From a loyal MR reader:

I’m very curious about the macroeconomics of the sheepskin effects. Traditional productivity forecast research tends to assume the wage premium is entirely human capital. Eg, Bosler/Daly/Fernald/Hobijn use a mincer equation with five education dummies   Jorgensen’s approach dividing workers into types also assumes this is not an issue.

If sheepskin effects are purely relative status effects, then the impact on total output and income should be zero, right? This implies increasing educational attainment will have a much smaller impact on productivity and output than typical productivity forecasts imply.

But it seems to me like showing you are “high ability”, if that’s all it does, makes you able to be slotted into higher ability jobs, and that this won’t simply give you a leg up on other workers but increase the number of higher ability jobs filled.

Anyway, I’m sort of thinking out loud but would be curious to read a blog of your thoughts on this, so consider this a bleg!

In the simplest Spence signaling model, the output goes to workers, and if one more worker sends the signal and boosts his or her wage, the non-signaling workers will receive an equal amount less.  That is an equilibrium condition, but it makes less sense as an account of dynamics.  As a practical matter, it’s not clear why the employers should revise their opinion downwards for the marginal products of these less educated workers.  You could say that competition makes them do it, but it’s tough to have good intuitions about an equilibrium that is hovering between/shifting across a varying degree of pooling and separating.

As a more general extension of Spence, a richer model will have market power and payments to capital and labor.  If one more worker finishes school, that worker is paid more and the higher wage serves as a tax on production.  Yet it is a tax the boss does not perceive directly.  The boss thinks he is getting a better worker for the higher wage, but in the counterfactual with more weight on the pooling solution, the boss would have hired that same person, with the same marginal product, at a lower wage.  The “whole act of production” will be and will feel more costly, including at the margin, but the boss won’t know how to allocate those costs to specific factors.  By construction of the example, the boss however will think that the newly educated laborer is the one factor not to be blamed.  So he’ll cut back on some of the other factors, such as labor and land.  Labor in the company will be relatively more plentiful, and the marginal product of labor in that company will fall.  So the incidence of a boost in the sheepskin effect falls on the land and capital that have to move elsewhere, plus to some extent the declining marginal products and thus wages for the remaining workers in the firm under consideration.  Note that outside firms are receiving some influx of capital and land, and so in those firms the marginal product of labor and thus its wage will go up somewhat.

Or so it seems to me.  The trick is to find some assumptions where the hovering between/moving across a varying degree of pooling vs. separation is not too confusing.

Today I spoke at Brookings India on Online Education and India. One of the things I discussed was how online technology and AI can dynamically adjust content to the needs of an individual learner. An Indian firm, Mindspark, is a leader in mathematics education that is synchronized to an individual student’s actual ability regardless of grade. The ubiquitous Karthik Muralidharan with co-authors Abhijeet Singh and Alejandro Ganimian have an important paper doing a RCT on Mindspark, finding large gains in math ability and also in Hindi ability for students who win vouchers to the program. David Evans at Development Impact the World Bank blog has an excellent post on the Mindspark RCT.

I want to focus on a different issues: the personalization of education is especially important in India because classes often contain students of widely different abilities. Here’s a graph from Muralidharan et al. showing the student’s grade along the horizontal axis with the student’s actual ability on the vertical axis. The students are drawn from a sample of Delhi public schools.


The graph shows two things of importance. First, if most students were operating at grade level the dots/students would be clustered around the blue line. But very few students in grade 6 are operating at a grade 6 level–most are operating at a grade 3 or 4 level and some even at a lower level. The distribution of ability level in the same grade is extreme. No math teacher can be expected to teach students in the same class who are operating at grade levels 2-7. Even if the teacher teaches to the level of the average student the material will go over the heads of many. As a result, many students do not progress. Indeed, the second point is shown by the red line, the best-fit line for academic growth. The growth in achievement is slower than the growth in the standard. As a result, over time students fall further and further behind the standard.

Keeping all students in the same grade at a similar level of ability would be excellent and the best way to do this is by teaching to a student’s actual ability but the only way to do that on an economical basis is through online learning and AI technology.

