Published on 7 Apr 2015
Firms have an incentive to increase job safety, because then they can lower wages. In this video, we explore this surprising claim in much greater depth. Bear in mind that wages adjust until jobs requiring a similar level of skill have similar compensation practices. Why do riskier jobs often pay more? Why has job safety increased over the years? How does a firm’s profit motive play a role?
June 27, 2016
June 20, 2016
This is the season of college Commencement speeches — an art form that has seldom been memorable, but has increasingly become toxic in recent times.
Two themes seem to dominate Commencement speeches. One is shameless self-advertising by people in government, or in related organizations supported by the taxpayers or donors, saying how nobler it is to be in “public service” than working in business or other “selfish” activities.
In other words, the message is that it is morally superior to be in organizations consuming output produced by others than to be in organizations which produce that output. Moreover, being morally one-up is where it’s at.
The second theme of many Commencement speakers, besides flattering themselves that they are in morally superior careers, is to flatter the graduates that they are now equipped to go out into the world as “leaders” who can prescribe how other people should live.
In other words, young people, who in most cases have never had either the sobering responsibility and experience of being self-supporting adults, are to tell other people — who have had that responsibility and that experience for years — how they should live their lives.
In so far as the graduates go into “public service” in government, whether as bureaucrats or as aides to politicians or judges, they are to help order other people around.
It might never occur to many Commencement speakers, or to their audiences, that what the speakers are suggesting is that inexperienced young graduates are to prescribe, or help to dictate, to vast numbers of other people who have the real world experience that the graduates themselves lack.
To the extent that such graduates remain in government — “public service” — they can progress from aides to becoming career politicians, bureaucrats and judges, never acquiring the experience of being on the receiving end of their prescriptions or dictates. That can mean a lifetime of people with ignorance presuming to prescribe to people with personal knowledge.
Thomas Sowell, “Commencement Season”, Townhall.com, 2016-05-24.
June 13, 2016
In 2012, the Institute for Justice — a public-interest law firm advocating libertarian causes — looked at the number of occupations that require licensing. Specifically, the institute looked at occupations typically filled by lower- and middle-income workers. These are not your airline pilots, your certified public accountants and your neurosurgeons; they’re the nations interior decorators, auctioneers and florists. (Yes, you read that right: In at least one state, these occupations cannot be practiced without a license.)
Why, you might ask, is the state requiring a license to decorate an interior? Are customers at risk of death from collapsing piles of pillow shams? Must we fear that they will be blinded by the decorator’s decision to pair fuchsia chiffon drapes with a chartreuse brocade sofa? Do we worry that without the threat of losing their license to keep them on the straight and narrow, these fly-by-night operators might be tempted into purchasing furniture from unlicensed auctioneers, and sourcing their floral arrangements from black-market florists?
Well, no. Mostly, these regulations benefit folks who are already plying the trade. They get helpful state legislators to protect them from competition by instituting tough licensing requirements. Their income goes up; the consumer’s wallet suffers. And people who want to follow their dreams into the industry get shut out if they lack the time to study for the licensing exams, the capital to pay the licensing exam fees (which can run in to the hundreds of dollars), or the social capital to know how to work the system.
Megan McArdle, “You’re Gonna Need a License for That”, Bloomberg View, 2016-05-17.
June 1, 2016
Published on 7 Apr 2015
If you had to choose, would you rather be a sewer inspector spending your days underground or a lifeguard on the beach? Most would say that being a lifeguard is a more fun job, but a sewer inspector has higher wages to compensate for the less-fun aspects of the job. In this video, we discuss the tradeoff between fun and wages and show how this illustrates that “There ain’t no such thing as a free lunch!”
May 31, 2016
In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.
Murray Rothbard, “Outlawing Jobs: The Minimum Wage”, 1998.
May 18, 2016
Published on 7 Apr 2015
Wages in America differ greatly among workers. Why is that? One reason includes differences in human capital — tools of the mind. Education is one of the biggest investments people make to increase their human capital. Which college majors offer the greatest returns? And are all returns on education due to human capital? A college degree can “signal” other factors as well, and we discuss what is commonly known as the “sheepskin effect.” In this video, we also discuss how globalization has affected wages in the U.S.
May 13, 2016
April 23, 2016
Published on 7 Apr 2015
In this video on the marginal product of labor, we discuss some commons questions such as: How are wages determined? Why do most Americans earn so much by global standards? What exactly is meant by ‘human capital’? Do labor unions help workers, and if so, by how much? How does discrimination affect labor markets? How is the demand for labor different than the demand for a good? We’ll discuss how to derive the demand for labor based on the marginal product of labor, and use real-world examples — such as the demand for janitors in a fast food restaurant — to illustrate this calculation. We’ll also cover an individual’s labor supply curve vs. market supply of labor.
