Wednesday, 21 July 2021

Old boys' clubs and upward mobility at Harvard and beyond

Upward mobility (the movement of a person from a lower socio-economic class to a higher class, or from lower-income to higher-income, or from lower-wealth to higher-wealth) tends to be much lower than many of us think. Income mobility is also closely related to income inequality, as demonstrated by cross-country data in what is known as the 'Great Gatsby curve':

This Great Gatsby curve (taken from Wikipedia) shows a positive relationship between inequality (on the x-axis) and intergenerational immobility (on the y-axis). Immobility is, of course, the opposite of mobility, so this curve demonstrates a negative relationship between inequality and income mobility. Countries that have higher inequality have less income mobility. In other words, high inequality today tends to lock in high inequality in the future, and that's probably not a preferable outcome. At the least, it inhibits merit-based success from driving upward mobility.

The persistence of intergenerational immobility is related to inequality in social status. So, I was interested to read this new NBER Working Paper (ungated earlier version here) by Valerie Michelman (University of Chicago), Joseph Price (Brigham Young University), and Seth Zimmerman (Yale University). They looked into the effects of old boys' clubs at Harvard, how those clubs shape upward mobility, and whether interaction with high-status peers can increase the chance of upward mobility. Before I get to the results, here is how Michelman et al. briefly introduce Harvard's final clubs:

Social life at Harvard centered on exclusive organizations known as final clubs, so-called because they are the last clubs one joins as a Harvard student. These clubs, which Amory (1947) describes as the “be-alls and end-alls of Harvard social existence,” are hundreds of years old and count among their members multiple US Presidents.

Michelman et al. collect administrative data on Harvard entering classes from 1919 to 1935, including home addresses, where they dormed at Harvard, club membership, and academic rank. They match those records to 25th Reunion class reports, and where possible to data from the Census. A key feature of the dataset is that room assignments were effectively random, so students could not choose the 'neighbourhood' in which their room was located. The price of rooms varies, so the average price of each neighbourhood varies as well. More expensive neighbourhoods would include more high-status students, being those who went to 'private feeder schools', than less expensive neighbourhoods. Michelman et al. use this randomisation to compare students who dormed in these differently-priced neighbourhoods in terms of outcomes at Harvard and afterwards.

The paper has a huge amount of detail, but in short, they find that:

...exposure to high-status peers helps students achieve social success in college, but that overall effects are driven entirely by large gains for private feeder students. A 50 percentile shift in the room price distribution raises membership in selective final clubs by 3.2 percentage points in the full sample (34.2% of the mean). For private feeder students, the same shift raises membership by 8.4 percentage points (37.8%), while effects for other students are a precise zero. These effects build on similar patterns we observe starting in students’ first year at college. A 50-percentile increase in neighborhood price raises the count of first-year activities by 11.2% overall, with larger gains for private feeder students and small, statistically insignificant effects for others. Looking across activities, effects are largest for leadership roles, where baseline gaps in participation by high school type are also largest.

In other words, interacting with high status peers encourages more social activities, including final club membership, but only among students who are already high status. Score one for immobility. They also find that:

25 years after graduation, a 50 percentile change in peer neighborhood price raises the chance that students participate in adult social organizations by 8.7%. As with on-campus clubs, the overall long-run effects are driven entirely by large gains (26.1%) for private feeder students, with near-zero effects for others.

The social club effects observed while students are at Harvard persist into adulthood. They also affect incomes and social status:

Turning to occupations, a 50 percentile change in neighborhood price rank raises the share of private feeder students in finance by 7.2 percentage points, 39.7% of the group mean.

For high status students, interacting with other high status students is in turn associated with high-income careers in finance. Importantly, none of this is driven by academic performance. The high status students from private feeder schools consistently perform significantly worse than other students in terms of academic rank.

