.5 million dollars

A short but alarming post by Jack Stilgoe on the Demos [UK] webloblog: Harare 2 - Everyone's an economist:

"Everyone's an economist," Lawrence tells me as we drive from Harare airport. We overtake an overcrowded minibus, full of people trying to make the most of what petrol can be found. On the back of the bus, a banner says "Opportunity Cost!" On the front, it says "Demand Elasticity!" If "Civilization advances by extending the number of important operations which we can perform without thinking about them" (A N Whitehead), then Zimbabwe's economy needs a nudge. At the moment, for it to work at all, everyone needs to be involved.

Zimbabwe's is an economy going rapidly backwards. Its size has halved in the last 8 years. Unemployment is between 70 and 80% (although the Government hilariously claims it is "pegged" at 9%). Inflation, the ever-optimistic local newspaper tells me, is now down to 900%. Two rates of exchange exist. Unofficially, Western cash will earn you four or more times the offical exchange rate. Those with money or stuff to sell are forced to reinvent markets every week. Petrol is driven over from Mozambique and sold for whatever people will pay. The cashpoints can't be filled quick enough to dispense the doorstops of notes required to buy almost everything. Things will get better, everyone tells me. The taxi back to the airport costs me 4.5 million dollars.