Labor Economics – Page 98 – artdiamondblog.com

Money Buys Happiness, and Governments Tax It Away

We are . . . all constantly reminding each other that "money doesn’t buy happiness."

Economists aren’t so sure. They note that people with a lot of money tend to express a higher subjective happiness than people with very little. According data from surveys by the National Opinion Research Center, for example, people in the top fifth of income earners are about 50% more likely to say they are "very happy" than people in the bottom fifth, and only about half as likely to say they are "not too happy."

There is, however, generally very little change in the average level of happiness in populations getting richer over the years. For instance, the percentage of the U.S. population saying it was "very happy" in 1972 was exactly the same as it was in 2002: 30.3%. Social critics of "consumerism" explain this by claiming that what makes rich people happy is not money per se, but rather the fact that they have more of it than others — so if everybody gets richer, happiness remains unchanged. The critics go on to say that income differences lead to unwholesome feelings of superiority, so taxes can improve our moral fiber simply by bringing us closer to the same income level.

Perhaps you’re unconvinced. In fact there is another explanation for unchanging happiness levels over time which is rather less supportive of income redistribution. As incomes rise, so generally do levels of government revenues and spending, and there is evidence that these forces work against personal income on the overall level of happiness. For example, a $1,000 increase in per capita income is associated with a one-point decrease in the percentage of Americans saying they are "not too happy." At the same time, a $1,000 increase in government revenues per capita is associated with a two-point rise in the percentage of Americans saying they are not too happy. In other words, not only can money buy happiness, but it may be that the government can tax it away as well.

For the full commentary, see:

ARTHUR C. BROOKS. "Money Buys Happiness." The Wall Street Journal (Thurs., December 8, 2005): A16.

“Financial Incentives Can Change the Way Medicine is Practiced”

An angioplasty being performed in Eyria, Ohio. Source of photo: online version of the NYT article cited below.

Medicare patients in Elyria receive angioplasties at a rate nearly four times the national average . . .

. . .

. . . some outside experts say they are concerned that Elyria is an example, albeit an extreme one, of how medical decisions in this country can be influenced by financial incentives and professional training more than by solid evidence of what works best for a particular patient.

“People are rewarded for erring on the side of an aggressive, highly expensive intervention,” said Dr. Elliott S. Fisher, a researcher at Dartmouth Medical School, which analyzed Medicare data and found Elyria to be an outlier.

Medicare pays Elyria’s community hospital, EMH Regional Medical Center, about $11,000 for an angioplasty involving use of a drug-coated stent.

The cardiologist might be paid an additional $800 for the work. That is well above the fees for seeing patients in the office. And with the North Ohio doctors performing thousands of angioplasties a year — about 3,400 in 2004, for example — the dollars can quickly add up.

Some medical experts say Elyria’s high rate of angioplasties — three times the rate of Cleveland, just 30 miles away — raises the question of whether some patients may be getting procedures they do not need or whether some could have been treated just as effectively and at lower cost and less risk through heart drugs that may cost only several hundred dollars a year.

. . .

Experts know that changing the financial incentives can change the way medicine is practiced.

For example, Kaiser Permanente, the big health system that employs its own doctors, says its patients in Ohio, including some in Elyria, are slightly less likely than the national average to undergo the type of cardiac procedures the North Ohio Heart Center doctors perform so prolifically.

Kaiser’s cardiologists, who work on salary instead of being paid by the procedure, typically treat patients in that region at the Cleveland Clinic, where they have hospital privileges. And they follow established protocols about when a patient should undergo an angioplasty, when drugs might suffice and when bypass surgery might be the best resort.

“It’s not just individual doctors making up their minds,” explained Dr. Ronald L. Copeland, the executive medical director for Kaiser’s medical group in Ohio. With no financial reason to perform expensive procedures, the Kaiser doctors frequently choose to manage the patients’ heart disease with drugs only. “Our doctors have no disincentive to do that,” Dr. Copeland said.

. . .

For many cardiologists, the natural tendency when they see a patient with heart disease is to perform a procedure to try to clear arterial blockages. And patients, cardiologists say, tend to rely on their doctors’ judgment.

“It’s sort of like, you go to a barber and ask if you need a haircut,” said Dr. David D. Waters, chief of cardiology at San Francisco General Hospital, who is currently studying the effectiveness of different kinds of treatment for heart disease. “He’s likely to say you do.”

. . .

Experts say it can be difficult to detect cases in which doctors cross a medical line and are clearly performing unnecessary treatments.

