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10/14/2007

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paco

I generally with Prof. Becker's analysis. I would only add that income inequality is also a function of age -- i.e., we should expect significant disparities in income even among members of the same culture group or learned profession. I also wonder how the "super-star" effect contributes to relative vs. absolute inequality.

KIO

Accurate quantitative analysis of inequality in the USA shows no change since 1960 in personal income distribution , as defined by Gini coefficient. The problem of increasing inequality is in a wrong methogological approach , when IRS daat are used. The IRS does not provide reliable estimates at low income end.
I have conducted a quantitative analysis. Abstract is below.

Why income inequality estimates based on data from the IRS and Census Bureau are different? Methodological notes
Abstract (link to SSRN paper)

This paper quantitatively demonstrates that modern estimates of income inequality based on the data reported by the IRS are not reliable. The principal problem of the estimates is highly volatile incomes of people in the low-end of income distribution. This volatility is likely related to measurement errors, changes in definitions or improper reporting. Income estimates at high and the highest incomes are robust and follow the Pareto law. When normalized to total population with income and total (gross) personal income personal income distributions for 1990 and 2004 practically coincide. Hence, the inequality estimates based on the IRS data are distorted by reading in the low-income zone.
At the same time, income data provided by the US Census Bureau are consistent over time in all income ranges. Results presented by Kitov (2007) demonstrate that personal income distributions based on readings obtained in the Current Population Survey are characterized by practically constant Gini coefficient since 1960. This observation implies that normalized personal income distributions are also not changing with time.

Key words: personal income distribution, economic inequality, Gini coefficient, IRS, Census Bureau
JEL Classification: D01, D31, E17, E64, J1, O12

Link to full paper in:

http://inequalityusa.blogspot.com/2007/10/how-to-explain-of-difference-between.html

Jack

KIO Please submit your findings to Wikipedia as their material is terribly wrong. Geez, just between 1967 and 2003 the graph depicts a near doubling of purchasing power for the 90 and 95th percentiles and virtually zipnada for those of median income, along with those of the 10th and 20th percentiles.

I'd urge you to correct the wiki soon, before the mythology of a rapidly widening income distribution gap becomes unanimous. Jack

http://en.wikipedia.org/wiki/Image:United_States_Income_Distribution_1967-2003.svg

David Hoopes

James Q. Wilson in the California Management Review, paraphrases from Smith’s introduction to Wealth of Nations, “Among savage nations made up of hunters and fishermen, every man is employed, and the differences in wealth are not great; but most people are very poor. In civilized nations, by contast, many people do not work at all, there are great inequalities in wealth and income, but very few people, provided they are industrious and frugal, live in poverty.

Please note: what passes for poverty in the U.S. is considered upper middle class in well over half the world. In India and China "poor" people are not obese. And no, India, China, and sub-Saharan Africa are not in their current economic conditions because of U.S. Corporations.

KIO

Jack,

The graph in wikipedia is correct and based on the same data set of the same agency (Census Bureau) as I used in my research.
To quantitatively understand the difference between personal (as I did) and household (wiki) income distributions I need some more time.

Jack

Thanks, KIO. For a quick approximation the Census shows 2.6 persons per household, and 04 median household income of $44,350 for per capita median income of of $17,000 as compared to about double that amount for average per capita income.

But perhaps you are delving deeper to adjust for the patchwork of earned income credits, food stamps and the like that makes the whole thing "work".

Interestingly? Bernanke was asked by a Congressman whether making ends meet by raising the min wage, or by increasing the EITC was better. I was surprised at this conservative appointee's reply in favor of the EITC which places the burden of subsidizing labor costs of Walmart, fast food and many small businesses on the taxpayer instead of on the company benefiting from the labors of their employees. Such a policy can hardly be claimed to allocate capital and labor to their highest and best use.

KIO

Jack,
I am preparing a very short study of the influence of labor force participation rate on productivity growth. Hope to post it tonight (CET).
There is a
discussion on that topic

http://commentisfree.guardian.co.uk/john_schmitt_and_dean_baker/2007/10/the_real_economic_crisis.html

http://krugman.blogs.nytimes.com/2007/10/16/the-productivity-slowdown-and-the-trouble-with-europe-bashing/).

