Bad times for the middle class

In a recent Yahoo!Finance article, Michael Snyder is reporting that the middle class is fast shrinking and he blames it on globalism and "free trade." Being the editor of the blog The Economic Collapse, this is no surprise coming from Snyder (being the stereotypical dismal economist that he is).

Among the interesting statistics he shares are:

* The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
* The top 10 percent of Americans now earn around 50 percent of our national income.
* 66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.
* In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
* In America today, the average time needed to find a job has risen to a record 35.2 weeks.
* Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.
* More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.
* The top 1 percent of U.S. households own nearly twice as much of America's corporate wealth as they did just 15 years ago.

Now, first of all, you start asking which jobs are we talking about that corporations are instead looking at low-wage, labor-intensive foreign countries for manpower? Well, according to Snyder, it's not really because most companies are outsourcing manpower (because if you think about it, corporations that do so are mostly firms from the I.T. industry). It's because companies are moving operations out of the U.S. What remains are traditional service sector industries (e.g. retail) who pay lower wages. So who benefits are the rich, the owner of these corporations.

It's hard to deny the facts put forth by Snyder, and as I've already mentioned, globalization can lead to increasing inequality. Because face it, what is happening is also a symptom of increasing inequality: disappearing middle class can lead to widening income, since what is left are the rich, on the one side, and the poor, on the other. From my recent paper with Rana Hasan, Rhoda Magsombol and Ajay Tandon, we mentioned that increases in inequality may well be a part and parcel of the growth process of a developing economy.

Or maybe it's not really about that at all. We were analyzing India, a developing country. But U.S. is already developed.

The thing then is, some other factors in the economy might be contributing to this diminishing middle class. Paul Krugman at an Economic Policy Institute's 2007 conference suggested looking at the U.S. tax and social insurance system:

"But the amount of inequality in the United States is substantially less than it would be if we did not have still at least somewhat progressive taxation, and still a pretty extensive, though not nearly extensive enough, system of social insurance. And that makes a big difference. Certainly if you're looking at say the United States versus Canada, a lot of the difference between the two countries is just that Canada has more of a better safety net financed by somewhat higher taxation.

And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care."

Well, the whole point is, we don't need to go back to that "blame globalization" routine again, because it may not be the case. The diminishing middle class is actually not new. Discussion of such issues have been around since the 1980s. Charles Beach in his 1989 paper "Dollars and Dreams: A Reduced Middle Class? Alternative Explanations" cites four reasons for the diminishing middle class that stand out--and none of them is about globalization (Beach's thesis is that it has something to do with structural changes in the economy).

Globalization does have its benefits. And it has costs. But I don't think it is solely to blame for the upcoming (and hopefully avoidable) extinction of the middle class.

More bad news for single parents

Over the long run unmarried fertility is positively associated with murder and property crime.

Wow.

This is the finding in the paper by Todd Kendall and Robert Tamura entitled, "Unmarried Fertility, Crime, and Social Stigma." I'd like to think that it should be more than due to the single parenthood situation, and that it may also have to do with the neighborhood and peers surrounding the child. Kendall and Tamura's theory goes like, "[c]hildren born to unmarried parents may receive lower human capital investments, leading to higher levels of criminal activity as adults. Therefore, unmarried fertility may be positively associated with future crime."

Futhermore, their paper has a particularling interesting application to developing countries (particularly countries with the majority of the population being religious), where single parenthood is not that common and where there is somewhat a social stigma attached to it:

"[I]n an environment in which social stigma attached to nonmarital fertility is high, many low‐match‐quality parents will marry, and children reared in these families may actually be worse off than if their parents had not married."

It does make sense. The pressure from the social stigma may force an unmarried parent to choose a partner in haste, who may turn out to be an imperfect partner. In addition, imagine what it will do to the child. Being brought up in a society where a complete family is everything, when all of a sudden you're introduced to a new father or mother without going through a slow but effective transition introducing the child to the parent. What a shock it would be for the child. Imagine what that will do to a child's core of values.

In an age where women empowerment is a trend--and single parenthood seems okay--this paper is saying that might not actually be the case. On the bright side, though, this is one good promotional material for dating websites.

It "pays" to have a credit card

Well, if you don't have a credit card, you probably find yourself sometimes thinking if you should get one. You're probably caught between anticipating the joy of being able to buy something even if you don't have the cash, or worrying that you will find yourself in a situation where it will be hard for you to pay off your credit.

Well, Scott Schuh, Oz Shy and Joanna Stavins of the Federal Reserve Bank of Boston may be suggesting that you're better off getting the credit card.

