Thursday, October 19, 2017

The Amount of Your Compensation Going Toward Benefits Keeps Rising

By Josh Zumbrun of the WSJ.

In my micro class, when I cover poverty, incomes and the income distribution, this is something that I mention when talking about incomes over time. Maybe they have not gone up as much as they used to because more of employee compensation has been going to benefits. The trend that Zumbrun discusses has been there before even 2006.


"In 2006, just over 70% of employer costs went to wages and salaries. That’s now down to 68.3%, the lowest point in the data."

"In the first quarter of 2017, employers spent $24.10 an hour in wages and $11.18 in benefits for every hour of work.

The breakdown on those benefits: $2.91 for health insurance, $2.49 on various types of paid leave (including vacation time, sick pay, holiday pay and personal leave), $1.95 for Social Security and Medicare, and $1.88 on other benefits (including unemployment and disability, life insurance, workers’ compensation payments, and various types of supplemental pay.)

Taking inflation into account, the gap in growth rates between wages and benefits becomes starker. Real wages have grown just 4% in total since 2006, according to this report’s measure. Real benefits have grown 12.4% over that period."

Thursday, October 12, 2017

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:

"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Thursday, October 05, 2017

Price-gouging laws can backfire

This was by me and was printed in The San Antonio Express-News on Oct. 3. Click here to go to it.

Re: “More and more, qualms about price gouging in short supply,” Daniel Fridman, Opinion, Sept. 24:

Daniel Fridman argues we should not ignore the immorality of price gouging.

It seems immoral to sell a thirsty disaster victim bottled water for $5. Maybe that would happen even more without anti-gouging laws. But we should not ignore the immoral results the laws cause, which can be serious.

One is wasted resources. I drove around for two days a few weeks ago, looking for gas and unable to buy any. Either the lines were too long or the stations had no gas. My time and gas were wasted.

All I wanted was 2 gallons to keep me going for about a week (I drive only about 12 miles a day and own a Honda Civic). I would have gladly paid $5 a gallon, but the law prevented that.

If the price had been that high, most of us would have purchased just enough to last until the crisis ended. An extra-high price might have prevented the long lines.

What about all those cars idling in line at the gas stations (maybe many of the people just wanted to keep the AC going)? How much waste and pollution did that cause?

The Express-News had pictures of cars backed up a block or more onto busy streets. More congestion and pollution.

One of my students said she waited in line 30 minutes but the station ran out before she could buy any gas. Fights and fender benders also occurred.

Then there were the people filling 50-gallon drums. With the law preventing price increases, there was nothing to stop that behavior.

There is also the misallocation of resources. Who gets items when there are price controls?

After disasters, hardware store owners have sold gas-powered generators to friends since they are not allowed to raise the price. How is it moral that you need to know someone to get a vital good or service?

Grocery stores that might have been willing to pay a premium for the generators were out of luck. They couldn’t power their refrigerators and coolers. Food spoiled when people were in great need.

Fridman offered no examples of victims who did not get food, water or gas. He also did not mention that major companies don’t price gouge because they have their long-term reputation to consider, not because of any laws.

One example of this was Best Western cutting its affiliation with a hotel that gouged. It did not have to be told by the government to do that.

But what should be done when a hotel has too few rooms? If it raises the price, some friends or family members might go in on a single room and some can sleep on floors in sleeping bags, freeing up a room for others.

Otherwise, we are left with first come, first served. Only those who get there first get a hotel room.

Enforcing these laws causes problems, too. After Katrina, John Chefferson drove 600 miles to sell generators at twice the price he paid. But he was arrested and no one got them because the police confiscated them. How is that moral?

Texas gouging laws are vague. Attorney General Ken Paxton said not to raise prices by more than 10 percent above the previous three-month average. But neither that nor any other specific number is codified, showing how hard it is to make moral judgments in these cases.

Cyril Morong, Ph.D., is an associate professor of economics at San Antonio College.

Friday, September 29, 2017

Want to be happy and successful? Try compassion

By Jen Christensen of CNN.

