Author: Jeremy Horpedahl

The Decline of Working Hours, in the Long Run and Recently

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If you look at the long-run trends in labor markets, one of the most obvious changes is the decline in working hours. The chart from Our World in Data shows the long-run trend for some countries going back to 1870.

Hours of work declined in the US by 43% since 1870. In some countries like Germany, they fell a lot more (59%). But the decline was substantial across the board. One thing to notice in the chart above is that for the very recent years, the US is somewhat of an outlier in two ways. First, there hasn’t been much further decline after about the mid-20th century. Second, average hours of work in the US are quite a bit higher than many of developed countries (though similar to Australia).

But the labor market in the US (and in other countries) is in a very unusual spot at the present moment after the pandemic. So what has happened really recently. Many economists are looking into this question of hours and other questions about the labor market, and a new working paper titled “Where Are the Workers? From Great Resignation to Quiet Quitting” presents a lot of fascinating data about the current state of work in the US. The paper is short (just 14 pages) and readable for non-experts, so I encourage you to read it all yourself.

Here is one table and one chart from the paper that I will highlight, which shows that hours of work have been falling, but in a very specific set of workers: those who work lots of hours, and those with high incomes. For workers at the high end of hours worked, the 90th percentile, they have dropped from 50 hours to 45 hours of work per week just from 2019 to 2022. But workers at the median? Unchanged at 40 hours per week. (The data comes from the CPS.)

The figure below is only for male workers, and it shows a similar decline in hours worked for those at the high end of the earnings distribution. For those at the bottom, hours of work at mostly unchanged.

Air Travel Prices Have Not “Soared” Since 1980 — They’ve Been Cut in Half

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Winter holiday travel is notoriously frustrating. This year was especially bad if you were flying on Southwest. But that frustration about delayed and cancelled flights seems to have caused a big increase in pundits criticizing the airline industry generally. Here’s one claim I’ve seen a few times lately, that airline prices have “soared” as airlines consolidated.

Reich’s claim that there are 4 airlines today is strange — yes, there are the “Big Four” (AA, United, Delta, and Southwest), but today there are 14 mainline carriers in the US. There have been many mergers, but there has also been growth in the industry (Allegiant, Frontier, JetBlue, and Spirit are all large, low-cost airlines founded since 1980).

But is he right that prices have increased since 1980? Using data from the Department of Transportation (older data archived here), we can look at average fare data going back to 1979 (the data includes any baggage or change fees). In the chart below, I compare that average fare data (for round-trip, domestic flights) to median wages. The chart shows the number of hours you would have to work at the median wage to purchase the average ticket.

The dip at the end is due to weird pandemic effects in 2020 and 2021, so we can ignore that for the moment (early analysis of the same data for 2022 indicates prices are roughly back to pre-pandemic levels, consistent with the CPI data for airfare).

The main thing we see in the chart is that between 1980 and 2019, the wage-adjusted cost of airfare was cut in half. Almost all of that effect happened between 1980 and 2000, after which it’s become flat. That might be a reason to worry, but it’s certainly not “soaring.”

Of course, my chart doesn’t show the counterfactual. Perhaps without several major mergers in the past 20 years, price would be even lower. Perhaps. But research which tries to establish a counterfactual isn’t promising for that theory. Here’s a paper on the Delta/Northwest merger, suggesting prices rose perhaps 2% on connecting routes (and not at all on non-stop routes). Here’s another paper on the USAir/Piedmont merger, which shows prices being 5-6% higher.

There are probably other papers on other mergers that I’m not aware of. And maybe all of these small effects from particular mergers add up to a large effect in the aggregate. But, as my chart indicates, even if the consolidation has led to some price increases, they weren’t enough to overcome the trend of wages rising faster than airline prices.

One last note: the average flight today is longer than in 1979. I couldn’t find perfectly comparable data for the entire time period, but between 1979 and 2013, the average length of a domestic flight increased by 20%. So, if I measured the cost per mile flown, the decline would be even more dramatic.

Tough Year for Investing (with one little-known, totally safe exception)

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There’s still a few more days left in the year, but at this point it is safe to say, unfortunately, that it was a very bad year for investing. This Google chart shows most of the bad news. Note: nothing in this post is investment advice about the future, just a summary of the past.

The S&P 500, the typical benchmark for US equities, was down 20%. Bonds, usually a safe haven, were down over 14% as measured by the Vanguard Total Bond fund (more on bonds later).

Gold, the traditional hedge against bad times, was flat. I guess that’s not so bad. But gold is also traditionally considered a hedge against inflation, and inflation will probably end up being somewhere in the range of 5-7% this year (depending on your preferred index). So in real terms, even gold was down. And the supposed new hedge against fiat currency? Bitcoin is down 65% (crypto has other potential redeeming features, but inflation hedging was supposed to be one of them).

Did anything do well? Oil was basically flat too, starting and ending the year in the $75-80 range. Of course, oil companies did very well this year — Exxon is up over 70%, since prices were elevated for much of the year. But picking individual stocks is always fraught with danger. For example, you might think electric car companies would have done well in the past year, given the high gas prices for much of the year, yet Tesla was down over 70% (I won’t speculate here about why, but it may have other idiosyncratic explanations).