This also indirectly answers your question. In general, the growth in participation rate in the USA between 1965 and 1985 was the reason for productivity slowdown during the same time. Basically, more people in economy produce the same "amount" of goods and services if expressed in monetary units, and these people redistribute their personal income for these goods and services in the same way. As I mentioned in previous comment here and discuss thoroughly in my blog, personal income distribution during these years was the same (in relative terms) as before and after.
Therefore, there is no difference between min wage and EITC from my point of view. Any external change (legislative or whatever) aimed at the redistribution of personal income ends in an equivalent compensation process, which returns personal income distribution to its original shape. Only individuals exchange (lose and obtain) their income positions as a result. Not sure that this is fair.

Bertil

In the light of these conclusions, would you support the IMF in sponsoring the One Laptop Per Child (OLPC) project from the MIT? What about the cell phone manufacturers efforts to design user interface with mostly logos and as little text as possible, to empower the illiterate users?

The project is as private and self-sufficient as possible. Dominique Strauss-Kahn is notoriously an IT enthusiast--but he might benefit from your endorsements.

John Dewey

"Basically, more people in economy produce the same "amount" of goods and services if expressed in monetary units, and these people redistribute their personal income for these goods and services in the same way."

Between 1965 and 1985, didn't service workers move from the unpaid workforce into the paid workforce? As housewives entered the paid workforce, formerly unpaid services such as child-raising, food preparation, and housecleaning became paid services. Because unpaid services hours are uncounted in computing wage statistics, the 1960's median wages would be overstated. Does that make sense?

kio

John,

I think you get my message. Essentially everybody (above 15) is involved in production of goods and services in any developed economy. There are many other ways to get income extra to paid job. The shear of labor force in full working age population makes no difference as personal income distribution is the same over time.

I am finishing the post of productivity. What it says is - productivity is not a good parameter as it measured using changing labor force
participation rate.

Ronald

In future posts, I would be interested in seeing Mr. Posner and Mr. Becker address the following topic:

Humans could marry robots within the century. And consummate those vows.


"My forecast is that around 2050, the state of Massachusetts will be the first jurisdiction to legalize marriages with robots," artificial intelligence researcher David Levy at the University of Maastricht in the Netherlands told LiveScience. Levy recently completed his Ph.D. work on the subject of human-robot relationships, covering many of the privileges and practices that generally come with marriage as well as outside of it.


At first, sex with robots might be considered geeky, "but once you have a story like 'I had sex with a robot, and it was great!' appear someplace like Cosmo magazine, I'd expect many people to jump on the bandwagon," Levy said.


Pygmalion to Roomba


The idea of romance between humanity and our artistic and/or mechanical creations dates back to ancient times, with the Greek myth of the sculptor Pygmalion falling in love with the ivory statue he made named Galatea, to which the goddess Venus eventually granted life.


This notion persists in modern times. Not only has science fiction explored this idea, but 40 years ago, scientists noticed that students at times became unusually attracted to ELIZA, a computer program designed to ask questions and mimic a psychotherapist.


"There's a trend of robots becoming more human-like in appearance and coming more in contact with humans," Levy said. "At first robots were used impersonally, in factories where they helped build automobiles, for instance. Then they were used in offices to deliver mail, or to show visitors around museums, or in homes as vacuum cleaners, such as with the Roomba. Now you have robot toys, like Sony's Aibo robot dog, or Tickle Me Elmos, or digital pets like Tamagotchis."


In his thesis, "Intimate Relationships with Artificial Partners," Levy conjectures that robots will become so human-like in appearance, function and personality that many people will fall in love with them, have sex with them and even marry them.


"It may sound a little weird, but it isn't," Levy said. "Love and sex with robots are inevitable."


Sex in 5 years


Levy argues that psychologists have identified roughly a dozen basic reasons why people fall in love, "and almost all of them could apply to human-robot relationships. For instance, one thing that prompts people to fall in love are similarities in personality and knowledge, and all of this is programmable. Another reason people are more likely to fall in love is if they know the other person likes them, and that's programmable too."


In 2006, Henrik Christensen, founder of the European Robotics Research Network, predicted that people will be having sex with robots within five years, and Levy thinks that's quite likely. There are companies that already sell realistic sex dolls, "and it's just a matter of adding some electronics to them to add some vibration," he said, or endowing the robots with a few audio responses. "That's fairly primitive in terms of robotics, but the technology is already there."


