Does that make any sense?: Statistical discrimination

Does that make any sense?: Statistical discrimination: "The effects of statistical discrimination go beyond the obvious unfairness of judging an individual by his group identity. As economists have realized, there's the possibility that an entire racial group will be stuck in a bad equilibrium. If an employer believes that very few people of a particular race have invested in their job skills, he's likely to discount a good interview or test result from a member of that race as a fluke. Then, realizing that they're unlikely to get a good job anyway, people in that race will not invest in skills, confirming the employer's belief. It's a simple but lethal self-fulfilling prophecy.
Some observers, like Bryan Caplan, argue just the opposite—that statistical discrimination may be self-reversing because it raises the return to education. Caplan points out that the return to education is empirically higher for black students than white ones; he surmises that statistical discrimination makes "counter-stereotypical" behavior particularly valuable. To an extent, I think he's right. The "bad equilibrium" story doesn't seem to lower the returns to obtaining easily observable credentials like college degrees. Perhaps this is because college degrees are such good indicators of competence that they overwhelm negative racial perceptions, or because in a world that erects massive social and economic barriers to obtaining a good education, managing to get a degree as a black student is much more impressive than it is for most white students.

Super-Economy: Simple pictures against bad ideas

Super-Economy: Simple pictures against bad ideas
Unfortunately and despite their rhetoric, the Green Party has a lot of bad economic ideas. One in particular is work sharing, a government regulation that forces everyone to work as standard no more than 35-hours per week. Their idea is that if you force people to work fewer hours, there will be more job for others.

The consensus belief among academic economists is that work sharing does not work.
Unemployment does not arise because there are too many people. It is because there is some imperfection in the market (either policy induces or due to market failure) that causes the market to generally not be able to match jobs to people.

We have to remember that normally in functioning economies, there are very strong forces that create jobs for everyone who wants to work. To illustrate this for non-economists, please allow me to put up a graph with a high "duh" factor (but which really is quite important).

This is the relationship between number of working age adults in 2007 and number of jobs in 2007, for the OECD countries. Source is as usual OECD.


The correlation between potential workers and jobs in the OECD is 0.99!
...
To an economist this is trivial, and just says that there is no connection between employment rate and country size among the OECD countries. But savor the pictures for a moment. They have a profound implication. It means that there are extremely powerful forces in market economies that create jobs for ordinary people, no matter how many people we have, and regardless of if we can perfectly understand these forces.

It is not easy to describe this magic when people demand "where will jobs come from?". You may even sound naive if you say that "the market will take care of it", and refer to history or to the graph above. But in this case what sounds naive is in fact the most profound answer. Empirically, we can observe that the market does seem to take care of creating jobs.

The problems that cause unemployment is never the number of people, it is things like the skill composition combined with wage rigidity, cyclical demand conditions, search friction, taxes and regulations, and market imperfections. None of the core economic forces that create unemployment is affected by permanent work sharing for all workers.

Let me also look at this a little more directly. Here is average hours worked for workers and the unemployment rate, again for OECD, and again for 2007.



There is no statistically significant relationship between the typical workday and unemployment rate (p value 0.52). Countries that have reduces the average hours worked have not been able to achieve lower unemployment rate. Now, correlation is not always causation. Maybe the unemployment rate in France would have been even higher if they worked more hours. But I strongly doubt it.

Matthew Yglesias » Evaluating the North American Union

Matthew Yglesias » Evaluating the North American Union:
it’s hard not to notice that Mexican people, in general, seem to wind up doing much better for themselves when they’re able to relocate and live under American or Canadian institutions. So one of the goals of North American political integration would be for Mexico to begin to be governed by more US/Canadian-style institutions, extending the opportunities that are currently provided only through migration. You might also see more reverse migration, as retirement to Mexico could be a compelling opportunity for American or Canadian senior citizens living on fixed incomes.

