Author Archives: Zach Schoettle

Why Inflation is Good News for the Economy.

T: In fact, with inflation rising, the US economy can expect steady job gains in the short-term future, and effectively transition to higher interest rates in the economy.

On Sunday, the WSJ reported that inflation, as gauged by the CPI, has risen for the second consecutive month with a .2% growth rate. While most people would lament inflation since they lose purchasing power, this is actually a very promising sign for the economy. In fact, with inflation rising, the US economy can expect steady job gains in the short-term future, and effectively transition to higher interest rates in the economy.

With inflation rising, we can expect job-gains in the short-term future because rising inflation is a sign that active money in the economy is increasing. With gas prices stabilizing, it seems that inflation has started to make gains in the economy. Generally, inflation should occur when more money is put into the economy by adjusting interest rates and quantitative easing. When inflation is too low, this can be a sign that the amount of cash being used in the economy is much lower than it should be. Similarly, a deflation can be the result of a recession since money stays stagnant during a recession. In this scenario, people may be investing the money abroad, or saving their money in banks. Right now, with inflation rising from a very low level, this is a sign that business activity has increased in the economy. When money spreads around the economy, people are more likely to spend that money because income has risen and seems more stable. Consequently, consumption causes stores to invest more money and hire more workers to accommodate this increase in demand. Thus, inflation rising allows us to believe that spending will rise, which will cause jobs to increase.

While job gains in the economy are certainly a great thing for the FED, the FED might be more excited with rising inflation because it will allow the FED to raise interest rates with fewer complications. Recently, the head of Mexico’s Central Bank has stated that he is worried about how fragile the economic recovery is around the world with regards to low interest rates. Certainly, he has reason to be worried since governments around the world have massively cut interest rates since the recession, and further stimulated their economies with quantitative easing. This response has been unprecedented. It will be interesting to see how the FED deals with that; however, rising inflation will allow the FED to avoid this dilemma. The rise in inflation will offset the effect of higher interest rates. Therefore, inflation is definitely an exciting economic development for the FED.

While most Americans will dread this rise in inflation, there is significant evidence to suggest that this will positively affect the economy. In general, with inflation rising, the US can expect substantial job gains in the short-term future and less effects from the rise in interest rates at the end of the year.

Revised 5: The Disastorous Consequences of a 15 Dollar Minimum Wage

T:If the country were to adopt this high of a minimum wage, we could expect massive inflation in the country, increased unemployment, and increased business failures.

In the past few days, workers have been protesting for 15 dollar an hour wages around the nation. Nobody can fault these workers for trying to increase their wages. However, a nation-wide minimum wage of 15 dollars an hour would be harmful and disastrous for the economy. If the country were to adopt this high of a minimum wage, we could expect massive inflation in the country, increased unemployment, and increased business failures.

                  Despite what some people would tell you, the labor supply and demand are the main natural drivers of wages, so an increase in minimum wage would result in layoffs. With the nation-wide minimum wage at $7.25, most analysts would expect unemployment to increase drastically with new minimum wage of $15. As an illustration, the CBO has announced that it would expect a loss of about 500,000 jobs with the minimum wage increasing to about $10 an hour. If the minimum wage were to be 5 dollars even higher than that, the job loss would be substantially higher. In fact, one study came “to the conclusion that a minimum wage that is greater than 50% of the average wage is harmful to small wage earners and that a minimum wage that is less than 45% has very little risk for this group of workers.” With an increase in the minimum wage of about two times, those who rely on minimum wage jobs would be hurt. Those who are able to get jobs will benefit; however, the resultant unemployment would make the policy a bad thing for most low-wage employees. Additionally, with an increase in overall unemployment, teenage workers would struggle to find jobs. This would hurt ingenuity in the next generation.

In addition to the expected increase in unemployment by this policy, business failures and inflation would also be expected. The effect of this minimum wage increase would be highly dependent on the living costs of the local community. Due to the fact that many local stores are locally owned in small towns, this policy would be a death knell for business owners. As shown in this article on the narrow profit margins for fast food restaurant franchisees, it is unlikely that these owners will be able to raise money to deal with substantially higher operating costs. Eventually, prices will need to rise to accommodate this substantial increase in cost as shown in this Heritage article, but purchasing power for workers will take some time to be a factor. Therefore, many of these owners will need to suffer until workers wages rise in the broad economy and increase prices. Unfortunately, it is unlikely that these kind of businesses will be able to withstand such a situation since its capital is not similar to larger corporations. Furthermore, for all communities, wages for workers will need to increase since fast-food workers’ wages increased. People will not go to college to work in a profession such as counseling if they are being paid less than a job that does not require a degree like fast-food work. For this reason, employment costs around the nation will increase and cause resulting inflation.

