unions

Income and Education

In the last thirty years in the US, the number of college-educated people living in poverty has doubled from 3% to 6%, which is bad! And then consider that during the same period of time, the number of people living in poverty with a high school degree has risen from 6% to a whopping 22%.

Crash Course jumps from discussing the causes of income inequality (see part 1) to the statistical results. I assume this is to imply that technology is widening the income gap so fast that even college graduates are living in poverty.

These numbers are designed to be shocking, and they are. Aren’t schools supposed to give students skills to be successful in real life? And shouldn’t colleges do this to a greater extent, considering students are spending tens of thousands of dollars on it?

If you’ve been to college (or high school for that matter) in the past 10 years, you already know the answer to this: High Schools and Colleges, with some exceptions, are not teaching students the skills they need to survive in the modern economy. Crash Course implicitly blames the number of high school and college graduates in poverty on technology (and other causes they cite which we’ll also get to), while there is no responsibility placed on the failings of these educational institutions.

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Over the last fifty years, the salary of college graduates has continued to grow while, after adjusting for inflation, high school graduates’ incomes have actually dropped. It’s a good reason to stay in school!

Crash Course’s argument here implies that going to college will give you steady salary growth because college classes give you the skills to get a higher paying job.

This (again with some exceptions) is not necessarily true. High-paying employers might discriminate against those who haven’t graduated from college, which would also explain the statistics. Many employers see a college degree one of the few ways to judge a candidates ability, since they often shy away from real skills-testing for job applicant since it might be considered an illegal form of discrimination.

This is not to say that someone couldn’t learn marketable skills in college. There are many areas (engineering and computer science come to mind) which actually give students the skills they need for the job market. It’s no surprise that these majors are also the highest paying for college graduates. But the majority of college students do not choose these skills-based majors.

Other Causes of the Income Gap

There are other reasons the income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and the fact that somehow it’s okay for CEOs to make salaries many, many times greater than those of their employees.

Let’s look at each of these in turn:

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Unions, by themselves, are collective bargaining groups for employees that generally demand higher wages from the employer. Originally, they served as a centralized mouthpiece for a large group of workers whose individual voices might not be heard. Their greatest power is the threat of striking if their needs are not met.

In economic theory, unions would help the employer and employees identify the market rate (what the employer is willing to pay and the employees are willing to work for), but it wouldn’t necessarily reduce income inequality. Let me give you two simplified examples:

In scenario 1 there is a company with 10 employees and 1 employer. Employees demand a $1/hour raise or they will strike, and the employer obliges, taking the money from either his own salary (which is rare) or from investor equity. The workers are paid more and there is less income inequality between the employees and employer.

In scenario 2, the workers demand $5/hour more. The company cannot afford this price and remain profitable, so they invest in machinery that will reduce the number of employees needed to 3. The remaining employees might get that $5/hour raise, or the employer might look outside of the union for employees, since it’s now easier to fill the fewer positions available. In scenario two, 7 or more employees are now being paid $0/hour, which widens the income gap.

Unions today, due to abundant legislation related to them, are not the unions of economic theory, and they if they were, they do not necessarily narrow income inequality. Although people might show you a graph of union membership next to a graph of income inequality, one can only speculate that this correlation equals causation.

Tax Policies That Favor the Wealthy

As Mr. Clifford points out later in the video, the United States has a progressive tax system, meaning that the rich pay a greater share of their income above a certain level to taxes. Occasionally, the rich may receive a tax cut. For example, the Bush Tax Cuts lowered the taxes on income over 400k from 39.6% to 35%. In this case, Mr. Clifford is 100% correct, since higher taxes on the rich (absent everything else) does reduce income inequality as a whole.

“Somehow It’s Okay for CEOs to Make a Lot More Money Than Employees”

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How about the framing of this sentence? It may not seem “okay” for someone to make more money than someone else, but as economists, the Crash Course hosts should know that wages are not decided by comparing them to other people in the company. We’ve talked about this before on this blog, but wages are decided by the amount of value you produce to the company (as a wage ceiling), as well as how much the employer (in this case the board of directors) and the prospective CEO negotiate for.

I am incredibly surprised that Crash Course implicitly argues that it’s not okay for two people to negotiate a salary irrespective of two other people negotiating a salary for a completely different position in the same company. How did this script make it passed the editors on Crash Course? Isn’t someone there an economist?

I think Mr. Clifford gets it, since later in the video he says:

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When different jobs have different incomes, people have incentive to become a doctor or an entrepreneur or a YouTube star – you know, the jobs society really values.

This doesn’t really talk about how wages are determined, but I’ll take it.

Wow guys. There is still a lot more to say, so we’re going to have to make this a three-parter. Thanks for reading and look forward to part three soon (Sunday hopefully)!

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Crash Course came out in Episode 15 to talk about International Trade. Maybe this is a reaction to some political candidates talking about the Chinese trade deficit. Regardless of the motive, this episode was economically sound in content, while the tone may not have been along the same lines.