Economists assume that people are selfish. It seems reasonable to also assume that selfish people want to be happy and successful. So it could be in the interest of selfish people to be compassionate. This might be a variation on the invisible hand of Adam Smith, the idea that it leads self-interested people to act for the good of society.


"The compassionate tend to have deeper connections with others and more friends. They are more forgiving and have a stronger sense of life purpose. Many studies have shown these results. Compassion also has direct personal benefit. The compassionate tend to be happier, healthier, more self-confident, less self-critical, and more resilient."
The article also discusses compassion exercises that change your brain.

Below is a related post I did in January called "The Dalai Lama Says It Is Sometimes OK To Be Selfish."

"This is mostly a post from November, 2013. But there was another article about something similar involving the Dalai Lama this week. So I have a bit about that at the end of this post.

And of course, Adam Smith said when people act selfishly they are led, as if by an invisible hand, to make society better off.

So when might it be OK to be selfish according to his holiness? When caring for others.

Wait, how can that be selfish? Or is this some kind of Zen riddle like what is the sound of one hand clapping? No, it's biology and evolution. See Lending a hand does a body good by Jessica Belasco, from the San Antonio Express-News, 10-25-2013.

She talked to Dr. James R. Doty, a neurosurgeon at the Stanford University School of Medicine and founder of Stanford's Center for Compassion and Altruism Research and Education. Excerpts:

"Practicing compassion — recognizing someone else is suffering and wanting to help relieve that suffering — just might be as important for health as exercise or a healthful diet, some scientists believe.

When we respond to another person's needs, our body responds in turn:

We become relaxed and calm.
Our blood pressure goes down.
Our stress level goes down.

Practicing compassion is associated with lengthened telomeres, the DNA that protects the ends of your chromosomes and is a marker of longevity.

To understand why humans are hard-wired for compassion, Doty said, just look at human evolution: Caring for others was essential to the survival of the species. Humans developed powerful neuropathways associated with nurturing and bonding with their offspring as motivation to care for them in a hostile environment; otherwise their genes could not be passed on. The same was true beyond the nuclear family when humans formed hunter/gatherer tribes.

A few hundred millennia later, our need for compassion remains strong. We may not be facing predators as our ancestors did, but frequent low-level stressors — work deadlines, traffic noise, our cellphone buzzing with texts — keep our fight-or-flight response continually engaged. That releases stress hormones, which raises the risk of disease.

When we're responding to others' needs, though, we engage the “parasympathetic nervous system,” relaxing us, Doty said. Stress hormones decrease, and the immune system is boosted. In fact, that occurs even if we just think about performing a good act for someone.

That's why intervening when someone needs help — whether in the form of a hug, reassurance, financial help or something else — has a powerful impact not just on the person being helped but on the helper.

Studies also have shown that volunteering, which is a way to practice compassion, helps increase longevity — but with an important exception. Study subjects who said they were volunteering to impress somebody or for some other benefit, not because they authentically wanted to help others, didn't enjoy the same benefit."
Adam Smith wrote a book called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through (and I wonder if we need to be good storytellers to be able to do that). Neuroeconomist Paul Zak has been studying how the hormone oxytocin plays a role in making us feel good when we have empathy for others (beware: Zak is a big hugger). See an earlier post Adam Smith vs. Bart Simpson for more details.

There is an interesting book called Paleopoetics: The Evolution of the Preliterate Imagination. It relates storytelling to evolution.

Click here to go the Amazon listing. It is by Christopher Collins, professor emeritus of English at New York University. Here is the description:
"Christopher Collins introduces an exciting new field of research traversing evolutionary biology, anthropology, archaeology, cognitive psychology, linguistics, neuroscience, and literary study. Paleopoetics maps the selective processes that originally shaped the human genus millions of years ago and prepared the human brain to play, imagine, empathize, and engage in fictive thought as mediated by language. A manifestation of the "cognitive turn" in the humanities, Paleopoetics calls for a broader, more integrated interpretation of the reading experience, one that restores our connection to the ancient methods of thought production still resonating within us.