With income inequality as high as it is, it would be nice if workers could make enough money to avoid poverty. Unfortunately, a 15 dollar an hour minimum wage is not economically rational or efficient. In fact, with this rise in minimum wage, the economy will suffer tremendously with increased unemployment, business failures, and inflation.

The Disastrous Consequences of a 15 Dollar Minimum Wage

T:If the country were to adopt this high of a minimum wage, we could expect massive inflation in the country, increased unemployment, and increased business failures.

In the past few days, workers have been protesting for 15 dollar an hour wages around the nation. Nobody can fault these workers for trying to increase their wages. However, a nation-wide minimum wage of 15 dollars an hour would be harmful and disastrous for the whole economy. If the country were to adopt this high of a minimum wage, we could expect massive inflation in the country, increased unemployment, and increased business failures.

                  Despite what some people would tell you, the labor supply and demand are the main natural drivers of wages, so an increase in minimum wage would result in layoffs. With the nation-wide minimum wage at about $7, most analysts would expect unemployment to increase drastically with this new wage. As an illustration, the CBO has announced that it would expect a loss of about 500,000 jobs with the minimum wage increasing to about $10 an hour. Similarly, one study came “to the conclusion that a minimum wage that is greater than 50% of the average wage is harmful to small wage earners and that a minimum wage that is less than 45% has very little risk for this group of workers.” An increase in the minimum wage of about 2 times the minimum wage would actually hurt those who rely on minimum wage jobs. Those who are able to get jobs will benefit; however, the resultant unemployment would make the policy a bad thing for most low-wage employees. Similarly, with an increase in overall unemployment, teenage workers would struggle to find jobs.

In addition to the expected increase in unemployment by this policy, business failures and inflation would also be expected. The effect of this minimum wage increase would be highly dependent on the living costs of the local community. Due to the fact that many local stores are locally owned in small towns, this policy would be a death knell for business owners. As shown in this article on the narrow profit margins for fast food restaurant franchisees, it is unlikely that these owners will be able to raise money to deal with substantially higher operating costs. Therefore, many of these owners will need to suffer until workers wages to increase in the broad economy and increase prices. Unfortunately, it unlikely that these kind of businesses will be able to withstand such a situation since its capital is not similar to larger corporations. Furthermore, for all communities, wages for workers will need to increase since fast-food workers’ wages increased. People will not go to college to work in a profession such as counseling if they are being paid less than a job that does not require a degree like fast-food work. For this reason, employment costs around the nation will increase and cause resulting inflation.

With income inequality as high as it is, it would be nice if workers could make enough money to avoid poverty. Unfortunately, a 15-dollar an hour minimum wage is not economically rational. In fact, with this rise in minimum wage, the economy will suffer tremendously with increased unemployment, business failures, and inflation.

Why the Drop in Oil Prices is Vastly Different than Germany’s Wage Increase

T: Nevertheless, lower interest rates in Germany and a drastic, yet stable wage increase by workers in Germany will push the global economy in a meaningful way unlike the result of lowered gas prices for the US.

Yesterday, Brian Blackstone did not ruffle many feathers by stating that higher German wages were good for the global economy. However, many conservative analysts doubt that a rising German wage will affect the world economy by very much, due to their low savings rate. Similarly, some cynics believe that the wage increase carries a weight similar to the one brought by lower gas prices for Americans, which is not much. Nevertheless, lower interest rates in Germany and a drastic, yet stable wage increase by workers in Germany will push the global economy in a meaningful way unlike the result of lowered gas prices for the US.

When you look at the minimum wage increase in Germany and the decrease in gas prices, there is a significant difference in long-run stability. Americans could not know when gas prices would increase, and thus, Americans were more likely to save their savings on lower gas prices. On the other hand, Germans will be able to expect additional wages for the rest of their time working. Similarly, with the ECB lowering interest rates with their quantitative easing program, Germans will be more likely to spend these savings instead of saving them like Americans. Thus, although Germans do have a higher savings rate than Americans, the difference should not matter since Germans will be able to expect their lifetime wealth to increase. Therefore, spending across all periods will increase.

Similarly, the decrease in gas prices in America and the increase in wages for Germany are of a different magnitude, so it is possible to believe that an increase in German wealth will affect the world economy. According to CNN, the average American will save about 750 dollars or about 1.5 % of their projected household income as a result of the lower gas prices this year. For Germany, the wages are expected to increase 3.5%, due to an increase in the minimum wage. This is a very large difference in magnitude. Especially, when we factor in the fact that wages will maintain that high for an extended period. When you throw in the fact that the euro is down, Germans have good reason to purchase foreign goods that use to be too expensive. This will cause foreign companies to prosper, and it will level the exchange rate. These events will cause more workers to be hired, and the loop will continue to positively affect the world economy.

