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Unfounded Obsession With the Greek Minimum Wage

by Rebecca Wilder

Unfounded Obsession With the Greek Minimum Wage

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.
First, the Greek people aren’t lazy at all. In fact, Greek workers spent more hours working 2010 (in annual hours actually worked per worker) than those in Chile, Hungary, Czech Republic, Poland, Estonia, Turkey, Mexico, Slovak Republic, Italy, the US, New Zealand, Japan, Portugal, Canada, Finland, Iceland, Australia, Ireland, Slovenia, Spain, the UK, Sweden, Luxembourg, Austria, Belgium, Germany, Norway, and the Netherlands – and in that order. (You can download and view the data from the OECD 2011 Employment Outlook.) Marc Chandler also highlighted this fact back in January.

Sure, one could argue that the Greek workers work a lot of hours, but it’s for less output. Furthermore, labor costs have risen substantially relative to other Euro area countries, so the country’s worse off. That’s the uncompetitiveness route. If you care about productivity and relative wage gains, why not look at the drop in Greece’s relative unit labor costs?
The chart below illustrates the average accumulated gain/loss in nominal labor costs (labor costs per hour) across the EA 12 in the run-up to the crisis, 2005-2008, and then since the recession, 2009-Q32011 (Finland data unavailable). By this measure, Greece is certainly doing what the Troika want of it: relative devaluation in nominal labor costs. Since 2009, Greek labor costs have fallen 5.3%.

(Note: the data are constructed as the percentage gain/loss of the average 2008 quarterly labor costs over the average of 2005 labor costs versus the average of Q4 2010 to Q3 2011 labor costs over the average 2009 quarterly labor costs, all working-day adjusted.)

French and Austrian labor costs appreciated 12% and 10.7%, respectively, spanning 2005-2008, and another 5.7% and 4.0%, respectively, since 2009. In Ireland, the 1.8% average reduction in labor costs since 2009 pales in comparison to the 2005-2008 14.7% surge. Greece saw a lower accumulated gain in labor costs spanning 2005-2008 than most countries and cut labor costs since 2009. The ‘wage’ cost anger towards Greece seems to be misdirected.

Now I’m really wondering what is this obsession with the Greek minimum wage? True, the Greek minimum wage did rise 0.8% spanning 2010-2011 (you can see Eurostat data here). However, as a proportion of average monthly earnings, the 2010 minimum wage in Greece is roughly in line with other program countries, Ireland and Portugal, and lower than that in France, Luxembourg, and the Netherlands.

Only in 2011 do Greece’s policies stick out when monthly minimum wage as a proportion of average monthly earnings surged to 50.1%. However, simple calculations demonstrate that for Greece the higher 2011 ratio of minimum wage to average monthly earnings was largely a function of falling average monthly earnings, -18.7%, rather than the rise in the minimum wage, +0.8%.

Perhaps I am not understanding things clearly here – I am sure that you all will correct me if I am not – but what’s this obsession with minimum wages? It looks to me like the fiscal austerity driven recession is indeed resulting in a reduction in Greece’s relative labor costs irrespective of minimum wage policy. Isn’t that the point?

I Still Don’t Get Why the ECB Hiked Rates

by  Rebecca Wilder

I Still Don’t Get Why the ECB Hiked Rates

I still don’t get why the ECB hiked rates in April and July of 2011. I questioned this using bond market pricing back in August 2011. Now I question it once more using the ex post trajectory of mortgage rates.

Across the Euro area, 43% of total home loans are made on a variable rate basis – this means that mortgage rates are highly elastic to ECB rate setting policy.
Average mortgage rates started rising well before the ECB actually hiked rates. The bottom in mortgage rates was seen in June 2010 and hit a local peak in August 2011 when rate cut expectations started to pass through. But the high correlation between ECB policy and average mortgage rates was to be expected and very harmful to those economies with a rising household desire to save.

It would be one thing if the variable mortgages were concentrated in the core countries; but they’re not. The Periphery economies drive up the average share of variable rate mortgages. In the most extreme case, Portugal, 99% of all home loans are made at a variable interest rate. It doesn’t take a PhD to figure out the speed at which tighter monetary policy will pass through to the real economy when 99% of all loans are made at a variable rate.

Like I said, I still don’t get why the ECB hiked rates.
Source data: ECB for current rate data, and an ECB structural issues report on EA housing for the variable rate shares.

originally published at The Wilder View…Economonitors

Temporary Employment: A New Ugly Rearing its Head in Europe?

by Rebecca Wilder

Temporary Employment: A New Ugly Rearing its Head in Europe?

