Category: Economics

Why have so many Americans left the work force?

Since 2001 nearly two million Americans, between the ages of 25 and 54, have left the workforce. This is why the unemployment rate has been falling, but the number of people with jobs is not showing comparable improvement.

Why leave the work force? A recent (Tuesday, February 17, “More Americans are Leaving the Work Force”) Wall Street Journal article suggests several answers:

1. More people are taking early retirement. Interestingly, workers over 55 are reentering the work force, the only group to show significant net increase. So these early retirements must be early indeed, or could involve a temporary willingness to live off severance pay.

2. Educated black women are leaving the work force in greater numbers. Some are losing their jobs. Others are returning to school for an advanced degree. In any case this group shows one of the largest participation declines, from 82.3% in 1998 to 76.3% in 2003.

3. Many people, especially women, are leaving for labor force for reasons of disability. Between 1999 and 2003 applicatons for federal disability insurance benefits rose from 1.2 million to 1.9 million. It is unlikely that more people are being injured. Employers are less willing to offer flex-time or part-time work during hard times, which causee disability claims to increase. See Alex’s post Paying for Disability for more.

4. White collar employees, hit by downsizing, are returning for additional education. The new trend is for college graduates to return to community colleges for retraining.

The bottom line: I don’t doubt any of these hypotheses or estimates. But I still don’t understand why the number of employed Americans is recovering so slowly. On the bright side, parts of #1, #2, and #4 will later kick in as productivity benefits, or reflect a lesser need to work.

Markets in everything, continued

How about this? [is] the first Internet company to help drivers contest parking tickets online…”It’s such a unique concept — fighting tickets for you,” says Austin, for whom the service was a godsend, given that she averages 5 to 10 parking tickets a year. “Some of these tickets are unfounded and you start getting a little mad every time you write a check to the city.”

On the Web site, clients who get tickets in the District, New York or San Francisco are guided through 30 to 50 questions about the circumstances of their tickets — whether the meter was broken, what the parking sign said, did they have a medical emergency, etc. They transfer details from the ticket to a look-alike online version. Then they key in their credit-card data to pay for the service — if the ticket is dismissed. No dismissal, no charge.’s computers analyze the data in search of grounds for dismissal. If there are none, clients get an e-mail recommending that they pay the ticket promptly. It’s free advice. But if the computer finds a loophole, technicality or error, or a compelling reason to contest, the client is e-mailed a customized dismissal-request letter, with instructions on what proof to attach and where to mail it.

Because her car was disabled, Austin’s ticket was dismissed. charged her half of what the ticket would’ve cost her — $25. Case closed.

The District of Columbia takes in more than $100 million in parking tickets each year, a major source of city revenue. The head of claims that seventy to eighty percent of those tickets should be dismissed for technical or legal reasons.

Here is a previous installment of Markets in Everything, try this one too.

Outsourcing medical experimentation

India is emerging as a new proving ground for pharmaceutical trials. Clinical trials in India typically cost 50% to 60% less than in the United States. The Indian population is genetically diverse, labor costs are much lower, the number of people is large, many Indian hospitals keep good records, and many diseases are prevalent in India. Furthermore many Indians are “drug naive,” meaning that they are not taking other drugs that could influence trial results. The Indian government, however, will not allow testing for basic drug safety, out of fear that Indian nationals would be viewed as “guinea pigs” for the West.

The bottom line: Medical outsourcing will lower drug development costs and save lives.

The full story is from Thursday’s Wall Street Journal, “India Emerges as New Drug Proving Ground,” Marketplace section. Here is an earlier MR post on medical outsourcing.

Econometrics Text

I am teaching econometrics this semester and using a new book, James Stock and Mark Watson’s Introduction to Econometrics. It’s a very good textbook.

Stock and Watson use a “robust” estimator of standard errors right from the beginning. This means that they can dump an entire chapter on hetereoskedasticity and methods of “correcting” for hetereoskedasticity (these rarely worked in any case.)

They do not waste time discussing the difference between the t-distribution and the normal-distribution. Instead, they assume reasonably large datasets from the get-go and base their theorems on large-sample theory.

The book is not cluttered with examples. Stock and Watson use a handful of applications that they return to again and again as they introduce new problems and new techniques – thus simple regression is introduced with the goal of estimating the affect of the student-to-teacher ratio on test scores. The problem of omitted variable bias is then introduced and the solution of multiple regression then discussed. Later the same example is used to discuss fixed effects and so forth.

Finally, they have a good chapter on evaluating research designs for internal and external validity. In other words, they discuss how to tell the difference between a good study and garbage – really the most important asset for any reader of statistical work.

Two regrets. I would have liked an early chapter on exploratory data analysis. I would have loved a chapter on regression discontinuity design.

Where do immigrants go?

The geographic distribution of immigrants leads to some of the biggest complaints about cross-national migration. Disproportionate numbers of immigrants go to California, Texas, and New York. Potential problems include school overcrowding, fiscal burdens on local governments and hospitals, and weaker incentives to assimilate. I’ve heard claims that it would be fine to take in extra immigrants, provided they would work on company towns in central Nebraska.