One of my favorites, David was great, here is the link to the podcast, video, and transcript.  Here is the opening summary of the chat:

Named one of the most influential Jewish thinkers of our time, Rabbi David Wolpe joins Tyler in a conversation on flawed leaders, Jewish identity in the modern world, the many portrayals of David, what’s missing in rabbinical training, playing chess on the Sabbath, Srugim, Hasidic philosophy, living in Israel and of course, the durability of creation.

Here are a few bits:

WOLPE: So as my friend Joseph Telushkin says, “Polygamy does exist in the Bible, it’s just never successful.” David does have many wives, and very strained and interesting and complex relationships with women. David has the most complicated and most described relationships with women of any character in the Hebrew Bible.

Those qualities that can be negative, in David are to some extent positive. One of the things that draws David out of the charge of simple narcissism is that he really listens, he pays attention — he pays attention to women over and over again. He listens to what they say and changes himself because of it. And that’s not a characteristic of men in the ancient world or the modern one that you can rely on.


COWEN: So again, I’m an outsider in this dialogue, but say I were thinking of converting to Judaism and I were asking you about Hasidic philosophy. Now in terms of some social connections, I probably would fit better into your congregation than into a Hasidic congregation. But if I ask you, on theological grounds alone, is there a reason why I should be hesitant about Hasidic philosophy? From the point of view of theology, what do you think is the greatest weakness there, or your biggest difference with it, given how much you like Heschel?


COWEN: How would you alter or improve rabbinical training?

WOLPE: I’ve given this a lot of thought. Let me just mention one area. When I speak to rabbinical students, I tell them all the time that the single most valuable commodity you have as a rabbi . . . you can answer that yourself, and then I’ll tell you what I think: your voice. Most people are going to come in contact with you when you speak to them. Not all of them, but most. There’ll be more people who come to your services than the number of people at whose bedside you will sit as they die.

And yet, most rabbis — most people — don’t know how to speak.

There is much more at the link, including about Israeli TV, where to visit in Israel, whether King David parallels Trump, the future of biblical commentary in a world of context-less social media, whether Canadian Jews are more likely to stick with the faith, whether Los Angeles is underrated, what is beautiful and significant in Islam, and the Iran nuclear deal and the settlements, among other topics.  Self-recommending…

And again, here is David Wolpe’s most recent book David: The Divided Heart, which was the centerpiece for the first part of the discussion.

The world’s largest exporter of roses is an Indian firm, Karuturi Global, which has leased 3,000 square kilometers of land in Ethiopia.

I talked today about globalization and the price system using Valentine’s Day and the rose market as a jumping off point. I spoke at the Sarla Anil Modi School of Economics at NMIMS in Mumbai. The students were excellent. Lots of well informed, enthusiastic questions, and debate.

Here is a bit of what I said:

A while ago I had some email with Noah Smith on this topic, now we are getting somewhere, this is from a new NBER working paper by Daniel M Hungerman, Kevin J. Rinz, and Jay Frymark:

We use a dataset of Catholic-parish finances from Milwaukee that includes information on both Catholic schools and the parishes that run them. We show that vouchers [funded by the government] are now a dominant source of funding for many churches; parishes in our sample running voucher-accepting schools get more revenue from vouchers than from worshipers. We also find that voucher expansion prevents church closures and mergers. Despite these results, we fail to find evidence that vouchers promote religious behavior: voucher expansion causes significant declines in church donations and church spending on non-educational religious purposes. The meteoric growth of vouchers appears to offer financial stability for congregations while at the same time diminishing their religious activities.

I’ve long maintained that the fiscal effects of vouchers, if they were implemented on a much larger scale, are the elephant in the room.  For better or worse.

That is a question from Kevin Burke, who emailed it to me rather than going up to a microphone and asking.  His exact wording was “Why don’t we have better formats for soliciting audience feedback than going up in front of a microphone?”

First, I have seen event organizers move away from the questions at a microphone format to some degree.  They prefer either no Q&A, to draw upon written or social media questions, or to conduct the entire event as an interview with a single questioner or panel.  (Personally, I like to receive handwritten questions.)