Last week Clive Crook opined on some fallacies of labor reform, specifically related to the unions and through the Spanish experience. Labor reform is a highly contentious subject, given its close ties to welfare and politics. Based on Clive Crook’s article, I delved into global temporary employment using OECD data and noticed two things: (1) not only is it too ‘simple-minded’ to attribute labor problems to one or two broad agents (unions, in the case of Europe), but it’s impossible to compare one country’s problem to another; and (2) other global economies – Ireland being the most worrisome candidate – saw respective shares of temporary employment surge in recent years. To me, this highlights the fact that known labor issues are just the beginning – new problems are surfacing that will require attention in the future.

As highlighted by Clive Crook via Bentolila, Dolado, and Jimeno (or the Vox version), the cyclical aspect of Spain’s two-tier labor market – the two tier system consists of a large share of temporary workers ‘outside’ the permanent employment positions – can explain in part the boom in employment during the bubble and its crash during the recession. But that doesn’t explain the experience of the US. In 2005 (the last measured date for the US), temporary workers accounted for just over 4% of employment compared to 33% in Spain; however, like that in Spain, the US unemployment doubled during the crisis. What’s one country’s problem is not necessarily another country’s structural issue.

In contrast to other key players in Europe, the Spanish rate of temporary employment fell 8.4 ppt since 2005, where most of the drop occurred in 2009 and 2010. The crisis eradicated some of the inefficiencies of Spanish temporary employment by consolidating those industries that tended to favor temporary employment during the bubble, construction for one. More worrisome, though, is the trend in temporary employment in other European markets. The rate of temporary employment increased 3.5 ppt, 3 ppt, and 5.7 ppt in Portugal, the Netherlands, and Ireland, respectively, spanning 2005-2010.

The problem with Spain’s two-tier labor market is well known, while that in Ireland and Portugal, for example, is emerging. The 2002 OECD Employment Outlook Chapter 3 outlines some adverse impacts of temporary employment. Temporary employment is associated with higher wage gaps among the temporary and permanent employees, fewer health benefits, negative effects on well-being for individuals and families, and minimal job security. I haven’t read recent research to this point; however, those countries with outsized surges in temporary employment – Ireland, Portugal, Netherlands, Italy, Greece, and the UK are among the highest in the sample above – are likely to experience a drop in welfare relative to other countries, all else equal.

Another interesting aspect of the Spanish labor market on a relative basis is that while Spain has a large presence of temporary workers, these workers do have a relative advantage relating to claim of unfair dismissal than do other global workers. The implication could be, that as the share of temporary workers rise in Ireland, Portugal, or the Netherlands, for example, the employment becomes more volatile and reduces expected lifetime income, hence spending or growth. (Data from the OECD.)

I’m worried and just conjecturing here. But, not only have countries not reformed labor issues already in the pipeline – the Spanish two-tier labor issues date back to 1984 – we’re creating new ones. The Great Recession and forced austerity is likely a very big factor in the surge in Irish temporary unemployment employment. This will bring with it unintended consequences that may require further reform (or alternative scenarios like exit from the EMU) at some point in the future

Which Economy Is Pursuing Procyclical Fiscal Policy?

by  Rebecca Wilder

Which Economy Is Pursuing Procyclical Fiscal Policy?

Today the BLS reported that the US unemployment rate dropped to 8.3% in January 2012. This is the lowest measured rate since February 2009 – a local trough. Also this week, Eurostat reported that the Euro area (EA) unemployment rate stabilized in December at 10.4%. This is the highest level since inception of the euro – a global peak (so far).

It’s pretty easy to see through relative labor performance which economy is pursuing procyclical fiscal policy, namely deficits rise when the economy is booming and fall when the economy is contracting: the EA.

originally published at The Wilder View…Economonitors

Is the ECB/EU Achieving Stated Objective of Balanced Growth

by Rebecca Wilder

Is the ECB/EU Achieving Stated Objective of Balanced Growth?

The primary objective of the European Central Bank is to maintain price stability; however, as a compliment to its primary objective, the Eurosystem shall also ‘support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’. These include inter alia ‘full employment’ and ‘balanced economic growth’”. These objectives are laid out in Articles 3 and 127 of the Treaty on the Functioning of the European Union. I wonder whether or not the objectives related to ‘balanced economic growth’ and ‘full employment’ are indeed being achieved? One could argue that they are not.