As software becomes more advanced and the relationship between humans and robots becomes more personal, marriage could result. "One hundred years ago, interracial marriage and same-sex marriages were illegal in the United States. Interracial marriage has been legal now for 50 years, and same-sex marriage is legal in some parts of the states," Levy said. "There has been this trend in marriage where each partner gets to make their own choice of who they want to be with."


"The question is not if this will happen, but when," Levy said. "I am convinced the answer is much earlier than you think."


When and where it'll happen


Levy predicts Massachusetts will be the first jurisdiction to legalize human-robot marriage. "Massachusetts is more liberal than most other jurisdictions in the United States and has been at the forefront of same-sex marriage," Levy said. "There's also a lot of high-tech research there at places like MIT."


Although roboticist Ronald Arkin at the Georgia Institute of Technology in Atlanta does not think human-robot marriages will be legal anywhere by 2050, "anything's possible. And just because it's not legal doesn't mean people won't try it," he told LiveScience.


"Humans are very unusual creatures," Arkin said. "If you ask me if every human will want to marry a robot, my answer is probably not. But will there be a subset of people? There are people ready right now to marry sex toys."

The main benefit of human-robot marriage could be to make people who otherwise could not get married happier, "people who find it hard to form relationships, because they are extremely shy, or have psychological problems, or are just plain ugly or have unpleasant personalities," Levy said. "Of course, such people who completely give up the idea of forming relationships with other people are going to be few and far between, but they will be out there."

Ethical questions

The possibility of sex with robots could prove a mixed bag for humanity. For instance, robot sex could provide an outlet for criminal sexual urges. "If you have pedophiles and you let them use a robotic child, will that reduce the incidence of them abusing real children, or will it increase it?" Arkin asked. "I don't think anyone has the answers for that yet—that's where future research needs to be done."

Keeping a robot for sex could reduce human prostitution and the problems that come with it. However, "in a marriage or other relationship, one partner could be jealous or consider it infidelity if the other used a robot," Levy said. "But who knows, maybe some other relationships could welcome a robot. Instead of a woman saying, 'Darling, not tonight, I have a headache,' you could get 'Darling, I have a headache, why not use your robot?'"

Arkin noted that "if we allow robots to become a part of everyday life and bond with them, we'll have to ask questions about what's going to happen to our social fabric. How will they change humanity and civilization? I don't have any answers, but I think it's something we need to study. There's a real potential for intimacy here, where humans become psychologically and emotionally attached to these devices in ways we wouldn't to a vibrator."

Levy is currently writing a paper on the ethical treatment of robots. When it comes to sex and love with robots, "the ethical issues on how to treat them are something we'll have to consider very seriously, and they're very complicated issues," Levy said.

Levy successfully defended his thesis Oct. 11.

Forecast: Sex and Marriage with Robots by 2050 Charles Q. Choi
Special to LiveScience
LiveScience.com
Fri Oct 12, 5:10 PM ET

NWX Consulting

This is all well n good but IMF is so 200 years ago.

Jack

KIO sez:

"Therefore, there is no difference between min wage and EITC from my point of view."

Perhaps you are looking only at the recipient's side? As there is a world of difference in terms of allocating labor and capital.

In our country SOMEONE is going to pay a living wage to our lowest paid workers as we'll not stand by and watch them starve. Ideally, that someone should be the employer who derives the benefit of the employees' labor. Thus, the employer will have strong incentives to use labor efficiently and wisely including investing in labor saving technology as it becomes available.

The alternative is the costly and messy patchwork of transfer programs we see today that "make ends meet" or nearly so. Consider; if my fellow taxpayers are subsidizing a major fraction of the cost of an employee, I can afford to use the "cheap" labor very inefficiently to my advantage and their disadvantage.

Do some here (including Bernanke?) get so far out there that they perhaps forget that the very basic tenets and strengths of capitalism are to combine and deploy labor and capital efficiently? In order to accomplish that effectively both the costs and the benefits must accrue to the employer.

Often I seem to be one of the "liberal" voices here, but think we'd be far better off with a "living" min wage, universal health care, and FAR fewer transfer programs.

