Chart of the Week: Ireland’s Fight Against Income Inequality

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Chart of the Week: Ireland's Fight Against Income Inequality // IMF Blog
https://blogs.imf.org/2017/06/30/chart-of-the-week-irelands-fight-against-income-inequality/

By IMFBlog

June 30, 2017

Shoppers in Dublin, Ireland: the country has high income inequality, before taxes and transfers (photo: Caro Rupert Oberhaeuser/Newscom)

Ireland's economy continues to recover after a housing market crash in 2008 plunged the country into a deep and severe crisis. The strong social welfare system provided an important cushion against the worst effects of the crisis.

Ireland's tax-benefit system is one of the most effective in the European Union in redistributing income. The tax system is relatively progressive and funds a robust system of social benefits, a significant share of which is means-tested. Income inequality before taxes and transfers in Ireland is high—37 percent of income is held by the top 10 percent of income earners. Social transfers make up about 70 percent of income for the bottom 20 percent of earners.

Our Chart of the Week from a new paper shows how Ireland has over a number of years used social benefits and taxes to reduce high income inequality.  

The most common measure of income inequality is the Gini coefficient, where zero expresses perfect equality, and 100 expresses maximum inequality. In Ireland's case, about 60 percent of the average 25-percentage point improvement in income inequality, as measured by the difference between the Gini coefficient before and after taxes and transfers, was driven by social benefits. This is one of the highest among EU countries and largely means-tested. Another one-fourth of the improvement was due to direct taxes, which is broadly in line with the EU average.

Part of the story of income inequality in Ireland is also about geography: 40 percent of the population live in Dublin, which has more employment opportunities and higher incomes. Regions that suffered high unemployment before the crisis continue to lag in the ongoing recovery.

Ireland still faces an uphill battle: long-term unemployment above pre-crisis levels, a relatively low participation rate in the labor force, driven in part from low participation by women, and young people facing more uncertain job opportunities than they did before the crisis.

Part of the solution, already under way, is to build on already strong basic and tertiary educational attainment to take advantage of opportunities in high productivity sectors such as information and communication technology. Broader investment in vocational training and apprenticeships are also key to help new job-market entrants and those looking to return to work. The National Skills Strategy aims to provide skill development opportunities and foster lifelong learning. New Regional Skills Fora will facilitate ongoing employer-educator dialogue to match identified needs with sustainable provision in each region, to optimize the return on investment in education and training.

Also, to help more women enter the workforce, Ireland needs high quality and affordable childcare. To tackle this, the government will replace existing programs with the generally means-tested Single Affordable Childcare Scheme in September, with a strong focus on low-income, disadvantaged families. Further efforts to strengthen incentives to work, including by reducing high marginal income taxes for second earners, would also help women join the paid workforce.

For more on the challenges facing women and young people in the global economy, check out our March issue of Finance and Development Magazine's feature on policies that help integrate women into the workforce, and our June issue on Millennials and the Future of Work.


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Illinois austerity turning state to junk

https://www.bloomberg.com/news/articles/2017-06-30/illinois-races-to-cobble-budget-deal-as-downgrade-to-junk-looms

Stumling and Mumbling: SELECTING FOR GROUPTHINK

SELECTING FOR GROUPTHINK

Stephen Buranyi says the scam that is academic publishing "actually holds back scientific progress":

Given a choice of projects, a scientist will almost always reject both the prosaic work of confirming or disproving past studies, and the decades-long pursuit of a risky "moonshot", in favour of a middle ground: a topic that is popular with editors and likely to yield regular publications.

The FCA says that active fund managers "did not outperform their own benchmarks after fees."

These two observations are related. They show us that selection mechanisms – peer review, hiring fund managers and the funds market – don't necessarily select for the best. A new paper (pdf)by George Akerlof and Pascal Michaillat discusses one way in which this can happen.

They start from some experiments with flour beetles in the 1950s and 60s. These found that when two different species were placed into jars of flour, it was not the case that the most biologically fit species came to dominate. Instead, sometimes one species did and sometimes the other. The reason for this was because the species were more likely to eat the eggs of the other species than those of their own. This meant that when one species increased relative to the other – perhaps for arbitrary reasons – it continued to increase still further. Such an "egg-eating bias", say Akerlof and Michaillat, means that in science unfit paradigms might prevail over fitter ones - as Buranyi claims.

The egg-eating bias takes the form of professors or journal editors preferring candidates or papers in their own image – ones that work in their paradigm. This is sometimes because of simple favouritism. But it can also be simply because it's easier to evaluate someone's work if it is like your own.

This fits with the claims in economics that bad paradigms – suchas (pdf) DSGE (pdf) or CAPM – have prevailed despite their empirical flaws.