At first glance, the German wage increase can appear similar to the decrease in gas prices for Americans. However, this increase in German’s lifetime wealth is far greater and more stable than the increase in American’s lifetime wealth caused by a decrease in gas prices. For this reason, the world economy will be affected by this event.

Time to Relax?

T: If Americans decided to work fewer hours, worker productivity would increase and allow Americans to earn higher wages.

With stagnant wages griping the economy, many observers believe that workers need to work better and harder to get a wage increase. Unfortunately, most people believe hard work and hours worked are synonymous. This is a disastrous mistake in terms of economic efficiency. If Americans decided to work fewer hours, worker productivity would increase and allow Americans to earn higher wages.

With fewer hours worked, Americans would be able to increase their productivity level closer to European countries such as: France and Italy. In ‘s Robert Hall’s and Charles Jones’s paper ”Why do Some Countries produce so Much More Output than Others”, they measured worker productivity of other countries against the United State’s workers. In terms of measurables, France had an output to labor ratio of .818 and an hours to labor measure of .666. Similarly, Italy had similar ratios of .834 and .650. At the same time, these countries had almost the same level of capital compared to the US. Historically, Europeans have always had a relatively high output per hour compared to the US. It makes sense that there is a point where workers do not work as well, and it appears the US has crossed this threshold. As an employer, it makes sense to give employees time off, so they can be fresh and relaxed at work. Fewer mistakes will occur, and employees will be more focused.

In correlation to an increased worker productivity level, Americans will be able to expect an increase in their wages and time off. Economists have always believed that workers’ wages correspond to their productivity level since employers would not hire them for more. In addition, workers would be able to demand higher wages from their bosses since they are more valuable to their bosses. By accepting that wages and productivity levels are correlated, we can conclude that the decrease in hours worked will allow workers to garner higher wages from their employers. Therefore, even though workers are working fewer hours than they previously did, their wages will help make up the wages lost by working fewer hours. With that said, I am sure some Americans would enjoy working less hours with higher wages.

If wages are to increase in the future, America should consider promoting workers to work less and take more time off. Already, some companies have began pushing their workers to take more breaks. With Americans taking more time off, we will be able to raise our worker productivity levels and wages.

 

 

 

In an Ocean of Applicants, with Nobody to Hire.

T: While this is somewhat true, employers have become pickier about the quality of their workers and would rather avoid training new employees.

In September, when Penn economist Peter Capelli stated that employers are responsible for the increasing length of time that jobs remain unfilled, many analysts were critical. The WSJ’s image below shows this increase. “These jobs require technical skills and knowledge that America’s schools are failing to teach, “ they would say. While this is somewhat true, employers have become pickier about the quality of their workers and would rather avoid training new employees.

Hiring

As a result of the increasing proliferation of bachelor’s degrees and the poor economy, employers have been able to hire workers with bachelor’s degrees for positions that would have been filled by high school graduates in the past. Part of the problem of this is that most employers would prefer bachelor’s degrees for these positions, but since only about 35% of the labor force has one, it takes a longer time to get someone to fill this position. This has caused a great disequilibrium in the labor market since the standards of the employers have risen to a level that does not match the current labor market. Furthermore, as the economy continues to recover, the workers with bachelor’s degrees will continue to be snatched up and the qualifications of the rest of the labor force are being lowered. This makes up a large amount of the perceived “skills gap” that employers blame for an increase in unfilled jobs.

Correlatively to the increased pickiness by employers, most employers would like to avoid training new employees, due to cost. As the Millennial generation enters the labor force, the amount of job-hopping will increase. This is not necessarily a bad thing for the labor force, but it can create problems in regards to training cost. As I have previously stated, the poor economy allowed employers to become choosier with job candidates, which made bachelor’s degrees required in positions that previously did not require them. This allowed employers to pay less on training time for employees. Therefore, with the better economy, employers are waiting for workers with bachelor’s degrees to apply rather than hire an employee without one, and being required to train them more.

Although there is a skills gap in the STEM job positions, a significant amount of the skills gap is in response to the proliferation of bachelor’s degrees in a poor economy. As a result, the skills gap has become a major problem because employers are choosier about their workers’ credentials and would prefer workers that require less training.

 

The Economic Backlash against Indiana

T: Although Chick-Fil-A has weathered a similar past controversy; it is unlikely that other states will enact a law similar to Indiana’s, due to the economic backlash and resentment shown towards Indiana.