Put more simply: nominal GDP is diverging across program and non-program countries. If this economic duress leads to early exit, I would posit that the balanced growth clause has been breached.

The charts above illustrate the dynamics of nominal GDP (NGDP) across the largest non-program and program countries (I explicitly refer to a program country as falling under an explicit EFSF program). These charts demonstrate that unbalanced growth may already be in the works. In Q3 2011, Ireland, Greece, and Portugal are producing an average 2.2% above their minimum level of NGDP during the crisis (Greece’s last data point was in March 2011, so this number is clearly biased upward). In contrast, the largest non-program countries are producing at 6.1% above their minimum levels of NGDP during the crisis – a 3.9% differential in recovery patterns. Germany alone is producing 110.3% 10.3% above its trough during the crisis. I suspect that the program country average will fall below 100 in coming quarters, as the debt deflationary cycle grabs hold. This view of the Euro area is anything but “balanced”.

Balanced, according to Merriam-Webster online, takes several definitions, but essentially it’s some measure of equality in weight on two sides of a vertical axis. Let’s call the vertical axis the Euro area average NGDP recovery. It’s a pretty close call because France is running just below the EA average – but compared to the minimum level of NGDP attained during the recovery through Q3 2011, 56% of the EA has recovered by a % less than the EA average of 6.3%, while 44% have recovered by more. I’m sure that there are many ways to define balanced growth – but in NGDP terms, this looks unbalanced.

Now, the Treaty defines no explicit time frame for ’balanced growth’ – if it’s a long-term objective, lets say 5-10 years, then one could argue that the forced structural reform in Ireland, Portugal, and Greece (even Spain, Italy, and France) will increase long-term potential growth, thereby not breaching the treaty.

But what if the countries are forced to exit before the structural reform starts producing positive growth in average real GDP? Chapter III of the 2004 World Economic Report highlights two important points that should be considered: (1) it’s rare for countries to tackle multiple levels of structural reform at once; and (2) it takes a long time, as in the case of New Zealand, for aggressive structural reform to pass through to the real potential growth rate. The EA is attempting many levels of reform, including financial, labor, product, and tax. This is rare and history shows that this can take up to a decade to show results (as in New Zealand’s case).
I can only deduce that Greece, Ireland, and Portugal probably don’t have enough time and are likely going to be, if they haven’t started already, weighing the pros and cons of exit. If these countries do choose exit, it’d likely be under economic duress; hence, the EU would have failed to target ’balanced growth’, as outlined in Article 3.

I like the way that Megan Greene (@economistmeg) put it in her response to the Irish Times query “Is austerity the best policy?”: “There is a fighting chance that Ireland can eventually grow its way out of it – but I think the time is too short for Ireland to turn it around.”

The Wilder View…Economonitors

The ECB is Plugging Holes

by Rebecca Wilder

The ECB is Plugging Holes

Today the ECB released its monthly data on monetary developments in the Euro area (EA), as measured by M3 and its components. The market usually focuses on the marketable assets portion of M3, M3-M2, as a representation of funding access – here’s an FT Alphaville post highlighting as much. In December 2011, M3-M2 declined 0.2% over the year, its first annual decline since early 2010. What’s going on here? The ECB’s plugging holes.

There’s an evolution in marketable debt that is telling a very interesting story regarding bank funding through December 2011. As each private funding market shuts down, the ECB compensates by relaxing its lending facilities and collateral rules, effectively shoring up bank liquidity.

Look at the chart below: it maps out the dynamics of the components of marketable instruments in the EA, M3-M2, in levels of seasonally adjusted billion €. See Table 1 of the release, or download the data here. Since September 2011, the level of repo lending dropped 21%, or – €107 billion. Not coincidentally, the ECB started to introduce longer-term refinancing operations starting with the 1-yr in LTRO October. Holdings of debt instruments <2 years increased €40 billion, as banks use the securities for collateral under the ECB’s lending operations.
The ECB is offsetting, at least partially, the crunch in private repo funding markets.

This policy behavior is evident throughout 2010. Spanning the period January 2010 to August 2011, money market securities fell -€ 108 billion while private repo lending rose € 179 billion. The ECB offset fully the dropoff in funding from mutual fund shares by flushing private repo markets with liquidity.

The Table below describes the dynamics of funding through marketable assets more succinctly.

