Month: July 2012

Empirical Evidence, Sexual Harassment, and the Economic Way of Thinking

An improvement in a district’s schools will increase house prices in that district. A burger and fries will cost more than a burger. All else the same, cars that get more miles per gallon will sell for higher prices than cars that get fewer miles per gallon. I trust that most people would not find these statements objectionable.

All else equal, an improvement in workplace conditions will reduce wages. Now that looks slightly different than “A burger and fries costs more than a burger” but it’s really not. Think of the worker as buying better working conditions with a lower wage, thus better working conditions (burger plus fries) cost more (lower wage) than worse working conditions (burger alone).

Conceptually the burger story and the workplace story are very similar but the latter causes Henry Farrell to object:

…where you will find me objecting, and quite vociferously too, is to the suggestion that we ought to employ simple econ 101 style analysis in order to figure out the tradeoffs, and the appropriate solutions. This style of analysis has an awful lot of presuppositions built into it, and these presuppositions are politically loaded.

Let’s take the case of labour relations. If, as Matt argues, you ought to start with a model of firms, each of which has a cost function such that the total compensation they can offer is fixed, and any increase in costly rights (such as not having your body searched to stop you smuggling widgets out between your arse-cheeks) is inevitably associated with a proportionate decline in wages, then, indeed, you will end up concluding that compulsory rules forbidding body searches will lower overall choice without really benefitting anyone. But you only get to that result because of what you are assuming in the first place. You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation. In other words, you are only ‘refuting’ the people you disagree with, because you assume away the problem that they are worried about.

(FYI, Henry is responding to a smart and devastating post by Matt Yglesias that no doubt rankled because Matt is a liberal.)

Henry gets the economics wrong (the model does not require perfect competition) but let’s ignore that and look to his larger point:

The lesson here is straightforward. Simple economic models can be quite useful, but they should be employed with very considerable caution. In particular, one should always think carefully about whether the assumptions of your model blind you to factors that are important to the debate that you are applying them to. As a secondary matter, you should also look to the empirical support for your model – intuitively appealing models are frequently wrong.

Now. what are you expecting to follow this paragraph? Surely, some empirical evidence that the model is wrong. None follows. Henry seems to think that economists have never thought about their assumptions or tested their models. Nothing could be further from the truth so let me provide some empirical evidence about the model of compensating differentials:

Here is Jonathan Gruber and Alan Krueger (n.b. both of them have worked for Obama) on workers’ compensation:

This paper empirically examines the incidence of the workers’ compensation program to infer the likely consequences of mandated health insurance proposals. In certain industries, such as trucking and carpentry, workers’ compensation insurance costs are quite large, and vary tremendously within states over time, and across states at a moment in time. This variation is used to identify the incidence of the program. Empirical analysis of two data sets suggest that changes in employers’ costs of workers’ compensation insurance are largely shifted to employees in the form of lower wages.

Here is Gruber on mandated maternity leave:

I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.

And, dare I mention it, here is Joni Hersch in a recent paper in the AER on sexual harrasment:

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

Henry goes wrong because he doesn’t want to conclude that sexual harassment is ok but he thinks that the only way to deny that conclusion is to deny that wages are higher so he rejects the model, he rejects the assumptions that he thinks (incorrectly!) are driving the model and he assumes without looking for any evidence that wages are in fact not higher. (Talk about being blinded by assumptions!).

Matt Yglesias, by the way, is much smarter on this point, he doesn’t reject the model but gives several extensions, such as externalities, that may change the conclusion.

Here is another way to think about sexual harassment and the model. What the theory and the empirical results are saying is that people exposed to a higher risk of sexual harassment are paid more, just as people exposed to a higher risk of death are paid more. In the case of risk, however, the firm’s owners (shareholders) are paying higher wages but also getting the benefits of risky work. But in the case of sexual harassment the shareholders are paying higher wages but not getting the benefits of sexual harassment. In other words, from the firm’s point of view sexual harassment is a bit like employee theft – with the stealing being done by the harassers. (I alluded to this point in my original post and Miles Kimball made it as well.) Thus, shareholders may benefit if the government can reduce sexual harassment at low cost, precisely because they would then be able to pay lower wages without losing productive workers.