All of this analysis is based on data from Harvard students from the 1920s and 1930s. Surely things have improved since then? Michelman et al. collect data from more recent cohorts (although not in as much detail) up to the class of 1990, and find that:

Harvard changes profoundly over this time, enrolling women and many more non-white students. However, cross-group differences in academic performance persist. Public feeder students outperform private feeder students and Jewish students outperform Colonial students over the full 1924-1990 period. Differences in career outcomes change shape. Finance career choices by high school type and ethnicity converge, while gaps in academic careers and MBA receipt emerge, and gaps in medical careers remain large. Overall, students from high-income families at elite universities continue to earn more than other students at those universities.

So, maybe there are some cracks beginning to show in the upward immobility of students at Harvard. However, the persistent post-graduation income differences between high status students and other students remain. Clearly, social groups continue to matter greatly.

[HT: Marginal Revolution]

Tuesday, 20 July 2021

The minimum wage, the living wage, and the effective marginal tax rate

Advocates for the living wage tend to ignore that workers that currently receive the minimum wage also receive a lot of other government support, in the form of various rebates and subsidies, that they may not be eligible for if they earned a lot more. That means that increasing the minimum wage to the living wage would not necessarily lead to gains in net earnings that are as high as those advocates expect.

A worked example, based on U.S. data, is provided in this article by Craig Richardson. Here is the key figure:

Increasing the hourly wage from US$7.25 per hour to US$15 per hour would net a full-time worker only US$198.94, after accounting for all of the social benefits they would lose, and the additional taxes they would pay. Richardson writes:

There are some uncomfortable truths about raising the minimum wage from its current level of $7.25 per hour to $15 per hour that are revealed by an online tool created by our Center for the Study of Economic Mobility (CSEM) at Winston-Salem State University, along with our local research partner Forsyth Futures.

The tool, which we call the Social Benefits Calculator, enables anyone to go online and experience for themselves what it is like to be receiving social benefits and experience a monthly wage increase. Designed for Forsyth County, the calculator shows that with more than a 100% rise in the minimum wage, many people who currently receive social benefits will barely experience a change in their standard of living...

Let’s use the calculator and create a hypothetical example: a full-time working parent earning the minimum wage, who is unmarried with two children in subsidized day care. As seen in Table 1, after his or her wages more than double from $7.25 an hour to $15 an hour, earnings rise from $1,160 to $2,400, or a $1,240 change.

Sounds good, right? That’s an enormous bump up of wages by 106%. But after subtracting the decrease in benefits and higher taxes, that $1,240 increase erodes to just a $199 net improvement, or just a 16% change.

Imagine getting a big raise and seeing 84% of it go away. 

The effective marginal tax rate (EMTR) is the amount of the next dollar of income a taxpayer earns that would be lost to taxation, decreases in rebates or subsidies, and decreases in government transfers (such as benefits, allowances, pensions, etc.) or other entitlements. Taking the example of the table above, increasing the worker's wage from US$7.25 per hour to US$15 per hour increases their monthly before-tax-and-transfers income from $1160 to $2400. In other words, their income increases by $1240. With that higher income, they pay more federal and state taxes. Their monthly tax payments increase from $88.74 to $314.70. In other words, they pay an additional $225.96. The marginal tax rate over that interval is 18.2% (calculated as [225.96 / 1240]). But wait! Their entitlement to social benefits decreases from $3110.10 to $2295 monthly. In other words, they lose $815.10 in entitlements, as well as the additional taxes they pay. So, their effective marginal tax rate over the interval is 84.0% (calculated as [(225.96 + 815.10) / 1240]).

EMTRs are something that policy makers should keep a close eye on. When the EMTR gets too high, it can create some perverse outcomes. In some cases, workers could actually be financially better off by working less (this happens whenever the EMTR exceeds 100%). The problem is that every program has its own eligibility rules and thresholds, and keeping track of how the interaction between all of those works is incredibly difficult. You can try out the Social Benefits Calculator tool mentioned in the article here (it is based on data for Forsyth County, North Carolina). We really need a similar calculator for New Zealand.

[HT: Marginal Revolution]

Monday, 19 July 2021

Who will really gain from the electric vehicle subsidy?