It’s pretty clear what the ECB is doing: plugging up the bank funding holes left exposed by private capital markets. What’s next?

originally published at The Wilder View…Economonitors

European Daily Catch: Know Your Consumers

by Rebecca Wilder

European Daily Catch: Know Your Consumers Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns.

Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful.

Consumer confidence could be a useful tool for predicting consumption, hence GDP, in France and Italy…

…but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers.

…and it is in Italy. When Italians are depressed (not confident), they spend less. And boy are Italians depressed. The same series, consumer confidence and annual real retail sales growth, has a very high correlation in Italy, 76%. The implication is, that with confidence running 12.5 points below its 2000-2012 average I do not expect real retail sales to rise above the current 4.9% annual decline in November (CPI-adjusted).
Given the recent downtrend in Italian consumer confidence, the likelihood of a December decline in real retail sales is high. But even if it did stabilize at current levels, Q4 real retail sales are running 2.5% below Q3 sales. Therefore, household consumption is likely to decline in Q4, and quicker than its 0.2% drop in Q3.

So the moral of today’s European Daily Catch is when it comes to confidence indicators, know your consumers. Unhappy Italian consumers make poor spenders, while unhappy French households may very well hit the shops. Domestic demand in Italy is shaping up poorly.

Japan’s Lopsided Financial Balances

by Rebecca Wilder

Japan’s Lopsided Financial Balances

Tim Duy and Paul Krugman discuss the merits and failures of Japanese policy. The sectoral snapshot of the economic financial balances shows that Japanese policy was indeed a success but also a failure.

First, policy was a success, given the private sector was recuperating from the bursting of a credit and investment bubble.

The chart below illustrates the 3-sector financial balances model – read Scott Fullwiler on New Economic Perspectives for a detailed description of the 3-sector financial balances model. According to this identity, the capital account plus government net saving plus private net saving must equal zero. For a given level of the capital account (Japan’s capital account has been quite stable over the years), when the private sector increases net saving, aggregate demand declines and government net saving declines.

In the early 1990s, all sectors were roughly in balance. However, since then government debt surged in response to a like rise in the private sector desire to save. One could argue that the government deficits and accumulated debts were indeed required, hailing the government’s actions a policy success. However, I contend that this has been a missed policy opportunity rather than overall succes

The second chart illustrates the same financial balances model, but broken down into 4 sectors: the capital account plus government net saving plus household net saving plus corporate net saving must equal zero – household plus corporate net saving equals private net saving in the chart above.
Household net saving has steadily declined with the ageing population. But the corporate saving rate has been positive every year since 1996, offsetting the stimulating effect an ageing population could have on domestic demand. So here’s the policy failure: the government missed the opportunity for structural reform targeted at the corporate saving rate.

Had the government created incentives for a reduction in the corporate saving rate, the returns could have/would have been filtered back into the domestic economy. Now they’re in a state of panic, watching the European debt crisis with an anxious eye. Why else would Noda be pushing so hard for a new tax?

Martin Wolf commented on this one year ago:

Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last.

As with all credit cycles, the burden of debt falls on the government as the private sector recoups. However, in Japan’s case the government missed a great opportunity for structural reform before the crash associated with credit cycles in other major developed economies (the USA).

originally published at The Wilder View…Economonitors

Ratings Matter for the Euro Area

As you all have heard, Friday was (again) S&P’s day in the limelight. The rating agency downgraded over half of the 16 Euro area countries put on credit watch negative in December 2011. A quick look at my feed shows several takes on S&P’s action: the Economist’s Free Exchange comments on the now soft-core country, France; Michael Schuman hammers out the implications of the EA policy makers’ ‘misguided’ approach; Bruce Crumley (h/t Schuman) sees problems for Sarkozy; and as always, one of my favorite authors, Edward Hugh, eloquently characterizes the downgrades in the context of the real economy.

However, there’s one curt take on the downgrade that I disagree with. Barkley Rosser at EconoSpeak (h/t Angry Bear) compares the downgrade of France and Austria from AAA to AA+ as the same as a downgrade to the US or Japan. Furthermore, his title implies that these downgrades are irrelevant. I wholly disagree. There is one simple reason for this: France and Austria are subject to high rollover risk, while the US and Japan are not. Why? Because France and Austria do not have monetary autonomy over the currency in which their debt is issued (euros, to which the ECB holds the right to supply), so all debt issued can be treated as foreign-currency debt. Debt issued by the US and Japan is primarily local-currency debt.