The question arises to what extent distributional problems are self-correcting. If a state declines in quality, some immigrants will start to look elsewhere. It resembles yesterday’s question of whether a blogging topic can become overcrowded.

We now have some recent evidence. For the first time in thirty years, immigrants are finding California a less appealing place to settle. The 2000 census measures 24.8 percent of all new arrivals going to California, down from 37.6 percent in the 1990 tally. New York arrivals are down as well, from 13.7 percent of the share to 11.8 percent. Those changes are so big that virtually every other state has a bigger share of the total, with Texas, Georgia, and North Carolina showing the largest gains.

The results also show that poverty is declining among both established and arriving immigrants in California, heralding positive future trends.

Here is coverage from USA Today. Here is the original research. Here is the home page of Dowell Myers of USC, the researcher.

The bottom line: Good news all around. A more even spread of immigrants, achieved by voluntary means, will ease California’s fiscal burdens and bring gains from trade to the other states.

Should we raise taxes?

Martin Feldstein says no. Brad DeLong says yes, at least once the economy recovers further. Alex Tabarrok says maybe, if we can cut the right deal. I would say that taxes, real taxes, already have been raised, the Bush Administration just hasn’t admitted it yet. Milton Friedman has long insisted that the level of government spending is the best measure of what government is taking from the economy.

Addendum: Co-blogger Alex agrees, read his very nice statement of the argument.

Kidney swaps

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? In an important paper (Warning! Very technical. Requires NBER subscription.) Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives. Who says efficiency is a pedestrian virtue?

See here for more on how to alleviate the shortage of transplant organs.

The Peter Principle

Remember the Peter Principle? It suggested that we would all be promoted to a level where we are incompetent.

Economist Ed Lazear asks whether we might expect such a result from profit-maximizing businesses. His article, “The Peter Principle: A Theory of Decline,” appears in the latest Journal of Political Economy.

Here is the abstract:

Some have observed that individuals perform worse after being promoted. The Peter principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter principle effect, and the more important the transitory component is relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

In other words, firms know that you sometimes get lucky, and they set the promotion bar high on purpose. After your promotion you experience a “regression toward the mean”, and your observed performance declines in quality, relative to your promotion-winning triumphs. But on average the promotions are still deserved. In other words, the Peter Principle will appear to be true in a well-functioning organization, even when promotions are handed out rationally.

My take: Lazear offers a characteristically nice demonstration of a clever idea. Behavioral factors may skew promotions in less efficient directions, but they will not overturn the central argument. People often overweight recent observations, but of course worker skill levels change through time. It is not obviously inappropriate to weight some observations more than others. Furthermore if people overvalue first impressions as well, the two behavioral effects may cancel to some degree.

Here is an earlier version of Lazear’s paper. Thanks to Eric Crampton for the pointer.

Economists versus spam

The short history of society’s fight against spam–usually defined as unwanted commercial e-mail–may be about to pass into a significant third phase. In the first phase, it was geeks who led the resistance, using techie weapons such as e-mail filters with fancy Bayesian mathematics. In the second phase, politicians joined in, eager to get their names on to new legislation–in America, for instance, 36 states and Congress have passed laws of some sort against spam. Now, in the third phase, the economists are taking over.

The market opening for the economists is obvious. Both the geeks and the politicians are widely seen to have failed miserably.

Great writing from The Economist but it is not clear that we have an answer that will be accepted. The obvious solution is to price email. Even at a penny per email most spam would become uneconomic. The Economist argues, however, that internet culture is against pricing and micropayments are more expensive than they are worth. They recommend instead several groups who are creating clubs of approved bulk emailers. The emailers who join are guaranteed passage of their email past spam filters – club members either pay to get on the list or are fined if recipients complain. Unfortunately, these ideas only work indirectly by making the job of spam filters easier. If the clubs take off, a positive tipping point may be reached but that is a big if and in the meantime the plan assures that for many people spam will get worse before it gets better.

This economist has another idea. The problem of spam is really a negative externality generated by the people who actually buy the products spammers offer. Thus, I suggest sending out fake spam and prominently posting the names of all those who respond….. What product to advertise in the fake spam? I suggest, “length enhancers.”

Insourcing: the current trend

Michael Walden writes:

While outsourcing has captured current attention, it is not a new phenomenon. If the term is defined as jobs operated by U.S. companies in foreign countries, the current total is 10 million positions, or 7 percent of domestic U.S. employment. Further, there’s been an upward trend in the number of outsourced jobs since the mid-1990s, when trade barriers were significantly reduced following the signing of the NAFTA and GATT agreements.

What is less well publicized and understood is that “insourcing” also occurs in our economy. Insourcing happens when foreign companies establish jobs in the United States.

The latest statistics show insourcing accounts for over 6.5 million jobs nationwide. Although this is less than the number of outsourced jobs, the gap has actually narrowed in the past quarter century. That is, there’s been a recent trend of foreign companies adding jobs in the U.S. faster than U.S companies have increased jobs in foreign countries….