The government is pressing ahead with introducing subsidies on electric vehicles. However, that comes with unintended consequences, as Newsroom reported last month:

The prices of used electric vehicles have leapt in response to the Government announcing its subsidy of up to $3,450 a car, the country's biggest secondhand car importers say.

Japan-based vehicle buyer Marcus Jones has emailed car importers with a somewhat sardonic update on pricing.

"I thought perhaps you could pass on thanks from the wives and orphans of Japanese EV and Phev owners," he wrote, "who have seen the auction values of their cars rise in the past few days by more or less the precise amount that the New Zealand taxpayer has generously agreed to contribute."

That a subsidy causes prices to rise should come as no surprise to anyone with a good understanding of basic economics. This point is illustrated in the diagram below, which assumes that the subsidy is paid to the buyers of EVs. [*] Without the subsidy, the market is in equilibrium, with a price of P0, and Q0 electric vehicles are traded. Introducing the subsidy, paid to the buyer, is represented by a new curve D+subsidy, which sits above the demand curve. It acts like an increase in demand, and as a result the price that producers receive for an electric vehicle increases to PP. The buyers pay that price, then receive the subsidy back from the government, so in effect they pay the lower price PC. The difference in price between PP and PC is the per-vehicle amount of the subsidy (which is up to $3450 per car, as announced by the government). The number of electric vehicles traded increases to Q1 (because buyers want to buy more electric vehicles because of the lower effective price they have to pay, and sellers want to sell more electric vehicles because of the higher price they receive). One thing to notice is that the price doesn't go up by the whole amount of the subsidy - the difference between the original price P0 and the new higher price PP is less than the per-vehicle subsidy (PP - PC).

Who gains from the subsidy? It turns out that both buyers and sellers do. Without the subsidy, the consumer surplus (the difference between the amount that buyers are willing to pay, and what they actually pay) is the area FBP0. With the subsidy, the consumer surplus increases to the area FEPC. Consumers are better off with the subsidy. Without the subsidy, the producer surplus (the difference between the price that sellers receive, and their costs) is the area P0BH. With the subsidy, the producer surplus increases to the area PPGH. Sellers are better off with the subsidy.

However, not all groups gain from the subsidy. The government has to pay it, and that comes with an opportunity cost. Perhaps the government has less money to spend on schools, or roads, or raising the pay of striking nurses. Or perhaps they borrow, in which case future generations have to pay it back through higher taxes or decreased services. The area that represents the amount of subsidy paid by the government is PPGEPC (it is the rectangle that is the per-vehicle amount of the subsidy (PP - PC) multiplied by the number of subsidised vehicles Q1). [**]

Now, we can consider who gets the most benefit of the subsidy. In simple terms, on the diagram you can see that the price rise for sellers (from P0 to PP) is greater than the price fall for buyers (from P0 to PC). Sellers benefit more from the subsidy. In fact, the sellers' share of the subsidy is the area of the subsidy above the original price - the area PPGFP0. The buyers' share of the subsidy is the area of the subsidy below the original price - the area P0FEPC. The sellers' share is much larger than the buyers' share.

That need not necessarily be the case. Notice that the supply curve is quite steep, much steeper than the demand curve. The supply curve is relatively more inelastic than the demand curve. That means that sellers are less responsive to a change in price than buyers are. It turns out that whichever side of the market is more inelastic gets the larger share of welfare gains (or losses) when there are changes in market conditions. In the diagram above, the sellers are more price inelastic, and so they receive the greater share of the benefits of the subsidy. The reverse could be true. If buyers were more price inelastic, they would receive the greater share of the benefits of the subsidy. This is shown in the diagram below (which retains all of the same labels as the previous diagram, but shows the case where supply is more elastic than demand).

