Labor Economics – Page 96 – artdiamondblog.com

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

Increase in Minimum Wage, Decreases Employment Among Low-Skill Workers

Basic price theory seems to imply that raising the minimum wage, will result in greater unemployment. Almost all economists accepted this conclusion until several years ago, when some empirical results seemed to challenge it. Now there is active debate.

Here is the abstract of a relevant, just-published, article in the leading journal in the field of labor economics:

We infer the employment response to a minimum wage change by calibrating a model of employment for the restaurant industry. Whereas perfect competition implies that employment falls and prices rise after a minimum wage increase, the monopsony model potentially implies the opposite. We show that estimated price responses are consistent with the competitive model. We place fairly tight bounds on the employment response, with the most plausible parameter values suggesting that a 10% increase in the minimum wage lowers low-skill employment by 2%-4% and total restaurant employment by 1%-3%.

The article reference is:

Aaronson, Daniel, and Eric French. "Product Market Evidence on the Employment Effects of the Minimum Wage." Journal of Labor Economics 25, no. 1 (Jan. 2007): 167-200.

Your Tax Dollars at Work: Government Protecting Us from Bling-Bling

A dental grill, one form of the hip-hop jewelry sometimes called "bling-bling." Source of image: http://www.thesmokinggun.com/archive/0410062teeth1.html

If all you want for Christmas is to gild your front teeth, you may have to buy the bling-bling somewhere other than the Gold Plaza II kiosk at Crossroads Mall.

That’s because an employee of that shop, Bhavin Dalal, faces a felony charge of practicing dentistry without a license. He’s accused of helping customers fit their teeth for glittering mouthpieces known as grills.

It’s the first such case in Nebraska involving the hot hip-hop fashion accessory. And Dalal and his attorney, James Martin Davis, plan to fight it tooth and nail.

Dalal entered a not guilty plea Friday in Douglas County Court. Davis blasted the Nebraska Health and Human Services System for its investigation of Dalal and the charge that resulted.

"It’s overzealousness on the part of a bunch of bureaucrats" who don’t want people to wear grills, Davis said.

For the full story, see:

CHRISTOPHER BURBACH. "Dental Grill Seller Feels State Law’s Bite." Omaha World-Herald (Saturday, December 2, 2006): 1A & 2A.

(Note: the slightly different online title for the article is: "State puts bite on grill seller")

“Forgotten not for lack of importance, but for lack of theoretical frame-works”

A paper by current head of the President’s Council of Economic Advisors, Ed Lazear, is significant for what it says near the end about economists forgetting facts, because the facts do not fit into current theory.

(p. 260) Human capital theory is primarily a supply-side approach that focuses on the characteristics and skills of the individual workers. It pays far less attention to the environments in which workers work. As such, the human capital framework has led researchers to focus on one class of questions, but to ignore others. Specifically, little attention has been paid to the jobs in which workers are employed.

(p. 263) The fact that some jobs and some job characteristics are more likely to lead to promotions than other jobs is not surprising. But the analysis suggests that other ways of thinking about wage determination, namely, through job selection, may have been unduly ignored in the past.

. . .

Researchers have begun to make jobs rather than individuals the unit of analysis. This change of focus can illuminate new issues and provide answers to questions that were once posed and forgotten. The questions were forgotten not for lack of importance, but for lack of theoretical frame-works. The theory is now developed and awaits confirmation in the data.

For the full paper, see:

Lazear, Edward P. "A Jobs-Based Analysis of Labor Markets." American Economic Review 85, no. 2 (May 1995): 260-265.

(Note: elipsis added.)

“Smart People Can’t Come Here”

Several years ago, I got up in the middle of the night to call the United States embassy in Beijing, in order to beg an embassy official to issue a visa to our best applicant for our open Research Assistant position. He did not want to do so, solely on the grounds that she might not return to China. The woman we wanted to hire had sky-high credentials by every measurable criterion, and based on letters of recommendation, was exceptional by the non-measurable criteria too.

How bizarre is the immigration policy of the United States when we view it as a problem that such a person might honor us by wanting to stay in the United States?

PALO ALTO, Calif. – Some of technology’s biggest names shared the stage at Stanford University last week to discuss the future of American innovation.