The scorecard on job outsourcing versus job insourcing has actually moved in the favor of the U.S. in recent decades, and policy-makers must consider both when evaluating the worldwide movement of jobs.

Thanks to Daniel Drezner for the link, read his accompanying discussion of the Europeans are dealing with outsourcing.

Should you buy Latin American art?

A recent study by Sebastian Edwards suggests that Latin American art, in the latter quarter of the twentieth century, brought supra-normal returns with low risk relative to the market portfolio. Under one measure, the mean annual return was a solid nine percent. Here is the abstract:

In this paper I use a large data set to analyze two aspects of the Latin American arts: (1) the nature of artistic creative process, and (2) Latin American art as an investment. I use data on auctions to understand the relation between artists’ age and the value of their work. The analysis on creativity suggests that Latin American artists have followed very different patterns from that followed by U.S. artists. There is strong evidence suggesting that American artists born after 1920 did their best work at an earlier age than their older colleagues; exactly the opposite is true for the case of Latin America. Indeed, the results reported in this paper suggest that Latin American artists born after 1920 did their best work at a significantly older age than their colleagues from earlier cohorts. The analysis of art as an investment is based on the estimation of hedonic price indexes, and indicates that Latin American art has had a relatively high rate of return indeed much higher than that of other type of paintings. The results also indicate that returns on Latin American art have a very low degree of correlation that is, a very low beta relative to an international portfolio comprised of equities. This means that adding Latin American art will lower the overall risk of an international portfolio.

How can this be?: Most national art markets are driven by collectors from that country or region. The high investment returns on Latin painters suggest that the wealth of the wealthy, in Latin America, grew faster than expected for several decades. At the same time, some Latin painters, such as Frida Kahlo, attracted sudden and unexpected interest from North American buyers. So two particular idiosyncratic factors drove these superior returns. Mexican art is a great avocation of mine, but I cannot recommend it as a means of reducing your future portfolio risk. Buy what you love, and consider it consumption expenditure.

Cell phone numbers for sale

“The New phone number rules that allow you to keep your phone number when you switch carriers has given rise to phone nascent number property rights. On E-bay you can bid on 867-5309 (made famous by Tommy Tutone’s Jenny I got your number). As I write this the bid is over $8000 dollars with seven days to go. What other numbers are famous or valuable? Will we see a land rush like the internet names?”

From Slashdot, thanks to Noah Yetter for the pointer. And when I checked, the bid for the number was up to $56,000. Here are some classified ads selling cell numbers. I’d like CTA-102 in my number, $50 to anyone who can deliver it.

Musgrave and Buchanan

David Warsh writes about the pioneering public-finance economist Richard Musgrave and a series of debates he had with fellow Wicksellian, yet rival, public-choice pioneer James Buchanan.

In 1998, Hans-Werner Sinn, the leading economist at the University of Munich, invited Musgrave and his arch-rival in the study of political economy, James Buchanan, father of the relentlessly skeptical study of “public choice,” to a carefully organized five-day debate.

The scholars took turns stating their positions. They responded to one another. They took questions from the floor. Then they restated their views more narrowly. The results were published in 1999 as Public Finance and Public Choice: Two Contrasting Visions of the State. Their debate was a textbook example of what psychologist Daniel Kahneman recently called “adversarial collaboration.” So useful are both lenses for different purposes that it is not easy to form an opinion about who “won.”

It is, however, very likely that the lectures are the most important delivered at the University of Munich since the great Max Weber gave his farewell addresses on politics and science there in 1918. Long after the results of the next election have become old news – the next 40 years’ elections – the exchange between Musgrave and Buchanan will still be fresh.

Progressive speeding fines?

One of Finland’s richest men has been fined a record 170,000 Euros ($217,000) for speeding through the center of the capital, police said.

Jussi Salonoja, 27, heir to his family’s sausage business, was caught driving 50 mph in a 25 mph zone last week.

Finnish traffic fines are pegged to the offender’s income. According to tax data, Salonoja’s 2002 earnings were close to 7 million Euros.

Imagine that kind of system here. It could be scaled way down, say $3,000 for a rich person, $300 for a middle-income person and $30 for a poor person for each violation involving speeding, running a red light, blocking an intersection, ignoring a crosswalk or parking illegally in a curb lane during rush hour. Think that might bring any more compliance and downtown gridlock relief?

As reported by Dr. Gridlock, who writes for The Washington Post on traffic problems.

Legality and constitutionality surely do not favor this idea in the U.S., but how about efficiency? I say no. Richer individuals on average have higher valuations of time. If a billionaire wants to park illegally, there is some chance he is in the process of cutting a big deal. Don’t levy a special fine on him. “Rich people speeding” is not a crisis in need of a particular solution, general reductions in the speeding rate will do, which suggests upping a general fine for speeding. Equal dollar fines are consistent with the rule of law, and progressive fines would give the cops a special incentive to go after Bill Gates. Gates in turn would have special incentive to hire a chauffeur. True, efficiency is unlikely to suggest strictly equal dollar fines, but if the choice is equal dollar fines or discretion I will prefer the former.