In their paper "Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations," there is actually an implicit money transfer from non-card users to card users because merchants cannot recoup discounts for credit card reward programs from card holders, and instead, take it from non-card users. They say on the average, "each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year."

It does make sense, and there's nothing really non-card users can do about it. I mean, except for not buying the goods these merchants are selling. But then again, it's a cost and benefit decision on the part of the merchants: is the benefit of gaining credit card purchases (which is more likely than not, from richer people) outweigh the cost of losing purchases from non-card holders?

It can also be economies of scale, particularly when you consider how these merchants will promote their product. If they target credit card holders, they can "join forces" with the credit card companies (and sometimes, other merchants too) in reaching out to credit card users. If they target non-card users, they would end up doing all the promotion on their own.

Seems unfair, huh? Well, you would think Schuh and the team is out to promote credit card use, but of course they're not. They're pure economists. And the solution they're suggesting? Reduce merchant fees and card rewards, and this would increase consumer welfare. So the card companies have to think of other ways of making their product more competitive and attractive.

New playground for economists

The internet is starting to become an economists dream laboratory. I came through this story about a person managing to eventually trade an old celphone into a Porsche convertible! He did this while bartering in Craig's List. There's even another person who managed to eventually trade a red paperclip into a two-story farm house. Well, I said eventually because it took more than two or three trades before they eventually got the big prize. But then you can see from the story that some people would trade valuable items that for them is less valuable than what they are looking for--a thing which in most cases should be of lower value. The example given is a musician traded his Toyota car for a MacBook simply because at that point, the Macbook is more important for the musician. Like what?

That is why I am so intrigued about how different people value goods. I mean, it's definitely not unexpected, but it seems examples are now becoming more common to find. And it would really be interesting to study and analyze this individuals--how they go through their decision process and what factors have shaped how they value such goods. As an economist, these are things worth studying.

So the internet, specially trading sites such as Craig's List, is going to be one big playground for economists. They can come up with different studies relating to the behavior of list members, how they interact, the values and prices they put into their things up for trade, and so on and so forth. Economists can even analyze the whole structure itself--how the internet and trade sites such as these have enabled this new form of transactions.

Wow talking about coming full circle. The internet has already done so much. Now, it is putting bartering back in the map. To barter now with someone at the other side of the country has become a very less inefficient form of transaction.

You wanna' trade? Speak English!

Of course, you can't trade if you can't communicate, right? That's a no-brainer. But Hyejin Ku and Asaf Zussman has helped that discussion further by quantifying it. In their paper in the Journal of Economics Behavior and Organization entitled "Lingua franca: The role of English in international trade," they find that the better the countries speak English (what we consider as the lingua franca in international trade), the more "connected" they are to international trade:

"By constructing and employing a new dataset based on a standardized test of English and using an augmented gravity model we find that English proficiency has a strong and statistically significant effect on trade flows."

Like I said, it goes without saying that you have to have a common language to start trading with other countries. But what's interesting to me is that this paper finds that the more proficient the country is in speaking English, the higher the trade. Of course, this takes into consideration other factors that might affect the size of trade. But still, this is interesting finding.

I mean this proves one point that I was reflecting on before. I remember back then someone telling me that it would help to start learning how to speak Chinese given the rising economic influence of China in terms of world trade. In a nutshell, she's saying Chinese will be the next lingua franca. But I have my reservations on that. For non-English speaking countries, it would cost more than benefit for countries to learn Chinese especially after years of learning English. In any case, the Chinese has already began to learn to speak English for some time now, so why go the other direction?

No my dear. English has started it, and English is here to stay.

Trade Liberalization and Labor Mobility

Sticking to the topic of inequality, there's a good paper by Rana Hasan and Karl Robert Jandoc (the former my mentor and the latter a former colleague) published by the University of the Philippines School of Economics. Entitled "Trade Liberalization and Wage Inequality in the Philippines," the paper examines the role of trade liberalization in accounting for increasing wage inequality in the Philippines from 1994 to 2000—a period over which trade protection declined and inequality increased dramatically.

Now this result of increasing openness to trade and at the same time increasing inequality is much like the case in India, and is consistent with a growing body of literature that has found trade liberalization to lead to increases in inequality.

But the interesting thing is, at least for the Philippines, Hasan and Jandoc actually found little evidence to suggest that trade liberalization itself had an important role played in increasing inequality. More specifically, "the effect of trade on industry wage premia and industry-specific skill premia were found to account for very little of the increase in wage inequality." Instead, most of the "trade-induced" increases in inequality were captured by the "employment reallocation effects" of trade. In particular, "reductions in protection appear to have led to shift in employment to more protected sectors, especially services where wage inequality tends to be high to begin with and increased still further."

