from Renewing America

Morning Brief: Calculating the “Place Premium”

Employees at a McDonald's Restaurant in Beijing serve food to customers in October 2011 (Stringer/Courtesy Reuters).
Employees at a McDonald's Restaurant in Beijing serve food to customers in October 2011 (Stringer/Courtesy Reuters).

May 29, 2012

Employees at a McDonald's Restaurant in Beijing serve food to customers in October 2011 (Stringer/Courtesy Reuters).
Employees at a McDonald's Restaurant in Beijing serve food to customers in October 2011 (Stringer/Courtesy Reuters).
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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New research indicates that the bulk of the pay premium enjoyed by workers in developed nations is from a difference in location, not skills (BusinessWeek). Workers in the United States enjoy a “place premium”—even after adjusting for purchasing power—due to public goods such as infrastructure, a developed financial system, and reliable regulations and laws. This location effect accounted for three-quarters of the difference in average pay between U.S. software workers and Indian counterparts. It also explains why an Indian McDonald’s employee can only afford one-third of a Big Mac after an hour of work, while an American worker can buy two.

Mobility Tied to Education

U.S. workers are substantially more mobile than Europeans, but mobility correlates with education (WSJ). As the economic vitality of U.S. cities becomes more uneven, the greater ability of highly-educated workers to pay the upfront costs of relocation leads to increasing inequality. The author recommends a federal relocation assistance voucher program to help workers pursue new opportunities in growing cities.

Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies.

Debt and Deficits

Extended Unemployment Benefits Ebb

Unemployment checks are stopping for many long-term unemployed as the federal benefit extensions begin to phase out (NYT). In February, Congress extended the use of federal monies to supplement state unemployment funds to cover out-of-work workers for up to ninety-nine weeks. But that legislation also phased in a reduction of benefit weeks, and set higher standards for states to receive the maximum amount of aid. The end of federal assistance is part of the “fiscal cliff” that the CBO warned could lead to recession next year.

Earlier this year, CFR’s Edward Alden discussed the CBO report on the budget impact of current legislation if Congress does not act. While he states that no action would be bad policy, he suggests that Congress take the current law as a budget baseline.

Public Pension Funds Take on More Risk

The Financial Times reports that U.S. public pension funds have increased investment in risky assets as more of their participants retire, despite economic theory that suggests they should invest more conservatively. U.S. public plans calculate liabilities with an assumed rate of return; investing in risky assets allows plans to lower stated liabilities by assuming a higher rate of return. If those higher returns do not materialize, shortfalls may result. One expert remarked: “All the current fund boards, politicians, and even taxpayers have an incentive to kick the can down the road.”

Debt and deficits. Read more from experts on the challenges in reducing U.S. debt.


CBS News Sunday Morning examined the importance of highways to U.S. economic strength, and the consequences of underinvestment. Federal Highway Administrator Victor Mendez offered: "When we're competing with China, India, emerging economic powers like Brazil, we better have our infrastructure ready to go, to be able to compete on a global basis." A principal challenge is funding; last year the federal gas tax ($32 billion) was insufficient to pay for federal transportation outlays ($37 billion). The Department of Transportation needs $100 billion a year for the next twenty years just to maintain the current system.

Scott Thomasson, the president of NewBuild Strategies and an expert on infrastructure funding, recently authored "Encouraging U.S. Infrastructure Investment," a Policy Innovation Memorandum released by the CFR’s Renewing America initiative. Thomasson proposes new initiatives to address crumbling U.S. infrastructure.

Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness.


Facebook’s Stumbles May Chill IPO Market

In less than two weeks since its initial public offering (IPO), Facebook’s share price tumbled more than 15 percent; that fall may be dampening investor enthusiasm for IPOs (LA Times). Other Silicon Valley firms such as Twitter and Spotify are considering delaying their IPOs until market sentiment rebounds. Facebook may weigh especially hard on small, individual investors; one who lost $1,000 on Facebook remarked: "It was a chance to be part of history. This was my first foray into an IPO, and it'll probably be my last." One analyst speculated that the effects will not last: “I don't think long term there will be any less demand for anything Silicon Valley produces.”

Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth.

The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

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