Biggest Metros Spawning Greatest Inequality. NewsWire

NEWSWIRE: 1/21/20

• Since 1980, wage inequality in the U.S. has widened to new extremes in the largest and highest-income metro areas. The rising inequality is mostly the result of the same forces that are driving economic growth in those areas—an influx of high-skilled, high-paying jobs. (The New York Times)
• NH: Care to talk about growing wage inequality? New academic research spotlights something curious about how this trend is playing out in our cities. Forty years ago, wage inequality in cities was lower overall than it is today and was uncorrelated with city size. Today, wage inequality is not only higher, but also most of the rise has occurred in the largest cities. So today wage inequality is greatly correlated with city size. See the first two charts below.
• Large MSAs like New York, Houston, San Jose, San Francisco, and Washington, DC, once had the same wage inequality as smaller cities. Today, their inequality is much higher than that of other cities. Btw, Stamford, CT--where Hedgeye Risk Management happens to be headquartered--is clearly an outlier: It has the highest inequality score (out of 195 MSAs) both in 1980 and in 2015. That's what happens when you juxtapose a very impoverished urban core with very affluent suburbs full of financial professionals.
• Urban inequality is a topic with many layers worth examining.
• Let's start with some level setting. Growing wage inequality is one contributor to a more general trend of growing total income inequality. For the top so-called "one percent," the return on assets--not wages--is the key driver of total income inequality. And because the top one percent has so much asset income, it is a significant driver of rising overall national inequality using a measure like a gini coefficient. Rising capital income inequality is something that the Paris-Berkeley axis of left-leaning economists (like Thomas Picketty and Gabriel Zucman) like to write about. One big problem in any discussion of asset income is that it is very hard to measure accurately. This is why the Picketty-Zucman argument has become so mired in controversy. Most economists agree than capital-income inequality has gone up over time, but there's lots of disagreement about just how much.
• Once you broaden your view to look at the top 10% or 20% of all Americans, however, wage inequality is the key determinant of total income inequality. And yes, wage inequality too has been rising. See the third chart and fourth charts below. From 1980 to 2015, the real wage for the 25th percentile worker grew by 25%. For the 75th, it grew by 40%. For the 90th, by 60%. For the 95th, by nearly 80%. Unlike capital income, we're pretty certain about the magnitude of wage trends.
• OK, now let's look again at wage inequality in cities. (See the fifth chart.) What we see is that inequality has risen fastest in the largest cities not because low-wage earners experienced slower real growth than in small cities, but mostly because high-wage earners experienced faster real growth. In other words, big cities are not immiserating their low-wage workers. Rather, they are enriching their high-wage workers. From 1940 to 1980, city differences in worker wage growth at all skill levels tended to regress to mean--and this kept wage inequality in one city pretty much in line with any other. But from 1980 to 2015, while city differences in noncollege wage growth continued to regress toward the mean (keeping low-skill wages in line across cities), city differences in college wages started to diverge. In other words, cities in which college workers were paid more rose faster. These, it turns out, tended to be the largest cities or MSAs. See the sixth and seventh chart.
• Growing inequality in big cities may therefore be interpreted as simply a sign of their success. In recent decades, for some reason, big cities have led to enhanced productivity and earnings among high-skilled workers. What might this reason? Economists have enumerated several "agglomeration" scale advantages that big cities may possess. These include knowledge spillovers (knowledge workers become more productive when working near each other); thick product markets (specialized firms knowing their customers will find them all in the same place); and thick labor markets (specialized workers knowing their employers will find them all in the same place). Many see innovation becoming increasingly specialized by place. In computer science, for example, the top 10 global cities account for 70% of patents. In semiconductors, the global top 10 account for 79%. In biology and chemistry, it's 59%.
• Accordingly, the luckiest big cities have recently been dubbed "superstar" cities or "winner-take-all" cities. They aren't just paying their skilled workers more. They are paying their asset-owners more. They are home to "superstar" firms that claim a rising share of all S&P profits and of national GDP. (See the seventh, eighth, and ninth charts.) What's more, as the earlier reference to "global" suggests, this isn't just an American phenomenon. The rise of superstar cities (home to superstar firms with superior productivity growth rates) is a worldwide phenomenon. McKinsey identifies fifty global superstar cities (from Shenzhen and Mumbai to Lagos and Frankfurt), whose GDP per capita ($42,000) is roughly twice the global urban average. (See the last chart.)
• Viewed from this "neoliberal" perspective, rising big-city inequality may be a problem with no easy solution. Everybody wants faster productivity growth, and nobody wants a Dickensian divide between haves and have-nots. But if you can't have one without the other, you may be left with no good policy option--either for reducing the inequality within big cities or for reversing the growing economic gap between densely and sparsely populated communities. Millennials are unusually attracted to bustling urban hubs in part because they have come to identify them with upscale job opportunities.
• There are two alternative schools of thought. One agrees that yes the rise of the supercity is predicated on the rise of the superfirm. But, it argues, superfirms arise less from the competitive productivity advantage they posses than from their growing market share and their growing pricing power due to regulatory favors, inadequate antitrust enforcement, or infinite economies of scale. Solve these problems at the firm level, they say, and you may solve the inequality problem at the city level. One symptom of superstar firm advantage accruing to growing market share would be a decline in inter-firm competition and business dynamism. There's plenty of evidence that we are seeing such a decline. (See my presentation, "Declining Business Dynamism: A Visual Guide.")
• Another, even darker school of thought argues that, no matter what is causing the rise of supercities, this path-dependent process could become self-reinforcing over time, leading eventually to an Elyisum-like dystopia. The spread of assortative mating (skilled with skilled) with both spouses working plus higher regulatory, tax, and (especially) living-cost barriers to low-skill immigrants could lead to an ever-rising sorting out of skilled (within the city) from nonskilled (without). As I pointed out in a recent note ("America's Steep and Troubling Decline in Geographic Mobility"), declining mobility in America has been specifically linked to land-use regulation and higher housing costs that prevent low-income workers from moving into affluent cities. Thus, for the first time in over a century in America, net internal migration is actually moving out of more affluent states and into less affluent states.
• I think all these arguments have some merit. Yes, there may be some genuine agglomeration scale advantages that accrue to big cities. But why now, for the first time, is this giving big cities such a decided advantage? Some say it's the digital economy. But how inevitable was that? Fifteen years ago, I recall, the wisest seers were making exactly the opposite prediction--that the rise of the Internet would lead to a geographic dispersal of the creative class since "anyone will be able to work from anywhere." Clearly, it didn't turn out that way.