Now that is interesting: opening the economy to trade resulted in laborers moving to more protected industries. How did that happen? Hasan and Jandoc did not provide explanations and suggested to other economists for future work. I would guess that the answer is already there. Laborers go to where higher wages are. Never mind for the moment that between the three primary sectors of the economy, the services sectors give the highest wages. Even if we consider it generally, the benefits of opening an industry to international trade is lower prices in the products. Even after considering economies of scale, chances are, lower prices of goods would mean lower wages for workers.

Naturally, what else can you do? If you find the guy across the block is earning more working for another firm, you'd want to join him working for that firm.

Although granted that the study only limits to the country of the Philippines, it would be interesting to know if other countries exhibit these effects of trade liberalization on labor mobility.

Education and Inequality

Oh by the way, permit me to indluge you with a discussion about my latest paper. I forgot to announce last March that my paper with Rana Hasan, Rhoda Magsombol and Ajay Tandon were already published in the journal World Development. Entitled "Accounting for Inequality in India: Evidence from Household Expenditures," we utilize household-level consumption expenditure data from India to examine the evolution of inequality during the period of 1983 to 2004.

Like what is already a trend in most countries today, inequality in India increased, specially in the decade between 1993 to 2004. (As a sidenote, an also similar current trend is the fact that even with rising inequality among countries, poverty levels have gone down--even if more people have begun to eat the pie, some eat way more than others). Now the thing is this phenomenon of increasing inequality is more prevalent in the urban sector, and more interesting is that we find this to be accounted more for by increases in returns to education.

What does this mean, you say? Well, the economic liberalization that happened in India during the 1990s have resulted in the rise of education-intenstive service industries where the highest level of job compensation can be expected. But of course, not anyone can immediately be hired for such occupations. It requires heavy investment in education on the part of the individual. And so, of course, such situations are accessible to only a few--either the rich or the more intelligent or talented that has a better chance of getting a scholarship from the government or from some charitable organization.

But this is always the case, isn't it? Any economy in their history underwent the same situation. Their economic growth first witness a few benefiting and then eventually, the benefits would gradually spread to the rest of the population. That is why we also raised this question in the paper: if it is a natural progression of a growing economy, then we should leave it to the "market" and let it evolve naturally. Or should we? Should governments take a hand in minimizing this negative effect (growing inequality) of increasing GDP?

The fact is, there is also what we call inequality in abilities (i.e., the intelligent and the talented), and since the higher-paying jobs are more accessible to them, this does give rise to inequality in opportunities. This is one area that a government may need to intervene. Furthermore, leaving economic development to the "market" may lead to development of only one sector, i.e. the service sector, leaving the other sectors underdeveloped, i.e. industry and especially the agricultural sector, where the majority of the population is. Then it becomes a vicious cycle--being underdeveloped means income is low in these sectors (as is naturally), leaving workers in these sectors with little or no income needed to help put their children to good schools. Not having the right education needed to enter the high-paying service sector, these children will grow up and remain working for these underdeveloped sectors. In this case, the solution is for the government to come in and help develop these sectors.

Child Obesity and Sex

NBER recently released two somewhat related papers that is very interesting. First, having overweight children is actually worst than it is. Susan Averett, Hope Corman and Nancy Reichman found that "overweight or obese teenage girls are more likely than their recommended-weight peers to engage in certain types of risky sexual behavior but not others." I think it's actually sad because the way I see it, obese children may be aware of stigma associated with being fat (less attractive, etc.). So I suppose engaging in sexual activities makes them feel better about themselves. I'm not making excuses for them. In fact, I think this paper is one reason for parents to control their children's excessive eating behavior.

Related to obesity is Christopher J. Ruhm's paper pointing out that obese children may not be thinking rationally when they're binge-eating. Being a rational person, you would be aware of the negative effects of being obese (medical and social). But Ruhm proposes that the reason why obese people doesn't do so is because there are also biological considerations. In particular, he says that "eating behaviors reflect the combined influences of a utility-maximizing deliberative system [the economic part] and an affective system that responds quickly and often impulsively to external stimuli, without accounting for the long-term consequences [the biological part]." Excessive eating results when the "affective system" dominates the deliberative system. Now what is beautiful about this paper is that, like others, it tries to incorporate other scientific fields to explain why man may not be rational (one of economists' century-old mantra). And in this case, it actually makes sense. Now obese people do have some scientific basis for saying in front of a large entree of food: "I can't help it."