Précis
The marketization hypothesis
Inequality, families, and growth
Tale of three trends
The percentage of women in the United States who work for pay is notably higher than in many European countries. Richard B. Freeman of the National Bureau of Economic Research and Ronald Schettkat of Utrecht University examined this fact recently.
In "Marketization of Production and the US–Europe Employment Gap" (NBER Working Paper Number 8797), they compare data on the United States and Germany in their investigation of "the marketization hypothesis." This hypothesis challenges previous explanations of the U.S.-European Union (EU) employment differences: that the EU lost jobs in the 1980s and 1990s because "its wage-setting institutions compressed wage differentials below market levels" and that "EU welfare state provisions led many to remain jobless longer than would otherwise be the case." In contrast, the marketization hypothesis explains the differences in terms of how the location of production—the household or labor market—affects demand in the labor market. Freeman and Schettkat present evidence indicating that Germans spend more time on household production than Americans and less time on market work. For example, Germans spend more time per week preparing meals. The difference in time allocation is most pronounced among women.
Freeman and Schettkat suggest that by producing relatively more goods in the market, the United States generates demand for low-skill labor, while by producing relatively more goods at home, Germany creates less of a demand. But what would lead to less marketization of the German economy compared with the United States? Freeman and Schettkat mention several possible factors: 1) higher tax rates and higher nonwage labor charges in Germany; 2) less dispersion of earnings in Germany; 3) higher proportion of women in the United States with college degrees; and 4) "differences in lifestyle" (Germans seem to prefer fewer working hours in the labor market).
Inequality, families, and growth
Gary Burtless, a Senior Fellow at the Brookings Institution, explores the relationship between inequality and growth in a paper entitled "Has Widening Inequality Promoted or Retarded U.S. Growth?" Burtless concludes that it may have been that American economic institutions permitted inequality to increase as growth rates rose while others may have sacrificed some growth to prevent differentials from widening. Burtless also examines some often-overlooked links between domestic social trends and inequality.
After decomposing the change in personal income inequality between 1979 and 1996, Burtless finds that a third reflects increasing inequality of wage earnings, particularly among men. A roughly equal part can be associated with two changes in the social landscape. First, is a higher correlation between married couples’ earnings. That is, high earners are increasingly likely to be married to high earners. Second, fewer people live in married-couple families and more live in a family headed by only one adult.
The potential impact of the first factor on inequality is straightforward and accounts for about 13 percent of the increase. The second is a more interesting story: "A family containing more than one potential earner has the equivalent of an insurance policy to offset the variability of the principal earner’s wages. A family with only one potential earner lacks that insurance." Burtless finds that the "atomization" of families contributes about 21 percent of the increase in income inequality, a proportion not far below the contribution of increased earnings inequality among males.
Three long-term demographic trends will have significant impacts on the economy in the 21st century, according to Jane Sneddon Little and Robert Triest’s writing in the New England Economic Review. The population is expected to grow more slowly, age rapidly, and become more diverse. As a result largely of the first two, one challenge will be to supply the consumption needs of a growing number of dependents ( young and old) from the output of a more slowly growing labor force. The dependent population will tilt toward the older end of the scale as the baby-boom generation ages. This implies that the economic impact of dependency ratios approaching those of the 1960s could actually be more significant.
Increased immigration will alleviate some strains. Immigrants tend to be of working age and may have contributed as much as 40 percent of total labor force growth in the mid 1990s, according to Little and Triest. Countering that, however, is their mixed impact on the educational composition of the labor force, a significant source of productivity growth. A much higher share of the immigrant than the U.S.-born population do not have a high school degree while, at the same time, a greater share of immigrants than native-born Americans have attained a graduate degree. This bimodal distribution, according to Sneddon and Triest, "mainly reflects big differences in the educational attainment of immigrants by country of origin."
The economy will have to incur some costs to accommodate these trends. Little and Triest are "reasonably confident" that accommodation will be made through increasing productivity. The increase in productivity, they suggest, will be fueled in part by increased investment and capital deepening and in part through immigration and education policies.
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