Tag Archives: Australia

Manufacturing employment and the prime-age male LFP rate: What’s the relationship?

Recently I wrote about the decline in the U.S. prime-age male labor force participation (LFP) rate and discussed some of the factors that may have caused it. One of the demand-side factors that many people think played a role is the decline in manufacturing employment in the United States.

Manufacturing has typically been a male-dominated industry, especially for males with less formal education, but increases in automation and productivity have resulted in fewer manufacturing jobs in the United States over time. As manufacturing jobs disappeared, the story goes, so did a lot of economic opportunities for working-age men. The result has been men leaving the labor force.

However, the same decline in manufacturing employment occurred in other countries as well, yet many of them experienced much smaller declines in their prime-age male LFP rates. The table below shows the percent of employment in manufacturing in 1990 and 2012 for 10 OECD countries, as well as their 25 to 54 male LFP rates in 1990 and 2012. The manufacturing data come from the FRED website and the LFP data are from the OECD data site. The ten countries included here were chosen based on data availability and I think they provide a sample that can be reasonably compared to the United States.

country 25-54 LFP rate, manuf table

As shown in the table, all of the countries experienced a decline in manufacturing employment and labor force participation over this time period. Thus America was not unique in this regard.

But when changes in both variables are plotted on the same graph, the story that the decline in manufacturing employment caused the drop in male LFP rate doesn’t really hold up.

country 25-54 LFP rate, manuf scatter plot

The percentage point change in manufacturing employment is across the top on the x-axis and the percentage point change in the prime-age male LFP rate is on the y-axis. As shown in the graph the relationship between the two is negative in this sample, and the change in manufacturing employment explains almost 36% of the variation in LFP rate declines (the coefficient on the decline in manufacturing employment is -0.322 and the p-value is 0.08).

In other words, the countries that experienced the biggest drops in manufacturing employment experienced the smallest drops in their LFP rate, which is the opposite of what we would expect if the decline in manufacturing employment played a big role in the decline of the LFP rate across countries.

Of course, correlation does not mean causation and I find it hard to believe that declines in manufacturing employment actually improved LFP rates, all else equal. But I also think the less manufacturing, less labor force participation story is too simple, and this data supports that view.

America and Italy experienced similar declines in their male LFP rates but neither experienced the largest declines in manufacturing employment over this time period. What else is going on in America that caused its LFP decline to more closely resemble Italy’s than that of Canada, Australia and the UK, which are more similar to America along many dimensions?

Whatever the exact reasons are, it appears that American working-age males responded differently to the decline in manufacturing employment over the last 20 + years than similar males in similar countries. This could be due to our higher incarceration rate, the way our social safety net is constructed, differences between education systems, the strength of the economy overall or a number of other factors. But attributing the bulk of the blame to the decline of manufacturing employment doesn’t seem appropriate.

New Public Choice Papers

Last week I attended the annual Public Choice Societies conference in Miami, Florida. Among the most interesting papers were:

Does Economic Freedom Foster Tolerance?” by Niclas Berggren and Therese Nilsson:

Tolerance has the potential to affect both economic growth and wellbeing. It is therefore important to discern its determinants. We add to the literature by investigating whether the degree to which economic institutions and policies are market-oriented is related to difference measures of tolerance. Regression analysis of up to 65 countries reveals that economic freedom is positively related to tolerance towards homosexuals, especially in the longer run, while tolerance towards people of a different race and a willingness to teach kids tolerance are not strongly affect by how free markets are….We furthermore find indications of a causal relationship and of social trust playing a role as a mechanism in the relationship between economic freedom and tolerance and as an important catalyst: the more trust in society, the more positive the effect of economic freedom on tolerance.