Coming back to the Newsroom article, if the price of electric vehicles is going up a lot, then that suggests that the supply is more inelastic than the demand. In fact, if the price actually went up by the entire amount of the subsidy, that would suggest that supply is perfectly inelastic, that is, completely unresponsive to price changes. Not everyone is suggesting that the price is going up by the full amount of the subsidy (from the same Newsroom article):

[Robert Young, director of New Zealand's biggest used car importer Nichibo Japan] estimated about half the $3450 subsidy would end up off-shore, benefiting the auction vendors in Japan and the UK as well as new car manufacturers. More would go to GST – meaning Kiwi EV buyers would pocket only about one-third of the subsidy.

It's hard to see what supply of electric vehicles to New Zealand would be very inelastic compared with demand. There are other markets that Japanese second-hand car sellers could be selling to, including Australia, Thailand, Malaysia, the Indian subcontinent, and southern Africa (all areas that drive on the left). Receiving a higher price for selling into the New Zealand market should induce Japanese sellers to shift to selling their EVs to New Zealand instead of into those other markets. It is also hard to see why demand for EVs in New Zealand would be very elastic compared with supply, but many substitutes (including petrol- or diesel-powered vehicles, which are due to be taxed and become more expensive concurrently with the introduction of the EV subsidy) and the high cost of EVs would play a part. It wouldn't surprise me to learn that the subsidy is roughly evenly shared between buyers and sellers.

Anyway, the key point of this post is that this is somewhat futile (again from the same Newsroom article):

But Transport Minister Michael Wood said the Government was keeping a close eye out for any attempts to take advantage of the subsidy.

“The new and imported used vehicle market is very competitive and I’m sure anyone attempting to distort market pricing will be called out," he said.

It's not the sellers that are distorting the market pricing, it's the subsidy.

[HT: Eric Crampton at Offsetting Behaviour]


[*]  The subsidy could be paid to the sellers instead of the buyers. However, it turns out that the price and welfare effects would be exactly the same, regardless of who it is paid to. The only difference would be in terms of the transaction costs (the costs of administration of the subsidy). There is an argument that it would cost less to pay the subsidy to EV sellers, because there are fewer of them, and so fewer payments would need to be made. However, a canny government would realise that not every buyer would claim back the EV rebate, and so paying the subsidy to buyers in the form of a rebate may turn out to be cheaper overall. And even if it doesn't, it looks better politically for the government to pay the subsidy to 'ordinary car buyers' than to 'millionaire car salespeople'.

[**] For completeness, adding the consumer surplus and producer surplus together, and subtracting the subsidy, gives us a measure of total welfare (or total surplus). Without the subsidy, total welfare is the area FBH. With the subsidy, total welfare decreases to the area (FBH - BGE). The area BGE is the deadweight loss of the subsidy. However, this assumes that there are no positive externalities associated with electric vehicles, which there probably are - a person buying an EV is a person not buying a carbon-powered vehicle, and so each EV sold reduces carbon emissions (and reducing a negative externality is the equivalent of a positive externality).

Sunday, 18 July 2021

Book review: Range

Should you aim to specialise in a single domain, developing deep expertise on a specific topic? Or aim for breadth, developing understanding of a wide range of domains? In David Epstein's view, we should be aiming for the latter, and that is the argument that he puts forward in his 2019 book, Range. The poster child for (and possibly, against) the idea of specialising early and deeply is Tiger Woods, who Epstein contrasts with Roger Federer in the first chapter. I hadn't realised the breadth of Federer's sporting experience as a youth, and that he came to tennis rather late. He seems to have turned out all right, so is a good place to start.

The book is wide-ranging and somewhat difficult to abstract, but here is what Epstein writes in the conclusion:

The question I set out to explore was how to capture and cultivate the power of breadth, diverse experience, and interdisciplinary exploration, within systems that increasingly demand hyperspecialization, and would have you decide what you should be before first figuring out who you are.

So, a part of Epstein's argument in favour of breadth over depth is to develop a range of experiences. His own journey is a good example:

When I was seventeen and positive that I was going to go to the U.S. Air Force Academy to become a pilot and then an astronaut...

