Coyote Blog

Kevin Drum, in commenting on a Binyamin Appelbaum article in the NY Times, writes that the Presidential candidates should be talking more about poverty in part because the US is way behind Europe.  Specifically, Appelbaum quotes a Harvard Sociology (!) Professor as the source for the poverty claim:

“We don’t have a full-voiced condemnation of the level or extent of poverty in America today,” said Matthew Desmond, a Harvard professor of sociology. “We aren’t having in our presidential debate right now a
serious conversation about the fact that we are the richest democracy in the world, with the most poverty. It should be at the very top of the agenda.”

Drum argues that Desmond is right, because of this chart from the OECD:

One of the dirty secrets about poverty measurement is that the actual measurement seldom has anything to do with absolute well-being.  And this is the case with the OECD numbers.  The OECD's poverty measurement is based on the country's median income, and is the percentage of people who are below a certain percentage (generally 50%) of the country's own median income.  As such, this is more rightly thought of as a graph of income inequality rather than absolute poverty.

Here is an example.   Image country A with a median income of $50,000 and an income of the 20th percentile at $20,000.  Now imagine country B where the median income is $30,000 and the 20th percentile income is $15,000.  In this example, the poorest 20th percentile in country A are better off on an absolute basis, but the OECD (and most other poverty numbers) will show country B doing better because the poor are closer to the (much lower) median income.  In an extreme example, if everyone in a country were equally impoverished, the OECD would show that country as doing the best on poverty -- Yes, you read that right.  By this metric, the OECD would show a country where every person made just $10,000 a year as having 0% poverty.

Obviously, what one would really like to do is compare across nations the absolute well-being of the lowest 10th or 20th percentile.  On a purchasing power parity basis, which country's poor has, after transfers and taxes, more money?  Unfortunately, you likely have never ever seen this.  Yes, the data comparison is hard, but it is possible, so one has to wonder if there is some ulterior political motive for never showing this quite obvious analysis.

I tried to do this analysis myself for years (I describe some false starts here) but was unsuccessful until I actually identified a data source that would work, ironically from two folks on the Left (Kevin Drum and John Cassidy) who were using data from the LIS Cross-National Data Center to make comparisons of income inequality.  It turned out the data they were using could do what I wanted.

So now we get to the chart I call the poverty Rorschach test.  It is a comparison of the absolute income, by income percentile and including transfers and taxes, of the US vs. Denmark (the country by Drum's chart that should be the "best" on poverty)

(The date is old, alas, because this kind of cross-country data is only gathered every so often)

This chart shows, on a purchasing power parity basis, that for every single income percentile, all the way to the bottom, an equivalent person in the US has more income than that a similarly situated person in Denmark.  In short, the poor in the US are wealthier than the poor in Denmark.  The only reason Denmark does better than the US in the way the OECD and others measure poverty is that the middle class in the US are a LOT wealthier than the middle class in Denmark.

I call it the Rorschach test because one either sees the US doing a good job, because everyone is better off, or the Danish doing a better job, because everyone is more even.  Proponents of the latter view tend to believe that the size of the economic pie is an exogenous variable, unrelated to the method one chooses to slice it.

I picked the Danish because they were the obvious comparison from Drum's chart, but here is the US vs. all the European countries for which there was data in the survey.  The US is better than all but 3 at the 10th percentile and better than all but one country at the 20th percentile.  And better -- by a huge margin-- for the middle class than any of the countries in Europe.

Update:  One more note on Drum's chart.  As I said above, the exact definition of the OECD numbers is percentage of people with income less than 50% of the country's own median income.  The US has a median household income, per the OECD, 41% higher than Denmark's.   So the US has 9% more people under a number that is 41% higher.   That is hardly a fair or meaningful comparison.

For reasons that are beyond my understanding, I am banned at Mother Jones so I cannot post the comments directly to his article.  If someone wanted to cut and paste this under his or her own name, I wouldn't complain.

Brink Lindsey of Cato is on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?"  I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic.  Here is my (uninvited) contribution.

The question of skills and the American workforce is typically tackled in only one direction:  that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology.  A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern.  As Eduardo Porter writes in the Times:

To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.

The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....

“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”

A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them.  School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system).   But a large portion of the population apparently does not take advantage of the educational opportunities that do exist.  Why is that?

