Author Archives: Jonathan Finegold

Illegal Immigration and the Minimum Wage

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Browsing this website campaigning for a higher minimum wage, I came across this Bruce Bartlett blog post discussing one of Ron Unz’ rationales that supposedly favors increasing it. Unz suggests that setting wages at $12 will price illegal immigrants out of the market, helping to mitigate the “problem” of illegal immigration. I’m surprised that Bartlett didn’t include any criticisms of the idea.

In 2003, 20 percent of the low-wage labor force was composed of immigrants. About one fourth of those earned less than the minimum wage. I don’t know what the cut-off for “low wage” is, but it’s probably a few dollars over 12. Nevertheless, there are a substantial amount of non-immigrants who work in low-wage industries that would also see themselves priced out of the market. The firm then has a choice between employing less natives at a higher price, or try to hire more illegal immigrants at lower wages. There is a unique cost to hiring illegal labor, which is a probabilistic legal cost, but if a quarter of low-wage immigrants were earning below the minimum wage, I think it’s safe to say that this cost is relatively low.

Raising the minimum wage to $12 an hour would not only put many natives out of work, but it would also make hiring illegally a much more attractive option. The Federal minimum wage is $7.25 ($8 in California) and a ~quarter of the low-wage immigrant labor force is making less than that. Now, imagine a minimum wage of $12. Illegal immigrants, or legal immigrants working under the table, will become relatively attractive. The implication is that a higher minimum wage will raise the demand for illegal labor — labor willing and able to work for less than $12, without the legal recourse to complain that the firm isn’t paying the legal minimum.

Unz argues that a higher minimum wage will be a disincentive to immigrants. The logic is that few people will be willing to migrate to a country where there’s no work for them. But, it’s very possible that raising the minimum wage will have the exact opposite effect! Instead of pricing immigrants out of the market, it would make them relatively cheaper.

What do Smart Students Do?

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According to a study cited by Esquire Magazine,

Sex. Drugs. Late nights.

You may be reading the first four words of my memoir. Or you could be simply listing three things that show signs of being a genius, according to various studies. There’s evidence that shows that if you’re spending less of your nights hitting the books and more time smoking weed and getting laid until 3am, then you’re probably wiser than the rest of us.

Maybe smarter students just need to study less. More likely, smarter students think they have to study less. That’s what I thought, and I paid the price.

 

No Coasean Solutions for Strong Odors

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A Southern California company that produces Sriracha hot sauce was ordered to shut its doors, after a Los Angeles County judge ruled in favor of residents who said the smell drove them to distraction.

The odor from the Huy Fong company was so overpowering that some residents suffered headaches, watery eyes and soar throats, CNN reported.

The city said it tried to reach an agreement with the company to install a filtration system that would confine the odors, before pursuing the court route. Huy Fung officials did not immediately comment but in a previous media report, said the filtration system the city wanted was prohibitively expensive.

— Cheryl K. Chumley, Washington Times.

I propose a Sriracha tax.

Why La Liga’s Quality Has Dropped

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I don’t know much about the economics of sports, and this transfers to Spain’s La Liga. This is Spain’s top football (soccer) flight, which is considered #1 by UEFA, but which is actually, arguably, worse in quality than the English Premier League. Why are top flight Spanish football teams losing so much quality?

To some extent, I think there’s an illusion. The best Spanish teams are Real Madrid and Barcelona. Atlético de Madrid is, this year, competing head-to-head with both of these rivals, but typically other squads end up 20+ points behind. R. Madrid and Barcelona are top three world wide (along with Bayern Munich), whereas English Premier League and Italian Serie A teams are not comparable. In conjunction with this, we have to consider that Barcelona has dominated domestic football for 4–5 years, and many teams have just accepted this state of the world (but, look how competitive a club can be if they think they have a significant probability of winning a domestic title: Atlético de Madrid). In other words, I think many La Liga squads look poor, only because we’re judging them against the quality of two clubs that could beat any other team in the world (over a 38-game season).

At the same time, I have to admit that oftentimes the La Liga teams in the top 10 spots (as of today) don’t look terribly competitive against the EPL or Serie A teams with the same rankings. I think that Barça, R. Madrid, and A. Madrid could beat any EPL and Serie A team, right now. But, consider that 9th place Valencia cannot dominate 11th place Swansea in the Europa League. Consider how poorly 6th place Real Sociedad has done in this year’s Champions League. I think any Spanish teams between 4th and 10th place would have a hard time with Manchester City, Everton, Tottenham, Manchester United, and Southampton. The Italia Serie A is of lower quality, in general, than both leagues, but certain top ten Spanish teams would still have trouble with certain top ten Italian teams.