There is one boring, sleeper investment that would have earned you a decent return. Not a massive return, but one that will likely be slightly higher than the rate of price inflation (once we have complete inflation data). And the investment is totally safe, and by April you would have known exactly your rate of return for the full year: 8.5%.

That investment? Series I Savings Bonds, issued by the US Treasury. Series I Bonds pay a fixed rate of return for 6 months, which you know at the time you buy it. The interest rate rests every 6 months based on the rate of CPI inflation. If you invested in these bonds in January 2022, you would have earned 3.56% for 6 months, and then you would have earned 4.81% for the second half of 2022. And this was all known as early as April 2022 (though not officially confirmed by the Treasury until May).

While a lot of people were talking about the possibility of high inflation at the beginning of 2022, I don’t recall many people advising anyone to buy these bonds. It’s not a super well known investment, and not super exciting. Plus each investor is capped at $10,000 per year in most cases, so you couldn’t have moved all your money into I Bonds. Another restriction is that you lose some of the interest if you pull the money out before 5 years.

Still, this was one bright spot in an otherwise terrible year for most broad investment types.

The Wealth of Generations: Latest Update

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I’ve covered the topic of generational wealth before, and here’s the latest data on how each generation was doing at roughly the same age. The data is updated through the 3rd quarter of 2022.

The main takeaways:

  • Millennials are roughly equal in wealth per capita to Baby Boomers and Gen X at the same age.
  • Gen X is currently much wealthier than Boomers were at the same age: about $100,000 per capita or 18% greater
  • Wealth has declined significantly in 2022, but the hasn’t affected Millennials very much since they have very little wealth in the stock market (real estate is by far their largest wealth category)

Inflation-Adjusted Wages Have Been Rising Since June 2022

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Back in May 2022, I wrote about the very bad picture for inflation-adjusted wages in the US. While they were still slightly above pre-pandemic levels, wages had been falling consistently since the beginning of 2021.

But since then, we’ve got some better news. The chart below shows the data (note: I’m using wages for private production and non-supervisory workers here, rather than for all private workers in the May post).

While the overall inflation picture still looks bad, with 7.1% annual inflation in the latest report, we also see that in the past 5 months wage growth has exceeded CPI growth. It’s also been true compared with the PCE price index for the past 4 available months (November PCE data won’t be available until next Friday). Inflation has cooled slightly in the past few months, while wages have continued to grow.

This all means that real (inflation-adjusted) average wages in the US have been rising consistently since June 2022. Finally, some good news!

Message To My Students: Don’t Use AI to Cheat (at least not yet)

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If you have spent any time on social media in the past week, you’ve probably noticed a lot of people using the new AI program called ChatGPT. Joy blogged about it recently too. It’s a fun thing to play with and often gives you very good (or at least interesting) responses to questions you ask. And it’s blown up on social media, probably because it’s free, responds instantly, and is easy to screenshot.

But as with all things AI, there are numerous concerns that come up, both theoretical and immediately real. One immediately real concern among academics is the possibility of cheating by students on homework, short writing assignments, or take-home exams. I don’t want to diminish these concerns, but I think for now they are overblown. Let me demonstrate by example.

This semester I am teaching an undergraduate course in Economic History. Two of the big topics we cover are the Industrial Revolution and the Great Depression. Specifically, we spend a lot of time discussing the various theories of the causes of these two events. On the exams, students are asked to, more or less, summarize these potential causes and discuss them.

How does ChatGPT do?

On the Industrial Revolution:

And on the Great Depression:

Now, it’s not that these answers are flat out wrong. The answers certainly list theories that have been discussed by at various times, including in the academic literature. But these answers just wouldn’t be very good for my class, primarily because they miss almost all of the theories that we have discussed in class as being likely causes. Moreover, the answers also list theories that we have discussed in class as probably not being correct.

These kinds of errors are especially true of the answer about the Great Depression, which reads like it was taken straight from a high school history textbook, ignoring almost everything economists have said about the topic. The answer for the Industrial Revolution doesn’t make this mistake as much as it misses most of the theories discussed by Koyama and Rubin, which was the main book we used to work through the literature. If a student gave an answer like the AI, it suggests to me that they didn’t even look at the chapter titles in K&R, which provide a roadmap of the main theories.

So, my message to students: don’t try to use this to answer questions in class, at least not right now. The program will certainly improve in the future, and perhaps it will eventually get very good at answering these kinds of academic questions.

But I also have a message to fellow academics: make sure that you are writing questions that aren’t easily answered by an AI. This can be hard to do, especially if you haven’t thought about it deeply, but ultimately thinking in this way should help you to write better exam and homework questions. This approach seems far superior to the one that the AI suggests.

Fight for $15? $25? $40?

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Remember the “Fight for $15”? It’s a 10-year-old movement to raise the federal minimum wage to $15 per hour. While there hasn’t been any increase in the federal minimum wage since the movement began in 2012, plenty of states and localities have done so.

I won’t rehash the entire debate on the minimum wage here, but I will point you to this post from Joy on large minimum wage changes, and here are several other posts on this blog on the same topic. But lately I have seen an increasing call for even larger minimum wage increases, well beyond $15.