This Episode’s Major Principle

Imagine that I have a choice of buying an American made TV or a TV made in Malaysia. Because of lower labor costs in Malaysia the imported TV cost $200 less than the American made one. So I buy the imported TV. That may cost jobs at a TV factory in the US but I saved $200 by buying the imported TV.

And what am I gonna do with those $200? I’m gonna spend them on something I couldn’t have afforded if I bought the US TV. Like maybe taking my family out to a baseball game or to a restaurant. That creates jobs in those industries that wouldn’t have existed if I’d bought the more expensive TV.

Remember Episode 2, on comparative advantage? Crash Course has already explained that international trade between two countries helps both countries, even if one is poorer or less productive.

More importantly, international trade doesn’t only help the businesses who are trading, but it helps consumers who are able to save more with each purchase. That money saved can either go to spending on other goods (creating jobs in those areas) or in the bank (which gets lent out to growing businesses).

But in the same breath of mentioning how international trade helps everyone involved (including consumers), Crash Course goes a little off the rails:

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Economic Theory suggests that international trade shuffles jobs from one sector of the economy to another, like from the TV factory to the restaurant. But the quality of these jobs can be markedly different. The guy assembling TVs at the US factory was probably making a lot more at his manufacturing job before he got reshuffled to the burrito assembly line at Chipotle.

As technology improves and consumer demands shift, employees will have to move from certain sectors of the economy to others. But Crash Course does some injustice to the former factory employee. Why would this employee get a job at Chipotle? Because assembling a burrito is like assembling a TV?

If domestic manufacturing shrinks, another sector is likely to grow. And as the factory employee takes a new job somewhere else, his skills and work product will likely determine his pay.

Trade does not just shuffle jobs from one sector to another; it moves jobs from less productive areas of the economy to more productive areas of the economy. If Malaysia is better at producing TVs for a cheaper price (assuming both countries’ TVs are the same in quality), then it’s better to have American employees working in areas that can compete internationally, instead of making TVs that will be no one will buy because it’s too expensive.

What Crash Course did not explain is what happens when protectionist policies prevent international trade (this is sometimes referred to as Mercantilism). For example, let’s say the US government imposes taxes and fees that make the price of Malaysian TVs higher than US TVs. It will keep that factory employee at the manufacturing plant, but everyone else in the economy will be worse off, as they have to pay more of their paycheck for their TV.

NAFTA

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NAFTA is a polarizing political issue, and depending on which camp you’re most affiliated with, you will regard the agreement as either a huge success and a catastrophic failure. For example, Democrat Party loyalists or Bill Clinton supporters will call it success, since it happened under his presidency. Labor Unions hate it, since it removed trade barriers that kept some American producers afloat (like the TV example explained above). Libertarians and free marketeers are a mix about it, for reasons I will explain.

Like the TPP agreement currently in the works, NAFTA was heavily influenced by corporate interests, and parts of the agreement were tailored specifically to benefit these companies. NAFTA was a free market international agreement, but not for all goods across the board, just the ones outlined in the legislation. NAFTA was a move toward freer markets, but it was orchestrated in a way that reeked of cronyism.

Thus, politicians and pundits alike had to choose sides: Do I support the Democratic Party more than I support Labor Unions? Do I support free markets more than I oppose crony legislation?

Crash Course comes down in favor of NAFTA, as they should if they were looking purely at economic benefits:

So despite the fact that some workers and industries were clearly hurt, economists would tell us NAFTA has had a net positive impact on all three countries.

Are Trade Deficits Bad?

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Crash Course doesn’t clearly explain how they stand on trade deficits, but you can infer from the end of video that although they agree they make everyone better off, they sympathize (possibly more so) with those who are negatively affected by international trade:

In purely economic terms trade deficits and surpluses are the result of people and nations seeking their own self-interests. But while everyone is acting in the self-interested way, international trade doesn’t always meet our individual interests. What might be good for the wider global economy, might be really bad for me or my hometown. But in the aggregate, trade does improve the global standard of living. It’s just sometimes hard to see up close.

As I mentioned before, the alternative to international trade makes everyone worse off. While it’s easier to witness the negative effects of international trade (since people are laid off), it would be much worse if domestic businesses were protected from international competition. Resources would be wasted, prices would be higher, and the living standards of everyone (rich and poor alike) would be worse.

As a final note, Crash Course never responds to people who say that trade deficits “ship jobs overseas”. An excerpt from this article does an excellent job at illustrating why this does not happen:

If say Toyota sells a Japanese-manufactured car in the United States, then they have two options as to what they shall do with the money: either buy American goods and services, in case which the trade deficit does not increase, or they can buy American assets which will increase the pool of funding for investments in America, or they can try to exchange the dollars earned into yen, which someone will have to sell to them and then use it for one of Toyota’s two first options.

Trade deficits are offset by capital surpluses, which in this case is Toyota having to spend US dollars somewhere in the American economy. These dollars, in addition to the dollars saved by Americans who buy a cheaper Toyota instead of a more expensive Ford car, contribute to the economy and create growth (and jobs) in other areas.

Tag: unions

Episode #17 – Income and Wealth Inequality, Part 2