Wednesday, 29 April 2015

Why compensating differentials might mean that inequality has been decreasing over time

John McGinnis wrote an interesting piece earlier in the month, on why compensating differentials likely temper any growth in income inequality. John writes:
This simple observation suggests that focusing only on earned income from employment can provide a misleading picture of  any growth in inequality.Overall satisfaction from a job comes not only from earnings but also from the amenities it provides and the risks it presents.  If our economy is improving lower income jobs by reducing risks and providing a more enjoyable environment this trend could compensate for at least some of any growth in income inequality.
Applying this idea to New Zealand might mean that inequality has been decreasing. Important note: "inequality", not "income inequality" (an important distinction, because we're not just talking about monetary income now).

The argument goes like this - first, our total compensation from any job includes both monetary and non-monetary components. The non-monetary characteristics of jobs include things like how annoying your work colleagues are (or how vivacious and enthusiastic, depending on your perspective), how boring or monotonous (or exciting) your job is, and how dangerous to life and limb your job is.

Think about two jobs that have the same human capital requirements. If the first job has attractive non-monetary characteristics (e.g. it is exciting) then more people will be willing to do that job. This leads the supply of labour to be higher, which leads to lower equilibrium wages. In contrast, if the second job has negative non-monetary characteristics (e.g. it comes with a high risk of death or injury) then fewer people will be willing to do that job. This leads the supply of labour to be lower, which leads to higher equilibrium wages. The difference in wages between the attractive job that lots of people want to do and the dangerous job that fewer people want to do is called a compensating differential. This is the reason why welders on oil rigs earn US$61,000-66,000, while spot welders in general earn US$24,000. Oil rig work comes with negative characteristics like lots of time away from family (for some families, this might be a positive characteristic!), and higher risk of death or injury.

Importantly, it is likely that compensating differentials have been changing over time. John McGinnis points out that in the U.S., "Since 1970 workplace deaths have plunged 65 percent and workplace illnesses 67 percent." Similarly, if we look at more recent data from New Zealand, the incidence of workplace injuries has fallen from 119 per 1,000 full-time equivalent employees in 2008, to 92 per 1,000 full-time equivalent employees in 2013.

How does that relate to inequality though? It depends. John argues that "These economic transformations differentially help those on the lower income part of the scale". Increases in inequality would be mitigated, if the improvements in non-monetary characteristics were greatest among the lowest-paid workers.

We can use some freely available data to check this. Using the injury data linked above and data from the NZ Income Survey by occupation, we can create a very crude analysis (which is made difficult by the change in occupational classifications over time). I picked three occupations that are reasonably consistently defined between the NZSCO95 classification (which is used in the injury statistics) and the NZSCO99 and ANZSCO classifications (that are used in the income statistics): (1) Professionals (median hourly wage of $30.17 was the highest of all occupations in June 2013); (2) Clerical and administrative workers ($21.58); and Machinery operators and drivers ($19.34).

For these three groups, between 2008 and 2013, injury incidence fell 19.5% for professionals, 41.9% for clerical workers, and 27.5% for machinery operators. So, injury incidence did fall by a greater proportion for the two lower-paid occupational groups when compared with professionals over this period, but it was the clerical workers who had the highest injury gains (note: they also had the highest income gains over this period, with median wages increasing by 21.7%). Perhaps there is something to this that could do with some further investigation - however, you would probably want to take into account how much people value reductions in injury incidence (since otherwise there is no easy way to combine change in wages with the change in injury incidence).

Now, why does this mean that inequality might have been decreasing in New Zealand? As Eric Cramption has pointed out on many occasions (e.g. see here or here), income inequality has been fairly static in New Zealand since the 1990s. So if income inequality has been static, but the non-monetary characteristics of occupations have changed in ways that favour occupations with lower median wages, then perhaps overall inequality has been decreasing. Of course, that assumes that there hasn't been a big shift in the occupational structure of the economy away from the lower-wage jobs (which there has - in the three occupations I used above, professionals increased from 17.3% to 19.5% of full-time equivalent employees between 2008 and 2013, and machinery operators and drivers decreased from 8.8% to 8.0%). Again, the relative effects on inequality of changes in wages, non-monetary characteristics, and changes in occupational structure of the economy, is something that bears further investigation.

