Tuesday, April 01, 2014

Shards on Income Inequality

The Oligopsony Hypothesis

Everyone knows what monopoly means.  A single seller has market power due to an absence of rival sellers.  Oligopoly is similar to monopoly.  There are a few sellers, each with some market power.  They compete against one another, but not so much as if there were many more equally capable sellers.  Monopsony is similar to monopoly in that it is about market power, but it is now the buyer with the market power.  In theory this can happen in any market.  It is frequently considered with regard to the labor market where the mental picture to support the model is the single factory small town, where that employer dominates the local labor market.  Oligopsony is similar, but now there are a few buyers who compete with one another.

Why is oligopsony interesting to consider now?  In yesterday's NY Times Paul Krugman took on "the skills gap" argument and contrasted it to insufficient aggregate demand (for product and hence for labor input).  In particular, he cited this paper, Is There Really a Shortage of Skilled Workers?  The evidence points to insufficient demand.  This is done by dividing unemployment into various categories and contrasting unemployment within each category with before the housing bubble burst. The results show uniformly that unemployment is higher now across the categories.  It is quite convincing that a skills gap explanation can't be the complete story.  That paper and Krugman's column too makes it seem that those who argue for a skills gap are perpetuating a hoax, thereby inviting the wrong policy response.  The oligopsony alternative can accommodate the empirical results and yet make those who argue there is a skills gap not guilty of deceit.

One place where it seems obvious to me that monopsony power has increased since the downturn is employment at the U of I (and likewise at other major universities located in college towns).  The impact is greatest, not on faculty, the stars among the faculty have an international market and must be compensated competitively or they will work elsewhere, but rather among the academic professional staff, many of whom have strong local roots.  Staff reductions have been achieved, through attrition, the voluntary separation program, and in some cases forced severance.  This has happened with no reduction in scope or intensity of activity, with the consequence of increased burden on those AP's who continue to work.  Their real wage has declined as a consequence. 

Traditional approaches to market power look at concentration.  If a traditional oligopsony explanation makes sense here, one would have to explain what's going on by seeing the big guys more and more dominating the labor market.  I'm guessing there is some evidence of this, especially since the housing bubble burst.  But I think the weak aggregate demand story certainly has some merit as well, so what might be most interesting to consider is how that interplays with an oligopsony story and if as a consequence even comparatively small employers act now as if they have market power in the labor market.

If that is what is going on, the increase in the minimum wage is a good and appropriate tonic for improving the lot of low wage workers.  But it is unclear that it will have much if any ripple effect on those who are currently making more than $10/hour.   The normal antidote economics would recommend here is to find counter forces to oligopsony.  Two possibilities are (1) against the big guys increased pressure from application of the antitrust laws and (2) against all employers increased unionization.  Neither of those look likely, however, in the current environment.

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Is Government Impotent to Solve These Problems of Income Inequality?

If you were to travel back to the late 1970s and queried people about whether they trusted government or not, you would find distrust across the political spectrum.  This was the aftermath Vietnam and Watergate.  Certainly there have been incidents since that have fed on the distrust theme.  Have there been, in contrast, substantial actions since to reaffirm the positive role government can play?

In his previous column, Krugman makes an argument that we need a latter day Teddy Roosevelt.

And they’re right. No true American would say this: “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” and follow that statement with a call for “a graduated inheritance tax on big fortunes ... increasing rapidly in amount with the size of the estate.”

The quoted passages in the above are from Teddy Roosevelt's New Nationalism Speech.  If delivered today, would the public trust the government enough to pull off the ideas?

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The Social Obligation of the Ten Percent

Via Bernie Sanders' newsletter (Bernie Buzz) I became aware of this documentary featuring Robert Reich, Inequality for All.  I found it off putting that it wasn't freely available.  (At Amazon.com it is available for $3.99 rental, $4.99 for the HD version.)  I haven't watched it yet and so won't remark on it here.  Instead, I want to comment on thoughts that bit of irritation triggered.  They are based on this question.  For those of us who are comfortable income-wise, what goods and/or services should we give away freely and what other goods and services should we expect to be compensated for? 

