Arnold Kling  

The Great Substitution

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Naturally, Tyler Cowen recommends David Leonhardt's post, which in turn highlights Michael Greenstone and Adam Loney on the dismal trends in median male earnings.

I think that broad aggregates of wages and productivity may not be the most informative way of looking at these trends. Instead, I want to give a perspective based on Robert Fogel's view, which is that the share of consumption going toward food and durable goods has been trending down while the share of consumption going toward health care, education, and leisure is going up.

The aggregate earnings of males seem to have fallen because there are fewer males working full time. This may be a substitution effect. As the cost of food and durable goods falls, what are you going to do? You only consume more health care services if you think you are sick and that the doctor can do something for you. So you either consume more education or more leisure. The way I look at it, a lot of males are choosing more leisure. Maybe they would prefer to work 2000 hours a year if they had a really high after-tax wage. But in any case, they can get by on more sporadic employment.

Suppose we were living in the alternate universe where these males have technical training in computers, finance, or some other highly marketable skills. Would total employment and output be much higher? Instead, perhaps the distribution of leisure would be different. It would be less concentrated among high-school educated males and more widespread among females and highly-educated males.

In the universe as it exists, those with the right skills can afford to live expensive lifestyles. What do these lifestyles consist of? For many, the expensive lifestyle consists of sending their children to private schools and high-priced colleges. It consists of generous contributions by their employers to health insurance. Maybe it consists of some expensive goods and services, such as gourmet meals with fine wine at fancy restaurants.

If you do not crave such things, maybe you can get by working on and off, rather than in a steady job.

One point about the Great Substitution of leisure for work is that leisure escapes taxation. That raises all sorts of issues.


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CATEGORIES: Growth: Consequences



COMMENTS (16 to date)
Lord writes:

Technical skills are not highly marketable, they are only back to the level they were a decade ago. Finance beyond the small world of Wall Street is sales. Healthcare yes, but how much longer since there is no one to pay for it?

Alex J. writes:

I think it's fair to say that home production of leisure has gotten much more efficient over the past 10 years.

GinSlinger writes:

Maybe I'm missing the nuance here. Are you talking about backward-bending labour curves? It's a concept I'm familiar with from pre-nineteenth-century economics, and it makes sense when the possible consumption bundle is not much larger than food until very high levels of wealth. If working more only allows the labourer more bread, yet they've enough bread, why work more no matter what the wages? In fact, if wages rise, work less!

So, in this case, food prices (amoung others) fall, so work less. Got it. But, the possible consumption bundle (at all wealth levels) is swelling--this would seem to suggest that labourers work as much (or more) to consume the newly available. So, what accounts for the backwards bend? Is it that the new available consumption goods are considered not worth consuming? Is there a particular reason that leisure is an increasingly inferior good? It just seems to turn one of the theories of the industrial revolution (the straightening of labour curves) on its head.

I've no problem with increasing consumption of leisure as an answer to the issues Cowen raises, but I wonder if we have an explanation for why.

Yancey Ward writes:
One point about the Great Substitution of leisure for work is that leisure escapes taxation. That raises all sorts of issues.

Mandated service?

mick writes:

Many of those men worked in dirty factories and industrial farming, sectors that have been suppressed by the environmental movement. Almost all the men in the central valley of California are unemployed, their jobs sacrificed to stop the natural selection of a fish.

tom writes:

Yancey Ward,

Or taxing you for having money but not having a job. If only there was some precedent for the government taxing a decision not to engage in an activity!

To support Arnold, I'll say that I know of men in their 50's who don't work anymore but whose wives have office jobs, with the kids grown up.

Elvin writes:

I think you have to look at two demographic trends since 1945.

First, women and minorities have been given opportunities that previously only white males had. A women lawyer was unheard of in the 1950s. Now most college undergrads are women.

Second, after World War II the US had the only intact industrial base in the world and global rebuilding was necessary. America practically had a monopoly and unions took advantage in the 1950s and into the 1960s. But by the mid-1960s, Japan and Europe had rebuilt and the developing countries wanted their own steel mills and manufacturing as well.

So, by the early 1970s, just in time for Tyler's story of lower median wage growth which he attributes to lower productivity, the unskilled white male was in big trouble--labor competition both domestically, especially with immigration, just when the gains the higher education kicked into high gear. (I remember an argument in 1974 that maybe I shouldn't go to college--it might not be worth it.)

Finally, men staying at home while the wife works isn't unheard of. I know of at least four couples that have this arrangement. I wonder how common it was 60 years ago.

wintercow20 writes:

Several of the American colonies (at least SC and MA if I recall correctly) instituted something called a faculty tax. No, it was not a tax on intellectuals, but rather a head-tax type annual assessment made by your local villagers on how much "ability" you had, and you were taxed based on that ability, not on how much you actually produced.

Incredibly, this sort of a tax preserves marginal incentives to work, and if you read Rawls one way, you might infer that such a tax would emerge from behind the veil (and it would be applied to the currently low-income too).

BTW, I switched careers nearly a decade ago, my pay is 1/5th to 1/10th of what it was/would be, and I have a lot more leisure. And I made the decision for reasons that are consistent with the Fogel story. It helps that my favorite things in the world are hiking, paddling and reading.

Lord writes:

Much of that increased consumption is by third parties, employers and government, on our behalf, not by ourselves, and market satiation rather augments Tyler's argument.

Randy writes:

And don't forget leisure on the job. Many of today's workers are tech oriented and virtually (pun intended) autonomous. That is, while we are peripherally "managaged", we actually do just the amount of work in a day that we feel like doing - and then find ways to fill the rest of the day. I'd say that we now have at least two generations of such "workers".

Seth writes:

Are you saying that some of the trend in average earnings may be personal choice because we're well enough off to not to have to bust our humps as much?

Mike writes:

Suppose we were living in the alternate universe where these males have technical training in computers, finance, or some other highly marketable skills. Would total employment and output be much higher?

Not from my vantage point.

All this talk about unskillled or uneducated males should be about non-credentialed males. I think that is a more accurate description.

Steve Sailer writes:

Employment rates for black males have dropped sharply since 1960.

tom writes:

Best comments ever.

1. Civilization has been based on men working.
2. Men work for sex and leisure (and respect?).
3. Leisure is getting really cheap.
4. Sex is getting really cheap.
5. Respect?

What do we do?

1. Mandate work.
2. Tax those with money who don't work.
3. Tax those with ability who don't work up to it.
4. Shame?

Meg writes:

The workers who have the highest marginal tax rate are not the ones with high incomes but singles earning between $40,000 and $100,000 a year. Here is a set of graphs that show the net effect of income and payroll taxes for people with income up to $400,000 a year using the standard deduction. I think this will suprise the people who think that it is only the rich that are effected by the Laffer curve. http://www.visualizingeconomics.com/2010/04/08/comparing-marginal-tax-rates-including-payroll-taxes-2009/#comments

You are probably aware of the recent paper on the effect of the change in the tax code, They found that it only effected the income of people earning more that a million a year, but they only looked at high earners.

Tom writes:

"One point about the Great Substitution of leisure for work is that leisure escapes taxation. "

And, in many cases, subsidized.

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