[HT: Marginal Revolution]

Monday, 27 April 2015

Try this: The monkey economy and behavioural biases

Someone (I forget who, sorry) pointed me to this 2010 TED Talk by Laurie Santos (a psychologist at Yale). In it, Santos talks about creating an economy in a group of capuchin monkeys by introducing them to the concept of money. My ECON110 students might recognise it, as one of their assignments was based on this research. She also shows that the monkeys are subject to some of the same behavioural biases as humans, especially: (1) loss aversion (we value losses more than we value gains); and (2) thinking in relative rather than absolute terms (we compare any change we anticipate relative to our current position). Enjoy!

You might also like: Does exposure to markets make us more, or less, rational?

Saturday, 25 April 2015

Why export quotas probably failed to help coffee farmers

Last year, my wife and I both read the same story from Daily Coffee News, entitled "A Brief History of Coffee Price Volatility in the Modern Era (1963-2013)". Probably unsurprisingly given our different disciplinary backgrounds, we had completely different takeaways from the story. On the one hand, you could take away that free market forces are a bad thing, because they led to volatility in the price of coffee on world markets - as the International Coffee Organization is quoted in the article as saying, this "makes it difficult for roasters to control processing costs and affects profit margins for traders and stockholders, making their activities less attractive".

What I took away from the article was how the International Coffee Organization ensured price stability in the period from 1963 to 1989 - by using a system of export quotas in producing countries. My overall comment was "wow, the coffee farmers were probably worse off, but I bet the middlemen were happy". And now I'll explain why (which I've been promising my wife I would do here for some time).

Let's start with an exporting country - a country that has a comparative advantage producing the product (coffee in this case). That means that the country can produce coffee at a lower opportunity cost than other countries. On a supply-and-demand diagram like the one below, it means that the domestic market equilibrium price of coffee (PD) would be below the price of coffee on the world market (PW). Because the domestic price is lower than the world price, if the country is open to trade there are opportunities for traders to buy coffee in the domestic market (at the price PD), and sell it on the world market (at the price PW) and make a profit (or maybe the suppliers themselves sell directly to the world market for the price PW). In other words, there are incentives to export coffee. The domestic consumers would end up having to pay the price PW for coffee as well, since they would be competing with the world price (and who would sell at the lower price PD when they could sell on the world market for PW instead?). At this higher price, the domestic consumers choose to purchase Qd0 coffee, while the domestic suppliers sell Qs0 coffee (assuming that the world market could absorb any quantity of coffee that was produced). The difference (Qs0 - Qd0) is the quantity of coffee that is exported. Essentially the demand curve with exports follows the red line in the diagram.

We can also use the diagram to demonstrate the gains from trade for an exporting country. Without trade, the market would operate at the domestic equilibrium, with price PD and quantity Q0. Consumer surplus (the gains to domestic coffee consumers) would be the area AEPD, the producer surplus (the gains to domestic coffee producers) would be the area PDEF, and total welfare (the sum of consumer surplus and producer surplus, or the gains to society overall) would be the area AEF. With trade, the consumer surplus decreases to ABPW, the producer surplus increases to PWCF, and total welfare increases to ABCF. Since total welfare is larger (by the area BCE), this represents the gains from trade. So, coffee farmers are better off with trade, because the producer surplus is larger than it is without trade.

What happens when there is an export quota? This is demonstrated in the diagram below. Whereas previously, we assumed that the world market could absorb any quantity of exports of coffee, now the quantity of exports is limited to the agreed quota amount. Let's say that the export quota is limited to the amount between B and G (about half the amount of unrestricted exports). Importantly, the export quota is implemented using licenses - only holders of export licenses are allowed to export.

Now that there is a quota on exports, consider what happens to the demand curve (including exports). The upper part represents the domestic consumers with high willingness-to-pay for coffee. Then there is a limited quantity of export demand, at the world price PW. After that, there are still profit opportunities for domestic suppliers (that is, there are still some domestic consumers who are willing to pay more than what it costs the suppliers to produce coffee). So, the demand curve (including the export quota) pivots at the point G, and follows a parallel path to the original demand curve (i.e. the demand curve including exports follows the red line in the diagram). The domestic price is the price where supply is equal to demand (P1). Export license holders can purchase coffee at this price, and then sell it on the world market and receive the higher world price (PW), and pocket a profit. The domestic consumers choose to purchase Qd1 coffee at the price P1, while the domestic suppliers sell Qs1 coffee at that price. The difference (Qs1 - Qd1) is the quantity of exports (which is also the quantity of the quota).