March 18, 2016
There is a war on. People who can do things, even just the things our parents could do, or less, are losing.
But there is worse. Lately I’ve been running into a new category “people who can’t do their jobs.” And these aren’t just our manual labor imports, I mean, people who supposedly are trained and certified and either can’t or won’t do their jobs.
I know everyone was very impatient with me last year when I was fixing the house for sale, but honestly, there is a reason I do all the manual labor I can. The reason is the tile wall I paid someone 1500 to fix (it had fallen. Long story) and which fell in the night, the day after he put it up. He’d mixed the adhesive wrong. So he came back and fixed it. It fell again. The third time I got a book (this was before Youtube) figured how to do it and did it. This wasn’t an isolated incident. It just keeps happening when someone comes over to fix something. So if I can, I do it.
But there’s more serious cases, like the guy who replaced our brakes but didn’t replace the brake cables. Leading to us losing brake power 15 minutes later. (Thank G-d someone was looking out for us. We lost it a) when Dan was driving. I’d have panicked. Well, he did too, but… he works even panicked. b) we were JUST outside a garage c) we’d been going very slowly.) Or the doctor who convinced himself my 13 year old had an STD and wouldn’t listen to the kid when he insisted he was a virgin. If I hadn’t gone over his head to a urologist, and told the boy to stop taking the antibiotic that was making him ill, my son would probably have died within months. (Of the problem, which was rare, but not unheard of particularly in early teens. As in the urologist identified it on symptoms alone.)
I’ve been given completely wrong instructions by someone selling me a machine or a product. I’ve had ghastly things done to garments or objects taken in for repair because the person who was supposedly an expert on this just couldn’t do it.
Publishing… well, there’s a reason the houses are floundering. And it’s not just the innovation, the end of push marketing, or the fact they can’t wrap heads around Amazon. That’s all I’ll say. Every time someone tells me they can’t go indie because how do they know the book is good if no professional has read it, I remember when I was sitting in a panel with the editor of my friend’s book, (professional, one of the big five) and it became clear not only hadn’t she read the book, but she had only skimmed the proposal. I later watched for the tells and (other than Baen) most of my books were published without anyone but the copyeditor even looking at them. And the copyeditor often sounded like she (it was always a she) had a high school education, even the ones editing history books.
Movie making. Director’s cuts are illuminating. “I filmed that scene, then it didn’t work. I don’t know why” — usually the reason is a gross error in basic storytelling. One anyone who had read a couples of plotting books could fix. But billionaires in Hollywood have no clue. They were never trained.
Sarah Hoyt, “The War On Competence”, According to Hoyt, 2016-03-04.
January 22, 2016
… the free market flourishes when everyone, most of the time, refrains from taking advantage of each other’s vulnerability.
Many people, especially college professors, are surprised by how much honesty, reciprocity, and trust exist among those who engage in business. The biggest, most successful corporations in the world, such as Google and Apple, are renown[ed] for how much they trust their employees and how much independence they give them. (There are much smaller companies that do so, too.) A very successful entrepreneur I know told me recently that the key to running a large, profitable business is to treat your employees, suppliers, and customers with respect and like responsible people. It’s just not possible always to be looking over someone’s shoulder.
When you trust people to reciprocate that trust, you’re taking a chance that they may take advantage of you. Such pessimism, however, means your relationships with other people — your suppliers, employees, and customers — will never have a chance to flourish. That’s why it goes against your long-term interests to hunker down and never leave yourself vulnerable to opportunistic behavior.
The incentive to treat people right by following norms of honesty and fair play is non-monetary, but it can make your business prosper. It seems that the best business owners aren’t driven primarily by profit-seeking, although they probably wouldn’t do what they’re doing without earning that profit. No, the incentives they follow often have more to do with knowing that they’ve done things the right way and so deserve all that they’ve earned. (Which is why they can get very upset when a politician says, “If you’ve got a business, you didn’t build that.”) That knowledge is something all the money in the world can’t buy.
Sandy Ikeda, “Incentives 101: Why good intentions fail and passing a law still won’t get it done”, The Freeman, 2014-11-13.
January 10, 2016
As a mortgage-paying parent, I don’t tend to dine at restaurants that employ sommeliers, so I can’t speak from personal experience about this “golden age”, but in the NY Eater, Levi Dalton says it’s coming to an end:
Prosecco sales are soaring in the United States. Rosé has been on fire as well. One aspect that these categories often share is that consumers don’t feel that they need a recommendation when making a choice among them. Consumers are comfortable purchasing these wines on their own. This is especially true of first-time wine buyers. Nielsen recently noted that, in the States, one third of Prosecco’s massive growth has come from buyers that never bought sparkling wine before. Prosecco is an entry point for consumers who are new to wine. What’s worth noting about that is that Prosecco is not a sommelier-driven category. Sommeliers typically shun Prosecco, and there are New York City wine directors that have gone on record as refusing to offer a Prosecco. What’s important about this is that although we think of sommeliers as introducing people to wine, it seems that consumers are choosing to find their own way into wine and that they are gravitating towards categories where a sommelier’s advice isn’t needed. In the same way that some movies are “critic proof,” obtaining large ticket sales even if the reviews for them are lukewarm, some wines have become “sommelier proof.”
