Friday, July 20, 2012

Calling BS on Sticky Wages

There's a lot going around the economics blogosphere about sticky wages. A great deal has been made of various graphs that show wages are sticky downward (but not upward). Here's one from George Selgin, a researcher whose work I greatly respect: The graph does, in fact, show that average hourly earnings in the private sector have steadily increased every month from 2005 to now.

Unfortunately, and like most aggregates, that's only part of the story. I looked at the change in average hourly earnings from April 2006 to June 2012 for the following sectors: Construction, Durable Goods, Education and Health, Financial, Good-Producing in general, Information, Leisure & Hospitality, Manufacturing, Mining and Logging, Nondurable Goods, Other Services, Private Services, Professional and Business Services, Retail Trade, Total Private, Transportation and Warehousing, Utilities, and Wholesale Trade. I have graphs for all these, and they generally show upward trades, although slopes differ across the industries.

What's more important for the argument regarding 'downward stickiness' or the reluctance of firms and employees to settle on a decrease in wages is the frequency we observe negative changes (decreases) in the average hourly earnings. You'd think from the 'sticky' arguers that we never see negative changes. This is wrong. In fact, wages do decrease, about 22% of the time (average across all industries). The industry with fewest wage decreases is Private Services (4% of all changes are negative), and the industry with the most is Utilities (40% of all changes are negative). The magnitude of decreases is -0.27% across all industries, while the magnitude of increases is 0.40% across all industries. The industry with lowest decreases is Private Services (-0.06%) and the industry with highest decreases is Mining and Logging (-0.82%).

My point is this: wages do not appear to be sticky. At least, the evidence isn't all in favor of stickiness. Viscous, maybe, but not sticky. Also, here are three graphs drawn from the extremes of my wage change distributions showing the relationship between employment and wages. The first is Private Services, then Mining and Logging, and then Utilities. I see upward trends post-recession of both employment and wages. Riddle me that Batman.

For a strong theoretical point as to why wages are NOT STICKY, see my former Prof and blogger extraordinaire David Andolfatto:

Wednesday, July 4, 2012

That Other War for Independence

On this particular Independence Day, I want to discuss a different war of independence - the war for Southern Independence. In common parlance, the Civil War. Civil War is a mistaken nomenclature, however. Civil War means to parties fighting for control of the same government. The War for Southern Independence was an invasion of a foreign country, as the states in the South that were attacked by the North had all seceded and were thus no longer part of the United States.

I have to put in a paragraph here that I am not, nor would I ever, defend slavery. It is an unfortunate statement about the quality of education in this country that I have to say this. The War of Southern Independence was not about slavery. (On this see Tom Woods "Politically Incorrect Guide to American History, for example; also see Tom DiLorenzo's work on Lincoln). So when I am talking about the evils of the war, I am not talking about a noble endeavor to free slaves. I am talking about aggression based on economic concerns. Note that if the war was about slavery then the U.S. would have been the only country that had a war to free slaves. Also, four states in the Union allowed slavery after the secession: Missourri, Kentucky, Maryland, and New Jersey. If this war was about slavery, why were these states not warred upon?

The point I am trying to make is that states are the source of federal power, not the other way around, and states have a right to leave the union if they want to (again see Tom Woods on this, and it's important derivative power: nullification). The American war for Independence (the Revolution) was fought to establish the principle of self-government. The independent states, after the war, formed a union and a central government. This was done mostly because of the two-fold need of wanting a central representative to deal with foreign governments and to provide defense services generally. The federal government was not supposed to have more power than the states. The War for Southern Independence and Reconstruction changed that.

The Declaration of Independence states that if a government is destructive to the ends of the people, then the people have the right to dissolve that government and start a new one. That's what the secessionists were after, in the same way the Founding Fathers wanted to remove the British government and establish their own. And didn't the British have forts in the American colonies, just like the Union had Fort Sumter in South Carolina? 

The Union had the option to let, as is proper, states secede from the Union. And President Buchanan did not go to war with the first seven seceding states. But Lincoln, once President of the Union, did. And then the next four seceded because they were forced to choose. Lincoln fought to preserve the Union, not to free the slaves. Lincoln viewed the Union as his empire, and was not about to allow it to shrink.

Had the Union shrunk, the likely outcome would have been catastrophic for the North. Why? Because of trade tariffs. The North was industrialized and the South was agrarian, and the Union had a trade tariff raising the cost of imported goods. This policy obviously favored the North over the South, since cotton and tobacco traded on world markets. Now, if secession had been allowed, the South would have been a free trade zone and foreign powers would have preferred to trade with the South, not the North. So the North saw a huge loss of trade if the South were to successfully secede.

And then, after the war, Reconstruction came. Reconstruction was essentially reparations the Republicans wanted from the South. The most important effect, though, was to install the 14th Amendment. The 14th Amendment essentially puts the federal government above the various state governments as the last word on laws that affect the state. And that was the end of the united States of America, and the beginning of the USA.