 

• Between 2008 and 2018, alcohol consumption per capita in Russia fell by half. Under Putin, the country has worked hard to shed its heavy-drinking reputation, which has coincided with a rise in life expectancy to an all-time high. (Financial Times)
• NH: Who can forget the moment, back in the early Clinton years, when drunk Russian president Boris Yeltsin, visiting Washington, DC, stumbled out onto Pennsylvania Avenue and passed out in his underwear? Over the decades Russia has acquired the image of a nation of alcoholics, addicted to vodka and (when that wasn't available) to antifreeze.
• At last, that image may be changing. According to the WHO, per-capita alcohol consumption in Russia dropped from 18 liters in 2008 to 9 liters in 2018. This dramatic 50% decline is no accident. It's the result of a deliberate government campaign. New laws have prohibited alcohol sales after 11 pm, changed the drinking age to 21, added higher taxes on booze, and banned alcohol sales at sporting events.
• Russians on average are still drinking 9 liters of pure alcohol a year, which is significantly higher than the world average of 6.4 liters a year. But this average hides a steep generational decline. While older Russians continue to be (relatively) hard drinkers, Russian Millennials today actually consume alcohol at lower rates than Western European Millennials.
• Spearheading the campaign is President Vladimir Putin himself. During his leadership years, Putin has crusaded to clean up the image of the unhealthy Russian and ditch the dissipated lifestyle popularized by Yeltsin during the chaotic early post-Soviet years. He has had similar success in hugely reducing smoking in Russia. See “What in the World Are Millennials Smoking” and “How (and Where) to Bet on Big Tobacco."
• As a result, the age-adjusted mortality rate is falling (that is, life expectancy is rising) at the same time that fertility rates are rising. Russia's population is still shrinking (see "Russia's Demographics are Anomalous" and "Russia Enters Negative Population Growth Territory"), but it is no longer gripped in the demographic death spiral that it seemed to have entered in the 1990s. If these behavioral improvements in mortality and fertility can be sustained, Russia may yet have a demographic future.

