The Wages of Populism

The real median wage in the United States has barely grown since the 1970s. With wages not keeping up with productivity growth, inequality has skyrocketed. As Piketty and Saez show, “the bottom half of the income distribution in the US has been completely shut off from economic growth since the 1970s.” Wages today are actually lower than in 1979 for those at the bottom quintile. Worse, according to the IMF, “in inflation adjusted terms, more than half of the U.S. population has lower incomes today than they did in 2000”. Even though labor force participation has increased, the labor share of income declined from 64.5 percent of GDP in 1973 to 56.8 in 2017. Capital’s share of the pie has increased at the cost of the rest, in relative and absolute terms. Piketty and Saez note: “In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more.” They place this in context: “[a] ratio of 1 to 81 is similar to the gap between the average income in the US and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi.” Indeed, in 1975 the share of income going to the top 1 percent in the United States was similar to France, today it is closer to Brazil.

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After 30 years of trickle down economics, this is evidence that growth has not ‘trickled down.’ Piketty and Saez show that France, a country known for its interventionist state and strong unions, the real income of the bottom 50 percent has grown by 32 percent since 1980. This data is calculated before state transfers. The United States is a more dynamic economy than France, but it lacks the tools to distribute market incomes to the poor and working class. It lacks strong unions, which increases wages in the short run. It lacks universal programs in education and healthcare that increases wages in the medium to long run through higher human capital formation. Also, it lacks adequate minimum wages that boost the wages of the poorest.

It is not surprising that coincident with wage stagnation, social mobility has declined. As a recent World Bank report notes, “the sharp decline in absolute mobility in the United States between individuals born in the 1940s and those born in the 1980s was driven more by the unequal distribution of economic growth than the slowdown in aggregate growth since the 1940s.” Without universal healthcare, it comes as little surprise that American life expectancy has declined. The principal cause, deaths associated with poverty: drug overdoses and poor diet. Under the current administration, inequality enhancing policies are being doubled-down. But, the decline in social mobility and the worsening health outcomes pre-date the current administration and signal a serious problem for the functioning of the political system. As Hacker and Pierson argue in their book, Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class, “The foremost obstacle to sustainable reform is the enormous imbalance in organizational resources between the chief economic beneficiaries of the status quo and those who seek to strengthen middle-class democracy” (2010, 290). That is, the rich are better organized to defend their interests than the poor. This is true and explains a great deal, but their claim that structural features of the economy are of secondary import is debatable.

What has not been addressed is why is growth being concentrated at the top? This is a debate within economics, and I do not pretend to have the answer, but clues abound. Apart from policy decisions, there have been structural changes in the economy that affect all developed and developing countries. Growing inequality is a problem in almost all countries, as is the declining labor share of income. The United States represents the most extreme case among developed economies, due to weak state intervention in markets. If trickle-down was to work, it should be working now. Economic growth is very strong with unemployment at the lowest level since the 60s. Yet, wages are not increasing at a pace to reflect that reality.

A recent paper by IMF economists Yasser Abdih and Stephan Danninger delve deeper into the empirics to explain lackluster wage growth. They point out “Lower regional unemployment puts an upward pressure on wages of individuals, although this effect has become weaker since 2008.” (2018, 2) In addition, “…there is downward pressure on wage for individuals with occupations that are exposed to automation and offshoring, and in industries with a higher concentration of large firms” (Ibid). They show that “Workers in occupations with routinizable and offshorable tasks receive on average significantly lower wages than others, although there are important differences” (2018, 24; emphasis mine). These differences include the fact that, contrary to belief, white collar workers lose the most from automation (Ibid, 25). While low skilled workers lose the most from offshoring (Ibid). And high skilled workers are the biggest losers when it comes to firm concentration (Ibid). In the last case, the use of non-compete clauses reduces workers wages.

Tackling automation, trade and monoposy power are key to addressing the problem of wage stagnation and inequality. But, as Hacker and Pierson argue, the organized interests to protect rents in the US economy are strong. The populist solution of using bludgeons like tariffs and restricting mass immigration are ill-advised. It is also sub-optimal to push for higher rates of unionization and high minimum wages without raising productivity of workers. Rising the price of labor, especially in routine tasks, when the price of capital declines can lead to greater labor substitution and a lower labor share. Yet, the Reagan-era consensus is no longer viable as large swathes of the left and right are demanding policy change. Ideally, the United States should be joining other countries in seriously exploring the universal basic income (UBI) to begin to adjust to the potential of a post-work world for millions. Education and health reforms need to be implemented, such as a national daycare program and universal healthcare access. Education should be focused on skills formation, improving interpersonal socialization and problem solving. These steps will be essential to increasing human capital formation and social mobility. Also, expanded anti-trust legislation should look at monopsony; failing that, these firms should face higher taxation. Major and creative reforms are needed to recalibrate the economy towards a middle class democracy. The alternative will be demagoguery or worse.