A bit of background on ratings. When S&P, for example, changes its rating for a country, the rating that market participants (and the press) usually discuss is the foreign-currency rating. There’s another rating, the local-currency rating, that is used to quantify the risk associated with bonds denominated in the currency issued by the monetary authority. Now, for countries like the US and Japan, where the lion’s share of its debt issuance is denominated in its local currency, foreign-currency ratings are largely meaningless. The central banks in the US and Japan can always monetize debt issuance when needed. However, for any country in the Euro area (even Germany), debt is issued in a currency over which it has no effective control. Therefore, the foreign-currency rating is the one that matters.

For foreign-currency ratings, external indebtedness and leverage trajectories are key metrics. The next couple of quarters are likely to show either an improvement or deterioration in these metrics. If the real economy has not stabilized – the ECB desperately hopes it has – and turns downward in coming months and quarters, creditors in euros will favor the markets with the higher credit metrics, Germany, Netherlands, and Finland relative to those with lower metrics, France and Austria. Better put: if the growth trajectory is worse than expected – the 63 respondents to the ECB’s Q4 Survey of Professional Forecasters expect +0.8% GDP growth in 2012 – spreads to German bunds only remaining AAA with a stable outlook, as rated by S&P) will rise.

Ratings do matter for the EA countries. S&P’s action is a harbinger of bad economic and political things to come, not lower rates.

This post was originally published on my Roubini Global EconoMonitor blog, The Wilder View.

What is a safe asset?

by Rebecca Wilder

What is a safe asset?

Last month, David Beckworth at Macro and Other Market Musings had some interesting thoughts on the global shortage of safe assets. His essay got me thinking about what is a safe asset? Beckworth alludes to three definitions of ‘safe’: (1) a credit being AAA-rated, (2) satisfying a certain level of liquidity to be used in repo markets (an important aspect of US credit transactions), and (3) backed by a sovereign with sufficient (and targeted) aggregate nominal income. I would agree with (2) and (3) in a broader context, but not necessarily (1).

Why does a ‘safe’ asset need to be AAA? To be sure, the share of AAA sovereigns of 76 developed and developing/emerging sovereigns fell by 3% in 2011 compared to 2007. This should hardly be surprising, given the weak recoveries and leverage that exists in the developed markets. But it’s liquidity, and to a lesser extent, sovereign risk that matters, not the rating, per se. Furthermore, ‘safe’ is a matter of perspective.

Liquidity is a pre-requisity for a ‘safe asset’ so that investors can purchase this asset in even the harshest of times. The United States runs the most liquid bond and currency market in the world; it can satisfy demand from flight-to-safety in times of stress. But one can think of liquidity in another manner: the ability to print fiat currency that is used to honor the debt instrument (asset). The US government issued just 8% of its external government debt position in non-dollar form. Better put: the US is a ‘safe’ assets because it’s a market large enough to satisfy broad demand and the US government is always going to be able to honor its debts. Liquidity is the most important definition of a safe asset, rather than the rating.

Norway prints its own currency, in which most of its bonds are denominated. However, it will never be a ‘safe asset’. The bond market is just not capable of satisfying broad demand during times of stress. So while Norway has enjoyed AAA status since 1975 (according to Bloomberg), it’s never going to be a safe-haven bond market for the global economy. Norway may be perceived as ‘safe’, though, due to its AAA status; but that’s of secondary concern.

And now I get to my second point: perception of safety. On December 5, 2011, S&P put the entire Euro area (EA) on credit watch negative, including Germany. If Germany were downgraded to AA+, does this mean that it is less ‘safe’? I would argue quite the opposite. Specifically, for all EA investors – using external debt statistics from the World Bank/IMF, I calculate that EA government debt held outside the EA amounts to 24% of GDP – the bund market (the German sovereign bond market) would enjoy an increase in safe haven status relative to other European economies. The reason is, that EA investors are likely euro investors, and Germany is the most liquid and perceived safest debt market in the EA. So unless you want to take currency risk, which ditracts from the ‘safety’, then EA investors are likely to flock to safe within the EA.

Until the German investors themselves start to seek non-euro assets, the German bund market is likely to increase in ‘safety’ from the perspective of euro (as a region or the currency) investors without regard to the rating of the sovereign. This goes against intuition that safe assets have higher ratings.

More on safe assets in another post. That’s enough for today. Rebecca Wilder

originally published at The Wilder View…Economonitors