• In an effort to combat population decline, rural bureaucrats in Japan are running their own matchmaking services. Local residents don’t just find it hard to meet new people; they’re also facing a gender imbalance, with more single men in rural areas and more single women in cities. (The Economist)
• NH: Alternatively, how ya gonna keep 'em down on the farm?
• Rural prefects in Japan suffer from youth flight to the big cities and thus depopulation. (See "Due to Depopulation Nearly Half of Cities in Japan Are Disappearing.") Meanwhile, in the cities, young women are choosing to delay or even do without marriage. (See "Japanese Women Are Not Rushing to the Altar.") The gist of the article is that the Japanese government wants to solve both problems with one solution. It is helping rural towns create dating apps to bring city dwellers to their hamlets to find love and settle down. The goal: More babies for Japan and more residents for shrinking rural backwaters.
• Alas, these bureaucrats may be misconstruing the problem. They assume that young Japanese urban dwellers really want to get married but just can't find anyone. The evidence suggests, on the contrary, that while some of these young women may be looking for romance, few of them are looking for marriage. And, in particular, they aren't looking for a strict Confucian marriage in which wives devote the entirety of their lives to their husband, their children, and their in-laws--which is exactly what is still prized in rural Japan. Why do you think so many of these women left the rural prefectures in which they were raised and moved to Tokyo or Osaka or Yokohama in the first place?
• It's a daring idea. Call me skeptical, but I'm open to being surprised. When it comes to knowing what women want, I can certainly get it wrong.
• A recent article explores what it’s like to live in St. Marys, a growing Catholic community in Kansas that lives strictly by traditional Catholic values. These kinds of insular communities are not new, but they’re taking on new resonance in today’s fractured political climate. (The Atlantic)
• NH: Welcome to St. Marys: a small but growing town about half an hour outside of Topeka. Over the past four decades, St. Marys has become a refuge for followers of SSPX, an order of priests who see themselves as defenders of traditional Roman Catholicism. Here, residents are happy to live alongside like-minded neighbors: sharing child-rearing duties, sending their kids to sex-segregated schools, and getting time off from work to attend Mass.
• At first glance, this place comes across as an outlier. After all, it’s an insular group that has purposely separated itself from mainstream society. But in a way, St. Marys isn’t separating from mainstream society so much as reflecting it. Choosing to live there is not all that different from die-hard leftists settling down in Berkeley, recent immigrants clustering in tight-knit neighborhoods, or online surfers following only people they agree with on Facebook. Whether it’s where you live, who you follow, what you watch, or what you buy (see: “Shopping Along the Partisan Divide”), we are increasingly sorting into ever-smaller communities that reflect our values and splintering off into our own universes.
• St. Marys might consider itself out of step with modern America. But as our shared public culture gradually weakens, this town is really participating in the same trend gripping most of America today: finding your own community and going your own way.
• Recent research offers an explanation for weak wage growth: Workers post-financial crisis are more reluctant to switch jobs. Though unemployment rates are low, job-switching rates in the U.S. are still lower than they were in the early 2000s, which economists attribute to a sense of caution among workers, as well as population aging and increased regulation. (The Wall Street Journal)
• NH: This is a deep piece that addresses a serious and often-asked question: If the unemployment rate is so low and labor-markets are so tight, why have average wages failed to accelerate--as per the traditional Phillips-Curve logic? One revealing clue: Rates of job-switching (or "job churn") remain historically low. This is important because it is through job changes that workers ordinarily experience the biggest wage gains and also contribute the most to rising productivity.
• The challenge is to figure out what's causing low job churn. One type of explanation focuses on the changing motivations and outlook of workers--e.g., that workers today are more "cautious" after the Great Recession (the WSJ's main explanation) or that the rising generation of Millennials is more risk averse in general.
• A second type of explanation focuses on broad structural constraints that deter job-switching among workers who want to switch. These include employer-benefit "job lock" (especially the fear of losing health insurance); rising regulatory barriers to changing careers (roughly 25% of all jobs now require a government license); and geographic barriers to mobility (such as unaffordable housing costs in the highest-paying urban centers). They could also include a growing tendency among large firms to stress an insular corporate culture and hire only "from within" (see "Keeping It In the Business").
• Yet a third type of explanation focuses on labor-market monopsony--which is of growing interest to economists studying declining business dynamism (see "Declining Business Dynamism: A Visual Guide"). According to this logic, as product markets become more concentrated, so too do labor markets. Concentrated product markets means there are only a few dominant product sellers. They allow firms to raise profit margins by raising prices. Concentrated labor markets means there are only a few dominant employers. They allow firms to raise profit margins by lowering wages--something that is also made easier over time as unions weaken and as the federal minimum wage falls relative to the average wage.
• Big-employer monopsony, clearly, does not cause workers to stop switching jobs. A lower wage will always incentivize workers to quit and look elsewhere. Less job-switching may, however, reflect the ability of big firms to hold wages down in those regions and in those professions where workers only have one or two employers to choose from. The spread of non-poaching agreements among big-tech firms (successfully challenged by the Justice Department) and non-compete agreements among low-skilled franchise employees (these agreements now cover nearly 20% of all private-sector employees) suggests that many employers do actively look for ways to suppress turnover.
• If monopsony were a driver of lower job churn, what would we expect to happen? Well, we would expect more workers to want to work in dense urban cores where labor markets are more competitive. And we would expect more workers to seek out piece-work gigs in markets where they can bid their services to any buyer worldwide. Well, that's exactly what we're seeing. The problem with urban cores is that many cannot afford (or do not want) to live there. And the problem with piece-work on the Internet is that you are expanding not just the number of labor-buyers but also the number of labor-sellers. So if you're paying rent to live in Santa Barbara, you are competing with someone who is paying rent to live in Karachi. Good luck with that.
• Around a quarter of American workers have a nontraditional work arrangement with multiple income sources, according to a new survey. Over the past decade, the gig economy has grown steadily, with about half (48%) of gig workers opting for these arrangements out of preference rather than necessity. (The New York Times)
• NH: The author, Jonathan Rothwell, is the principal economist at Gallup, which has focused heavily in recent years on workplace quality. I agree with his basic quantitative finding, which comes out in favor of IRS and GAO data showing that gig work is larger and rising in prevalence--as opposed to BLS data showing that it is smaller and declining. (See "The Gig Economy is Large and Growing.")
• Looking at the data, I also strongly suspect that the gig economy is aging over time as Boomers and Xers, accustomed to the idea of gig work, shift into older age brackets. Millennials, more than their parents' generations, are familiar with the downside of gig work. As they mature, they are likely to seek out more permanent alternatives. Gen-Xers may thus grow older as a uniquely high "gig" generation.
• While Millennials today are the most likely to hold a gig job (see "Anatomy of a Gig Worker"), the job is typically a "side hustle." Gen-Xers are by far the most likely to rely on gig work as their sole source of household income (see "Xers Rely on Gig Work Income.") And apparently these gig-work Gen-Xers are least satisfied with their work life or their career prospects. (See "What's Making Xer Workers Miserable?") Gallup, in its public document on work satisfaction, does not discuss how its gig work findings break down by age.
• Overall, interestingly, Gallup finds that workers who are self-employed and work at one job are more satisfied with their job than any other type of worker. According to Gallup's own figures, these constitute just 5% of all workers (21% of all self-employed workers). The next-most satisfied are workers with only one employer and no self-employment. These constitute 67% of all workers. Everyone else falls into a less satisfied zone--workers with more than one employer; workers who have both an employer and self-employment (the so-called side-hustle); and self-employed workers who work at many jobs.
• Altogether, there appears to be a lot of variance--from best to worst--among gig-work situations. Most Millennials, I suspect, would be glad to settle in as one of the 67% of all workers who are happy and engaged enough with their one employer that they do not feel driven to seek out more.