It also fits with the poor performance of fund managers. One reason for this is that older fund managers hire and train younger ones on the basis of judgment-based stock selection rather than their ability to exploit proven means of beating the market such (pdf) as defensive or momentum investing. And as Bjorn-Christopher Witte shows, market forces do not necessarily weed out bad managers and favour good: markets are imperfect and sometimes perhaps even counter-productive selection mechanisms.

It also, of course, has implications for corporate management. It's consistent with work by Dan Bernhardt, Eric Hughson and Edward Kutsoati who show that because bosses favour underlings in their own image, firms can become increasingly inefficient: for example, as finance-types exclude engineers. In the same vein, Eric Van den Steen has described (pdf) how "organizations have an innate tendency to develop homogeneous beliefs". This is because like hires like, and then people learn from those similar to themselves.

You can also, of course, tell a story about gender bias along these lines. (And, of course, about the media).

The point here is simple. Institutions – be they markets, firms, universities, publishers or whatever – are (among other things) selection mechanisms. We should not assume that such mechanisms work perfectly to optimize efficiency or truth. We must look under the bonnet to ask how exactly they work, rather than tell ourselves just-so stories.

In particular, institutions select – perhaps not entirely intentionally – against cognitive diversity and for groupthink. But as John Stuart Mill warned, this can be "a social tyranny more formidable than many kinds of political oppression" which can end up "enslaving the soul itself."

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John Case
Harpers Ferry, WV

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Letter to the House Committee on Education & the Workforce concerning H.R. 986, The Tribal Labor Sovereignty Act of 2017; H.R. 2776, The Workforce Democracy and Fairness Act; and H.R. 2775 [feedly]

Letter to the House Committee on Education & the Workforce concerning H.R. 986, The Tribal Labor Sovereignty Act of 2017; H.R. 2776, The Workforce Democracy and Fairness Act; and H.R. 2775
http://www.epi.org/publication/letter-house-committee-on-education-workforce-hr-986-hr-2776-hr-2775/

Letter to the House Committee on Education & the Workforce concerning H.R. 986, The Tribal Labor Sovereignty Act of 2017; H.R. 2776, The Workforce Democracy and Fairness Act; and H.R. 2775

1 Economic Policy Institute by Josh Bivens, Heidi Shierholz  /  22h  //  keep unread  //  hide

NOTES

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Heidi Shierholz and Celine McNicholas of the Economic Policy Institute Policy Center submitted the following letter to the U.S. House of Representatives Committee on Education & the Workforce, on June 28, 2017.

June 28, 2017

The Honorable Virginia Foxx
Chairwoman

The Honorable Bobby Scott
Ranking Member

Committee on Education & the Workforce
U.S. House of Representatives
Washington, DC

Dear Chairwoman, Ranking Member, and Distinguished Committee Members:

We write on behalf of the Economic Policy Institute Policy Center (EPI-PC), to express our views on H.R. 986, The Tribal Labor Sovereignty Act of 2017; H.R. 2776, The Workforce Democracy and Fairness Act; and H.R. 2775, The Employee Privacy Protection Act. The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank created in 1986. We were the first – and remain the premier – such think tank to focus on the needs of low- and middle-income workers in economic policy discussions.

For years, EPI's researchers have studied the effect of the erosion of collective bargaining and union membership. The research is clear1 – the erosion of collective bargaining has been a core contributor to our decades-long problems with wage stagnation and inequality, hurting not only union workers but nonunion workers as well. Any legislation that amends our nation's basic labor law should protect and enhance workers' freedom to join a union and collectively bargain, not make it harder for working men and women to exercise this fundamental right. Unfortunately, all three of the bills the Committee is considering today would make it harder for workers to engage in collective bargaining. We strongly urge all Members of this Committee to oppose these bills.

H.R. 2776, The Workforce Democracy and Fairness Act (WDFA), mandates unnecessary delay in the union election process, requiring a 35-day waiting period between the filing of an election petition and an election. The legislation also enables employers to gerrymander a bargaining unit (a group of workers that join together in a union). Under the WDFA, employers could pack the voting rolls with workers who do not share the organizing workers' interests, making it very difficult for workers to win a union. At the same time, the bill would make it harder for workers to grow their union by adding members to an existing bargaining unit. This double standard reveals the true goal of the legislation—to ensure that all workers are left on their own to negotiate with their employers.

H.R. 2775, The Employee Privacy Protection Act (EPPA), restricts the voter information unions receive during an organizing campaign. Under current law, a union has the right to a list of voter names, job classifications, work locations, shifts, and contact information within two days after a bargaining unit is determined. The EPPA would require that the voter list information be provided to the union "not earlier than 7 days" after a final determination of the bargaining unit. However, the bill does not provide a maximum waiting time. So, the union could receive the information the day before the election. Further, the EPPA restricts the contact information unions receive. The bill forces a worker to select, in writing, one form of contact information (telephone, email, or mailing address) to provide to the union. It prohibits workers from providing multiple forms of contact information.