Yahoo co-founder Jerry Yang and Kleiner Perkins Caufield & Byers venture capitalist John Doerr were among the members of two panels at a technology summit at the university.

The third annual innovation summit, where industry leaders talked about emerging trends and government technology policy, was organized by TechNet, an advocacy group that lobbies on behalf of tech executives.

. . .

The executives also lamented government policies limiting student and work visas, warning that this shuts out people like Google co-founder Sergey Brin and former Intel chief executive Andrew Grove.

"We have this crazy policy in the U.S. that says smart people can’t come here. I think we all agree it makes absolutely no sense," Yang said. "Are people going to want to build a company in the U.S. . . . or in the new talent centers?"

For the full story, see:

SAN JOSE MERCURY NEWS. "Technology summit sees risks for U.S." Omaha World-Herald (Sunday, November 19, 2006): 7D.

(Note: the ellipsis between paragraphs was added; the ellipsis in the Yang quote was in the original article.)

We Will Always Want More Income

Karl Marx, John Maynard Keynes, and many others, have suggested that there is some level of income at which we will have enough, and want no more.

David Friedman, in his price theory text, and others, have doubted this. I am with the doubters. I suspect that we sometimes think a certain amount of money would satiate us, because at some level way beyond our current income, it does not reward us to think too much about how we might spend so much money.

But if you are Rockefeller, and you see what good comes with founding universities, curing diseases, and the like, then you can easily imagine what good would come from even more money, even if, like Rockefeller, you are the richest person on the face of the earth.

In the discussion excerpted below, Robert Frank gives another argument for joining the doubters: that as our income rises, so do our standards for quality. (I think this argument is sound, but less important than the one sketched above.)

When my wife and I were living in Paris a few years ago, we went out to dinner with well-to-do friends who were visiting from the United States. The restaurant we chose had a good reputation and, by our standards, was not cheap. But although my wife and I enjoyed our meals enormously, our friends found theirs disappointing. I’m confident they were not trying to impress us or make us feel inferior. By virtue of their substantially higher income, they had simply grown accustomed to a higher standard of cuisine.

. . .

By placing the desire to outdo others at the heart of his description of insatiable demands, Keynes relegated such demands to the periphery. But the desire for higher quality has no natural limits. Keynes and others were wrong to have imagined that a two-hour work week might someday enable us to buy everything we want. That hasn’t happened and never will.

For the full commentary, see:

ROBERT H. FRANK. "ECONOMIC SCENE; The More We Make, the Better We Want." The New York Times (Thurs., September 28, 2006): C3.

(Note: ellipsis added.)

Without Incentives, the Energetic become Lazy

Wise words from Frederick W. Taylor, who is known as the father of scientific management:

(p. B1) "When a naturally energetic man works for a few days beside a lazy one," Mr. Taylor wrote, "the logic of the situation is unanswerable. ‘Why should I work hard when that lazy fellow gets the same pay I do and does only half the work?’ "

As quoted in:

CYNTHIA CROSSEN. "DEJA VU; Early Industry Expert Soon Realized a Staff Has Its Own Efficiency." Wall Street Journal (Mon., November 6, 2006): B1.

Rosen’s Superstars Versus the Long Tail

One of Sherwin Rosen’s most important articles is "The Economics of Superstars" in which he argues that if a superstar’s performance is even slightly better than the next best performer’s, if the performance can be cheaply reproduced (as with radio, CDs, etc.) then a small premium multiplied thousands of times, might result in huge differences in earnings.

This argument works, so long as most of us are interested in the same sort of performance, and are willing to pay some small premium for the best performer of it. But what if we care as much about the content of the performance as the quality of the performance? (In other words, we care as much about what is done, as we care about how well it is done.)

The new book The Long Tail can be taken to imply that there are many niches, and that the days of the "superstar" are over (or at least that in the future, the compensation of the superstars will not be quite so super). If this argument works, and I think it does, then it implies that the new technologies will serve consumers by better matching consumer preferences with the services provided, and also implies that a more diverse group of suppliers (performers) will be able to sustain themselves.

More speculatively, it seems as though it might imply greater equality in the labor market. If this last is true, it goes against most accounts of the effects of recent high technology on the labor market.

The reference to the Rosen article is:

Rosen, Sherwin. "The Economics of Superstars." American Economic Review 71, no. 5 (Dec. 1981): 845-58.