“A lot of decisions are discretionary,” said Dr. Harlan M. Krumholz, a cardiologist and professor at Yale.

“It’s about where the thermostat is set,” he said, arguing that doctors in a particular geographic area tend to be unaware if the way they are treating their patients is markedly different from the practices of their peers in other areas.

Traditional measures of medical quality are not set up to detect whether patients are being treated too much, he said, unlike the kinds of safeguards that prompt credit card companies to call their customers to discuss unusual spending activity. “Right now there are no ‘smart’ systems in place,” Dr. Krumholz said.

In the absence of any real monitoring or oversight, doctors in most places, including Elyria, have few incentives not to favor the treatments that provide them the most reimbursement. Dr. Waters, the San Francisco cardiologist, said that the way physicians are typically paid — more money for more procedures — results in too many decisions to give a patient a stent.

“You can’t be paying people large sums of money to do things without checks and balances,” he said.

For the full story, see:

REED ABELSON. "In Ohio City, a Heart Procedure Is Off the Charts; SIDE EFFECTS; A Stent Epidemic." The New York Times (Fri., August 18, 2006): A1 & C4.

Source of graphic: online version of the NYT article cited above.

Minimum Wage May Destroy Jobs Overall, In Spite of Card and Krueger

The economists’ consensus about the job-destroying aspect of the minimum wage is less strong than it used to be. In the late 1970s, 90% of economists surveyed agreed or partly agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers." By 2003, this percentage had fallen to 73. Still a strong consensus, but a weaker one than previously. What happened?

The answer: One major study and a book by economists David Card, now at the University of California, Berkeley, and Alan Krueger of Princeton. In a 1994 study of the effect of a minimum wage increase in New Jersey, they found higher growth of jobs at fast-food restaurants in New Jersey than in Pennsylvania, whose state government had not increased the minimum wage. This study convinced a lot of people, including some economists. It was almost comical to see Sen. Edward Kennedy hype this study when he had never before mentioned any economic studies of the minimum wage.

Based on criticism of their data from David Neumark and economist William Wascher of the Federal Reserve Board, Messrs. Card and Krueger moderated their findings, later concluding that fast-food jobs grew no more slowly, rather than more quickly, in New Jersey than in Pennsylvania. But they never answered a more fundamental criticism, namely that the standard economists’ minimum-wage analysis makes no predictions about narrowly defined industries. As Donald Deere and Finis Welch of Texas A&M University, and Kevin M. Murphy of the University of Chicago, pointed out, an increased minimum wage help expand jobs at franchised fast-food outlets by hobbling competition from local pizza places and sandwich shops.

For the full commentary, see:

DAVID R. HENDERSON. "If Only Most Americans Understood." The Wall Street Journal (Tues., August 1, 2006): A12.

The citation for the article by Deere, Murphy and Welch:

Deere, Donald, Kevin M. Murphy, and Finis Welch. "Sense and Nonsense on the Minimum Wage." Regulation 18, no. 1 (1995).

Doctors Face Perverse Incentives and Constraints

Kevin MD’s blog provides an illuminating discussion of how hard we make it for good people to practice medicine. The case discussed involves an MD who is successfully sued for not performing a heart cath on a patient, even though two previous treadmill tests did not reveal any problems. (The heart cath procedure itself has a nontrivial risk of death and other serious complications.)

The discussion in the Kevin MD illustrates the difficult incentives and constraints faced by the conscientious physician. In terms of a patient’s health, a cost/benefit analysis may imply that a medical test should not be performed, but in terms of an MD’s income, and legal liability, a cost/benefit analysis may imply that a medical test should be performed.

Something is wrong with our reward structure and legal institutions, when MD’s who make the right medical call for the patient, are "rewarded" by earning less, and by increasing their chances of being sued.

Read the full discussion at:

http://www.kevinmd.com/blog/2006/06/liable-for-not-doing-heart-cath-on-49.html

For convenience, here is the opening entry in the discussion:

Continue reading “Doctors Face Perverse Incentives and Constraints”

More and Better Jobs Gained by ‘Insourcing’ than are Lost to ‘Outsourcing’

N. Gregory Mankiw, former chair of W.’s Council of Economic Advisors. The media, most Democrats, and some Republicans, skewered Mankiw in 2004 for simply and clearly stating the truth about outsourcing. Source of photo: online version of the NYT article cited below.

In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year. That’s a drop in the bucket. In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics. Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year. Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.