• According to WSJ columnist Andy Kessler, China’s ambitions of becoming a global superpower are likely to be thwarted by the country’s demographics. Retirees are expected to make up 21% of the population by 2040, and productivity growth isn’t going to be able to keep up. (The Wall Street Journal)
• NH: If you want to read a declinist view of China's demographic future, this is it. The facts cited by Kessler are mostly correct. Yes, the growth in the working-age population in China has stopped and is now going gradually into reverse gear. More importantly--a fact left unmentioned by Kessler--China has run out of excess rural laborers who used to earn next to nothing on farms and who can migrate to the eastern cities and create $30,000 annually in value-added as factory workers. This migration has added fabulously to China's productivity and GDP growth over the last thirty years. But now it's over. China has reached its "Lewis Point," a difficult headwind for any rapidly developing economy.
• It's also true, yes, that the aging of China's massive "Red Guard Generation" will put a much-larger strain on China's working age population than Boomers will in the United States. This is because China experienced a much larger drop in per-cohort births since the early 1970s. On the other hand, most Chinese workers understand that they have to save for themselves (or fall back on their families) to be able to retire. The pay-as-you-go promise offered by the government is much weaker than it is in America--to say nothing of Europe. The Chinese ruling elite may just allow the indigent Red-Guarders, especially their rootless migrant underclass, to fend for themselves.
• Lots of savings with little demographic growth should lead to a lower equilibrium real interest rate or "r-star." (See my presentation "Demography, Economic Growth, & Long-Term Real Interest Rates.") That is, unless China's industrial policies succeeds in unlocking whole new productivity frontiers. But the historical track record for such policies is poor.