Now this analysis is not complete or the only way to frame the issue (again see Yglesias for other approaches). It may bother some people that in this version the biggest gainers from sexual harassment law may well be the firm owners rather than the previously harassed (but does it bother you that the among the biggest gainers from better schools may be property owners without children?) Nevertheless, the principle here is clear, the way to think about these issues is not to throw out economic reasoning but to apply the reasoning ever more deeply.

Why is American labor mobility falling?

From The Economist:

The first [reason] is that the mix of jobs offered in different parts of America has become more uniform. The authors compute an index of occupational segregation, which compares the composition of employment in individual places with the national profile. Over time, their figures show, employment in individual markets has come to resemble more closely that in the nation as a whole.

This homogenisation reflects the rising importance of “non-tradable” work…

Yet a more uniform job distribution alone cannot account for falling mobility. As Messrs Kaplan and Schulhofer-Wohl point out, mobility has fallen for manufacturers, where jobs are more dispersed, as well as for service-sector workers. What is more, if workers know that they can find jobs they want in different places, they may become more willing to move for other reasons—to be by the coast, for example, or to savour a particular music scene. Yet survey data reveal that moves for these other reasons have not risen. The authors suggest another force is also reducing migration: the plummeting cost of information.

…In recent decades, however, it has become much easier to learn about places without moving house. Deregulated airlines and innovative online-travel services have slashed travel costs, allowing people to visit and assess different markets without moving. The web makes it vastly easier to study every aspect of a potential new home, from the quality of its apartment stock to the surliness of its baristas, all without leaving home. Falling mobility isn’t simply caused by labour-market homogenisation, the authors argue, but also by greater efficiency. People are able to find the right job in the ideal city in fewer hops than before.

When will the mini-apartment arrive?

Could apartments in New York City get any smaller? Mayor Michael Bloomberg hopes so. On Monday he announced a competition for architects to submit designs for apartments measuring just 275 to 300 square feet (25.5 to 28 square meters) to address the shortage of homes suitable and affordable for the city’s growing population of one- and two-person households.

Here is more, and for the pointer I thank Asher Meir.

*Climbing the Charts*

The author is Gabriel Rossman and the subtitle is What Radio Airplay Tells Us About the Diffusion of Innovation.

In other words, there is lots of payola.  My blurb is:

Gabriel Rossman is the leading researcher in the sociology and economics of the music industry, and this book shows him at the top of his research and exposition powers.

You can buy it here.  Rossman blogs here, and he is on Twitter here.

Pictures of Spain

Grandiose projects across Spain now sit empty and dying. The New York Times focuses in on Ciudad de la Luz, a mega-movie studio built far from cultural centers that is now foundering.

Ciudad de la Luz has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.

Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.

The Daily Mail takes a look at Spain’s “ghost airport,” a billion Euro project that was meant to serve 5 million passengers a year and is now closed after just three years in operation.


The Socialist regional government spent millions propping up the venue, promoting the project with advertising campaigns and approving a €140 million guarantee to keep it afloat.

But, last October, it saw its final commercial flight, by Vueling. The airport remained open for another six months, the staff still being paid to deal with a handful of private arrivals.

It finally closed in April, but even though it is now closed to air traffic, maintenance tasks still have to be carried out.

The 4,000 metre runway has to be continually painted with yellow crosses, so pilots flying over the airport will know they cannot land there.

Private money appears to have also taken a bath on many of these projects although it’s always difficult to say after government guarantees and kickbacks. The Times quotes one tourist on the meaning:

“I understand now why there’s a financial crisis in Europe,” said Bryce Matuschka of New Zealand. “The bridge is a real work of art, and the aquarium is great, but for some of these buildings you just have to ask, What was all that money spent for?”

I don’t think that’s quite right. My view is that rather than causing a crisis, bad investments are mostly masked by a boom and revealed by a crisis. Still, “infrastructure spending” doesn’t always create jobs; sometimes it’s better to stick with slow rail and sewers.

