The General Economics Thread

Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success.

“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”

Indeed, major financial players were so outraged by American’s decision to pay higher wages that they punished airline stocks across the board. American itself took it hardest on the chin, of course, but the consensus among stock analysts was that higher pay at American could signal higher pay at other airlines too, with negative consequences for the overall industry.

JP Morgan’s Jamie Baker was even more scathing than Crissey.

"We are troubled by AAL's wealth transfer of nearly $1 billion to its labor groups,” he wrote, suggesting that the move was not just contestable as a matter of business strategy, but somehow obviously illegitimate.

Baker is certainly correct that for workers to get a larger slice of the pie would be a dramatic new precedent relative to recent trends. As a report last year from the Organization for Economic Cooperation and Development shows, in both the United States and other rich countries workers as a whole have been receiving a smaller and smaller share of national income.

Noah Smith of Bloomberg View recently wrote a column summarizing the various main theories professional economists have about why this is happening — monopoly power, global trade, robots, and landlords are the leading contenders for villain.

It’s less quantifiable, and thus not-beloved by academic economists, but my personal view is that what amounts to a management fad for treating workers poorly is an underrated factor here. The beating American took in the stock market — and the outraged tone of the analyst letters — is a clear sign of the constant pressure that modern companies are under to be as stingy as possible with their workforce.

The Econimst: Higher minimum wages may make bad restaurants close

But do job opportunities vanish, too?

WITH Republicans in charge in Washington, the federal minimum wage is unlikely to alter soon. But debate over the impact of local pay floors is as hot as ever. Little wonder: 18 states and 22 cities and counties raised their minimum wages at the start of 2017, according to the National Employment Law Project, a campaign group. Left-wing activists have for years pushed politicians to guarantee minimum pay of $15 an hour, more than twice the federal minimum of $7.25, which last went up in 2009.

A new working paper by Dara Lee Luca of Mathematica Policy Research and Michael Luca of Harvard Business School looks at the impact of higher minimum wages from a new angle. Traditionally, scholars have focused on whether or not minimum wages reduce employment. But the Lucas asked something else: does it force firms out of business? In particular, they looked at the restaurant industry—about half of minimum-wage workers toil over food—in the San Francisco Bay Area, which contains 15 of the 41 cities and counties that have changed their minimum wages since 2012. Their analysis relies on data from Yelp, a restaurant-review app favoured by millennials.

The Lucas found that a restaurant has, on average, a one-in-250 chance of closing in any given month. Whether or not the odds change when the minimum wage rises seems to depend on the quality of the eatery—or at least, on its Yelp rating. Restaurants with a coveted five-star score are barely affected; but less impressive joints are suddenly more likely to close (see chart). Restaurants with a middling rating are about 14% more likely to shut down when the minimum wage goes up by a dollar. (The authors also show that rating is distinct from price—in other words, a glorious but cheap takeaway has less to worry about than sellers of pricey but tasteless fare).

The result can be spun multiple ways. If those scholars who say that overall restaurant employment is unaffected by higher minimum wages are right, the implication of the new paper is that pay floors somehow force up the quality of restaurants. So long as one minimum-wage worker is much like another, a laid-off waiter will be able to find a new job somewhere serving better grub.

If those scholars are wrong, however, then the new paper supports what sceptics have said all along: that higher minimum wages, by threatening the viability of some firms, dent employment opportunities for the low-skilled. That should be food for thought.

China’s new approach to beating poverty

After decades of success, things are getting harder

MOST of Tian Shuang’s relatives are herding goats in the barren hills of Ningxia province, one of the poorest parts of western China. But last year Mr Tian came down to Minning, a small town in the valley, when the local government, as part of an anti-poverty programme, gave him a job growing mushrooms and ornamental plants in a commercial nursery garden. His name, address and income (20,000 yuan a year, or $2,900—six times the minimum wage) are written on a board by its greenhouse door.

MOST of Tian Shuang’s relatives are herding goats in the barren hills of Ningxia province, one of the poorest parts of western China. But last year Mr Tian came down to Minning, a small town in the valley, when the local government, as part of an anti-poverty programme, gave him a job growing mushrooms and ornamental plants in a commercial nursery garden. His name, address and income (20,000 yuan a year, or $2,900—six times the minimum wage) are written on a board by its greenhouse door.

Mr Tian’s name is also pinned up on the walls of the town hall, along with those of 409 other people in the area who, without help, would be living below the local poverty line of 3,200 yuan a year (this is about 40% above the national minimum, but still not enough to buy meat more than once a week, or to spend on new clothes). The town lists the problems and requirements of each of its poor people. Thirty-seven are poor because of health problems; 77—including some of Mr Tian’s relatives—live in isolated, inhospitable areas; 95 are physically handicapped, and so on. Also listed is the help given by the government to each person, such as the provision of work, a solar generator or a cow.