But I never did any of that. Instead, at the last minute I changed my mind and went elsewhere to study political science. I took a single poli-sci class, and ended up majoring in Earth and environmental sciences and minoring in astronomy, certain I would become a scientist. I worked in labs during and after college and realized that I was not the type of person who wanted to spend my entire life learning one or two things new to the world, but rather the type who wanted constantly to learn things new to me and share them. I transitioned from science to journalism...

I have to say that I should be very much in favour of Epstein's argument, as my own path to economics was long and winding. I too wanted to become an Air Force pilot, but failed to get into the final intake of the RNZAF fighter pilot programme. I went to university, and started initially in physics and maths, then changed in my second year to chemistry and materials science, before dropping out. I have variously worked as a lab technician, a labourer, an accountant, and in hospitality. I finally went back to university to study accounting, but before the end of my first year back I had decided to switch to economics and strategic management, before later dropping strategic management in favour of a focus on economics. However, to say that I 'focused' would probably be overstating the case, and one look at my academic CV would reveal the range of research projects in health economics, population economics, and development economics, that I have been involved in. Unlike most economists, I haven't gone deep on any particular topic, and I guess that is also reflected in the wide range of topics that I post on in this blog.

However, in spite of being somewhat predisposed to Epstein's arguments, I found myself not entirely convinced. He presents a large collection of anecdotes, supported by lots of references to research, and yet I didn't find it compelling. In part, that's because there are really two separate (but related) arguments that Epstein is really making. In the early part of the book, he argues for more breadth for individuals. That is, he argues that people should err towards becoming generalists rather than specialists, or at least they should delay specialisation until they have had a chance to test out many different paths. Later in the book, Epstein switches to advocating for diversity of teams. That is, that teams should be comprised of a variety of viewpoints and should develop norms of challenging group-think. The two parts of the book are clearly related, but ironically by failing to specialise the book on one or the other (and preferably the first argument), I think Epstein doesn't advance the arguments as much or as thoroughly as he could. IN particular, in relation to teams there is a whole research literature on ethnic and gender diversity of teams and viewpoint diversity that would have added significantly to the argument, but was not considered.

Despite that gripe, I did enjoy the book, and there are some important implications for education. In particular, if there are advantages to late specialisation, that suggests that making university students elect for a major at the start of their degree is a mistake (which is something that I have argued), and may hamper the development of their future careers. More breadth within majors would also seem to be useful, and on that point I thought this part of the book, which describes some research undertaken by New Zealand-based political researcher James Flynn (famous for the Flynn effect) on students at top state universities in the U.S.:

Each of twenty test questions gauged a form of conceptual thinking that can be put to widespread use in the modern world. For test items that required the kind of conceptual reasoning that can be gleaned with no formal training - detecting circular logic, for example - the students did well. But in terms of frameworks that can best put their conceptual reasoning skills to use, they were horrible. Biology and English majors did poorly on everything that was not directly related to their field. None of the majors, including psychology, understood social science methods... Econ majors did the best overall. Economics is a broad field by nature, and econ professors have been shown to apply the reasoning principles they've learned to problems outside their area.

I'll take being the best of a bad bunch as a moral victory for economics. However, it is clear that education needs to be re-considered. Another thing that comes in for some criticism is the difficulty that interdisciplinary research has in getting funding. Epstein observes that research increasingly involves asking for funding for research where the answer is already known before the research begins. That isn't a recipe for advancement, or the type of serendipitous discoveries that underlie a surprising number of Nobel Prizes.

Anyway, the book is a good read. And interestingly, just as I was finishing up reading it, my attention was drawn to this new article published in the journal Perspectives on Psychological Science, which concludes that:

...(a) adult world-class athletes engaged in more childhood/adolescent multisport practice, started their main sport later, accumulated less main-sport practice, and initially progressed more slowly than did national-class athletes; (b) higher performing youth athletes started playing their main sport earlier, engaged in more main-sport practice but less other-sports practice, and had faster initial progress than did lower performing youth athletes; and (c) youth-led play in any sport had negligible effects on both youth and adult performance.

So, there is definitely something to be said for breadth over depth, in science and in sport.

[HT: Marginal Revolution, for the article]