Wage Gap Woes

It works out well when we happen to be covering the labor market in Macro during the first week of a month.  Everyone is primed and awaiting the Bureau of Labor Statistic's fresh Jobs Report on that first Friday!

Last Friday was that day-- the benchmark unemployment rate fell to 7.9%-- a decline of .5 percentage points.  This number is from the Household Survey.  The Establishment Survey showed a net of 660,000 jobs were added to payrolls

What to make of this? Well, certainly, it is better news than hearing that the unemployment rate went up or that the economy lost jobs.  (Note: the massive layoffs by airlines, Disney and others happened this week and won't show up till the November report).  But, the pace of job gain has slowed (there were 1.4 new jobs in August, 1.7 in July).  The numbers suggest that jobs are clawing their way up, but still have a ways to go before getting back to February levels. 

While the trend in economic indicators is heading in the right direction, it is hard to ignore the base levels-- just the sheer numbers.

Over ten million adults who want jobs cannot find them (unemployed), 26 million people are still collecting unemployment (1.4 of those just started last week, from the Labor Department), The number of persons not in the labor force who currently want a job is at 7.2 million, and 6.3 are underemployed. And here is something super concerning-- 865,000 women dropped out of the U.S. workforce last month. That's four times the number of men. 

Let's talk about this for a bit.

The wage gap between men and women is well-documented.  Given the this disparity in relative earnings,  if a couple face a situation where one person must stop working to take care of children or sick family members, it is often the woman because she is the one making less money.  While this seems like the "rational" decision given there is a wage gap, it still does not resolve the problematic issue of the wage gap itself. That is, a woman will earn less than a man with the exact same profile ad qualifications.  The pandemic is just showing how an economic crisis can exacerbate the wage gap.

 Matthias Doepke, an economics professor at Northwestern University writes about the gendered impacts of this recession in the New York Times: 

Dropping out of the work force completely has long-term consequences not just for the woman trying to re-enter the work force down the line but also for women’s overall position in the work force.  First of all, it takes some time to find a new job “but what’s actually more important is that it’s even more difficult to find a job that is comparable and to get back to the same career position. So we see that even decades after a recession, people who lost their jobs often have low earnings.... this recession will likely widen that gap by five percentage points, further perpetuating the conditions that drove women out of the workplace this year

Here is the McKinsey Report that shows some survey data on how COVID19 is having a  disproportionately negative impact of women in the corporate workplace.  This infographic below shows that mothers are more likely that fathers to scale back or leave the workforce completely due to the pandemic:

Taking Stock of Stocks

Financial markets were the topic du jour (week) in Macro and it seemed like a good time to think about the stock market. We've all heard "stock markets are not the real economy" but the dramatic divergence between stock market numbers and the pandemic real economy prodded me to think more about this connection.  Or is it a disconnection? That is the question...

This WSJ article-- Why Did Stock Markets Rebound From Covid in Record Time? Here Are Five Reasons provided a starting point to think about this question. The stock market has recovered in record time following the crash at the onset of the pandemic.  The main reasons behind are i) fiscal and monetary stimulus: Both sets of policy makers took massive actions early on prop up the economy.  While the fiscal stimulus in the form extra unemployment benefits and the PPP has run out, the Fed is indefinitely injecting liquidity into markets by purchasing assets,  ii) expectations of a strong recovery (still a lot shapes out there-- v-shaped recovery, square root shaped, w-shaped) iii) dominance of tech stocks-- the stock market is incredibly concentrated.  For example just six stocks: Apple, Amazon, Microsoft, Facebook, Google and Tesla now make up half of the Nasdaq 100. Just five stocks Apple, Amazon, Microsoft, Alphabet and Facebook make up almost a quarter of the S&P 500.  So when these prices rise, so do the indices.  iv) Robinhooders! These are small investors and day traders (many using the Robinhood app) to plunge into the world of game-ified trading while hanging out at home and v) momentum trading which is investors chasing trends and rising the wave of stocks on the way up.  Tesla, whose stock +400% exemplifies this.

So is the stock market "disconnected from the economy"?   Heather Boushey, in this WaPo op-ed, quotes ex-Fed Chair Janet Yellen, "The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector."