A blow to consumer confidence in sommeliers has come from sommeliers themselves. It is now common — and not only common, but expected — that sommeliers will shill for their friends and their friends’ wines when speaking to the press. The excitement that sommeliers repeatedly express for wines in the press is wholly at odds with their level of excitement for those same wines in private, but this no longer applies to just one or two people who are fluent in media training — this is pretty much the industry at this point. Over and over again sommeliers publicly go on record endorsing wines that have little going for them on their own merits in the market except for some sort of personal tie with the sommelier.
This is at odds with what brought sommeliers to such prominence in the first place — which is that sommeliers introduced consumers to new wines that offered superb value in the face of a wine writing establishment that often continued to predictably endorse their own favorites even as prices for those wines skyrocketed and left most consumers behind. Sommeliers stayed with consumers and offered them great wines in their price range when critics didn’t. In place of that, a certain cynicism has set in with sommeliers in that they don’t seem to think readers will be able to tell the difference between a good recommendation and a personally motivated one. This has already been toxic to the reputation of sommeliers in general and will only continue to be more damaging unless the sommeliers themselves change their tune.
H/T to Brendan for the link.
January 2, 2016
One of the things you might notice about novels from the 1950s and 1960s is how many of the affluent people in them are engaged in trades like selling insurance, manufacturing some dull but necessary article, or running a car lot. These people are rarely the heroes of the novel (even then, writers found it much easier to imagine themselves as doctors or lawyers or, for that matter, as rough-hewn working-class types than as regional office-supplies distributors). But it is telling that those novelists took for granted that the writers and professionals would be intermingled with the makers and sellers, something that comes across as distinctly odd to the residents of the modern coastal corridors. Few of my friends even run a budget outside their own households, much less a profit and loss statement, and very few indeed have ever gone on a sales call.
The change in our novels reflects a change in our economy: the decline of manufacturing; the rise in the number and remuneration of professional jobs; the increase in the size of service firms; and the resulting shift toward salaried positions rather than partnerships or sole proprietorships. As a result of these changes, the upper middle class has found itself in a curious bind. In some ways, its economic fortunes are better than ever: They make more money, more reliably, than they used to. But because they are employees rather than business owners, they have a very limited ability to pass their good fortune onto their children.
A parent who had built a good insurance business in 1950 had a valuable asset that he could hand over to his sons. As long as they put a full day in at the office, they too would be able to take home a good living. That calculation applies across a broad range of manufacturing, retail and service businesses that used to form the economic bulwark of the prosperous middle class.
An MBA, however, is not heritable. Neither is a law degree, a medical degree, or any of the other educational credentials that form the barriers to entry into today’s upper middle class. Those have to be earned by the child, from strangers — and with inequality rising, the competition for those credentials just keeps getting fiercer.
Of course, parents have always worried about their kids making it; small family firms were often riven by worries about Uncle Rob’s ability to settle down to the business. But those were worries about adults, at an age when people really do settle down and become less wild. These days, we’re trying to force that kind of responsibility onto teenagers in their freshman year of high school. Of course, we don’t tell them that they need to earn a living; we tell them they need to get into a good college. But the professionalization of the American economy means that these are effectively the same thing for large swathes of the middle class.
Many teenagers — and I include myself at that age — do not quite have the emotional maturity and long-term planning skills for the high-stakes economic competition they find themselves engaged in. So their parents intervene, managing their lives so intensely that their child doesn’t have much opportunity to, well, act like a child instead of a miniature middle-aged accountant. Since the professional class can’t pass down its credentials, it passes down its ability to navigate the educational system that produces the credentials. The more inequality widens, the more obsessively they will manage their kids through school — and the more economic mobility will stagnate, since parents outside the professional class will have grave difficulty replicating this feat.
Megan McArdle, “What Really Scares Helicopter Parents”, Bloomberg View, 2015-11-30.
December 15, 2015
In Forbes, Tim Worstall pinpoints exactly when many women stop earning as much (or more) than their male co-workers:
Currently, among women under 30 or so (it varies, the age, depending upon the average age of first childbirth and this is itself something that varies quite a bit in the US) women tend to outearn men. And as above those without children have, depending upon how you correct for other factors, a positive wage gap in favour of women of about the same size or no pay gap of any relevant size. But there is a pay gap between men and women who have married and who have children (the two effects are not being separated from each other). So, why?