The reasons why I think La Liga has lost some of its quality,

  1. The most cited reason in Spanish sports press is the unequal distribution of TV revenue, where Barcelona and Real Madrid, by far, get the largest shares (they’re also the teams with the most fans, of course). Atlético de Madrid gets the third largest share, in large part because it colludes with the “big two.” I have two problems with this, though: (1) I’m a capitalist pig; (2) if TV revenues were more equitably distributed, Real Madrid and Barça would probably lose their international dominance;
  2. The Steve Keen factor: a large accumulation of private debt during the bubble years. Spanish teams are heavily indebted, and most of them have relatively low revenue flows. The implication is that, to avoid bankruptcy, Spanish teams have been forced to cut their transfer budgets, focusing instead on selling players and paying down their debts. This has been the case for Valencia, Sevilla, A. Madrid, Málaga, etc. While R. Madrid and Barcelona have the fiscal space to improve their squads, other Spanish teams have been forced to sell their talent;
  3. Depression: Spain has been suffering from a horrible depression for the past 4–5 years. The only teams with significant international followings are R. Madrid and Barcelona. The other teams have seen a marked decrease in ticket sales, shirt sales, etc. Their income flows have shrunk;
  4. The tax structure: Admittedly, I don’t know what the tax structure looks like in other countries. But, in Spain, 50%+ of a player’s wage is taxed. Consider Cristiano Ronaldo’s gross annual income of R. Madrid. He makes ~€20 million on net, or ~40 million gross. Most Spanish teams can’t afford an annual salary over €5 million gross, which means that players looking to make a net income higher than 2.5 million are going to go elsewhere. Teams in countries with a more favorable tax structure can actually offer the player more, and still pay less than their Spanish counterparts.

I wonder if la Liga is evidence of “my” theory of sticky prices. My theory, basically, is that in industries where market power is unevenly distributed between firms, those with greater market power are also those most capable of paying higher input prices (their MRP curves lies farther to the right than those of their competitors). Because of their market power, they pull input prices up. Firms with less market power — relatively speaking, they’re closer to price takers — are forced to pay higher input prices. After a demand shock, because prices are pulled up by larger firms, their smaller counterparts are forced to cut output (if they can’t find cheaper substitute inputs).

Consider players as the only input to a football club. Over the past four years, clubs with greater market power have pulled transfer prices up. Consider, for example, the €30+ million R. Madrid paid for Asier Illarramendi, or the similar amount they paid for Isco. These are young players with huge transfer fees. They are essentially unaffordable to teams that aren’t Bayern Munich, Barcelona, R. Madrid, Manchester City/United, et cetera. This year, A. Madrid’s most expensive incoming transfer was Josuha Guilavogui, for €10 million. (A. Madrid did buy Falcao for €40 million two and a half years ago, but they had just sold Agüero to Man. City for €45, and they flipped Falcao to Monaco for €60 million two years later. Big teams, I think, usually don’t make that kind of re-sale profit from their big ticket transfers.)

Wages are probably an even better indicator of prices. A team might pay a smaller transfer fee, but they draw the player away by offering a higher wage. The wage cap for a team like A. Madrid, Spain’s “#3 team,” is €5 million gross. Clubs with market power can afford to pay twice to four times that amount. Spanish squads have had to substitute for lower quality inputs, or they’ve had to turn to their youth teams. But, the consequences are in line with what a sticky price model predicts: a decrease in output.

One day Spain’s economic troubles will end. Barcelona’s dominance will be something of the past. La Liga’s quality will increase again. So, if I were to highlight one thing as the main cause of the league’s diminishing quality, I’d say the depression. Inequitable distribution of TV rights is another thing, but I’m not sure it matters that much.

Quote of the Week

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It seems to be part of the folk wisdom in macroeconomics that this is in fact how the Great Depression came to an end: the massive one-time fiscal jolt from the war pushed the economy into a more favorable equilibrium. However, Christina Romer contends that most of the output gap created during 1929-33 had been eliminated before there was any significant fiscal stimulus. She argues that the main explanation of that expansion was a sharp decline in real interest rates, which she attributes to monetary policy (although most of the decline in her estimate of the real interest rate is actually due to changes in the inflation rate rather than the nominal interest rate).

— Paul R. Krugman, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity 2 (1998), pp. 159–160.