What’s more, the threat of outsourcing varies widely by industry. Lots of services require face-to-face interaction for people to do their jobs. That is particularly true for the biggest sectors, retail and health care. As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced. By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore. But those sectors account for only about 2 percent of total employment. The upshot: “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.

Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing. Quite the opposite. Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).

Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories. But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries. “That could mean that this is our competitive advantage,” Mr. Jensen says. “In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services.”

There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here. In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.

For the full commentary, see:

DANIEL GROSS. "Economic View; Why ‘Outsourcing’ May Lose Its Power as a Scare Word." The New York Times, Section 3 (Sun., August 13, 2006): 5.

Five More Hours Per Week of Leisure Time in 2003 Than in 1965

The easiest way to measure leisure is to take survey data on how many hours a week people spend at work and subtract. Since 1965, the number of hours the average American works for pay has not changed much. By this simple measure, then, leisure has also stayed the same.

But are we really working as much as ever?

”All time away from work is not equal,” Erik Hurst, an economist at the Graduate School of Business at the University of Chicago, said in an interview. Some time off is actually just more work.

To put it in economic terms, we spend some time off the job in consumption (watching TV, hanging out with our friends, reading for pleasure) and some in production (cooking dinner, cleaning the house, doing household repairs). Some activities, like sleeping and eating, fall somewhere in between, while others, including child care and gardening, combine pleasure and production.

The difference is not just that we enjoy some activities and dislike others. It is that we could, in theory, pay someone else to do the production for us. A cook or a restaurant can make dinner, but nobody else can play golf or watch TV for you.

. . .

Americans are not, in fact, working as much as they used to. They are just getting paid for more of the work they do. Using several different definitions of leisure, Professor Hurst and Mark A. Aguiar, an economist at the Federal Reserve Bank of Boston, analyzed time-use surveys done from 1965 to 2003. Whether they defined leisure narrowly or broadly, they got a consistent result.

”Leisure time — measured in a variety of ways — has increased significantly between 1965 and 2003,” they write in ”Measuring Trends in Leisure: The Allocation of Time Over Five Decades,” a Boston Fed working paper. . . . Using the most restrictive definition, which includes only ”entertainment/social activities/relaxing” and ”active recreation,” the economists found that leisure had increased 5.1 hours a week, holding demographics like age constant. (Without that control, leisure has grown 4.6 hours.) Assuming a 40-hour work week, that is like adding six weeks of vacation — an enormous increase.

”I was surprised by the magnitude,” Mr. Aguiar said in an interview, though the general trend agrees with earlier research.

For the full commentary, see:

VIRGINIA POSTREL. "ECONOMIC SCENE; The Work You Do When You’re Not at Work." The New York Times (Thursday, February 23, 2006): C3.

A PDF of the NBER draft of the Aguiar and Hurst paper can be found at:

http://faculty.chicagogsb.edu/erik.hurst/research/aguiar_hurst_leisure_nber_submit_final.pdf

“The More Sweatshops the Better”

JACQUELINE NOVOGRATZ, a veteran of the Rockefeller Foundation and a former consultant to the World Bank, talks enthusiastically about the development of a company in Africa where some 2,000 women earn, on average, $1.80 a day producing antimalarial bed netting. With the assistance of a $350,000 loan from an American investor, the business started making the nets nearly three years ago and is likely to add 1,000 more jobs within the next year.

”They’re in the process of building a real company town there,” Ms. Novogratz said.

Ms. Novogratz is not an outsourcing executive at a multinational company. Rather, she is the chief executive of the Acumen Fund, a philanthropic start-up based in New York that uses donations to make equity investments and loans in both for-profit and nonprofit companies in impoverished countries. One of the stars of her small portfolio is the bed-netting maker, A to Z Manufacturing, a family-owned company in Tanzania — a country where 80 percent of the population makes less than $2 a day.

. . .

”To put it in the baldest possible terms, the more sweatshops the better,” said William Easterly, professor of economics at New York University and author of ”The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.” Professor Easterly is not advocating the deliberate creation of workplaces with miserable conditions. ”As you increase the number of factories demanding labor, wages will be driven up,” he said, and eventually such factories will not be sweatshops.

Ms. Novogratz says it can be difficult to tell well-off, philanthropy-minded Westerners that what Africa really needs is more $2-a-day jobs. But when they understand the alternatives, she said, such concerns tend to melt away. Before they found work at the netting factory in Tanzania, for example, many of the women were street vendors or domestic workers and earned less than $1 a day. A to Z’s wages place the women in Tanzania’s top quartile of earners, Ms. Novogratz said.