Recently, Indiana has signed into law the controversial Religious Freedom Act, and the nation has become quite divided. Many groups of people have decided to boycott services and products from Indiana. Whatever a person’s stance on this law, the state of Indiana will suffer greatly from this controversy. Although Chick-Fil-A has weathered a similar past controversy, it is unlikely that other states will enact a law similar to Indiana’s, due to the economic backlash and resentment shown towards Indiana.

In response to Indiana’s controversial new law, companies, performers, and consumers have decided to stop business with the state, which will persuade other states from taking similar measures. According to the Center for American Progress, the state economy will lose roughly a quarter of a billion of dollars in the next six years. In regards to its economic relevance, Indiana’s total GDP was around 300 billion dollars in 2013, so this is very big for its economy. Similarly, it is also potentially at risk of losing major business transactions with other very large entities such as the NCAA. For a state’s governor, this kind of economic blow would destroy their ability to be reelected. It seems that a state’s economy is the most important matter for a state’s voters.

In regards to Indiana’s controversy, most people would point to the fact that Chick-Fil-A has survived a similar backlash; however, Chick-Fil-A’s loyal patrons and favorable location prevented significant losses, which Indiana cannot count on. When controversy struck at Chick-Fil-A, the responses around the nation were varied. However, Chick-Fil-A’s sales base was in the South and other historically politically conservative areas of the country, so it really did not affect the company too much. Indiana will not receive a similar boost from economic geography. No consumer will go out of his or her way to buy a product of Indiana. Indiana’s products are not as distinguished as Chick-Fil-A. Similarly, visiting Indiana to support the state will be more work than visiting a local food chain. In addition to Chick-Fil-A’s favorable geographic location, the food chain has very loyal patrons. While some people boycotted Chick-Fil-A, other people rallied around the food chain. This caused Chick-Fil-A to have a record year for sales in 2012. Indiana, as a state, will not receive similar loyalty.

It appears that this new Religious Freedom Law will greatly hurt Indiana for the short-term future. Whether this is fair for all of the state’s citizens is very debatable. While it is true that Chick-Fil-A has dealt with their past controversy, the potential costs for Indiana will deter other states from enacting similar measures.

 

Revised 4: Rationalizing the Decision to Attend College

T: As a result, the government should analyze the expected outcomes of the current education situation to implement practices that will prevent students from starting school without finishing with a degree.

As a consequence of the “Great Recession” in 2007, students have flocked to universities around the country to wait for better economic days. Subsequently, student debt around the country has continued to rise. Unfortunately, this is a major problem because a significant amount of students fail to graduate with a bachelor’s degree. According to CNN, only about 40% of middle-class students have been able to obtain bachelor degrees. If this continues to be true in the future, the economy will be worse off, due to less human capital and a higher debt level in the country. As a result, the government should analyze the expected outcomes of the current education situation to implement practices that will prevent students from starting school without finishing with a degree.

In many ways, the decision to pursue a college degree can be understood by game theory. There are three basic outcomes for a graduating high school senior: graduate from school with a degree, drop out of school without one, and not pursue a degree. With these choices, the outcomes can be seen as 1, -1, and a 0. We are able to assign these values from certain facts. According to CNN, dropping out of school would likely be smaller in magnitude than the present value of the benefits of graduating from college. Similarly, when we analyze the expected values of dropping out of school, we must look at the expected wage premium and the cost of college. In regards to wage, according to the WSJ, “There has been little or no difference in wages among 20- to 24-year-olds who graduated high school and those who completed some college but aren’t enrolled anymore. In 2011, wages for college dropouts were even lower, according to the Current Population Survey.” Furthermore, these students will possess substantial debt with high interest rates. Therefore, these dropout students are put at a significant disadvantage. In this current scenario, students are more likely to attempt to pursue college because they believe the expected outcome is larger than their opportunity cost. However, for the majority of middle-income students, this is not true.

With this in mind, high schools and the government should attempt to better educate students and their parents the academic and financial costs of college. Right now, it is possible that the benefits of college are praised too highly compared to the costs of college. This may cause students to attend college without understanding the sacrifices that must be made to graduate. Some high school seniors, who may not be suited for college in terms of skills and disposition, are currently pursuing college degrees. Instead, these people would probably rather be happier and consequently, more successful in a trade like welding or others. Indeed, it is true that college will help increase the expected incomes of workers. However, the worst outcome in the game is for students to not graduate with a degree, and unfortunately, this is the most common outcome for middle-income students. Therefore, by giving more information to the student before college and allowing students to experience a college atmosphere. It can be considered that students will know if they are suited for college, or if their time will be better off used elsewhere.