• Chinese tech giant Tencent has purchased a 10% stake in Universal Music Group for $3.4 billion. The company, which has stakes in many corners of the entertainment industry, is looking to get a leg up in streaming music and profit from the increasingly valuable music licenses that Universal owns. (The Economist)
• NH: This is an interesting move from Tencent, which is probably best known in the Western entertainment world for its involvement in video games. Music isn’t new territory for them: They own China’s biggest music company, Tencent Music Entertainment, and operate several popular Chinese music streaming apps. But they’ve been missing a piece of the puzzle that’s become crucial to the music industry’s success in the streaming era: intellectual property from global superstars. Now that streaming is basically the lifeblood of the industry, Universal’s catalog--which includes artists like Lady Gaga, Taylor Swift, U2, and The Beatles--is more valuable than ever. This deal means that Tencent gets more access to American artists, and can profit from both the talent putting out the music and the listeners consuming it. It’s a win-win.
• How times have changed. Who would’ve thought back in 2014 that diversifying into the music business would ever again be seen as a good idea?

DID YOU KNOW?

Please Don’t Take My Phone Away. Coffee lovers get antsy when they don’t get their caffeine. Heavy drinkers go through withdrawal when they stop consuming alcohol. And according to The Wall Street Journal, teens are experiencing a similar kind of separation anxiety, but it’s when they’re away from…their phones? Schools around the country have banned smartphones during class, but they’ve found that taking away the phones entirely introduced another problem: withdrawal pangs. Now teachers are trying other strategies that still keep students’ phones inaccessible but within sight. Some let students hold their phones in locked pouches. Others set up charging stations where the devices are kept during class. Then there are those who have opted for rewards instead of punishment: The app Pocket Points lets teachers reward students for not touching their phones, with prizes ranging from extra credit to free snacks. At New York’s DREAM Charter High School, students with enough “good behavior” points get to hold on to their phone instead of putting it in a pouch.