World Economic Forum - The India Gender Gap Review

World Economic Forum - The India Gender Gap Review: "The India Gender Gap Review has been released on 9 November by the World Economic Forum"

After the Wall

Matthew Yglesias:

The [Berlin] wall was built to bottle up an incipient revolt—a mass emigration that threatened to expose the Soviet system as inferior to the West, as an oppressive dungeon that its most educated young people yearned to escape. The wall not only blocked those yearnings; it also made clear to the brighter young Soviet and Eastern European leaders that the system itself—the ideological basis of their rule—was suspect, that it could not be sustained, much less compete with the West, without the internal imposition of force.

It’s interesting to reflect that it’s very much still the case that millions of people living in Ukraine and Russia and for that matter Mexico and Mozambique would love to engage in mass emigration to the West and expose the systems under which they live as corrupt and uncompetitive. Indeed, according to Gallup 700 million people would like to migrate permanently to a new country:

But of course the voters of the United States and Canada have no intention of letting as many people show up as might like to come, and the voters of Western Europe have even less desire for this, and those of Japan even less.

Birth date, business cycles, and lifetime income

OMB - Blog Post:

We often hear about people who are unlucky in love, but what of those who are unlucky in the business cycle? What is the impact of being born two decades before a significant economic downturn, such that you graduate from college and enter the labor force in the middle of a period of high unemployment?
As the class of 2009 is keenly aware, entering the labor market during a recession has immediate negative effects. Job offers are harder to find: according to the National Association of Colleges and Employers, less than 20 percent of the class of 2009 graduated from college with a job offer in hand, compared to 25 percent in the class of 2008 and more than 50 percent in the class of 2007. Whereas year to year starting salaries on average tend to increase, with the tough competition in this year’s labor market, average starting offers for the class of 2009 are slightly down.

I recently read a paper that suggests that, for this cohort, the wage effect of graduating during a period of high unemployment will continue well beyond the end of the recession and even the labor market rebound. In examining the cohorts of college graduates that entered the labor market before, during, and after the recession of the early 1980s, Lisa Kahn of the Yale School of Management found that an increase in unemployment produces a significant and enduring negative wage effect.

The chart below illustrates this effect: a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value.

Entering Labor Force During Recession Has Enduring Effect on Wages:
For the 1982 Cohort, $100,000 NPV Loss in First 20 Years of Career

Data from Kahn 2009

The long-term effect isn’t just a residual of low first-year wages: the author suggests that poor job match, lower prestige placements, and fewer opportunities for training and promotion also play a role. Other researchers have found similar effects: Oreopolous et al find persistent wage effects for Canadian college graduates; Bowlus and Liu find persistent wage effects for high school graduates moving directly into the work force, and other studies assess how the macroeconomy affects impact newly minted MBAs and economics PhDs.

The evidence thus suggests that a recession hits young people particularly hard, knocking them off course with effects that last for years to come. As we rebuild a new foundation for economic growth, it’s critical that we keep this in mind.

Money, Power Serve Up Alphabet Soup Of Regulators : NPR

Money, Power Serve Up Alphabet Soup Of Regulators : NPR: "Exactly one year ago, the U.S. government began planning its takeover of AIG to prevent the collapse of the largest insurance company in the world. The public seemed outraged that taxpayers had to save a private company. ...AIG was watched over by 400 different agencies around the world, including dozens in the U.S., and none of them noticed that the company was on the verge of taking down the entire global economy.

Economists say this kind of problem stems from regulatory arbitrage. When more than one regulator oversees the same kind of activity, financial firms find ways to play one off against the other. It's like what every 4-year-old has figured out — if Mommy won't let you, maybe Daddy will. Or worse, if Mommy thinks Daddy is watching you, and Daddy thinks Mommy is watching you, then you can get away with anything.

The other thing Democrats and Republicans agree on is that solving the problem by simply merging some of the regulators will never happen.

Consider one of the most glaring examples — the bizarre division of labor between the Securities and Exchange Commission, and the Commodity Futures Trading Commission. If you buy and sell stocks, your overseer is the SEC. If you trade stock futures or their kin, you get the CFTC.

Much of the current financial crisis is linked to the strange financial products that fell between the cracks of the SEC and CFTC."