KIO

Jack,

I completely agree with you. There are numerous mechanisms to implement social fairness and to please various human feelings. These processes drive actual economic world.
The outcome, however, does not depend on the mechanisms one selects. Income distribution is the same in the end. So, one can only redistribute total income among various groups of people (personalities like from Johnes to Smith), but the number of people in every income range will be the same.
One should then explain to some people displaced from current positions into lower-income bins, why does s/he consider this displacement as a fair solution.

Jack

KIO......... I don't see areas where we've agreed on the issues being discussed.

I've not suggested "mechanisms to implement social fairness and to please various human feelings." Instead, I've tried to point out that the socialistic mechanisms of transfer payments, not only create costly bureaucracies, but are damaging and distortive to the efficiency of deploying labor and capital.

In short, if two identical economies concluded that it's desirable for their lowest earners to have enough income to survive, they could accomplish the same thing on day one, as you indicate by A. An alphabet soup of transfer programs B. By establishing a livable minimum wage. On day two, or year two B will have pulled away from A for the following reasons:

In order of importance:

1. B is honestly allocating their TRUE cost of employing labor to the enterprise that benefits from the labor.

2. The recipient of the living wage could more efficiently deploy it in his best interest by comparison to the "one size fits all" nature of housing subsidies, food stamps et al.

3. B will also benefit by not having scarce labor and capital engaged in the transfer program bureaucracies, thus an immediate and ongoing increase in productivity.

Lastly, both A and B would benefit from universal health care as preventive care and costly medical incidents are impossible to properly manage at low incomes and the patch-up mechanisms are very costly and inefficient.

KIO

Jack,
I agree that your mechanism designed accurately and should work in excellent way. No doubt. Actually, we discuss somewhat orthogonal topics.
I see economic inequality a set of measured values, and you as a set of mechanisms and processes.

John Dewey

Jack,

Why should it be your decision or the government's decision or any other third party's decision about what amount should be paid for someone's labor? The only two people who should make that decision are the employer and the employee. The employer decides what he can offer and the employee decides if he can accept that offer. Why intervene in that clearly fair and just process?

Jack

John. Fair question and I plead guilty to stealing much of my rationale from econ texts. Each contains a chapter on how the pricing of generic commodities and lower skilled labor will be bid down to below the costs of production by the effect of many unorganized sellers and few, much better organized buyers. The concept is the underpinnings of EVERY advanced nation having farm price support policies and a minimum wage.

Then, as I mentioned, we in the "richest nation" are not going to have working folk starving, homeless in the streets or begging outside our toney restaurants as it the case in poor nations.

Thus, WE have decided that someone WILL pay all working folk a living wage and that even the non-working will be kept from starving. This IS our commitment and policy today, but the living wage is a mixture of token pay from the employer and the host of transfer programs most conservatives who claim to admire capitalism wish were not there, yet they favor an intellectually dishonest third partying of increasing fractions of the pay of those near the bottom. Why is that?

Consider, if the business requires a delivery van, for the most part, the owner expects to pay the entire costs of the van. Same with rents, advertising, AND all wages above the level of taxpayer subsidization.

So, my question to you is, why should any of the cost of lower echelon labor be born by the general taxpayer, instead of the employer who benefits from the labor?

It's a bit short-sighted isn't it to expect that a society can operate in which labor can be employed at less than the cost of maintaining a basic existence, after all, even slave owners, if nothing else, protected their investment by feeding, clothing, housing, and giving them rudimentary medical care. Should our wealthy nation do less? Why?

Jack

KIO Thanks, and you are right. I'm something of a "mechanic" who, in keeping with (I think) Posner and Becker would like to get the best out of our economic engine. Perhaps, unlike P and B I do not think that engine is best served by a very steep inequality curve, nor that those at or near the bottom are hardly participants in the operation of the economic engine. I doubt that any lasting good comes of the lowest earners suffering in poverty with limited access to medical care, while CEO's are paid fortunes every month.

I'm not opposed to reasonable levels of inequality, but today I've no doubt that Walmart employees are underpaid for their contribution to the companies stellar bottom line while upper management and stockholders are over compensated.

After looking over the history of the last century I'm positive that P & B's and so many other's trust in lassez faire "markets" work in terms of either getting the best out of the economic engine or rewarding employees accurately for their contribution to productivity. Instead, we've seen Humpty Dumpty fall several times and what has put the pieces back together again has been a combination of collective bargaining, a min wage that WAS close to being a living wage, a federal work rules.

