Category: Economics

Facts about downsizing

Downsizing occurs when a firm lays off workers to economize on costs. So what do economists know about this phenomenon?

1. About half of all downsizing firms end up with at least as many laborers within a few years’ time. Downsizing is often a matter of restructuring a labor force, not just getting rid of dead wood. In other cases downsizing may be purely temporary, and is reversed once the firm has some extra cash.

2. Downsizing in manufacturing is nothing new and has been going on since 1967. That being said, the smaller manufacturing firms generally have been increasing employment. The notion of “regression toward a mean” describes the manufacturing sector better than the universal downsizing hypothesis.

3. Downsizing is positively correlated with the degree of foreign competition in a sector. So trade does encourage firms to cut their costs.

4. Manufacturing is fifteen percent of the U.S. labor force and thus only a small part of the downsizing story. Retailing and services have been upsizing considerably for many years.

5. Downsizing firms tend to increase their profits but not their productivity. Downsizing commonly leads to lower wages within the downsizing firm. There is evidence for the “wage squeeze” story.

From the recent Downsizing in America: Reality, Causes and Consequences, by William J. Baumol, Alan S. Blinder, and Edward N. Wolff.

The authors conclude the following:

…no special programs appear to be called for, aside from measures to ease the transition of downsized workers to other jobs…the evidence provides no support for the conjecture that the economy is undergoing widespread and protracted reductions in the size of the typical firm’s labor force.

Tom Friedman on outsourcing

…when I came to the 24/7 Customer call center in Bangalore to observe hundreds of Indian young people doing service jobs via long distance – answering the phones for U.S. firms, providing technical support for U.S. computer giants or selling credit cards for global banks – I was prepared to denounce the whole thing. “How can it be good for America to have all these Indians doing our white-collar jobs?” I asked 24/7’s founder, S. Nagarajan.

Well, he answered patiently, “look around this office.” All the computers are from Compaq. The basic software is from Microsoft. The phones are from Lucent. The air-conditioning is by Carrier, and even the bottled water is by Coke, because when it comes to drinking water in India, people want a trusted brand. On top of all this, says Mr. Nagarajan, 90 percent of the shares in 24/7 are owned by U.S. investors. This explains why, although the U.S. has lost some service jobs to India, total exports from U.S. companies to India have grown from $2.5 billion in 1990 to $4.1 billion in 2002. What goes around comes around, and also benefits Americans.

Read the whole column.

Addendum: Here is Virginia Postrel’s latest piece on trade.

Second addendum: How about this press release, India awarding a big contract to Hewlett-Packard, thanks to Kevin Bone for the pointer.

Picasso at your local price club

Since last spring, the company has been selling fine art, including limited-edition lithographs by Pablo Picasso, Marc Chagall and Joan Miró.

Greg Moors, an art dealer in San Francisco, began selling art at some of the company’s stores in brief experiments last spring, and for the last two months has been selling on the company’s Web site, Costco.com. The artwork is museum quality, matted and framed.

“There were so many double takes at the stores,” Mr. Moors said. “People stopped in front of these lithographs and said: ‘Wow! What is this?’ “

Mr. Moors sold 43 pieces of art during appearances at Costco stores – in the La Jolla area of San Diego, as well as Concord and Mountain View, Calif., and Issaquah, Wash. “I consistently did fairly well,” he said, “considering that people are coming in to buy hamburger and walking out with a $1,200 work of art.”

Get this:

Ms. Elsner said Costco applied the same pricing system to the art that it did to other goods, marking them up no more than 14 percent above what it pays Mr. Moors. He said his markup was “way below what retail galleries charge” but declined to be specific.

Tony Pernicone, an art appraiser who owns Avanti Fine Arts, a gallery in Larkspur, Calif., north of San Francisco, and previously directed the San Francisco Art Exchange and other art galleries, said: “At a legitimate gallery, generally the markup is 100 to 150 percent, depending on their overhead and the cost of the art. Obviously, you get galleries that try to go higher.” Costco’s price of $1,550 for a Chagall Bible Series lithograph was $500 to $1,000 less than a gallery would have charged, Mr. Pernicone said.