Reminiscences of Miles Kimball, and others

Miles and I were in the same entering class in Harvard.  Miles and Abhijit Banerjee were for economic theory the sharpest students in the group and it must have been an absolute terror to teach them.  Both were gentlemanly in the extreme, but if a mistake or ambiguity were on the board, or in a paper, you could be sure they would find it and point it out.  I recall Abhijit answering a question on the macro final exam and showing that what he thought would be the supposed Harvard faculty member answer was in fact wrong, in addition to solving for the right answer, finding a few other possible equilibria, and acing the rest of the exam in but a few hours’ time.  Steve Kaplan, from the same class, later became known as an empirical economist but his theoretical acumen was remarkably good.  Those three dominated a lot of the discussions.  Mathias Dewatripont was also no slouch in theory though temperamentally quieter.  Alan Krueger, in his third year, obtained the reputation of having the best eye for an important empirical paper and how to execute it; he learned the most from Larry Summers.  Nouriel Roubini was generally quiet, though he looked all-knowing and at times slightly jaded.

Brad DeLong was a few years older.  He was thought of as the slightly right-wing guy (compared to his peers he was) who read a lot of unusual history of economic thought, including Adam Ferguson.  He and his girlfriend (now wife) were inseparable and always affectionate.

Miles struck me as a mind in perpetual motion, in the best sense of that phrase.  I was not surprised, in 1984, when I heard about his linguistics Master’s thesis, which includes a learned and original discussion of Charles Peirce.  Miles is also a cousin of Mitt Romney, and he will soon blog “Will Mitt’s Mormonism Make Him a Supply-Side Liberal?”.  I wonder what he makes of us all.

Here are his early tweets.

One feature about his blog which is refreshing is that he is neither a libertarian nor a progressive, though he incorporates ideas from both approaches.  My RSS feed is mostly libertarians and progressives, but that is part of the strange selection mechanism of the blogosphere, not a reflection of the economics profession.

Again, Miles’s blog is here and Miles on Twitter is here.  Most of all, he seems to be a great dad, or at least his daughter thinks so.  She too is studying at Harvard, for an MBA.  Here is her project Expert Novice, “Every month or so, I write a letter about what I’ve learned lately.”

Private Firefighters

Colorado Springs: When firefighter Eric Morris shows up at wildfires across the West, locals battling the flames sometimes look at him and wonder who sent him.

The answer isn’t a public agency. It’s an insurance company.

Morris is among a group of private firefighters hired in recent years to protect homes with high-end insurance policies. In a wildfire season that is one of the busiest and most destructive ever to hit the region, authorities and residents say their help is welcome.

…For insurers, hiring them is worth the cost. They spend thousands on well-equipped, federally rated firefighters, potentially saving hundreds of thousands, if not millions, of dollars to replace a home and its contents.

Private fire fighters benefit the insured and also the non-insured because the extra manpower lets public firefighters divert their attention elsewhere. Since there are spillovers, private firefighters are under supplied.

Hat tip: Tyler Watts.

*Rome: An Empire’s Story*

That is the new book by Greg Woolf.  Could it now be the best single-volume introduction to the history of ancient Rome?  It is conceptual yet avoids the pitfalls of overgeneralizing, a difficult balance to strike.  It also has a superb (useful rather than exhaustive) bibliography.  A good measure of books such as this is whether they induce you to read or order other books on the same topic and this one did.

A sure thing to make my “Best Books of 2012” list.

Paul Krugman on contractionary devaluation

This is from the 1970s, and with Lance Taylor:

The presumption that devaluation is expansionary is not supported by firm empirical evidence. Why, then, is it so widely accepted? Leftists have been known to suggest class bias — as we will argue later, devaluation does typically redistribute income from wages to profits — but this is too glib. We believe, instead, that the orthodox view of devaluation derives much of its strength from the persuasive power of the simple, elegant models in which it is presented. Since skeptics have mostly relied on Journalism or at best partial equilibrium analysis, it is not surprising that theoretical discussion is dominated by the belief that devaluation has an expansionary effect.

As just hinted, neglecting the contractionary impacts of devaluation amounts to ignoring income effects, especially those transferring real purchasing power toward economic actors with high marginal propensities to save. By redirecting income to high savers, devaluation can create an excess of saving over planned investment ex_ ante , and reductions in real output and imports ex_ post .

…Casual empiricism suggests that all three circumstances prevail in many countries, especially the less developed ones. In these
countries a deflationary impact from devaluation is more than a remote possibility; it is close to a presumption. The purpose of this paper is to show in a formal model how devaluation can cause an economic contraction. The results will come as no surprise to those concerned with policy in the underdeveloped world.

There is nothing wrong with changing your mind, as indeed I have myself on numerous issues.  The point is that most macro questions are not cut and dried, and opposing viewpoints are rarely stupid.  I also note a general tendency that, when critics attack other people, they are often attacking views they once held themselves.  I leave it to Adam Phillips and Darian Leader to tell us what that means.

