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The link between Trade-Structural Unemployment-Rising Inequality

1/21/2013

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A job market paper from a Boston U Candidate. I have been saying theses things since the inception of the blog.

"Abstract
Hourly wage data from 1990 to 2011 show a narrowing gap between the median wage and the 10th percentile wage, but an increasing gap between the median and 90th percentile wages. In this paper, I investigate the impact of offshoring on the employment and wage distributions to determine whether it has contributed to this convexification. I use a task-based framework of the labor market with three inputs and model what happens when the world price for the middle task input declines. The model predicts both a decline in domestic employment and a reduction in the wage paid to workers in this task, resulting in a rise in upper tail  unemployment. However, I demonstrate that observed wages within an industry can rise due to selection. I construct a proxy measure of offshoring for both service and material inputs, and use industry level production and trade data
from the US Census Bureau’s Census of Manufactures, and individual level wage data from the US Census and the American Community Survey to test the implications of the model. Offshoring has the anticipated effects on employment and convexification. I find a negative effect of offshoring on  employment and a positive effect of offshoring on upper tail wage inequality. Moreover, current levels of industry offshoring are significantly correlated with an industry’s lagged occupational composition. In particular,  both forms of offshoring decrease with the share of manual occupations and service offshoring increases with the share of routine occupations."
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Hardship in Italy Pushes Country to Brink of a Civil War

7/21/2012

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And according to the mayor of regional capital Palermo, the misery caused by financial crisis could spark a "civil war" in the southern island of Sicily.

 "Because of an explosive mix of despair felt by many families and the stranglehold of organised crime, a civil war could even break out," mayor  Leoluca Orlando said.

"Sicily is the Greece of Italy," Mr Orlando, a member of the anti-corruption  Italy of Values party and a staunch anti-Mafia champion, said. "Many businesses are shutting, families on low incomes can no longer pay  their electricity bills," he said.

On Tuesday, Prime Minister Mario Monti expressed concern that the region ran  the risk of bankruptcy.

In only my third post I identified this as a major risk to the global eonomy. Nearly a year ago, I wrote:"If you don’t start designing polices,  like a fiscal stimulus, that will get the poor working again your system will become destabilized and may implode."

And we aren't even close to a bottom for Europe yet. The US will not be immune.


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The Short Run:Fiscal Stimulus versus Redistributionist Reform

9/13/2011

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As we are watching the US economy decelerate and unemployment remain high, American fiscal policy has emerged front and center in the public debate, including on these pages.

I have come to re-evaluate my justification, but not my desire, for a stronger fiscal policy than the US has been pursing over the course of the past two years.

I have identified over several posts that the US, since China entered the WTO, on Sept. 17, 2001, has shed approximately six
million manufacturing jobs that were mainly held by low skilled workers. The plight of these workers, 10 years ago, is effectively chronicled in the second season of HBO's award winning series "The Wire". These job losses are structural; the economy is never going to replace them under the current competitive regime. These losses were temporarily masked by overemployment in the construction industry due to a real estate bubble.

In the past, I have advocated for a greater fiscal policy response on the basis of a demand shortfall and even cited unemployment of the unskilled as a justification. Since this unemployment is structural and permanent, Keynesian stimulus will not be effective, but instead only provide temporary relief. IE, for these jobs there is no demand shortfall, since they are not going to be brought back by the private sector economy.

As I look to my previous analysis, I can see only the public sector jobs that are yet to be cut, by states wrestling with budget crises, as a possible justification for Keynesian stimulus. Yet some of those cuts most certainly will be structural as well. What's more, as much of these cuts are likely to come from education, it is likely that structural problems for the low skilled will be exacerbated.

Therefore, while my  policy prescription remains the same for short term US policy; I now believe on balance the appropriate justification is redistributionist reform and that the Keynesian stimulus rationale is less compelling than I once thought.

 It has been a long held personal view, that the most challenging problem confronting the US is how to bring the uneducated poor and lower middle class along as the global economy is developing. Even healthcare reform is not as threatening to the US economy. Society needs to work for most of its members or the system will  become increasingly unstable. The rich and elites need to enact reform for their own benefit, not solely for the benefit of the underclass; otherwise the country their children will inherit will become much less hospitable than the one they live in today.

 Incarceration of the poor, as they turn to crime is not an option; as the US has already exhausted that policy option. At year-end 2007, the United  States had less than 5% of the world's population and 23.4% of the world's prison and jail population (adult
inmates).

This is why Jeffrey Sachs is advocating economic development policies for the United States. Unfortunately, prophets are
rarely accepted in their own country. After years of talking about these issues to my students, colleagues and friends, I am no longer wandering alone in the wilderness on this issue.

For those interested in a peek into the future, that has already arrived and is growing like a cancer everday, in America, check out "The Wire".


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I Predict A Riot

8/22/2011

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Social unrest is on the rise the world over. From the “Arab spring” to the London riots to the Tea Party protests in the US to the Chinese outrage over the high speed rail derailment to protests over reforms in Greece. The global economy has been in a recession, and currently, the major economies of the world are pursing austerity measures. New research finds a link between contractionary government policies in Europe over the last 90 years and civil unrest.  60 minutes recently did a piece stating that child poverty may soon reach 25% in America. 

According to the World Bank, food prices are up 33%, year over year, in July. Some have pointed out that this is the only major accomplishment of Quantitative Easing.  Low skilled labour is down, as manufacturing has been moved to developing countries
and because the construction industry, decimated by the housing bubble, has no sign of recovering any time soon. Thus, the consequences of the global financial crisis are falling disproportionately on the poor and middle class. 
 
The Atlantic has an excellent piece on this topic, for their September issue, titled ’Can the Middle Class Be Saved?’. Hardly a progressive extremist, Warren Buffet recently wrote an article for the NY Times, ‘Stop Coddling the  Super-Rich’. He  followed the article up with an interview on Charlie Rose. Warren explained that his last year’s “all –in” tax rate at 17%, on over 60 million in earnings, was approximately half the average rate paid by those working in his office. So much for the notion of shared sacrifice.
 
My point is simple. The poor and the middle class are being disenfranchised in the developed world. The London Riots should be a warning to American policy makers. If you don’t start designing polices,  like a fiscal stimulus, that will get the poor working again your system will become destabilized and may implode. For those who say it can’t happen here because of American exceptionalism, I say it’s already happening. Sarah Palin, when pushed, couldn’t recount Paul Revere’s historic warnings. Let's hope she and her Tea Party friends can heed contemporaneous political warnings. There is a new British invasion underway, and  it doesn’t involve cute guys with mop tops.

American policy makers have been warned, take a lesson from Brazil. Otherwise expect violent unrest,  kidnapping and flash mobs.

As the Kaiser Chiefs warned:

Watching the people get lairy
Is not very pretty I tell thee
Walking  through town is quite scary
And not very sensible either

A friend of a friend he got beaten
He looked the wrong way at a policeman
Would never have happened to Smeaton
An old Leodensian

La-ah-ah, lalala la la  la
Ah-ah-ah, lalala la la la

I predict a riot, I predict a riot
I predict a riot, I predict a riot

I tried to get to my taxi
A man in a  tracksuit attacked me
He said that he saw it before me
Wants to get  things  a bit gory

Girls scrabble around with no clothes on
To borrow  a pound  for a condom
If it wasn't for chip fat, they'd be frozen
They're not very  sensible

La-ah-ah, lalala la la la
Ah-ah-ah, lalala la la la

I predict a riot, I predict a riot
I predict a riot, I predict a  riot

And if there's anybody left in here
That doesn't want to be out there 
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