That said, this format still persists.  The Hansonian point would be that questioning isn’t about questions (or answers!), or however else you might wish to put it.  Rather the point is to show various constituencies that they are being recognized by the process and given some voice.  The more cumbersome and inefficient the questioning period, the more effective this signal may be.  There are, however, problems with this approach, one of them being that the Q&A period can be hijacked by weirdos, rather than remaining the province of the boring drones you wish to placate.   Furthermore, social media-generated questions, if manipulated, may serve the signaling function more directly, as you can ensure that some specific interest group is recognized as doing the asking (“And Mildred, from the teachers union in Ohio, sent in a question about caring for the children…”)

These days there are more and better ways to ask questions than ever before, including of course Reddit and Quora.  That means audience Q&A at the mike is less about information than it used to be.  I predict a kind of bifurcation, in which events either will run away from the format altogether or embrace it all the more firmly, and that is I think what we are seeing.  How about a limiting case for the signaling approach, whereby you invite a famous person, and simply make him or her submit to audience questions, with not even a chance to respond?

Saradhu Dhivar, 57, an unemployed villager, said he had daily spats with Mr. Koshle’s associates, arguing that Nimora had ample space to go “freestyle.” His food entitlements were withheld for a month, he said, until he built a toilet. It took days “to get used to this style,” he said.

There is much more:

In October, Mr. Koshle sealed a gap in the walls of a school whose large, grass-covered grounds had become a bathroom of choice. Dozens marched to his home in protest, wielding water buckets they carry for outside duty. They demolished the wall.

In December, Mr. Koshle got his police friends to stage the faux arrest of four locals he had instructed to relieve themselves outside—an attempt to strike fear, he said. He rented an auto-rickshaw with a loudspeaker, announcing that transgressors’ electricity supply would be cut.

Recently, teams of saree-clad women kept daily vigil around lakes and grassy fields from 4:30 a.m., shouting pro-toilet slogans and blowing whistles at offenders.

“Going to the toilet has become very political,” said Mr. Koshle. “You can’t imagine the hostility we’ve encountered.”

Don’t forget this:

“I like to take a walk,” said Luv Nishad, 35, a laborer in the village of Nagar, “and do my business away from where we sleep and pray.”

Here is the Niharika Mandhana WSJ story, via the excellent Samir Varma.

I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses. Indeed these professions seem to have lost ground salary-wise relative to others.

That is just one bit from a very excellent blog post by Scott Alexander.

A taxpayer-funded voucher that paid the entire cost of educating a child (not just a partial subsidy) would open a range of opportunities to all children. . . . Fully funded vouchers would relieve parents from the terrible choice of leaving their kids in lousy schools or bankrupting themselves to escape those schools.

…the public-versus-private competition misses the central point. The problem is not vouchers; the problem is parental choice. Under current voucher schemes, children who do not use the vouchers are still assigned to public schools based on their zip codes. This means that in the overwhelming majority of cases, a bureaucrat picks the child’s school, not a parent. The only way for parents to exercise any choice is to buy a different home—which is exactly how the bidding wars started.

…Under a public school voucher program, parents, not bureaucrats, would have the power to pick schools for their children—and to choose which schools would get their children’s vouchers.

That is from her 2003 book The Two-Income Trap: Why Middle Class Parents Are (Still) Going Broke, with Amelia Warren Tyagi.  Here is the WSJ link to the full passage, Friedmanesque throughout.  The more general underlying point is that the “rent is too damn high crowd” ought to be somewhat more sympathetic to vouchers than is often currently the case.