In other words, “non-dignified” intermediaries are entering the market and offering the goods at cheaper prices, thereby separating the artwork from the attached aura of the sale. Let’s root for the artwork, not the aura. Here is the story. Here is the web site, note they are temporarily out of stock. Here is the sort of work you can buy, albeit from another seller.

Steve Levitt on sports

The Financial Times surveys the research of Steve Levitt on sports. Here is one succint passage:

In Europe, Levitt is feted as one of the authors of the “penalty-kick paper”. Probably only a trio of economists would have watched videos of 459 penalties taken in the French and Italian football leagues. The authors were testing a complex point of game theory. What they found was that the best place to put a penalty was the middle of the goal, largely because goalkeepers always dive. Yet few penalty-takers actually choose the middle. “I think one reason people don’t is that it’s just incredibly humiliating to a kicker if he kicks in the middle and doesn’t score,” guesses Levitt.

How about Levitt on Michael Lewis’s Moneyball?

There has been much hype recently about baseball clubs finding statistics to identify good players. Levitt read Michael Lewis’s book Moneyball about the supposed innovators, the Oakland As, and is unimpressed. “If you look at all the stats they say are so important, the As are totally average! There’s very little evidence Billy Beane [the club’s general manager] is doing something right.”

My recollection is that Lewis claims the small-market A’s put together a good team more cheaply, not that they win every pennant. In fairness to Levitt, a scrupulous researcher, perhaps this quotation is pulled out of context.

Thanks to J. Charles Bradbury for the pointer, check out his blog.

Buy Hoosier, Raise Taxes

In Indiana, Governor Joe Kernan canceled a $15.2 million dollar contract with a subsidiary of a Bombay headquartered company. The next lowest bid was $8.2 million dollars higher. Even if we accept (incorrectly!) the notion that trade restrictions create jobs the governor’s action will at best create some 50 jobs at an additional cost to Indiana taxpayers of $162,000 per job. Consider, both Indiana taxpayers and workers would be better off if the state government hired the Indians and gave 50 randomly chosen workers $100,000 to spend at their leisure.

See Stuart Anderson’s review of state legislation against outsourcing for more examples of Mercantilism in action.

The economics of carnival culture

Have you ever been to Trinidad? The steel bands (“pans”) start practicing sometime before Christmas, and the pan competitions peak at the time of Carnival, which we call Mardi Gras. Serious pan music is otherwise hard to find on the island, although we do see many smaller performances for tourists throughout the year.

We find a similar pattern in Brazil. The production of samba culture has an especially pronounced seasonal business cycle, again centered around carnival.

Carnival culture appears to have started for religious and cultural reasons, yet it persists more in some places rather than others. Why bunch your cultural production so tightly into one part of the year?

Carnival culture may prove efficient when a large number of the customers are tourists, who journey from other countries, or other regions, to an urban center. A high fixed cost of the journey implies it is better to bunch cultural production at one time of the year, to lower transport costs.

The significant presence of amateurs in production also encourages carnival culture. It is widely understood in Trinidad that many workers will take off extra time to practice the pans. The relevant time of year is an accepted social convention, plus everyone takes off at the same time, so the pan orchestras can practice together. After carnival, everyone is expected to go back to work at the regular pace.

The use of national competitions to market performers also increases the efficiency of carnival culture. When everyone competes at the same time, on a set of common stages, it is easier to declare a “winner,” and indeed carnival cultures usually emphasize such competitions and hand out national or regional prizes. The prospect of being a winner is then used to drum up local corporate support. If a company backs a carnival winner, it receives significant favorable publicity.

So enjoy your Mardi Gras today!

By the way, classical music has survived as a truly popular music only in Trinidad and Tobago, largely because it is played on the steel pans at Carnival competitions.

Outsourcing: an extreme scenario

Imagine a future where India has billions of people, they are all as productive as American workers, and they all will work for a penny a year (forget the possible contradiction between the last two assumptions).