Minning is a model town. Its poverty-alleviation scheme was set up by Xi Jinping, China’s president, between 1999 and 2002 when he was governor of Fujian, a wealthy province in the south. (Fujian is twinned with Ningxia as part of a national attempt to spread expertise and money from rich to poor areas.) The system that Minning pioneered is now spreading throughout China. It focuses on poor individuals, and on drawing up specific plans for each, rather than merely helping poor places to develop in the hope that wealth will trickle down to the poorest. Other countries are trying this, too, but China is one of the few developing nations with a bureaucracy big enough and bossy enough to do it well.

China has been a hero of the world’s poverty-reduction efforts. It has eradicated poverty in cities (by its definition, at least) and reduced the number of rural people below the official poverty line of 2,300 yuan a year at 2010 prices from 775m in 1980 to 43m in 2016 (see chart). Its aim now is to have no one under the line by 2020.

Two years ago Mr Xi set this as one of the main jobs of his presidency. He calls it “the baseline task for building a moderately prosperous society” (which the Communist Party wants to create by its 100th birthday in 2021). Politically, poverty reduction matters because, as one party member says, unless China solves the problem of income inequality, the party’s legitimacy will be questioned. The party owes its power to a revolt fuelled by the miseries of the countryside. It does not want to be accused of failing to fulfil its mandate to eliminate them.

But the last stage of poverty reduction will be the most difficult. China’s success so far has been based largely on economic growth, which has generated jobs for the able-bodied. The final stage will be costly and complicated because many of the remaining poor are people who, because of physical or mental disabilities, cannot hold down jobs. A recent government survey found that 46% of China’s poor were poor because of their health.

Targeting individuals will help. By 2014 the government had compiled a “poverty-household registry” of every person and household below the poverty line. The following year it said a personalised poverty-alleviation plan must be drawn up for everyone included. The Philippines and Mexico also have such registries—they can help with monitoring the status of the poor, identifying their needs and (in theory) preventing waste and corruption.

There are signs that China’s is indeed improving its main form of poor relief, which is called “subsistence guarantee”, or dibao. The dibao programme has been notoriously inefficient. Many households that qualify for payments do not receive them because of corruption and bureaucratic failings. A survey by the World Bank found that between 2007 and 2009 just 10% of those that did get the dibao had household incomes below the poverty line (ie, 90% did not qualify for the handouts they were getting). The system is also corrupt. In 2015 an official in Henan province was found to have 267 bank deposit books in the names of extremely poor people, from which he had misappropriated 500,000 yuan of welfare payments.

But this may be changing. Poor people are getting more job training, as in Minning. There has been a crackdown on corruption. Ben Westmore of the OECD, a club mostly of rich countries, recently trawled through household data from five provinces collected by researchers at Peking University. He found that in 2014 about a third of rural households receiving dibao paymentswere below the poverty line—not good, but better than 10%. In Guangdong province in the south, an early starter in its focus on individual needs, more than half of recipients were below the line.

Still, there is a long way to go: most poor households still do not get dibao money. In the sample studied by Mr Westmore, three-quarters of them did not. It hardly helps that the poverty registry and dibao data are kept by different government departments; the two are not linked.

The dibao programme, though financed largely by the national government, is administered locally. This means local areas may set their own poverty lines and benefits. Some thresholds are far below the national minimum, and payments are barely enough to live on. Total dibao spending peaked in 2013 and has been falling since then—partly because governments are getting stingier. China spends a mere 0.2% of GDP on the dibao system, far below comparable programmes elsewhere. Indonesia’s poverty relief costs 0.5% of GDP.

Worse, some poor people are not even included in the registry. In a village of 100 poor households in Shanxi province, only ten families are in it—friends of the party boss. If the registry is flawed, poverty relief is all the more likely to be flawed too.

All these efforts are aimed only at extreme poverty in the countryside. The government claims the urban kind does not exist, ie, that no one in cities has less than 2,300 yuan a year. But that minimum is too low for cities, where living costs are higher. Using more realistic thresholds, Mr Westmore found that urban poverty was actually higher than rural poverty in four of the five provinces covered by the data he used.

At current rates of reduction (more than 10m fewer people annually in extreme poverty), Mr Xi should be able meet his target by 2020. It will be hailed as a great achievement. But huge government effort will still be needed to help the worse-off. It will not be the end of poverty in China.