Speaking with authority on the scientific aspects of cognitive poetics, Collins proposes reading literature using cognitive skills that predate language and writing. These include the brain's capacity to perceive the visible world, store its images, and retrieve them later to form simulated mental events. Long before humans could share stories through speech, they perceived, remembered, and imagined their own inner narratives. Drawing on a wide range of evidence, Collins builds an evolutionary bridge between humans' development of sensorimotor skills and their achievement of linguistic cognition, bringing current scientific perspective to such issues as the structure of narrative, the distinction between metaphor and metonymy, the relation of rhetoric to poetics, the relevance of performance theory to reading, the difference between orality and writing, and the nature of play and imagination."
Click here to read a longer description by Collins himself.

Here is the new article from this week The Dalai Lama Explains Why Being Kind to Others is the Secret to Happiness. Excerpt:
"Have you ever wondered why it matters that you care for other people?

It seems commonsense that this is a good way to live life. But there are dominant philosophies today that suggest we need to maximize our own individual self-interest.

This comes from economic theories of capitalism that suggest when people look after their own self-interest, then society is better off.

The Dalai Lama explains why this doesn’t make sense in the beautiful passage below. As he says, it’s an obvious fact that your own sense of wellbeing can be provided through your relationships with others. So it’s best to start cultivating practices of kindness and compassion."
Then the article has a long statement from the Dalai Lama on this philosophy. But some economists might say that you can't run a successful business if you don't care about others and try to learn their wants and desires. Here is what Adam Smith said in The Wealth of Nations
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”"

Thursday, September 21, 2017

The preference for partners of the same education has significantly increased for white individuals

See New results on assortative mating by education Tyler Cowen. It seems like well educated whites want partners that will share their values in developing the human capital of their children (like sending them to college). So you get more households with two high income earners and they try very hard to make sure their kids grow up to be well educated and marry someone else well educated (that they might meet in college).

"Partner Choice, Investment in Children, and the Marital College Premium, by Pierre-André Chiappori, Bernard Salanié and Yoram Weiss

We construct a model of household decision-making in which agents consume a private and a public good, interpreted as children’s welfare. Children’s utility depends on their human capital, which depends on the time their parents spend with them and on the parents’ human capital. We first show that as returns to human capital increase, couples at the top of the income distribution should spend more time with their children. This in turn should reinforce assortative matching, in a sense that we precisely define. We then embed the model into a transferable utility matching framework with random preferences, a la Choo and Siow (2006), which we estimate using US marriage data for individuals born between 1943 and 1972. We find that the preference for partners of the same education has significantly increased for white individuals, particularly for the highly educated. We find no evidence of such an increase for black individuals. Moreover, in line with theoretical predictions, we find that the “marital college-plus premium” has increased for women but not for men."
See also On Assortative Mating from Greg Mankiw.As mentioned above, we are getting these very high income households. When the government measures how equal or unequal the distribution of income is, it is often by household. So this process is increasing the difference in incomes between the poorest and richest households. The gini coefficient mentioned below goes from 0 to 1 and higher means less equal.

"A new working paper concludes:
"Data from the United States Census Bureau suggests there has been a rise in assortative mating....[I]f matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller""

See also Higher Education Attainment by Family Income: Current Data Show Persistent Gaps by the Association of American Colleges & Universities. Excerpt:
"Among students in the bottom socioeconomic quartile, 15 percent had earned a bachelor’s degree within eight years of their expected high school graduation, compared with 22 percent in the second quartile, 37 percent in the third quartile, and 60 percent in the top quartile."
So if you are at the bottom, you are much less likely to get a college degree than people at the top. If you were born into the top quartile, you are 4 times more likely to get a degree than someone from the bottom.

The table below (from Mark Perry) shows that the top quintile has 2 income earners while the bottom has 0.42. 78.1% of the top quintile are married households. For the bottom it is 16.9%.  62.2% of the people 25 or older in the top quintile have bachelor's degrees but it is only 13.7% for the bottom. So the top quintile tends to be married couples where both spouses work and have college degrees.