The document you will find here.  For the pointer I thank Jay S.

A fourth and hybrid perspective on the future of on-line education

In a very good blog post, Bryan Caplan lays out three competing perspectives.  But he leaves out a fourth:

Select groups, such as adult continuing education, military officers on ships, precocious 12-year-olds, or perhaps middle class students in Kenya who can’t get the real product, will follow an exclusively on-line model.  But most students will not, at least not in the United States.  College still has considerable consumption value, fraternities improve your job prospects, instructors help motivate, and face-to-face contact imprints a lot of learning on our minds.  Still, there is far too much duplication of lectures and universities are being squeezed by personnel costs.  State governments face rising Medicaid costs and 78 percent or so of students are in state systems.  Lecture duplication will be significantly reduced, and instructional time will be spent…instructing…rather than repeating canned lectures ad nauseum.  Imagine that ten years from now one-third of all lectures are delivered on-line in one manner or another, perhaps with some later in person commentary.  Students may watch those lectures with an instructional aide present to address questions or to show them how to press the “Play” button.  There will be no need for employers to fundamentally change which sources they respect for personnel certification, although possibly some upstarts will arise in corners of the market where quality can be measured by tests.

You will find two critiques of my views on on-line education here, and here, but neither represents my views correctly.  They all take on-line education to be an all-or-nothing prospect.

At the end of his post Bryan writes:

* When I talk about “online education,” I don’t just mean students at existing brick-and-mortar colleges taking some classes from their dorm rooms.  I mean students enrolling in virtual colleges instead of physical colleges.

I would say he is defining away the most likely model, namely a hybrid model which has a significant on-line component.

Higher frequency (book) trading: Walras, collusion, or both?

High-speed trading tools pioneered in the stock market are increasingly driving price movements on Amazon’s website as independent sellers use them to undercut and outwit each other in a cut-throat online market place.

Product prices now change as often as every 15 minutes as some of the 2m sellers on Amazon’s site join the online retailer in using computerised tools – often developed by former data miners at investment banks – to lure shoppers with the best deals.

…Amazon sellers – using third-party software – can set rules to ensure that their prices are always, for example, $1 lower than their main rival’s.

…Some sellers have even created dummy accounts with ultra-low prices to deliberately pull down those of rivals so they can corner a market by buying their goods, say pricing experts. That practice violates Amazon’s rules of conduct.

Here is more, “Amazon robo-pricing sparks fears.”

Re-running the Stanford experiment in Turkish prisons

It goes on today, more or less:

The problem confronting the conscripts nonetheless extends far beyond commanders who are drunk with power. In perhaps the strangest twist in the story of the disko, [rights activist Tolga] Islam says prison guards themselves are chosen from the ranks of conscripts, often from the same group that they oversee — and sometimes torture. “These are people who have been taken from the same group of soldiers, some know each other. And what is most incredible is that, from what we understand, commanders don’t necessarily tell guards how to torture or how far to go. In the disko, they give them impunity to do what they wish.”

It is chillingly similar, Islam says, to a notorious 1971 experiment by Stanford psychologist Philip Zimbardo, where participants were randomly given roles as guards or prisoners in a mock prison. Within less than a week, the mock guards had quickly “become sadistic,” subjecting some prisoners to psychological torture. The experiment was shut down after only six days.

“The diskos are the perfect real life example of this experiment. Guards begin to think, ‘We have this person in our prison for 24 hours. Nobody will stop us if we torture him.’” That disturbing license for abuse leads prison guards develop their own practices of torture, from slapping inmates who make eye contact with guards to severe and prolonged beatings, deliberate malnourishment, confining recruits to cramped and filthy spaces, or leaving them shackled outside in the sun for prolonged periods of time.

While former military judge Kardaş says that such practices follow a “hard logic” of instilling fear and a sense of arbitrary control among recruits, at times even that vague reason for torture seems to be absent. In Uğur’s case, it is difficult to understand what the torture was meant to communicate, given that his unit had just days left before its term of service was over. “The only way to explain it is that there’s a culture of impunity here, one that gives people unimaginable power and allows abuse to go on for years,” Islam argues.

Here is much more, by Noah Blaser, sad story but compelling reading.