The Tortoise, The Hare, and The Cubs: Argentina’s stalled development in comparative context

At the turn of the XX century, Argentina was one of the richest countries in the world. Argentina’s GDP per capita at the end of the Belle Époque (1870-1913) was 80 percent of the United States, 180 percent higher than Chile’s, and 238 percent higher than Italy. Argentina’s wealth was a major pull factor for European and Latin American immigrants. By 1914, 80 percent of Argentina’s population were either first, second, or third generation immigrants (Rock 1987, 166). Argentina also absorbed the world’s goods, with its per capita imports being the highest outside of the Netherlands and Belgium (Ibid, 172). As Table One shows, Argentina would sustain this relative prosperity until the Second World War.

Argentina’s relative per capita income




United States





























Source: Author’s calculations, Maddison Project Database (MPD) 2018

Why did Argentina fail to keep up with other advanced economies? Western Europe and the United States experienced sustained growth in the post-war era. This period (1945-1975) became known as the Les Trente Glorieuses, or the ’30 glorious years.’ Argentina’s growth over that period was respectable, but it saw more economic and political crises than other rich countries. Argentina experienced a major recession in the early 1950s; in 1959, the country experienced another recession and the first of many IMF programs; in 1975, the country experienced a major economic shock with the Rodrigazo; and in 1976, the last coup d’etat occurred leading to another major negative shock to the economy.

As Table One shows, the substantial decline in Argentina’s economy occurred after 1974. Why? Argentina’s crisis prone economy became even more susceptible to crisis with economic globalization. In 1981-82 the country was negatively affected by the Mexican debt crisis. The hangover from the debt of the dictatorship led to hyperinflation by 1989. During the 1990s, Argentina opened its economy even more to global capital markets. Argentina’s vulnerabilities—foreign denominated debt and an overvalued exchange rate—became unsustainable after 1998. The financial cum political crisis of 2001 led to a near collapse of the state and ended neoliberal reform. The last crisis occurred after 2011, when the CFK administration imposed a cepo cambiario—exchange rate controls. Unlike the other crises, this was a slow motion crisis. Nevertheless, growth in Argentina between 2011-2016 was almost nil.

This very brief overview of Argentina’s crisis prone economy explains a great deal why Argentina lost its position as one of the richest countries in the world. A recent IMF working paper by Valerie Cerra and Sweta C. Saxena titled, “Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and Its Policy Implications” makes an important contribution to development studies. First, they empirically reject the notion that recessions do not present a permanent negative shock to the economy; rather, crises lead to permanently poorer societies. As they put it succinctly, “the ‘business cycle’ is not a cycle” (2017, 7). Second, they argue: “Absolute divergence during 1960-2000 derives instead from the fact that poor countries recessions have been much deeper than those of rich countries” and that “adverse shocks and crises leading to recessions obstructed poor countries’ growth, rather than difference in their gaps to steady state” (Ibid, 22). Although Argentina is not a poor country, it is a developing country were many of the same dynamics identified by Cerra and Saxena are operative. The key to catching up is to maintain growth and avoid recessions. As they argue, “economic expansions in poor countries are stronger than in rich countries, which in the absence of negative shocks could over time lead to absolute convergence in the levels of output per capita” (Ibid, 23). As Figure 12 from their paper shows, recessions in developing countries are particularly damaging to development.

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Source: Cerra and Saxena 2017, 24

The challenge for Argentina is to create a proper policy mix to avoid falling into a deep crisis. The country should not be aiming for fast growth. Fast growth in a country with low savings rates often leads to crisis. In countries with low savings rates, the optimal strategy is steady growth. Chile and Uruguay are examples of countries that have sustained and gradual economic growth. I term these economies ‘cub’ economies. Unlike the East Asian tiger economies, they cannot depend on their own savings to supercharge growth. A cub economy is one where the overriding goal is to avoid crisis with macro-prudential policies. Will Argentina be able to stabilize growth? The Macri administration must tackle the fiscal deficit to bring down inflation and  stop crowding out investment. Though it is not advisable to shock the system with austerity, nor is it is advisable to pretend that deficits don’t matter.