The reference to The Long Tail is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Gerstner’s Insights on Business

Source of book image: http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg

Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes. His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations. I’ll mention a few of these in this and a few other postings in the next couple of weeks.

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career. One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter’s process of creative destruction.

I wonder if perhaps some of the success of McKinsey is due to the firm’s embracing and applying Schumpeter’s ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers. In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process. As a result some of them (e.g., Thomas Friedman) propose paternalistic ‘safety net’ labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM’s labor policies were among the most paternalistic. This is usually viewed as one of the positives about IBM. But one of Gerstner’s insights is to suggest that some of those in the IBM work force were hurt by IBM’s paternalistic policies:

(p. 186) . . . I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes. And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them. I was shocked, for instance, to discover the pay disparities—particularly in very important technical and sales professions—of IBM comployess when comapred to the competition and the industry in general. Our best people weren’t getting what they deserved.

Maybe I should mention that I don’t endorse everything in the book. For example, Gerstner seems to think that a desire to "win" is crucial to success in business. But I think the analogy between business and competitive sports is usually taken too far. Can’t one also succeed in business from a desire to innovate and to improve the world?

The reference on the book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

(Note: in the quote, the ellipsis was added, but the italics was in the original.)

300,000,000 Strong, and Free

Source of graph: online version of the WSJ article cited below.

The Census Bureau tells us that some time in the weeks ahead the U.S. population will reach 300 million. . . .

This demographic milestone is not cause for alarm — as some prophets of doom would have it. Rather, it is cause for celebration. We 300 million Americans are on balance healthier and wealthier and freer than any population ever: We breathe cleaner air, drink cleaner water, earn higher incomes, have more leisure time, and live in less crowded housing. Every natural resource we depend on — water, food, copper and, yes, even oil — is far more abundant today measured by affordability than when our population was 100 million or even 30 million.

Thanks to the rapid pace of technological progress, there’s every reason to believe these resources will be still more abundant when our population reaches 400 million — which should happen about 40 years from now. As the late economist Julian Simon reminded us, thanks to our free market capitalist system, the history of America is one of leaving the storehouse for every successive generation more endowed with wealth, knowledge and natural resources.

For the full commentary, see:

STEPHEN MOORE. "Supply Side; 300,000,000." Wall Street Journal (Tues., October 3, 2006): A26.

(Note: ellipsis added.)

United States Cardiologists Fail to Prescribe Fish Oil, Despite Low Cost, Safety, and Evidence of Efficacy

Source of graphic: online verison of the NYT article quoted and cited below.

United States cardiologists are reluctant to prescribe fish oil, wanting more definitive data on efficacy. But a lack of definitive data on efficacy doesn’t stop them from performing costly and risky procedures such as the application of stents. Possibly relevant: installing stents is much more lucrative for cardiologists, than prescribing fish oil. Doctors are not bad people, but like most of us, they respond to financial incentives.

(p. D5) ROME — Every patient in the cardiac care unit at the San Filippo Neri Hospital who survives a heart attack goes home with a prescription for purified fish oil, or omega-3 fatty acids.

“It is clearly recommended in international guidelines,” said Dr. Massimo Santini, the hospital’s chief of cardiology, who added that it would be considered tantamount to malpractice in Italy to omit the drug.

In a large number of studies, prescription fish oil has been shown to improve survival after heart attacks and to reduce fatal heart rhythms. The American College of Cardiology recently strengthened its position on the medical benefit of fish oil, although some critics say that studies have not defined the magnitude of the effect.

But in the United States, heart attack victims are not generally given omega-3 fatty acids, even as they are routinely offered more expensive and invasive treatments, like pills to lower cholesterol or implantable defibrillators. Prescription fish oil, sold under the brand name Omacor, is not even approved by the Food and Drug Administration for use in heart patients.

“Most cardiologists here are not giving omega-3’s even though the data supports it — there’s a real disconnect,” said Dr. Terry Jacobson, a preventive cardiologist at Emory University in Atlanta. “They have been very slow to incorporate the therapy.”

For the full story, see:

ELISABETH ROSENTHAL "In Europe It’ s Fish Oil After Heart Attacks, but Not in U.S." The New York Times (Tues., October 3, 2006): D5.