Lastly, the economic engine does not exist separate of the democracy of our nation and most state's Constitutions reference "resource being developed to benefit" it's people. After too many decades of preaching a bastardized version of Reagan-Gordon Gecko "greed is goodism" "we" have lost our way and forgotten that if most don't have a piece of what our democracy and its economic system offers things will not go well.

As for Corey's lament on the Posner thread and revolutionaries burning down our pricey new homes, I'm fairly sure we've at least weeks or months to go and in which to begin reversing the disadvantages targeting working people since Reagan gutted collective bargaining enabling legislation.

John Dewey

jack: "why should any of the cost of lower echelon labor be born by the general taxpayer, instead of the employer who benefits from the labor?"

I agree we should abolish our systems of wealth redistribution. But mandating "liveable wages" will not increase the welfare of anyone. An artificial wage rate will simply cause elimination of jobs. More jobs will be automated. More jobs will be offshored. More jobs will just cease to exist.

What's even worse than job elimination is the freedom you would take away from so many people. An 18-year-old kid with no work experience should have the right to offer his services at whatever price he is willing to work for. If he is not worth $7.00 an hour to an employer, he should be able to work for $5.00 an hour. Who are you to decide what that 18-year-old kid can accept?

Who are you - or the voters as a group - to decide that a mentally retarded person cannot have a job unless he is worth your arbitrary "livable wage" to an prospective employer?

Why do you think you can legislate the economic value of a human being's labor?

Jack

jack: "why should any of the cost of lower echelon labor be born by the general taxpayer, instead of the employer who benefits from the labor?"

I agree we should abolish our systems of wealth redistribution. But mandating "liveable wages" will not increase the welfare of anyone. An artificial wage rate will simply cause elimination of jobs. More jobs will be automated. More jobs will be offshored. More jobs will just cease to exist.

........... John most of the above paragraph is unsupported rhetoric of today's right.

..... I thought I had explained that there is some minimum COST of using factors of economic production. For example the delivery van, whether adding it to the company is a profit center or simply necessary its costs must be born by the company. As you point out, if its utility is lower than its worth then the company will "lay it off" and????? management can drop the deliveries off on their way home? or hire a rickshaw??

Offshoring? in many areas American labor has NO chance of "competing" with the lowest of the low internationally, or even the lowest of the high, such as offshoring engineering and IT to India. But! fortunately Walmart employees have to be where their stores are.

More automation? Great!!! One of the great advantages of higher wages including those of crafts unions is that of spurring more automation. Today's Longshoremen for example are paid very well, but it matters little due to containerization of the industry they process hundreds of tons with very few people.

More jobs will cease to exist?? Yah sure! Well perhaps a few, those that didn't need to be done anyway. But if the typically hard jobs at the bottom are being done for $50/day (min wage) a 20% raise to $60 is unlikely to cause those paying it to decide to do it themselves.

What's even worse than job elimination is the freedom you would take away from so many people.
An 18-year-old kid with no work experience should have the right to offer his services at whatever price he is willing to work for. If he is not worth $7.00 an hour to an employer, he should be able to work for $5.00 an hour. Who are you to decide what that 18-year-old kid can accept?

.......... This is a bit of a cheap argument against paying the COST of a basic living to an adult, however since you ask, my answer would be Fine! if he or she is in an apprentice program for a time certain. And....... even for doing typical labor jobs a somewhat lower min might be OK for 18 and under, but at the numbers you suggest two hours of pay would hardly cover his hamburger expenses.

Who are you - or the voters as a group - to decide that a mentally retarded person cannot have a job unless he is worth your arbitrary "livable wage" to an prospective employer?

........ Oh, gaaawd....... come ON! Do you think his costs of operation are lower than anyone else? But my answer would be that a taxpayer subsidy to remedy this situation is fine with me and about the only rational policy possible. What would you say? "I can get a whole guy for min wage so you get half that?"

Why do you think you can legislate the economic value of a human being's labor?