H.R. 986, The Tribal Labor Sovereignty Act, would deprive workers who are employed by tribal-owned and -operated enterprises located on Indian land of their rights under the National Labor Relations Act (NLRA). The NLRA contains no express exemption for federally recognized tribes or the commercial enterprises they own or control. The National Labor Relations Board (NLRB) has considered whether to assert jurisdiction over labor disputes on tribal lands. In 2004, the NLRB articulated a test for whether the NLRB should assert jurisdiction over tribal enterprises. The test provides for a careful balancing of tribal sovereignty with federal labor law protections. This legislation upsets this balance and instead undermines the rights of working men and women.

Workers deserve policies that will help shift power back to working people by strengthening their rights to organize and collectively bargain for better wages and benefits, not policies that make it impossible for them to do so. We urge you and all members of the Committee to vote against all three of these bills.

We would be happy to answer any additional questions from Members of this Committee about our analysis of these bills or questions on the economic impact of the continued erosion of collective bargaining.

Sincerely,

Heidi Shierholz
Director of Policy and Senior Economist, Economic Policy Institute Policy Center

Celine McNicholas
Labor Counsel, Economic Policy Institute Policy Center

1. Rosenfeld, Denice, and Laird, 2016. "Union decline lowers wages of nonunion workers."

 -- via my feedly newsfeed

A Job-Killing Robot for Rich People [feedly]

A Job-Killing Robot for Rich People
http://cepr.net/publications/op-eds-columns/a-job-killing-robot-for-rich-people

Dean Baker
Jacobin, June 27, 2017

See article on original site

In the last couple years, the financial transactions tax (FTT) has moved from a fringe idea to a policy proposal treated seriously by even the mainstream of the Democratic Party. The decision by Senator Bernie Sanders to make it a central part of his presidential campaign certainly helped, but a number of members of Congress, including Keith Ellison and Peter DeFazio, have also pushed FTT proposals for many years.

The FTT is also gaining momentum overseas. There's a push to enact an FTT in the eurozone. And in England, an expanded FTT — the London stock exchange has long levied a 0.5 percent tax on stock trades — was included in the Labour Party's platform in the recent election.

But while the idea of taxing financial transactions is growing more popular, even many of its proponents don't realize its full benefits. An FTT is usually seen as a way to raise large amounts of revenue (in the US, it could possibly generate as much as $190 billion a year, or 1 percent of GDP). Or it is viewed as a means to limit speculative trading in the financial sector, potentially making markets less volatile.

The best argument for an FTT, however, is that it can sharply reduce some of the highest incomes in the economy by curtailing the trading that makes those incomes possible. As a result, it can play a large role in reversing the upward redistribution of income that we've seen over the last four decades.

Investors ...

The key point that many miss about a financial transactions tax is that it would be borne not by investors but by the financial industry.

The logic of this point is straightforward. Any tax would likely be passed on almost in full to investors in the cost of an individual trade. This means that if a tax were equal to 50 percent of the current cost of trading stocks, bonds, or other financial instruments, then the cost of a trade to an investor would rise by close to 50 percent.

For example, suppose the current cost for selling $10,000 of stock is $30, or 0.3 percent of the sale price. If we imposed a 0.15 percent tax on the sale, then we would expect the cost of the sale to investors to increase to roughly $45 ($30 plus the $15 tax), if the tax was passed on completely to investors.

But there is a large amount of research showing that trading volume would decline roughly in proportion to the increase in trading costs. This means that if the cost of a trade rose by 50 percent, as it would in this scenario, then we would expect trading volume to fall by roughly 50 percent. In other words, a typical investor would end up trading roughly half as much as he had before the tax was imposed.

The drop in trading volume would matter to investors if they actually benefitted from trading, but taken as a whole, they don't. If someone sells shares of stock at a high price, they win from the deal. But someone else bought the shares at a high price and ended up as a loser. On average, the winners and losers balance out, which means trading is, on net, a wash for investors. If we have less trading, because of an FTT or any reason, investors aren't hurt by it.

Detractors might argue that lower levels of trading would hinder market liquidity. If investors didn't think they could sell shares of stock reasonably quickly, they would be more reluctant to buy them. And if they were more reluctant to buy them, companies would have a harder time raising capital in financial markets, which would slow investment and growth.

While this could be a problem if we had a small and underdeveloped capital market, that is not the case in the United States today, nor has it been for many decades. Even if we cut trading volume in half, we would still have as much trading as we did in the mid-1990s, when the US capital markets were already very large.

... And Industry

Instead of coming out of the pockets of investors, the revenue from an FTT would come out of the pockets of the financial industry.