Governance, Bureaucratic Rents and Well-Being Differential Across U.S. States” by Simon Luechinger, Mark Schelker and Alois Stutzer:

We analyze the influence of institutional restrictions on bureaucratic rents. As a measure for these rents, we propose subjective well-being differentials between workers in the public administration and workers in other industries. Based on data for the U.S. states, we estimate the extent to which institutional efforts to strengthen bureaucratic accountability affect differences in well-being. We find that the differences are smaller in states with high transparency, elected auditors, and legal deficit carryover restrictions. These findings are consistent with limited rent extraction under these institutional conditions. No effect is found for performance audits and regulatory review.

Economic Performance and Government Size” by António Afonos and João Tovar Jalles

Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth.

Leaders, Institutions and Fiscal Discipline” by Heiner Mikosch:

In particular, I find evidence that pure career politicians are fiscally more disciplined than politicians with working experience outside of politics. This contradicts a popular claim that people who have been working in the “real world” outside of politics, are better politicians.

Institutions, Lobbying, and Economic Performance” by Jac Heckelman and Bonnie Wilson:

They find that economic freedom improves growth but that lobbying detracts from it. Moreover, there may be an interaction between the two. It might be that in economically free societies, lobbying is particularly bad for growth whereas in less-free societies it actually enhance growth. This lends support to their basic hypothesis that:

while economic freedom that emerges spontaneously may be growth promoting, economic freedom that emerges as a result of costly lobbying efforts may be less fruitful.

And here’s one that made me smirk:

The Right Look: Conservative Politicians Look Better and Voters Reward It” by Niclas Berggren, Henrik Jordahl and Panu Poutvaara:

Political candidates on the right are more beautiful or are seen as more competent than candidates on the left in Australia, Finland, France, and the United States. This appearance gap gives candidates on the right an advantage in elections, which could in turn influence policy outcomes. As an illustration, the Republican share of seats increased by an average of 6% in the 2000–2006 U.S. Senate elections because they fielded candidates who looked more competent. These shifts are big enough to have given the Republicans a Senate majority in two of the four Congresses in the studied time period. The Republicans also won nine of the 15 gubernatorial elections where looks were decisive. By using Finnish data, we also show that beauty is an asset for political candidates in intra-party competition and more so for candidates on the right in low-information elections. Our analysis indicates that this advantage arises since voters use good looks as a cue for conservatism when candidates are relatively unknown

This last one reminded me of this famous paper from a few years ago showing that inferences based solely on appearance predicted 68.8 percent of U.S. Senate races in 2004. (It isn’t good to have a baby face).

Maryland realtors fight to protect their subsidy

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the City, Ed Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.

Rent Seeking at the Planning Department

Like many cities the world over, Sydney, Australia has recently had to endure budget cuts. During this process, the city’s Planning Department required all of its senior executives to reapply for their positions. The selection of new leadership created an ideological shift within the department, according to some staff members, when three of the Department’s former executives were not rehired. As reported in the Sydney Morning Herald:

All three [new] executive directors in the department have worked for the former planning minister Frank Sartor, and were seen as close to him. Mr. Sartor was dumped from cabinet last year and replaced in the planning portfolio by Kristina Keneally.

“It’s appalling, it’s disgraceful and it’s a highly retrograde step,” said one well-placed planning source who did not wish to be named. “The three people who are going are really good quality who are well-respected in the industry and have been replaced by others who are more malleable.”

This threat of industry capture could have severe consequences for Sydney if builders rather than the market are permitted to determine which business enterprises belong in a given neighborhood. Rent seeking from urban developers is commonplace here in the U.S. as well.  As Jane Jacobs writes in her seminal work The Death and Life of Great American Cities, when one developer is allowed exclusive rights to commercial businesses in an otherwise residential area, the negative outcomes associated with all state-sponsored monopolies will result: shoddy performance and high prices on the part of firms protected from new entrants.

Diversity of design and use will naturally occur in places where entrepreneurs are free to compete to meet the demands of cities’ and neighborhoods’ residents, but these efficient land uses can be stifled if municipal authorities exhibit cronyism or are subject to lobbying from builders.