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July 8, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View


Is Wage Growth a Problem?

Posted: 08 Jul 2014 12:33 AM PDT

Josh Bivens:

Is Wage Growth the Problem or the Solution?, by Josh Bivens, WSJ Think Tank: Lots of talk has percolated recently about whether a sudden burst of rapid wage growth would force the Fed's hand in pulling back monetary stimulus... Some who, like me, do not see any evidence of an imminent wage take-off have argued that the Fed should wait for some evidence of wage inflation before hitting the brakes.
These arguments essentially treat a pickup of wage growth as a problem to be guarded against. But the most conspicuous failure in the U.S. economy over the past generation, by far, has been too slow wage growth for the vast majority of American workers. ...
So one part of the "how much slack" debate that too often goes unaddressed is that there is not only a lack of evidence that wages are about to start growing rapidly but also that it wouldn't be a big problem if they did. In fact, it would be a good thing.

FRBSF Economic Letter: Slow Business Start-ups and the Job Recovery

Posted: 08 Jul 2014 12:24 AM PDT

Liz Laderman and Sylvain Leduc:

Slow Business Start-ups and the Job Recovery, by Liz Laderman and Sylvain Leduc: Employment growth during the current recovery has been weak compared with past recoveries. It has taken nearly five years since the beginning of the economic expansion for nonfarm employment to return to its pre-recession peak. One factor that may have contributed to this tepid job growth is slower-than-normal employment growth at new businesses, or "start-ups." Because start-ups generate jobs at a much faster pace than older businesses during recoveries, they account for a significant proportion of job growth in the economy, even though their share of overall employment is quite small. Therefore, even modest slowdowns in start-up growth could result in significant drops in overall employment growth. 
Employment at start-ups was particularly hard-hit during the Great Recession, suffering a much steeper decline in growth compared with more mature businesses and compared with start-ups in previous recessions. One issue may have been financing. Because personal assets are an important source of funding for start-ups, the tumble in house prices during the downturn may have weakened start-up activity. Since house prices remained depressed early in the recovery, this Economic Letter examines whether start-up employment growth also remained depressed. We further consider whether the slower growth may have been a significant factor behind the weak job recovery. 
We show that, compared with the recovery from the deep downturn of 1981–82, start-up employment grew significantly less in the year following the Great Recession. Our analysis suggests that between March 2010 and March 2011, lower employment growth at start-ups may have subtracted as much as 0.7 percentage point from total job growth, translating into roughly 760,000 fewer jobs. 
Despite the weakness thus far in the recovery, recent increases in home values may bring better news, translating into greater financing opportunities for start-ups and, in turn, contributing to faster employment growth. ...

'Why Hasn't the Yen Depreciation Spurred Japanese Exports?'

Posted: 08 Jul 2014 12:15 AM PDT

Mary Amiti, Oleg Itskhoki, and Jozef Konings:

Why Hasn't the Yen Depreciation Spurred Japanese Exports?, by Mary Amiti, Oleg Itskhoki, and Jozef Konings, Liberty Street Economics: The Japanese yen depreciated 30 percent from its peak in the fourth quarter of 2011 against its trading partners. This was expected to boost its exports as the lower yen makes Japanese goods more competitive on global markets. Instead, the volume of Japanese exports of goods actually fell by 0.6 percent over this same period, as can be seen in the chart below. Weaker external demand surely contributed to this poor export performance. Yet over the same period, U.S. goods exports grew by more than 6 percent, which suggests that other factors are also at play. In this post, we draw on our recent paper "Importers, Exporters, and Exchange Rate Disconnect" that highlights another channel to help explain these puzzling developments. In that study, we show that a key to understanding why there is low pass-through from exchange rates into export prices is that large exporters are also large importers, so they face offsetting exchange rate effects on their marginal costs. In the case of Japan, the connection between the yen and production costs has been made stronger since the country replaced nuclear power with imported fuels in the aftermath of the 2011 earthquake.
It has been well established that exchange rate changes are not fully passed through to export prices in foreign currency terms; that is, a 10 percent depreciation in the yen results in a less than a 10 percent fall in Japanese export prices and, thus, a relatively smaller boost to export quantities in response to a depreciation. This low pass-through has generally been attributed to "local currency pricing" and to "pricing-to-market." If firms choose to invoice their exports in foreign currency terms, then prices are "sticky" in that currency, so exchange rate changes mechanically translate into changes in the exporter's markup, with a weaker yen increasing the profit margin of exporters. A local currency pricing study shows that Japanese exporters to the United States generally invoice in U.S. dollars. In addition, exporting firms often tend to adjust their markups in response to an exchange rate depreciation, even if they do not invoice in the foreign currency, with the size of this adjustment depending on demand conditions in each export market.
The new finding in our study is that the incomplete pass-through is the most pronounced for exporters with large import shares—each additional 10 percentage points of imports in total variable costs reduces exchange rate pass-through by over 6 percentage points. We also show that large exporters are import-intensive, have high foreign market shares, set high markups, and actively move them in response to changes in their marginal costs. Thus, the prices of the largest firms, which account for a disproportionate share of trade, are insulated from exchange rate movements both through the hedging effect of imported inputs and through active offsetting markup adjustment in response to cost shocks. ...

Links for 7-08-14

Posted: 08 Jul 2014 12:06 AM PDT

'The Myth of America’s Golden Age'

Posted: 07 Jul 2014 11:46 AM PDT

Joe Stiglitz:

...the American dream—the notion that we are living in the land of opportunity—is a myth. The life chances of a young American today are more dependent on the income and education of his parents than in many other advanced countries, including "old Europe."...
Today, inequality is growing dramatically..., and the past three decades or so have proved conclusively that one of the major culprits is trickle-down economics... But it has taken us far too long as a country to understand this danger. ...
Only with a vibrant middle class can the economy fully recover and grow faster. The more inequality, the slower the growth—a conclusion now endorsed even by the IMF. ...
None of this is the outcome of inexorable economic forces, either; it's the result of policies and politics... If our politics leads to preferential taxation of those who earn income from capital; to an education system in which the children of the rich have access to the best schools, but the children of the poor go to mediocre ones; to exclusive access by the wealthy to talented tax lawyers and offshore banking centers to avoid paying a fair share of taxes—then it is not surprising that there will be a high level of inequality and a low level of opportunity. And that these conditions will grow even worse.
And now it's also clear that ... the richer you are, the more you are able to influence the political process and the economic decisions that stem from it, and to rig it all in favor of the 1 percent. Is it any wonder the rich keep getting richer?

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