At issue here are two underlying questions.  One is about principle.  Can one come up with a set of  principles to help answer the above question?  The second is about thinking through the consequence in aggregate if all those who are comfortable income-wise acted in this principled way.

I am going to come up short on both of those.  As a practical matter I answer the first question via intuition.  Whether a principle can be distilled from that I will leave for some other time.  On the second question, the best I can offer is that if I am typical, can we think through the consequence in aggregate from that sort of behavior?

When I do something of value for no compensation, I typically insist on some degree of control or on some quid pro quo where I benefit in some non-income way.  Here is an example.  Last fall one of my then students asked me to supervise her in an independent study so she could earn honors at graduation.  I gave her a couple of alternative projects that I was interested in.  She chose one of those for her independent study, which she is doing this semester.  I am not otherwise teaching this semester so am not a current employee.  I do supervise the project by kibitzing on her blog postings and ancillary work.  Would I have done similarly had she been the one to offer a project of her own choosing?  Probably not.

I have made much online content and make it freely available to anyone who is interested.  I'm quite willing to share my stuff that way.  In contrast, I get solicited, seemingly on a daily basis and perhaps more frequently, to make some charitable contribution.  I hate when this happens.  I don't like being put in the position of being a cheapskate so actively seek not to become connected to the people making these solicitations. 

Also, and this is consistent with a behavioral economics explanation but not with economic rationality, when I was employed full time by the university I did make charitable contributions via payroll deduction.  The retirement system doesn't have an analogous system for charitable contribution (at least I'm not aware of one).  So I seem to be willing to contribute when the organization where I work makes a charitable fund drive.   But individual solicitations I abhor. 

If someone wise and fair said - this is how much you should contribute and if you do it once (per year) then I'll make sure it gets to the right place - I'd much prefer to do that even if my total contribution was substantially greater that way.  In other words, I'd rather pay more in taxes than have greater discretion about charitable contributions.

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Factoids about the Income Distribution

Below is a table of household income for the upper ten percent.  It is from 2012. 

The full spreadsheet from which this screen shot was taken offers the entire income distribution.  In turn, this is taken from a Census table, HINC-06. I have added the Percentage and Cumulative columns to enhance readability.  From the full spreadsheet, one case see that median household income is about $50K.

Here are some caveats before proceeding further.  The income is not indexed, by location, size of household, net worth, pending financial need, or other possible factors that would add descriptive power.  Saying that the upper ten percent are comfortable income-wise is a generalization.  Some people in this income category may nonetheless be financially challenged.

With that, the bottom of that top ten percent has income not quite triple of the median income.  Those in the penultimate row have income in excess of four times the median.  Those in the last row have income that is many more multiples of median. 

If the reader were playing Robin Hood for the society as a whole, what cutoff income level would be chose to define the rich and how much should be robbed from them to give to the poor?  These questions are implicitly asked in many pieces discussing income inequality, without making reference to the actual income distribution.  Knowing the numbers should help making the discussion more real.

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Wrap Up

I'm a member of the professional class, one who has benefited income-wise from the rising income inequality in society as a whole, as what I did got compensated more as a result. My sensibilities are middle class.  While I'm not as penurious as my parents were (they came of age during the Great Depression) particularly in regard to spending on themselves, I respect the financial hoarding they did.  If the facts about upward mobility weren't so grim, I'd prefer that my parents ways would serve as the model for how to rise out of poverty.

But the facts about upward mobility are indeed grim.  And, in the case of household income, another fact seems to be that members of the professional class often marry others from that class.  When both spouses generate income in this case, the family will inevitably be in the top ten percent.  So it feels like Robin Hood should rob from us.

The income tax seems the natural tool for Robin Hood.  And many have pointed out that the real scandal there is on the low capital gains rate, vastly favoring unearned income over earned income.  But even on earned income marginal tax rate rates in the higher brackets could be a bit higher and those who are like me income-wise would hardly skip a beat.

My family learned a lesson from my mother's situation and my mother-in-law's situation.  Both required long term care.  Both used up essentially all of the their estate in the process.  So there is a reason not to just give it away when Robin Hood comes to the door.  But we could be a bit more like my parents in our spending, couldn't we?  That's the sort of question those of us who are comfortable should be asking. 

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