When one says "job skills," people often think of things like programming machine tools or writing Java code.  But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned.  Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's.  In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.

Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations.   Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all.  But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work.   The experience gained from unskilled work is a bridge to future success, both in this generation and the next.

But this road to success breaks down without that initial unskilled job.   Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work.  And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.

Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job.  As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills.  I am not an economist, I am a business school grad.   We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present.  So a question we business folks might ask instead is:  If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?

A few months back, I was at my Harvard Business School 25th reunion.  Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school.  I can't remember a single new business model discussed that relied on unskilled workers.

Is this just the way it is now?  Have the Internet and computers and robotics and complex genomics made unskilled work obsolete?  I don't think so.  I have been running a business for over a decade that employs more than 300 people in unskilled positions.  I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees."  But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor.  And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.

The reason for my despair comes from a single source:  the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.

The costs that government taxes and rules add to labor have been discussed many times, but usually individually.  Their impact is clearer when we discuss them as a whole.  Let's take California, because that state is one I know well.  To begin, the minimum wage is $9 (going to $10 an hour in 2016).  To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims.  For us, these add another $3.15 an hour.  We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour.  And the new California paid sick leave mandate adds another 45 cents an hour.  So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees.  We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed.  We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety.  In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff.  In fact, we tend to have little staff at all.  If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution.  In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year.  I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time.  And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours.  And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs.  But come on!  How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees?  But that is the reality of trying to run a service business today.  The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues.  But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work.  I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us.  We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues.  Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories).  So what changed around 2010?  Well, our work force composition changed a lot.  Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security).   However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company.  Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate.    But all eight of these legal actions were by these new, younger employees.  I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it.  They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law.   The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day.  They said they would sign a paper saying they had agreed to this.  Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I.  What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties.  The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of).  Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills.  This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern.   I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits.  That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed.  As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees.  If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success.  If the government continues on its current course, it will become impossible to run a business that employs unskilled workers.  The value of the work performed will simply not justify the cost.  We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

I thought it was kind of interesting that upon reading this McKinsey & Co study (currently the top one in the list) on education, Kevin Drum and a number of other left 'o center blogs pulled out this one chart to highlight.  It shows starting teacher pay  (i.e. out of college) as a percent of the economy's average)

The author's of the study argue that the countries higher on this list also have better student results.  Now, I will confess that this is a pretty interesting finding in the study -- that starting teacher pay is more important than teacher pay in later years, because the key is to attract talented people right out of college away from other professions.  Interesting. 

But here is the quite fascinating selection bias by the lefty blogs:  I have read the whole report, and this is absolutely the only chart in the whole study that in any way, shape, or form might be interpreted as a call for higher government education spending.  Even more interesting is what these bloggers left out.  This is the other half of the starting teacher pay analysis Drum et. al. chose note to include, and makes clear that even this chart is not a call for more total spending:

South Korea and Singapore employ fewer teachers than other systems; in effect, this ensures that they can spend more money on each teacher at an equivalent funding level.  Both countries recognize that while class size has relatively little impact on the quality of student outcomes (see above), teacher quality does.  South Korea's student-to-teacher ration is 30:1, compared to an OECD average of 17.1, enabling it in effect to double teacher salaries while maintaining the same overall funding level as other OECD countries....

Singapore has pursued a similar strategy but has also front-loaded compensation.  THis combination allows it to spend less on primary education than almost any other OECD and yet still be able to attract strong candidates into the teaching profession.  In addition, because Singapore and South Korea need fewer teachers,  they are also in a position to be more selective about who becomes a teacher.  This, in turn, increases the status of teaching, making the profession even more attractive.

Whoops!  Don't want our friends at the NEA to see that!  Most of the study turns on McKinsey's finding that teacher quality drives student results, way ahead of any other factor, from class size to socioeconomic background:

Well, now the NEA might be getting really nervous.  Something like this might cause parents to do something rash, like demand that low-performing teachers get fired.  Gasp.

Anyway, to get back to the cherry-picking and selection bias issue, the study is pretty clear that it thinks that "more spending" is a failed strategy for improving public education

If school choice is off the table, then I would be very supportive of a program to increase starting teacher pay, funded by larger class sizes and substantial reductions in useless administrators and assistant principals.  Anyway, it is kind of an interesting study, though you may find the pdf file format really irritating to try to read.  Lots of funny formatting.