So yes there would appear to be a disconnect if we were talking about the entire stock market.  In fact, the dramatic rises we have seen are not across the whole market, but only in specific indices.  Indices that put a lot of weight in the big tech companies. 

This morning, Nathan Tankus in his superb column "Notes on the Crisis" made this point very well.  He plots the YTD returns for the companies listed on the S&P 500 index against their sales growth.

This seems to show much more matching between sales and returns than our stock market sceptics would have us believe. Companies that have seen sales collapse have seen hugely negative returns. Companies that have seen big jumps in sales, have seen big returns. Companies that are treading water in sales are also treading water in stock returns. It’s hard to see from this data any reason to think the stock market is particularly disconnected from the ‘real’ shape of things.  

People are buying a lot of goods and services from Amazon, Netflix, Alphabet/Google, and that is showing up in their stock returns.  Nothing to be surprised about.   So the rise in the S&P 500 and Nasdaq is certainly tied to the performance of companies that are heavily weighted in them.  

So to answer the question, "Are the big-cap stock market indices disconnected from the portion of the real economy that they represent?" 

No, they are not.  

But closing the discussion here would be incomplete.  What story does the rest of the stock market tell? Beyond the frothy top, the rest of the market tells a more sobering story.  The Russell 2000, an index of "small cap" companies, those with assets less than $2 billion, is down almost 15% since the beginning of the year.  In fact, Apple shares have skyrocketed 57% in 2020 and were recently worth more than all of the small companies in the Russell 2000 index combined.  Sectors that have suffered major blows like airlines, hospitality and department stores are not a very big part of the stock market.  Look around the neighbors, the small businesses are the ones doing poorly but they are not listed in the stock market. Barry Ritholtz, another finance commentator I enjoy reading tells Yahoo!:

"Apple, Google and Facebook get more than half of their revenue from overseas. “Why is that important,” he asks? “[Because] the U.S. is 4% of the world population and has a quarter of infections. The rest of the world is managing lockdown much better, so if half of your business comes from overseas you’re doing well.” 

So to get a better idea of the condition of a (big) businesses in the economy, we have to look at the stock market broadly.  

What about the condition of households in the economy? Most directly and immediately, the stock market tells us about the condition of households who hold shares in businesses listed on the stock market.  Who holds shares, that is, who's wealth is growing?

According to Federal Reserve data, the top 1 percent of  U.S. households (by wealth) own over 50% percent of equities and mutual fund shares, and the top 10 percent own 87 percent — which leaves workers in the bottom 90 percent owning just 13 percent.  

Hello Hybrid!

 The dog days of August didn't really materialize this year. The weather wasn't particularly hot or sultry where I am.  And most certainly lethargy and indolence was not an option as the "Fall" semester, in hybrid format, started early.  Beginning-of-the-term hustle and bustle was even more than usual with the new modality, new learning management system (Canvas), new tech in a new campus building, new safety protocols, testing and quarantine updates to keep up on and just getting used to the sheer physical exertion of non-stop lecturing in a KN95 mask in a socially-distanced classroom.

One of the constants, however, is keeping my commitment to incorporating news in the classroom.  Now, more than ever, it is important than beginning economics students are not only able to keep up-to-date on the rapidly changing economic environment, but also be able make sense of it.

Today, I wanted to give an update on what  I am doing to incorporate current events and news into my principles of micro and macro classes.  The discussion boards, as featured on my previous posts, worked well on the fully online modality, but I am trying something new this term.

We typically begin a new topic in Tuesday (face-to-face) class.  After the lecture I introduce them to the week's posted news piece which they are supposed to read carefully before Thursday's class on Zoom.  

I create a ten question quiz where students must tie together class concepts and the article.  The quiz is not high stakes or high pressure.  I randomly assign the class into three person Breakout rooms where they have thirty minutes to discuss and turn in their answers (individually) on Canvas.  For micro, the quiz usually has a graphing problem which they draw together on the Whiteboard, save and submit. 

Below is a quick rundown of what we've done so far.  The quizzes are hosted on a Canvas Commons course called "Macoronamics: Content in Context"  accessible by any Canvas user.

• GDP: We certainly had some historic GDP numbers to discuss! I assigned this New York Times report on BEA's Q2 GDP.  In addition to being able to interpret the content in the article, I also wanted students to "get their hands dirty" with the actual BEA data. For example, by pulling out the growth rates of consumption, investment and government purchases.  Another area of focus was distinguishing between annualized and regular growth rates.  