Or imagine a nanotechnology machine that can produce the world’s output, and then some, for a nickel. If you wish, take this one step further. The machine produces robots, which compete with human labor, and cost only a penny a year to maintain.

The economics of outsourcing resemble the economics of technical change. Advanced robots would put many people out of work, just as computers have eliminated many jobs. Yet few people complain about this scenario, it is somehow emotionally more resonant to complain about “foreigners taking jobs” than to complain about “machines taking jobs.” Of course the empirical reality is that technology takes away (and also creates) many more jobs than do foreigners.

Now I am not going to give you the line “in the long run robots would create more jobs than they destroy.” For most plausible parameter values that is in fact true. But let us say that robots, or foreigners, could produce all of our current output for a mere nickel. Total wages, of course, could not exceed a nickel in such a scenario. Since this is below subsistence, no one would work for money (some wealthy capitalists might still work for fun).

If you are truly worried about outsourcing, you must have in mind something in this direction, albeit with less extreme parameter values. But as a perverse kind of reality check, consider the extreme case, how bad would it be?

National income would be enormous, the catch is that virtually all of it would go to capital. But capital is very very cheap. You need only save a nickel to command the equivalent of today’s global output. How many poor Americans today cannot save a nickel?

If you fear radical outsourcing you also should favor privatization of social security, with investment of the funds in the stock market. (Personally I am skeptical of the idea, but I don’t fear radical outsourcing either.) This would make us all very very wealthy.

Furthermore you should buy stocks immediately. If you are not devoting your portfolio to stocks, as rapidly as possible, and you fear radical outsourcing, you probably hold inconsistent views.

And of course you shouldn’t criticize the fiscal policies of the Bush administration, or call for a tax increase, if you think the stock market will skyrocket in this fashion.

Now I don’t ever expect to see parameter values so extreme. But neither do I expect that outsourcing will lead to a net destruction of jobs. The worrywarts wish to have it both ways. Outsourcing will be so significant as to take away American jobs, but not so significant to bring large benefits through the ownership of capital.

Link added: For this post I am indebted to conversations with Robin Hanson, and his paper on a robot economy.

Facts about economics Ph.d. students

1. The number of economics Ph.d degrees awarded in the U.S. fell from 1008 in 1996 to 930 in 2001.

2. The number of Ph.d degrees awarded to American citizens fell from 430 in 1996 to 350 in 2001. This number has not been so low since the Johnson administration.

3. 76 percent of newly minted Ph.d. students had undergraduate degrees in economics, 4 percent had undergraduate degrees in mathematics, 5 percent in engineering. No other undergraduate major accounts for more than four percent of the sample. (Those figures are taken from a representative but incomplete sample of respondents.)

4. Females account for 28 percent of graduating Ph.d. students. Female students are most strongly represented in labor economics, economic development, and health, education, and welfare economics.

5. The median “time to degree” is 5.4 years. The range is from 2.7 years to 29.7 (!) years.

6. 56 percent of graduating Ph.d. students wrote a “three essays” thesis rather than a single block work. This is estimated to save more than half a year’s time.

7. Only four percent of finishing Ph.d. students received no financial aid whatsoever.

8. The unemployment rate for graduating Ph.d. students is projected at 2.1 percent.

9. 23 percent found jobs outside the U.S., down from 31 percent five years earlier. The biggest foreign employers are, in order, Canada, South Korea, the U.K., and Brazil, Taiwan, and Turkey.

10. Only six percent of Ph.d. graduates in economics say they do not like their jobs. The median salary is $74,000, again noting that not everyone responded to the questionnaire.

The bottom line? It’s a great life. Sign up now.

Bryan Caplan suggests that economists’ wages are relatively high for the following reason. Few people, as a teenager, say to their parents: “I want to be an economist when I grow up.” Yet many people wish to be writers, astronauts, professional athletes, scientists, psychologists, and so on. I don’t know of any situation comedy where the lead star is an economist. So our relative lack of popularity keeps the supply low and our wages relatively high.