........... Hmmmm, somehow (divination?) today's rightwinger seems to KNOW the precise "value" of low paid employee's production right down to whether the "affordable" and "proper" min wage cost of living increase should be one cup of cheap coffee per hour or two cheap cups of coffee per hour. For now one cup is the winner. Somehow the right wing vision appears to fail when looking upward as today's CEO pay having soared by 2,000 percent while median and lower wages have been FLAT or in the case of min wage down. Not a peep as to whether today's CEO's have improved by 2,000 percent. Only "Well "The Market" by which they refer to the old boy club of interlocking board members taking care of each other.

Further? In earlier posts I covered the flaw in capitalism that bids down the price of generic labor and commodities below their cost of production, THE reason every advanced nation has A farm price supports and B a minimum wage.

More probably won't help, but in your own town as low paid workers pump the profits out of the locality and send them to Bentonville, who are you going expect to help you pay for your police, fire, teachers and other costs?

John Dewey

Jack, here's some examples where automation has eliminated low value workers:

1. self service checkouts are used by an increasing percentage of Walmart shoppers;

2. McDonald's has installed automatic french fry vats and automatic drink dispensers in all its locations;

3. gasoline stations are all now self-service, and customers use credit/debit cards to avoid the time required for interaction with employees.

Certainly some jobs cannot (yet) be automated away. But raising minimum wage rates will add to the number that are.

Again, why do you think you can legislate the economic value of a human being's labor?

KIO

May be it is not so relavant to the current discusion but it looks like that increasing labor force participation rate, i.e. inclusion of mainly unskilled and poor workers, has a reverse effect on productivity. The increasing portion of working age popualtion in labor force is completely compensated by decreasing productivity growth. At least this is observed in relative performance of large economies:

http://inequalityusa.blogspot.com/2007/10/some-myths-about-slowdown-of.html

It is likely that the influx of extra workers has no sense at all and redistribution is a good idea.

Jack

Jack, here's some examples where automation has eliminated low value workers:

1. self service checkouts are used by an increasing percentage of Walmart shoppers;

............ While I expect to finish my time here on earth by never using one!

2. McDonald's has installed automatic french fry vats and automatic drink dispensers in all its locations;

............. Great! Were taxpayers not so heavily subsidizing their labor costs, perhaps they'd have done it much sooner. They're a bit slow on the uptake aren't they? Just recently as Starbucks and millions of locally owned coffee stands have surrounded them they seem to have caught on to providing something other than colored water in a flimsy styro cup. Great example, perhaps you'll recall back before campaign donation limits that Ray Kroc set the record with $60,000?? to Nixon to keep min wage low.

3. gasoline stations are all now self-service, and customers use credit/debit cards to avoid the time required for interaction with employees.

.......... Indeed. Saves me time too, is a great productivity gain and I don't have to learn a foreign language to talk to the VERY low paid clerks in charge of selling junk food.

Certainly some jobs cannot (yet) be automated away. But raising minimum wage rates will add to the number that are.

....Great! and studies DO show that more US jobs have been lost to tech than to outsourcing. Is there an area now automated that you'd rather see done by an employee who is paid less than half a living wage while taxpayers chip in to keep him housed, fed and cover rudimentary medical care? Has the unemployment rate risen over the last century as we have automated? Do you think you could afford a loaf of bread made of hand-farmed wheat no matter how low the wages paid?

Again, why do you think you can legislate the economic value of a human being's labor?

..................Again, why do you think you can use any economic factor of production at less than it's true cost of operation? In moderately priced OK a recent study showed it takes $17/hour to live the most basic of independent life (they included a bit for health care) so for those earning much less than that do you favor:

A. Costly transfer programs that distort the labor market and add inefficiencies?

B. Letting the guy try to work w/o eating, while living on the street with no medical care?

C. Making up the difference by stealing or selling drugs?

And lastly do you expect to use my delivery van for less than its costs of operation? or to have taxpayers chip in to subsidize it for you?

Jack

KIO
Newer workers are always less productive and it's a known cost of the expansion of a company or an entire economy. Consider the plumber who goes out on his own; he's likely better than average, is motivated by working for himself to become very efficient and serve his clients. Odds are his first employee does not double his productivity, plus he'll use some of his time in management. That's why many of our most successful businesses try to hire good people, spend above average on training and pay them well enough to retain them. In a booming economy the "good people" are already employed and the choices are to training what's left or bidding up to steal good people from next door.

Some have forgotten these basics and are drowning in high turnover of low paid newbies who are have little reason to be motivated.

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