La izquierda en el poder ¿agrande el estado? Los casos de Argentina y Uruguay entre 2000-2015.

Una de las criticas más comunes que liberales hacen en contra de la izquierda es que cuando la izquierda está en el poder, el estado crece. La mayoría de las izquierdas modernas tienen ideas keyenesianas. Ideas que son, en la estimación de los liberales, equivocados. La critica está basada en la idea que los gobiernos de izquierda crecen el estado por dos razones.

Primero, una de las criticas de las ideas keyenesianas es que el estado no sabe cuando de parar de crecer su gasto. Si los gobiernos ven los problemas de la economía como una de la demanda, el rol del estado debe garantizar que hay suficiente demanda en la economía para crecer la economía. El problema es que hacer cuando el estado crece sus gastos y no hay crecimiento. En los 70s, los neoliberales como Milton Friedman señaló que los problemas en la economía del occidente eran estructurales y no de una falta de demanda. Ellos creían que los altos niveles de inflación y bajos niveles de crecimiento mostraban eso.

Segundo, la idea que la demanda es el eje de la economía, el estado debe ser un empleador para asegurar la demanda cuando el sector privado no crea empleo. Desde la vista de los liberales, un estado creciente saca del mercado privado trabajadores– ‘crowding out.‘ Si el estado ofrece mejores salarios y beneficios, muchos de los trabajadores calificados van a trabajar en el estado. Eso hace que para atracar a los trabajadores, el sector privado necesita ofrecer mejores salarios y condiciones de trabajo. Para la izquierda y los trabajadores esto es un gran beneficio, porque ayuda a redistribuir el ingreso. Cuando hay una economía está en pleno crecimiento y capital tiene alto niveles de renta, esto es un beneficio para los trabajadores. Pero cuando la economía no está creciendo esto puede bajar la renta de capital y puede servir como un desincentivo para invertir.

Pero, ¿qué paso con la izquierda en el poder en América Latina? ¿Hubo un gran crecimiento del estado en la economía? Los datos sobre la masa salarial del estado en Argentina y Uruguay muestran que hubo un gran crecimiento en Argentina y no en Uruguay.

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Fuente: FMI Art. IV

Como muestran los datos durante el periodo 2003-2015 Argentina veo un crecimiento de 61.5% en la masa salarial en el sector público. La masa salarial en el estado federal creció por 51% entre ese periodo. En el periodo 2011-2015, la masa salarial creció por 20.5% o 5.1% per annum. Entre 2011-2015 la economía estaba en un período de estagflación. El ministro de la economía durante 2014-2015 es conocido como una economista keyenesiana. Entonces la evolución de la masa salarial estatal en Argentina podemos explicar por una política de mantener demanda, via empleo estatal. Es notable también el crecimiento de la masa salarial en las provincias en este período.

En Uruguay, mirando sólo al gobierno central, la masa salarial del estado creció por 8.7% entre 2005-2015. El gobierno uruguayo tenía una estrategia de priorizar a la inversión privada y extrajera en la economía. Los ministros de la economía vienen del ala más ortodoxa del Frente Amplio. Y en comparación con Argentina son más ortodoxo económicamente, vendo a los planes sociales y consejos de salarios como mecanismo para ampliar o controlar la demanda.

La realidad es que no hay una sola izquierda, pero múltiples variedades de izquierdas. Más importante de las categorías son los contextos estructurales e institucionales en que los gobiernos gobiernan.

¿Qué paso con las PASO?

Esta semana los argentinos fueron a votar en el tercer Primarias, Abiertas, Simultáneas y Obligatorias (PASO). Las PASO es en fenómeno electoral interesante porque da las fuerzas políticas del país la oportunidad de medir su poder electoral antes de la elección legislativas. En esta vuelta hubo una competencia entre dos mandatarios y modelos de país. Por un lado es la ex-mandataria de la República, Cristina Fernández de Kirchner (CFK). Ella está defiendo su legado como líder del peronismo y su modelo económico denominado como ‘nacional y popular’. Por otro lado es el actual mandatario, Mauricio Macri y su modelo pro mercado. Después de un 2016 cuando Argentina se vivió una recesión y caída fuerte en el valor del salario real, la expectativas no eran favorables por su partido, Cambiemos. Al margen de estos dos protagonistas eran partidos disidentes del peronismo (Sergio Massa y Florencio Randazzo) y el Frente de Izquierda. Entonces ¿qué paso?