Math and Econ: A Fact

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Someone I follow on Twitter re-tweeted someone who wrote, “…move economics away from math” in the context of “what’s wrong” with economics. We can debate whether using math really improves economists’ ability to communicate with each other. We can debate whether using math helps economists keep their ideas straight, and helps them keep their thinking straight (especially when they’re thinking through a model).

But, remember that there was a time when math was not a prominent tool in economic analysis. Look at any major economics journal prior to the mid-1940s and you will see that the major debates did not involve very much math. Even in the decades immediately after the 1930s, the major articles that used math used relatively rudimentary math that is relatively easy to follow. There were probably sub-specializations where extreme mathematation mathematization (sic.?) took a hold at an earlier date, but before the 1970s — in my reading experience, at least —, most of the articles that we consider classic today did not involve heavy math (some math, sure, but not at the scale of many macro papers, for instance, today). To judge whether math has played a hand in getting the science where it’s at today, we don’t need to build a counterfactual, we have plenty of empirical evidence.

The evidence suggests that math is not responsible for any of the science’s contemporary woes. It was just as disputed 40–80 years ago as it is today. There was a lot of crap published back then. Contributions were still very hard to follow — economists are usually hard to understand, because the topic they’re exploring is difficult, not because of the math. There was a lot of disagreement over what the author meant. Oftentimes, authors’ logic was faulty.

So, no, economics does not need to move away from math to build a better set of theory. The reason economists disagree is not because of math, it’s because economics deals with complex phenomena, and complex phenomena are difficult to understand. That’s why we build models, with assumptions that help simplify the phenomenon we’re seeking to explain. Most of the critics of the current state of affairs of economics simply do not get this point, or they’re unwilling to grapple with it — or, they’re unwilling to accept the fact that most people disagree with the set of theory they think should replace what’s currently out there. And if people disagree with you, it’s because you aren’t making your case persuasively.

Striking as Entrepreneurship

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Accident Model

The accident model of strikes, illustrated (albeit poorly) above, says that the firm and the union will agree to set a wage equal to W*, which is where the “Employer Concession” (EC) curve and the “Union Resistance” (UR) curve intersect. The EC curve is upward sloping, because the longer the strike persists, the higher the costs to the firm — because, for example, the strike may act as a shock to the firm’s productivity. Likewise, the UR curve is downward sloping, because as the length of the strike increases, so does the opportunity cost to striking. Rational agents would choose to set wages at W* without the strike, and so according to the model if the strike occurs at all it must be an “accident.”

What does it mean that strikes occur “accidentally?” Well, given that if the two agents know where the opposite’s curve is the strike will be avoided, that strikes occur at all suggests that the two agents don’t know where their curves lie. Or, when guessing what the other party’s willingness to concede or to resist, one or the other party misjudges. Or, perhaps, there are costs to accruing the relevant information and a strike is preferred. Another explanation is that there is a probabilistic element to decision-making by the firm and the union, and so, ex ante, it may pay for one or the other to accept the strike, for some length of time. Finally, one other theory is that the union and the laborers its represents have asymmetric objectives, and the strike serves as a means of tempering the demands of the workers — allowing the union to ask for a wage that the firm is more likely to accept.

Sticking with the informational route to explaining why strikes occur, we could say that there is an entrepreneurial element to striking. Consider the union as a “seller of labor.” It enters into negotiations with the firm, because it sees an opportunity to profit. The firm offers a deal, but it doesn’t meet the minimum wage the union is seeking, and so negotiations turn into a strike. The strike is an opportunity for the union to “discover” where the firm’s EC curve is, under the expectation that ultimately the two agents will come to an agreement that is favorable to both (at that point in time). This behavior is entrepreneurial, because the union is seeking to take advantage of a perceived disequilibrium between the existing price of labor and the price of labor that would be possible through collective bargaining or striking.

Does the union, as an entrepreneur, help to coordinate market activity? In a sense, yes. It is coordinating the wants of its members with what the firm can supposedly provide. Of course, for the most part, unions are capturing rents with a political source. If the firm could hire outside of the union (assuming that there is a relevant labor market — for industry x — outside of the union), that EC curve would look very different. The firm will still suffer costs, but these may be a lot less than they are otherwise. Or, maybe the firm would negotiate with individual members of the union in an attempt to break it up. As in The Jungle, maybe the firm would simply opt to hire scabs. So, maybe, in the context of welfare, we don’t think of unions and striking as “good” coordination; but, it’s coordination nonetheless.