In online communities, antisocial behavior such as trolling disrupts constructive discussion. While prior work suggests that trolling behavior is confined to a vocal and antisocial minority, we demonstrate that ordinary people can engage in such behavior as well. We propose two primary trigger mechanisms: the individual’s mood, and the surrounding context of a discussion (e.g., exposure to prior trolling behavior). Through an experiment simulating an online discussion, we find that both negative mood and seeing troll posts by others significantly increases the probability of a user trolling, and together double this probability. To support and extend these results, we study how these same mechanisms play out in the wild via a data-driven, longitudinal analysis of a large online news discussion community. This analysis reveals temporal mood effects, and explores long range patterns of repeated exposure to trolling. A predictive model of trolling behavior shows that mood and discussion context together can explain trolling behavior better than an individual’s history of trolling. These results combine to suggest that ordinary people can, under the right circumstances, behave like trolls.

That is from Cheng, Bernstein, Danescu-Niculescu-Mizil, and Leskovec (pdf), via the never-trolling Kevin Lewis.

On February 27, I’ll be having a Conversation with Tyler with Malcolm Gladwell.  (Sorry the event is already sold out!  In due time I’ll get you information on the live stream.)  What should I ask him?

I thank you in advance for your intelligent and scintillating suggestions.

Volume 14, Issue 1, January 2017

In Memoriam (.pdf)

Government Propaganda Watch: Three investigations of economic discourse and research issued by governments and government agencies:

Classical liberal economic thought in Italy, since 1860: Alberto Mingardi contributes the 13th article of the “Classical Liberalism in Econ, by Country” series.

Econ 101 Morality: J. R. Clark and Dwight Lee tell teachers to embrace a moral purpose and to teach students where their instincts came from and why instincts often mislead.

Must moral judgment involve sympathy? Thomas Brown’s 1820 critique of Adam Smith.

Mitchell Langbert and coauthors rectify a coverage error in their study of faculty voter registration.

EJW Audio

Alberto Mingardi on Liberalism in Italy

Benny Carlson on Swedish Economists

EJW News

Professor Sir Angus Deaton joins EJW Advisory Council.

The context is the discussion of why Mafia members with college degrees earn more:

Signalling doesn’t really work IMO. Who is he signalling too? Other criminals? Customers? Why do they care? It seems if this is what it is the economy is deeply inefficient. 40% of the population needs 4 years of college to ‘signal’? So if there was some way to pick up this signal without college huge profits would await.

I suspect there’s two aspects that make college valuable:

1. Narrative creation – humans work by creating and sharing fictional narratives. College is a lot of practice at that which is a skill that carries over into business of many types.

2. Burns off immaturity. I suspect a big portion of the benefit of schooling is babysitting. It keeps kids out of the way of adults (which our economy couldn’t function otherwise…imagine if *every* day was take your kid to work day). By keeping immaturity somewhat walled off until kids grow out of it, schools prevent them from damaging their lives.

2.1 This may be somewhat related but workplaces are very, very stable. If you are changing tires at 18 there’s enough tires in the world that you can still be doing it at 59. Perhaps by starting work at a younger age, it is a bit too easy to fall into stability. School forces you to someday break things up. No matter how good you are at school you’re going to have to leave that stability upon graduation which will land you somewhere else which you’ll have to figure out. That flexibility may be more valuable than premature stability.

On this week’s Odd Lots podcast, we speak with Giovanni Mastrobuoni about the relationship between salary and educational attainment in organized crime. He’s the co-author of a paper titled “Returns to Education in Criminal Organizations: Did Going to College Help Michael Corleone?” Based on data sets from the first half of the 20th century, Mastrobuoni and his colleagues were able to show that mafia members who got more education also got paid more in the underworld.

That is from Tracy Alloway and Joe Weisenthal.

The Power of Online Education

by on January 27, 2017 at 2:21 am in Economics, Education | Permalink

One of the best things about teaching at Marginal Revolution University is the emails that Tyler and I receive from our students all over the world. Here’s a recent email we got from Rasim Mollayev, a student in Azerbaijan.

Sir! I’m writing this from Baku, Azerbaijan. I am studying at ADA University in Baku. Due to my personal and health problems I couldn’t attend my lectures properly in previous Fall 2016 semester. I missed most of my “Principles of MicroEconomics” class.

And then I found your videos on YouTube and prepared for all my midterm and final exams with your videos and quizzes. And passed that course successfully. I just wanted to say thanks for your great help.