Here is the full report, it has many more interesting facts. Thanks to Newmark’s Door for the pointer.

Where are the new jobs?

Daniel Drezner ably summarizes the ongoing debate in the blogosphere, covering Virginia Postrel, a critical response from Brad DeLong, and others.

Virginia writes:

My interest was in the question, Where will new jobs come from? A lot of non-economists are genuinely afraid that in the future there will be no jobs, or that there will be no jobs for people without large amounts of education…From other research, I know of a number of aesthetic professions where jobs are growing rapidly. I found that in every such category the BLS counts were way under or, at best, obscured in categories dominated by losses in traditional manufacturing (e.g., paper mill workers vs. stone fabricators).

Outsourcing and dining?

White House Council on Economic Advisers chief Gregory Mankiw was scalded last week for saying that sending jobs overseas was a good thing for the economy. So on Tuesday, he tried to, as they say on the Hill, revise and extend his remarks at a luncheon with economists. The restaurant? Chinatown Garden on H Street NW.

The Bombay Club was booked?

Here is the link. I propose that all opponents of outsourcing be forced to eat American food for one month straight.

The Ricardo effect in Haiti

The civil war in Haiti is intensifying, to the detriment of virtually everyone. Many American observers do not understand how poor Haiti is, how few good institutions it has, and how much it is currently hovering on the brink of a true disaster. The new blog HaitiPundit.com offers regular updates.

One of the most memorable accounts I read of Haiti concerned the time when a ferry sank off the coast, leading to hundreds of deaths (this has happened more than once, I might add). Oddly enough, a large number of employees were on hand to help bring in the bodies. Normally when a boat comes to shore it stops at a dock. Haiti could not afford the dock, so a large number of people are hired to wade out into the water and carry the passengers back to shore on their shoulders.

No, flying around the island isn’t safe either, nor is driving. Here is a short explanation (scroll down a bit) of the Ricardo Effect, which notes that capital is substituted for labor at higher wage rates.

The rise of barter clubs

Here is an update on the current surge in barter clubs:

“I live my life on barter,” says [Dale] the spunky, 5-foot-3-inch consummate deal-maker, who is part of a growing network of people working and playing in a largely cashless universe.

Dale, 57, runs Barter Advantage, one of hundreds of exchanges around the country that have emerged in recent years that take the age-old concept of barter – neighbors swapping chickens for a hog, for instance -to new, sophisticated, IRS-approved heights.

Instead of simple swapping, the exchanges offer what’s called round-robin trading, allowing members to barter their products and services for credits that they can later spend on whatever they want – from travel to office supplies to dental work – as long as it’s offered within the network.

Here is a previous post on the benefits and limits of barter clubs. Here is a previous post on the enhanced liquidity of gift certificates.

Thanks to Paul Jeanne for the pointer.

Addendum: Here’s a way to barter your books and music, thanks for Daniel Akst for the tip.

Can’t these guys take a joke???

Remember this story?

A 23-year-old student with no knowledge of economics bluffed his way into a trip to China to teach a prestigious course on the subject at Beijing University.

Matthew Richardson, in his fourth year at Oxford University, only gave up after nine hours of lectures, when he ran out of material from pages ripped out of an A-level text book.

It now seems the economist imposter is getting in trouble. His teachers, his dean, and his hosts are upset, BBC uses the word “furious” to describe the Chinese. How much less angry would they be, had they caught the guy up front? Even the interpreter was no more than suspicious. His college might discipline him for being absent during term (huh?), in this age of corporate scandals perhaps they should award him an MBA instead.

Thanks again to Ken Hirsch for the original pointer and the follow-up.

Q&A with Matthew Rabin

Matt is a MacArthur fellow and one of America’s brightest economists. He is best known for exploring the idea that human choices are not fully rational. I also like his argument that if you exercise too much moral suasion against a person, rather than heeding your opinion the person will simply stop listening. Read an interview with Matt here. At the bottom of the interview you will find links to his working papers. Thanks to www.2blowhards.com for the pointer.