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Mi mirada sobre las PASO 2017 está basado en la historia. Mi hipótesis es que después de la elección de 2015, la política Argentina está consolidando en dos partidos. Si vemos a los datos, vemos que después de la crisis de 2001, la oposición al peronismo se colapso. Argentina vivió un colapso parcial del sistema partidario durante los 2000s. En las urnas (incluyendo las PASO en ’13 y ’15) entre 2005-2015 el peronismo (K y disidente) logro tener un promedio de 52 por ciento del voto legislativas. Después de los años doradas del kirchernismo en 2011-12, el peso de la Frente para la Victoria (FpV) dentro del peronismo cayó. En 2011, 89 pro ciento del voto peronista era del FpV. En 2015 el peso del FpV cayo a 65 por ciento del total del voto peronista. En cambio, el partido de Macri (PRO/Cambiemos) incremento su peso del voto no peronista. En las elecciones legislativas ellos capto 19 por ciento del voto no peronista. En 2015 su peso del voto no peronista incremento a 74 por ciento. Si vemos en términos históricos solamente el radicalismo bajo Alfonsín en 1983 tiene una cifra más alto, captando 78 por ciento del voto no peronista.



En las PASO de 2017 vemos un notable incremento del voto para Cambiemos. Si comparamos el PASO de 2015, el macrismo incremento su voto nacional por 7 por ciento. Esto es raro, porque normalmente presidentes perdían votos en los ‘midterms’. Este caso es más raro todavía porque el país vive en una situación de bajo niveles de confianza en el desempeño de la economía (link). No ofrezco un hipótesis sobre las razones por este resultado. Solamente quiero notar que el voto no peronista está consolidando. Cambiemos paso su primera prueba con está elección y es obvio que una mala economía no era suficiente para parar esa consolidación. Si CFK perdía la elección en octubre, esto va generar fuerzas centrifugas en el peronismo, porque no hay un líder obvio en el espacio. Para Cambiemos esto no es un problema, porque atrás de Macri es Vidal. Nos vemos…

Medium-run Inequality in Argentina (1992-2017)

The Argentine statistics agency (INDEC) recently released data on the distribution of income. Since 2007, statistical data from the INDEC was not considered reliable. In 2016, the Macri administration re-established confidence in official statistics. Thus, Argentine statistics have regained comparability. With new data, we can take a medium-term view on the evolution of income distribution. Reliable data on income distribution goes back to the late 1980s. This allows us to compare two periods. The first period is the neoliberal period (1990-2001). The second period being the post-neoliberal period (2003-2015). The latter period, after 2006, is a blackbox due to the statistical crisis. The latest data allows us to see what the impact of post-neoliberal policies had on the income distribution. A note, Macri’s austerity policies negatively affected the distribution of income in 2017. The data shows that even in 2017, the picture remains positive.

I divide the periods into three: 1992, before the mass layoffs caused by privatization; 2006, before the the intervention in the INDEC; and 2017. In Table One, we see the evolution of income for the top 20, middle 60, and bottom 20. The middle 60 approximating the part of the population covered by collective contracts. The bottom 20 approximate those outside of the formal labour force. The top 20 being the upper middle class and rich.

Table One
1992 2006 2017
Bottom 20 4.6 3.6 4.5
Middle 60 44.5 44 47.9
Top 20 50.9 52.4 47.7

Sources: World Bank and INDEC

What does the data tell us? First, the bottom 20 have recovered most of  their share of income from the neoliberal period. The income of the bottom 20 is very sensitive to economic shocks. It is likely that they surpassed 1992 levels before Macri. Yet, the biggest winners from the post-neoliberal period is the middle 60. That is, formal sector workers covered by collective contracts. Their share of income increased by 3.4 percent from 1992. This was a period of time with a similar level of unemployment as in 2017. Thus, the pro-labour policies of the post-neoliberal period did redistribute income to the traditional working class. This formed the basis of a consumption-led growth model. With comparability of the data recovered, we can determine if Macri represents a new shift in the political economy of Argentina.