• Growth: The pandemic is exacerbating both within and across country inequalities.  This Yahoo Finance interview with World Bank President David Malpass discusses this worrisome trend and describes the Bank's efforts to tackle it.  In the quiz, I also ask students to dig into GapMinder data, with an eye on getting them to appreciate data visualization.   Hans Rosling was a pioneer of data visualization and I always kickoff  teaching growth by showing 200 Countries, 200 Years, 4 Minutes.  

For Micro, I have been tapping my collection of WSJ's Weekly Review articles.  I use some of the questions they provide, but also create some of my own.

• Demand & Supply: Oil is the featured example market when I teach Demand & Supply, so it made sense to use this piece on oil prices.  The quiz is all about bread-and-butter basics like identifying demand or supply shifters and graphing the model.

• Equilibrium: How can one teach shortages right now without discussing consumer staples like toilet paper, sanitizer, flour and all the other pandemic favorites?! This story on Costco was a good starting point for this application.

I'll post my article choices and my Canvas quizzes weekly.  

To all, a healthy and smooth semester!

The Price is Not Right (Again)

Externalities abound during a pandemic.  

"Externalities are adverse effects on others that rational self-interested individuals do not internalize when they engage in their personal cost-benefit analysis. When choosing the extent of their social and economic activity, self-interested individuals weigh their own risk of becoming infected and the associated costs, from having mild symptoms to potentially dying, but do not internalise that when they become infected, they impose costs on others by passing on the disease. These externalities therefore call for mandatory public health interventions, such as lockdowns and quarantines, that limit the spread of the virus."

This description is from a recent paper by two UVA economists quantifying the externality of a COVID infection.  

The personal cost or burden to an individual of getting sick is far less than the total costs they impose on society (through their interactions which may result in additional infections).   

A picture from the analysis:

The presence of the virus in society is creating all kinds of situations where externalities (positive or negative) are generated. 

Another example: workers involved in the delivery services of essential (and non-essential) products like groceries.  These workers at Instacart, Amazon, Target and other retailers or platforms are responsible for keeping our kitchens stocked even while we stay at home.  

 You may wonder, "Why is this an externality? They are being paid for the services."

Leigh Osofsky, a professor at UNC-Chapel Hill writes:

"Imagine a “shopper” for Instacart — the app-based food delivery platform — delivers groceries to someone with COVID-19. It begins as a private transaction: The worker gets paid, and the sick customer gets food delivered in a time of need. But there is an additional benefit to the rest of us — the positive externality — from the delivery. Everyone is safer because the sick consumer doesn’t have to go to the grocery store.

Then there is the extra cost. The Instacart worker faces a heightened health risk by spending more time outside of home and delivering groceries to the sick customer. While the customer may pay a higher tip as a measure of her gratitude, it is unlikely to be enough to take into account the value of the broader benefit to society or the concentrated risk that the Instacart worker faces in producing this benefit."

What is the result of this positive externality? 

Well, it means that delivery services will be under-provided.  That is, we could have had more delivery services, thus more people staying safely at home, if this external benefit was internalized.  Some retailers like Amazon, Target and Whole Foods have internalized the externality by boosting wages for workers.  Instacart provides protective gear for its shoppers.  However, as Osofsky writes: 

".. a few companies stepping up to compensate their own workers slightly more isn’t enough to compensate the workers for the great benefits they are providing to the public at large.

In economics, widely shared public benefits such as large parks and clean lakes tend to require public — that is, government — support. Similarly, the production of a good that is costly but has a large positive externality, like the efforts of all these workers, needs a government response."

Examples of an appropriate government response would be hazard pay or subsidies for protective gear and actions.

 

 The critique of a government response is: "How does the government know how much to subsidize?"  This piece by another group of academics lists way that private firms are internalizing these costs/benefits and advocates a "Hayekian" or "bottoms-up" approach: 

"A Hayekian approach — relying on bottom-up rather than top-down solutions to the problem — may be the most appropriate solution. Allowing firms to experiment and iteratively find solutions that work for their consumers and employees (potentially adjusting prices and wages in the process) may be the best that policymakers can do."