An FTT that raised $100 billion a year, for instance, would shrink the financial sector's size by roughly $100 billion. This downsizing would sharply reduce the number of very high-paying jobs in the sector. The narrow financial sector (securities and commodities trading) would be trimmed by a third, presumably reducing the number of very high-paying positions by at least that much.

Since the financial sector includes many, perhaps most, of the highest paid workers in the country, an FTT would be a big blow to those at the top. Just how big? The Social Security Administration (SSA) reports that the 202 highest-paid people in the country enjoyed average salaries of more than $90 million each in 2015. (This likely understates their actual pay since much of their wage income is hidden as capital gains income in the form of "carried interest.")

While the SSA data does not include industry breakdowns, it is likely that many or even most of these 202 super-high earners work in the financial sector. Even for a CEO, $90 million is an extraordinary sum. The financial industry likely also employed many of the next eight hundred top earners, who received an average of roughly $30 million in 2015.

In addition to reducing inequality directly — by eliminating many high-paying positions — an FTT would also have a substantial indirect effect. If we got rid of a large percentage of very high-paying positions in the financial sector, it would reduce the number of super-lucrative slots in the economy as a whole. We could expect this to put downward pressure on compensation at the top more generally as more people looked for high-paying jobs in software, biotech, or other sectors.

The dynamic would be somewhat analogous to what's happened in manufacturing: the loss of good-paying jobs due to trade pushed down the pay of non-college-educated workers more generally. The difference is that in the case of finance, we're talking about a very small group of extraordinarily well-remunerated workers, not the bulk of the US workforce.

Think of an FTT as a job-killing robot for rich people.

Attacking Finance

Of course, the attack on the financial sector can and should go beyond imposing an FTT.

Much of the profit in private equity stems from tax gaming and abusing bankruptcy law. If we eliminated the opportunities for gaming (most importantly, the tax deduction for corporate interest payments), the high earners in private equity would take a big hit.

There are other areas in which the financial sector is purely predatory, such as the excessive fees charged on retirement accounts or the management fees charged to public pension funds.

If these avenues for getting rich were closed off, the opportunities for very high-paying jobs would be substantially reduced. While this would not directly fix a broken corporate governance structure that allows for outlandish CEO pay or address the arcane licensing rules and immigration restrictions that allow many medical specialists to earn more than $500,000 a year, whacking the financial sector would be a very good start in reversing rising inequality.

And as a bonus, we could use the money raised to pay for free college or other good things — rather than letting it continue to line the pockets of investment bankers.

 -- via my feedly newsfeed

That Seattle minimum wage study has some curious results. [feedly]

That Seattle minimum wage study has some curious results.

http://jaredbernsteinblog.com/that-seattle-minimum-wage-study-has-some-curious-results/

[I'm outta town with very shaky internet access, but wanted to make a tiny bit of noise about this.]

I'm quoted in this story about a new paper on the Seattle minimum wage increase–it's in the process of phasing up to $15/hr–as follows:

"The literature shows that moderate minimum wage increases seem to consistently have their intended effects, [but] you have to admit that the increases that we're now contemplating go beyond moderate. That doesn't mean, however, that you know what the outcome is going to be. You have to test it, you have to scrutinize it, which is why Seattle is a great test case."

I still think that. But I also think something seems pretty "off" with the study, reviewed here by the WaPo.

–How could they get such job- and income-loss effects for low-wage workers in Seattle relative to their controls with such tiny wage effects? This is especially curious when considering the excellent point made by Schmitt and Zipperer, who critically review the Seattle study, that compared to Seattle's relatively high wage base, $13/hr isn't that far out of the usual range (be sure to read their critique).

–It seems extremely unlikely that increasing the min wg to $13 leads to job growth for those making >$19. I can't think of any labor market logic to that.

–The Seattle economy is doing really well, with solid job and wage growth amidst very low unemployment. I'd think that if the increase threw such a large wrench into the low-wage labor market as this study suggests, we'd see it in the broader economic statistics.

When you have an outlier study–their negative results are huge multiples of past research—with such unusual "internals," there may be something wrong. It could be the multi-establishment firms they left out, though if the increase is whacking smaller firms, that's a problem too.

So I suspect their control cohort—the other parts of the state that are serving as a control—is non-independent of the Seattle increase. This new study from Allegretto et al doesn't have the granular data available to the Seattle researchers but it uses what looks to me like a more credible control cohort and finds the Seattle increase to be having its intended effect.

Like I said, those of us who support out-of-sample min wg increases need to scrutinize the Seattle experience closely, and protect against confirmation bias. This time may actually be different. But you really don't want to make that claim based on one extreme outlier study with some eyebrow-raising quirks.

 -- via my feedly newsfeed