Towards Market Redistribution: Raising the Minimum Wage in Ontario

Ontario Premier, Kathleen Wynne  announced that the province intends to increase the minimum wage to $15/hour by 2019 (link). This represents a 31.5 percent increase from its current level of $11.40/hour. This would represent the largest increase in the minimum wage in Ontario’s history. A strong indication of the real value of the minimum wage is to compare it to the to the average wage. In 2017, the minimum wage represented 47 percent of the average national wage. Assuming that average wages increase at 2.7 percent, as they did in 2016, the minimum wage would increase to 57 percent of average wages by 2019. This increase comes with a package of labour reforms that enhance both individual and collective labour rights (link). Ontario is also at the forefront of incomes policies. For example, the universal basic income (UBI). A  pilot program is in the planning and soon to begin (link).

Screen Shot 2017-07-19 at 22.39.21The Ontario Liberals are proposing a very progressive set of labour policies. I am supportive of these policies. I support policies that curb precarious contracts, more notice about schedules, and making it easier to form a union. I also am a long-time advocate of the UBI. If we are to be even handed, all these represent increased costs for firms. The increase in the minimum wage has generated the ire of the business community. This is especially the case for small businesses, as many tend to employ low wage labour. The argument is that these businesses will find it too expensive to hire employees. Some employers claim that their firms will  have to close down. This may be the case for a few firms, but anecdotes do not make for a convincing argument. Most firms will not shut down, but this does not mean there will no negative effects.

The economics 101 argument against minimum wage is that increasing the price of labour will reduce its demand. A background assumption is that labour is like most other commodities. That is, labour is easily substituted. In other words, firms can reduce workers and replace them with robots. Force existing workers to work even harder. Or hire higher productivity workers who demand wages equal to their productivity. So, an x increase in the wage will lead to a y decrease in low wage employment. But, labour is not like other commodities. It is not easily substituted. Especially if there is a labour shortage. Either there aren’t enough workers, or there aren’t many workers willing to work at that wage. If this is the case, then firms are more likely to pass on the prices onto consumers. Or, if the firm is as big as Wal-Mart, they may pass the price onto their suppliers. It’s also possible to imagine firms maintaining employment and stable prices. How? Fudging around with the hours worked by workers. A study from Seattle suggests this is occurring after a set of minimum wage increases.

The study (link) shows that an increase of the minimum wage to $13 hour made low-skilled workers worse off. As the authors state, “we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016“ (2). In other words, employers compensated for higher wages by to decreasing hours. The authors admit that they only have data for firms that only have one establishment. This sample is representative of small businesses. They lack data for larger firms. Yet, they note “multi-site firms who we surveyed were more likely to self-report cuts in employment than smaller firms” (37). Thus,  if comparable data for larger firms may show employment losses to be large. This may be due to larger firms having better access to technology. I’ll get to larger firms later in the post.

A critique is that this study is not relevant for a large polity like Ontario. True, the market dynamics could be different in Ontario in some unexpected ways. But, I show that the effects in Ontario may be worse. They note that “some employers may have shifted jobs out of Seattle, but kept them within the metropolitan area, in which case the job losses in Seattle overstate losses in the local labor market” (38). This is very unlikely in the case of Ontario. Exit to other jurisdictions for low wage workers is next to impossible. Since neighboring provinces are unlikely to raise minimum wages to Ontario levels. It would be important to see how the labour market in Ottawa reacts compared to the rest of the province. Even there, the ability of low wage workers to work in Quebec is limited for linguistic reasons. Ontario would be an ideal case to test the effects of increasing the minimum wage in a national economy.

Another impact of the increase in the minimum wage is to further concentrate capital. As Ezra Klein notes (link), “And so if you begin to increase the minimum wage, you might actually really get Walmart workers a raise, but you might also hurt the corner store, and if you do that a bunch of different times, what you’re doing is systematically advantaging larger employers.” The ability of small firms to pay for this wage increase is limited. Large firms have access to credit that can help the accommodation to a new high wage economy. For example, credit is necessary to buy  expensive technologies that increase automation. Yet, if the effect is large, corporations are unlikely to hire all those laid off from small firms. Workers who are laid off may have the outside option of working in the so-called ‘sharing economy.’ Low wage workers face obstacles to join the sharing economy. For example, there are usually high standards of entrance. Another problem facing low wage workers is the recession in the retail sector (link).

Finally, higher wages decrease the relative cost of capital. In other words, robots become much cheaper. The increased competency in the average consumer’s use of technology makes it easier for firms to replace frontline staff. This is already the case for McDonalds, where touch screens dominate. The substitution of labour is not a static variable, it can increase or decrease. It is likely that a higher minimum wage will accelerate the process of automation and increase the substitutability of labour.