This may yield innovative solutions...eventually.  But is there really time during a pandemic to tinker and experiment?  

"You're being insensitive, Supply"

And I would also add-- "Demand, you're being too sensitive!"

Turns out that such incompatibility is difficult not only for human harmony, but also markets!

The price elasticity of demand and supply captures this idea of "sensitivity."  We know demand and supply respond to changes in price, but how much do they respond?

Incorporating elasticity into the demand and supply model gives a lot more insight into the discussion of shortages we started last week.  While we know consumers increased demand in expectation of lower future supply (aka hoarding), it is also helpful to know about how sensitive this demand is. For items like flour or cleaner, demand is pretty elastic.  

According to Dr. Prashant Karunaratne of Mcquarie University:

In an uncertain world, consumers are quite sensitive (elastic) to what they see, especially if it impacts on their physiological and safety needs, and we have a sudden, somewhat rational increase in demand.  On the physiological needs side the demand for basic staples has increased, which is why there is a rush for rice, pasta and flour. As for safety needs, the demand for hand sanitizers, sprays and wipes has increased.

 As the last post pointed out supply has not adjusted to these large changes in demand, leaving us with empty shelves.  The elasticity of supply is closely tied to this.

".. supermarkets, which would otherwise be more profitable if they were able to meet this demand, are not as sensitive (inelastic) in their response due to the time they need to adjust their processes, as well as deeper supply chain issues."

Early on, these "deeper supply chain" issues were mainly due to shutdowns in China.  For example, lots of the packaging material for food items comes from China.  But, as the virus spread, the supply chain problems are more localized.  

Shortages have been top of mind during the pandemic, but believe it or not, surpluses are an issue too!

Remember when crude oil prices went negative a few weeks ago? Or all the Dumped Milk, Smashed Eggs and Plowed Vegetables?  Inelastic supply plays a role here.  In particular because these commodities are hard to store. Here is what happened with oil.  It is more or less the same situation with agricultural markets: 

"The supply of oil is also inelastic in the short term. It’s expensive to shut down a producing well, so some producers are willing to keep pumping crude temporarily even at a loss.Storage is ordinarily the buffer that stabilizes inelastic markets. If supply exceeds demand, the excess goes into tanks. But the overproduction has gone on for so long that there’s almost no place left to store crude.

Prices can go outright negative in inelastic markets: The sellers pay the buyers to take it. The natural gas that comes out of the ground as a byproduct of oil production sometimes costs less than zero because it’s viewed as waste. Power generators sometimes pay customers to use electricity because it’s cheaper than shutting down power plants and having to restart them later. Dairy farmers haven’t reached the point of paying people to buy their milk, but they’re dumping what they have because the cows are producing more than the market will bear. (You can’t shut off a cow.)"

The Price is Not Right...?

Grocery shelves are looking better stocked these days, but not so long ago, items like toilet paper, cleaning supplies, flour, meat, puzzles and home gym equipment were barely available to anxious shoppers.

Why do these shortages exist?

When demand exceeds supply in a free market, the price will be bid up till the market clears.  There should be disinfectant wipes available to those who are willing to pay the higher equilibrium price (I was!). How did we get away from equilibrium in some of these markets? 

In most cases, both demand and supply moved. One does not have to look beyond the usual "shifters." Take toilet paper-- the poster child for shortages. Buyers expected future supply to be low, bought more and pushed up demand.  In the textbook model, this would mean the price of toilet paper should start inching up, so that some buyers drop out and some sellers are able to supply more.  This happens till we reach a point where the market clears-- there is no more excess demand. Demand was also primarily responsible for shortages in items like flour.  Here the "shifter" is changes in tastes or preferences, specifically a heightened increase in baking.

 In the case of meat, shortages were triggered by decreases in supply.  Inputs into production namely, labor, became unavailable when workers fell sick, leading to closures of meat processing plants.  When the supply shifted, prices would rise till buyers who were not willing to buy meat at the higher price tag dropped out, and suppliers who were receiving the higher price figured out a way to provide meat.  

In all of these example, prices rose a bit, but shortages still remained. So what's up Demand & Supply? Why is the price too low?  

The answer may lie in a principle that goes beyond the textbook: a high price is not "fair." 