For the full commentary, see:

DANIEL GROSS. "ECONOMIC VIEW; Fighting Poverty With $2-a-Day Jobs." The New York Times Section 3, (Sunday, July 16, 2006): 4.

Life Has Improved; And Can Continue to Improve

Source of graphic: online version of the NYT article cited below.

(p. 1) New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled. Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19) . . . stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

For the full story, see:

Kolata, Gina. "The New Age; Older and Better; So Big and Healthy Grandpa Wouldn’t Even Know You." The New York Times, Section 1 (Sunday, July 30, 2006): 1 & 18-19.

Source of graphic: online version of the NYT article cited above.

Source of graphic: online version of the NYT article cited above. Source of book image: http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

Fogel’s book is a primary academic source for much of what is interesting in the New York Times article. Fogel predicts that if we don’t screw things up, half of today’s college students will live to be 100. He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

Current Workplace Revolution Benefits Labor

(p. 8) Would you change places with your grandfather? Would you want to work 11 brutal hours a day… in yesterday’s Bethlehem Steel mill, a Ford Motor Company factory circa 1935? Not me. Nor would I change places with my father … who labored in a whilte-collar sweatshop, at the same company, in the same building, for 41 l-o-n-g years.

A workplace revolution is under way. No sensible person expects to spend a lifetime in a single corporation anymore. Some call this shift the "end of corporate responsibility." I call it … the Beginning of Renewed Individual Responsibility. An extraordinary opportunity to take charge of our own lives.

Source of passage:

Peters, Tom. Re-imagine! London: DK, 2003.

(Note: all of the ellipses in the above passage, appear in the original.)

Job Hopping May Aid Technological Experimentation

When employees jump from company to company, they take their knowledge with them. ”The innovation from one firm will tend to bleed over into other firms,” Professor Rebitzer explained. For a given company, ”it’s hard to capture the returns on your innovation,” he went on. ”From an economics perspective, that should hamper innovation.”

He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark. In their book ”Design Rules: The Power of Modularity” (MIT Press, 2000), they argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments. That requires modular designs rather than tightly integrated systems.

”By having a lot of modular experimenters, you can take the best, which will be a lot better than the average,” Professor Rebitzer said. Employee mobility may encourage productive innovation, as people quickly move to whichever company comes up with the best new technology.

. . .

To Professor Rebitzer’s surprise (though not his co-authors’), it turns out that Silicon Valley employees really do move around more often than other people. The researchers looked at job changes by male college graduates from 1994 to 2001. During that period, an average of 2.41 percent of respondents changed jobs in any given month.

But, they write, ”living in Silicon Valley increases the rate of employer-to-employer job change by 0.8 percentage point.”

”This effect is both statistically and behaviorally significant — suggesting employer-to-employer mobility rates are 40 percent higher than the sample average.”

For the full commentary, see:

VIRGINIA POSTREL. "ECONOMIC SCENE; In Silicon Valley, Job Hopping Contributes to Innovation." The New York Times (Thursday, December 1, 2005): C4.

A PDF of the paper by Rebitzer and colleagues is downloadable at: http://www.federalreserve.gov/Pubs/feds/2005/200511/200511abs.html

The book Postrel praises, is:

Source of book image: http://www.amazon.com/gp/product/customer-reviews/0262024667/104-2835260-2878345?redirect=true

Free International Labor Markets

As a fellow-signer of the Open Letter, I second Professor Armentano’s response to Rep. Rohrabacher:

So according to Rep. Dana Rohrabacher (Letters, July 5), economists who advocate relatively free international labor markets must be "lefty academics." Oh, yeah? I thought that "lefties" took the opposite position, that government (and not the market) should control resource availability in the so-called "national interest." And I also thought that advocating the removal of restrictions and penalties on the free movement of labor and other resources was the essence of a free-market position.

The economists (such as myself) who signed the Independent Institute’s Open Letter to the President on immigration were taking a consistent free-market position. We hardly need to be slandered with a label that implies the exact opposite

Source:

Dominick T. Armentano. "Open Letter to President Was a Free-Market Stance." The Wall Street Journal (Sat., July 8, 2006): A11.

The text of the Open Letter can be found at: http://www.independent.org/newsroom/article.asp?id=1727

Or access the Open Letter by clicking the link below:

Continue reading “Free International Labor Markets”