The obvious answer being that this is what humans do. No, it’s no longer true that this is what humans must do, women taking the majority of the child care duties, men going out to work to support everyone. But it is still what the majority do do, it’s the general expectation about how life is going to be worked out. And this does have its effect:
The division of labor in the family is less delineated than it once was and a majority of women with children now work in the market. Nonetheless, women on average still assume greater responsibility for child rearing than men, and that responsibility is associated with a lower extent and continuity of market work. In addition, the expectation and assumption of home responsibilities influence choice of occupation and preferences for working conditions that facilitate a dual career, combining work at home and work in the market. A significant literature has investigated the effect of work in the home on women’s lifetime patterns of labor force participation and the effect of labor force discontinuities on wages.15 Women with children devote relatively more of their energy to home responsibilities than women without children and as a result earn lower wages. On the other hand, married men earn higher wages than other men. Although that effect may be partly endogenous—women may shun low earners as husbands—it is a plausible consequence of the division of labor in the home, which leads men to take greater responsibility for providing the family’s money income and consequently to work longer, more continuously and possibly harder.
In a nutshell, the gender pay gap is really the effect upon the overall averages of two effects. Mothers earn less than non-mothers, fathers earn more than non-fathers. And yes, mothers and fathers are a majority and so the effect is large enough to sway that national average. And while the effect is not entirely symmetric it is reasonably so. We talk of the overall gender pay gap as being around 20% or so, and we see that fathers outearn non-fathers by 8%: that’s a significant portion of that gap right there.
Our conclusion thus has to be that the gender pay gap that we’re seeing isn’t a result of societal discrimination against women (nor of such discrimination in favor of fathers, something that no one at all is complaining it is) but instead a result of the choices that people make about how the kids are going to be cared for and who does it.
December 12, 2015
… the other new strategic wrinkle was much worse in that regard: the announcement of a policy for a restored “federal minimum wage.”
Provinces set minimum wages for most employees under the Constitution, but Ottawa has an unused right to set a national minimum in private industries regulated under Part III of the Canada Labour Code. The major categories are banking, interprovincial and international transport, and broadcasting. You may be wondering how many people in these technically complicated lines of business are actually making the minimum wage. In the most recent survey of the federal labour jurisdiction (taken in 2008), the answer arrived at by Statistics Canada was: 416 people. In the entire country.
The New Democrats were pretty clearly counting on the press to foul up the story, and it obliged. Some Postmedia newspapers, for example, wrote headlines implying that the new wage floor was for “federal workers.” Economists, who mostly dislike minimum wages anyway, will probably tear into the NDP for a misleading measure that, to a close approximation, helps nobody. And it probably won’t matter much, as New Democrats go on repeating the words “federal minimum wage” for a year.
Colby Cosh, “How to ignore the NDP’s new talking points”, Maclean’s, 2014-09-18.
November 28, 2015
A few months back, Tim Worstall explained why we can soon stop worrying about the rise in income inequality, because the disturbance which caused it in the first place is finally settling out:
We’re constantly told that rising inequality is the greatest threat to the peace and prosperity of the nation. And further, that the stagnant wages of the ordinary working guy and gal are an abomination: as is the increasing amount of the nation’s income going to the already well off. Therefore something must be done. And there’s interesting news for us all. Which is that we don’t have to do anything at all to reverse this trend, the world economy is going to do that for us. We don’t need to change domestic tax rates, start to place tariffs on imports, shout at China for being a currency manipulator, none of the things currently being touted. Because the reason for that income stagnation and rising inequality is itself reversing.
OK, this does rather depend upon agreeing what the original cause of them both was but I think it’s reasonably clear that it is the process of globalisation that has done it. As Branko Milanovic tells us, here’s the winners and losers from globalisation:
That 75% to 95% of the global income distribution, the people who haven’t done well out of it, is essentially some of the people in the communist transition countries and most of those on below median wages in the rich countries. That latter group being exactly who everyone is worrying about in terms of stagnant incomes. The poor of the world have made out like bandits from globalisation which is why I support it. And, yes, the already rich have done well too.
And the point is, this is exactly what we would expect from having added a couple of billion low wage and low skill workers to the global economy. The low skill and low wage workers already in that global economy aren’t going to do very well, as Charles Goodhart explains via Ambrose Evans Pritchard:
Prof Goodhart and Manoj Pradhan argue in a paper for Morgan Stanley that this was made even sweeter by the collapse of the Soviet Union and China’s spectacular entry into the global trading system. The working age cohort was 685m in the developed world in 1990. China and eastern Europe added a further 820m, more than doubling the work pool of the globalised market in the blink of an eye. “It was the biggest ‘positive labour shock’ the world has ever seen. It is what led to 25 years of wage stagnation,” said Prof Goodhart, speaking at a forum held by Lombard Street Research.