When we look at the decision to pursue a degree, economic analysis can help us understand why so many students end up with the worst outcome. With the government and high schools giving more information to their students about the true costs and benefits of college, the students will be more rational about the decision, and therefore, the expected outcome of education will improve.

McDonald’s Decision to Raise Wages

T:Admittedly, it is true that McDonalds decided to raise wage, due to external pressures and not because of a desire for increased worker performance; however, McDonald’s decision could force other low-skilled employers to increase their workers’ wages.

Today, McDonald’s announced that they would increase the wages of 90,000 in the US by about 10%. While this is certainly a major development for these workers for McDonalds, many critics believe that this decision will not help McDonalds and was due to the pressure of unions. Admittedly, it is true that McDonalds decided to raise wage, due to external pressures and not because of a desire for increased worker performance; however, McDonald’s decision could force other low-skilled employers to increase their workers’ wages.

It was only a matter of time before McDonald’s decided to raise their minimum wave since numerous states have increased their minimum wages in the past few years. As a nation-wide employer, the recent actions by state governments have affected McDonalds. Consequently, McDonald’s has figured that they could raise the minimum wage now or inevitably, the government will raise its wages. With this decision to increase their wages on their own, it allows McDonald’s to receive good press, which it has lacked in the past year. For McDonalds, this was a good decision to stay in front of the curve.

With regards to McDonald’s motives for this decision, it is unlikely that worker performance was a large component. Fast-food restaurants like McDonalds do not usually pay wage premiums to their employees for increased service quality. It could help persuade workers to work harder, so they can keep their job. However, this kind of incentive only makes workers work minimally harder. Most of these workers are not primary wage earners, or if they are, they must work two or more jobs to survive. Therefore, it is unlikely for a large increase in worker productivity.

While McDonald’s decision to raise these wages will not affect worker productivity by much, it could cause an increase in wages for low-skilled workers across the board. If McDonalds is successful with this wage increase, then other competitors will raise their wages as well. Furthermore, employees for their competitors will be able to demand higher wages. Due to their higher wages, more low-skill workers will apply to McDonalds For this reason, McDonald’s will be able to recruit a higher quality employee. Thus, McDonalds will become more efficient in terms of product.

McDonald’s decision to raise the wages of their employees is noble, but it is likely that this was more of a public relations move rather than a move to give more incentives to their workers. It knew that the wage increase was inevitable, and it needed good press. With that said, it is likely that this development will cause their competitors to also increase their wages.

Changing the NAIRU

T: However, the Fed’s is right to lower the NAIRU since the savings rate in the economy is high, and the economy’s employment numbers are deceptively low.

As the economy continues to recover, the Federal Reserve continues to lower the Natural Accelerating Inflation Rate of Unemployment. Janet Yellen has lowered this rate two times so far from 5.5% to 5.2% to 5%. Many analysts are critical of the Fed’s decision to lower their natural unemployment rate goal. There is fear that the Fed will cause inflation in the recovering economy. However, the Fed’s is right to lower the NAIRU since the savings rate in the economy is high, and the economy’s employment numbers are deceptively low.

As of right now, the savings rate in the economy is very high, so the Fed is able to not worry as much about over stimulating the economy. Recently, in the news, the savings rate has risen drastically in the past year. Bloomberg Business has illustrated this change in the savings rate in the diagram below. When the savings rate is higher, there is less money circulating in the economy. Ever since the recession in 2007, banks have been cautious about lending. When there is less money in the economy, money becomes more valuable compared to goods. For this reason, deflation is more likely than inflation in the current economy, due to a higher savings rate. With the recent rise in the savings rate, the Fed has an additional cushion, before it raises interest rates.

one

 

In addition to the rise of the savings rate, the documented unemployment rate of the economy is much lower than it actually is. Many unemployed Americans have stopped searching for jobs but would still like a job. Furthermore, real wages for Americans have been stagnate at best since the start of the recession. This suggests a plethora of workers that would like to be hired for new jobs. In the February jobs report, the labor force participation rate is at close to a record low of 62.8%. Obviously, the documented unemployment rate is too low compared to the actual unemployment rate. At the same time, the underemployment in the economy still remains relatively high at 12% compared to the historic average as shown in the diagram below by the WSJ. It seems safe to say that the economy still is relatively week, and also, the economy is not close to the NAIRU.

two

While many analysts are raising fears that the Fed should raise interest rates before the economy hits the true NAIRU, these fears seem very precautionary. With the recent increase in the savings rate and the discrepancies in the documented employment rate, the Fed is right to keep lowering this rate.