Nobel Prize winning economist Richard Thaler writes in the "The Law of Supply and Demand Isn't Fair": 

"Basically, it just isn’t socially acceptable to raise prices in an emergency.Most companies implicitly understand that abiding by the social norms of fairness should be part of their business model. In the current crisis, large retail chains have responded to the shortages of toilet paper not by raising the price but by limiting the amount each customer can buy."

That's nice and all, but why would firms care about fairness?  

It's not about feeling "good"-- keeping prices low during a crisis can create longer-run profit. 

"The large companies are playing a long game, and by behaving “fairly” they are hoping to retain customer loyalty after the emergency."

In the virtual world, things might play out differently.  Price gouging is widespread.  While retailers like Amazon and E-bay proactively bar third-party sellers selling at exorbitant prices, it seems to be a constant game of cat and mouse.   Smaller entrepreneurs may have less incentive to maintain longer-term relationships.  Thaler says: 

"It is not that large retailers are intrinsically more ethical than the entrepreneurs; it is simply that they have different time horizons. The large companies are playing a long game, and by behaving “fairly” they are hoping to retain customer loyalty after the emergency. The entrepreneurs are just interested in a quick buck."

The Big Five Everywhere

It's time to zoom in from the macroeconomy and think more about the individual choices and actions that collectively gave rise to the some of aggregate economic outcomes that we observed. 

 It's time for micro...or mi-corona-mics!

Over the next few several weeks, I'll spotlight microeconomic ideas in the news.  And as has been the case since March, COVID will play the leading role in driving many of the choices taken by business, individuals and policymakers.  To kick off, let's look at how so five big microeconomic ideas are constantly present in so many pandemic-related decisions we make.

Incentives Matter: Humans respond in predictable ways to not just monetary incentives, but also to incentives like fear, greed, reputation, sex and other feelings. Many of these are rooted in our evolutionary biology.  Which would make one think that the fear of a disease like COVID19 would be incentive enough to wear a mask!  But the human decision-making process is also subject to biases, faulty calculations and irrationality.  To incentivize folks to make sound public health decisions, officials are rewarding them for wearing masks.  Ocean City offered rewards to beachgoers who wore masks on the July 4th weekend. In Las Vegas, casinos are giving cash rewards. 

Tradeoff are everywhere: Tradeoffs are a major theme in the story of controlling the virus.  Every measure to curb the pandemic like large-scale social distancing and lockdowns have been very beneficial.  On the other hand, they come with large socioeconomic costs, not only to economic activity, but also to the social fabric when people cannot interact, as well as mental costs to individuals. This paper from UChicago economists  takes a deep dive into the basic economics of managing the pandemic and the associated tradeoffs. (It was written early on in the earlier months of Covid so some points could be updated with information and data that subsequently emerged, but the economic principles discussed remain unchanged) Going back to the more specific mask example, despite the enormous benefits of wearing a mask during a pandemic, some people estimate the costs too large.  Sometimes these estimated costs are not directly monetary, but ideological. 

Individuals are constantly using marginal analysis to evaluate tradeoffs.  How much will the next increment of preventative behavior reduce my probability of getting sick? What will be the opportunity cost-- the value of what I give up-- be when I make a choice? 

This kind of decision-making can give rise to an "externality"-- a situation where an individual is only considering their own private costs and benefits and not necessarily the costs/benefits to society.  This is where the role of good government policy comes.  Good institutions align the social interest with the private interest.  The authors in the UChicago article cited above write:

The nature of transmission via person-to-person proximity creates various “externalities”—individuals’ decisions to interact do not fully incorporate the costs imposed on others. In general, people with the disease (symptomatic or not) will have too many infection-causing contacts, and those without the disease will not have the proper incentive to avoid getting it. These “negative externalities” are the main reason for government-imposed social-distancing measures of the type now in effect. 

Finally, the last "Big Idea" in micro is the "Power of Trade." When individuals (or countries) specialize in their comparative advantage and trade, everyone is better off.  Political rhetoric that challenges the benefits of global trade has been high in the past few years.  The pandemic has certainly exacerbated the situation, not only because of the restrictions in the movement of goods and people, but also due to the shortage of essential supplies like masks and ventilators in many countries that have prompted more protectionism. However, as this piece from Econlife describes this might be counterproductive and might actually prompt more shortages.