A prominent recent call for a higher wage comes from the SEIU, the second largest labor union in the nation. They are calling for a $25 minimum wage in Chicago, where the legal minimum wage just recently crossed $15 last year. Again, without getting into the detailed debates about the economics of the minimum wage, we can recognize that this would be a massively high minimum wage, given that median hourly wage for the Chicago MSA was $22.74 in May 2021. It’s certainly a bit higher in 2022, and the city of Chicago is probably a bit higher than the entire MSA. Still, we are talking about a minimum wage that would cover roughly half the workforce. Well, at least half the current workforce. The negative employment effects would potentially be large.

Here I will dabble a little bit in the minimum wage literature. One of the most famous recent papers that suggests increasing the minimum wage doesn’t have large negative employment effects is a 2019 paper by Cengiz, et al. This paper only looks at legal minimum wages that go up to 59% of the median market wage, which is the highest wages have been pushed up so far. By contrast, that $25 minimum wage in Chicago would be somewhere around 100% (!) of the local median market wage. That’s huge, and goes far beyond what even the most sympathetic-to-the-minimum-wage research has looked at.

But here’s the most recent minimum wage call that really takes the cake: over $40 per hour in Hawaii. That comes from, in a way, a Tweet from Hal Singer:

Now in fairness, he doesn’t exactly call for a $40 minimum wage in Hawaii, but he does say we should use the minimum wage as a tool to address homelessness, and then points to a study showing that you would need to earn $40/hour in Hawaii to afford a two-bedroom apartment. That’s pretty close. The median wage in Hawaii? About $23 in May 2021. In fact, the 75th percentile wage in Hawaii was $36.50 in 2021! So, depending on exactly how much wage growth there has been in Hawaii since May 2021, we are likely talking about a $40 minimum wage covering 75% of the workforce! That would likely have some “bite,” as economists say.

Thanksgiving Dinner is Once Again More Expensive (But Not the Most Expensive Ever)

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Last year inflation hadn’t quite hit the levels we would see in 2022, but they were already rising. When Thanksgiving rolled around, many media sources were reporting that it was the “most expensive Thanksgiving ever.” In nominal terms that was true, though in nominal terms it isn’t that surprising. In a post last year, I compared the prices of Thanksgiving dinners (using the same data from Farm Bureau) to median earnings going back to 1986. While 2021 was more expensive the 2020, it turned out it was still the second lowest it had been since 1986.

As you might expect, this year’s Thanksgiving dinner is even more expensive than last year in nominal terms. It’s up about 20% since last year or over $10 more, according to Farm Bureau. That’s certainly more than the overall rate of inflation (7.7% in the past 12 months) and more than inflation for groceries (12.4% in the past 12 months). But how does that compare with median wages? Comparing the 3rd quarter of this year with the same quarter in 2021, median wages are only up about 7%, certainly not enough to keep up with those rising turkey prices.

When we add 2022 to the historical chart, here’s what it looks like.

The spike in the last 2 years is clear in the chart but notice that at about 6% of median weekly earnings, we have essentially returned to the average level of the entire series. From 2017-2021, we could be thankful that the price of your Thanksgiving dinner had dropped below that 6% level. We’ll have to find something else to be thankful for this year.

But Who Will Build the Roads? 19th Century Edition

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In the United States and much of the developed world today, most roads are publicly provided, i.e., they are built and operated by governments. This is not exclusively true, as many private toll roads exist, but the vast majority of roads are owned and operated by governments. Must it be this way?

A recent working paper by Alan Rosevear, Dan Bogart, and Leigh Shaw-Taylor looks at a very important case study: Britain in the 19th century. Britain is important because they were the leading economy in the world at the time, at the forefront of the Industrial Revolution. How were roads built and improved in England and Wales at this time? Here’s what the authors have to say in the abstract:

“non-profit organizations, known as turnpike trusts, built more new roads by attracting private investors and capable surveyors. We also show the Government Mail Road had the highest quality. Nevertheless, most turnpike trust roads were good quality, indicating their practical achievements.”

In the conclusion of the paper, they further add:

“Our analysis demonstrates that turnpike trusts were responsible for building 4,000 miles of new, good quality road in England and Wales, much of it between 1810 and 1838. On a directly comparable basis, the not-for-profit trusts built thirty times the mileage than had been built with direct Government funding during the early 1800s.”

To be clear, this paper is not a completely new discovery. It was already well-known that private companies built roads in Britain, as the authors make clear in their literature review. Similarly, there were many private turnpikes and toll roads in the US in the 19th century, as summarized in an encyclopedia entry by Klein and Majewski.

The Rosevear et al. paper adds new important details. First, they document the extent of private road building and improvements in the 19th century. Second, they show that these roads were generally of good quality, or at least they were of good quality for the time. Prior research had not documented these facts, thus making this a very important advance in our understanding of this time period. But perhaps more importantly, we see the possibility that many more roads today could be privately built and funded with user fee, especially considering that we are much, much wealthier today than 19th century Britain, we have more extensive and functional capital markets for raising the funds, etc.