Now the consumer surplus is larger than it was without the export quota (it is now the area AJP1), the producer surplus is smaller than it was without the export quota (it is now the area P1HF). The export license holders now receive a surplus (profit), equal to the area KLHJ. Total welfare (which is now made up of the consumer surplus, producer surplus, and license holder surplus) is smaller than without the export quota (it is now the area AJHF+KLHJ). There is a deadweight loss (a loss of total welfare arising from the export quota) equal to the area [BKJ + LCH] - these areas were part of total welfare with trade and no export quota, but have now been lost.

Of most interest to us though is that the export quotas don't help the coffee farmers - producer surplus has fallen. In contrast, the export license holders (the middle men, who buy coffee from the farmers and sell it on the world market) are made better off by the export quota system.

But wait - what if the export quota system makes world coffee prices higher? That seems a reasonable possibility - if all coffee producing countries are restricting the supply of coffee to the world market, then that should raise prices for all. I'm sure that's what the International Coffee Organization was probably trying to do all along.

The diagram below demonstrates what happens, if the quota is kept the same size as the previous diagram, but the world price increases from PW to PX. The demand curve (including the export quota) now follows the purple path (since the license holders can now sell at the higher price PX instead of PW), but notice that the resulting domestic price is exactly the same (P1). In terms of welfare effects, the resulting consumer surplus and producer surplus are unchanged even though the world price is now higher. The license holder surplus increases to MNHJ.

So, even if the export quota system successfully raises the world price of coffee, it is the middle men who benefit, not the coffee farmers. Which is why, after the coffee export quota system collapsed in 1989, we would expect coffee farmers to have been made better off.

[Update: Fixed missing label in second diagram]

Tuesday, 21 April 2015

Could early identification of students at risk of failure be a bad thing?

One of my Summer Research Scholarship students this year, Jacinda Herring, was working on a project on identifying  the characteristics of Waikato Management School students at risk of not completing their degree. The point of the project is, essentially, that if we can identify high-risk students before they start their degree, then we can better target pastoral care or other interventions that might help increase students' chances of successful degree completion. It seems to me there is little to argue against this approach, which is why I am pursuing research in this area with my students.

However, a recent interview with Jeffrey Alan Johnson (Utah Valley University) published in the Christian Science Monitor argues convincingly that perhaps we should pause before we get carried away with 'profiling' our students. Johnson says:
We've got an early warning system [called Stoplight] in place on our campus that allows instructors to see what a student’s risk level is for completing a class. You don’t come in and start demonstrating what kind of a student you are. The instructor already knows that. The profile shows a red light, a green light, or a yellow light based on things like have you attempted to take the class before, what’s your overall level of performance, and do you fit any of the demographic categories related to risk. These profiles tend to follow students around, even after folks change how they approach school. The profile says they took three attempts to pass a basic math course and that suggests they’re going to be pretty shaky in advanced calculus...
When I told my students I have Stoplight data, they were worried about what I thought of them coming into the class. It definitely bothered them. They wondered if instructors will think they need help, or dismiss them because it looks like they won’t succeed and it’s better to prioritize other students.
So it seems that maybe there are valid concerns about making this data available to teaching staff. Lecturers' attention is a scarce resource, and if lecturers know which students are more likely to fail a given course, then they may divert their attention away from most-at-risk students to students who are more likely to pass. Of course, the counter-argument is that maybe some lecturers would divert their attention towards those who are on the margin of passing the course (to the extent that pass rates, or helping individual students to pass, are important to lecturers). But the risk of profiling isn't a good reason not to have a system for identifying at-risk students. Perhaps the data on risk level could be made available only to student advisors or those engaged in pastoral care, which would minimise the risk to students of their interactions with lecturers being biased by preconceptions of their likelihood of passing. In any case, my aim is to press on with research into at-risk students later this year. 

Coming back to Jacinda's project, she compiled administrative data from all Waikato Management School students who commenced study between 2008 and 2011 (= 2033). Each student was then classified into three categories: (1) completed any degree (not necessarily the one they started in); (2) still studying (in 2014); and (3) did not complete any degree and not still studying. She then used chi-square tests and logistic regression models to compare the first group with the latter two (combined).

What did she find? In the final (multivariate) specification of the logistic regression model (which only included data we would have known before the students commenced study, and data that are available for all students):
  • Students aged 25 years and over (at first enrolment) had significantly lower odds of degree completion than those aged 19 years and under;
  • Male students had significantly lower odds of degree completion than female students;
  • Asian students had significantly higher odds of degree completion than all other ethnic groups, and Maori and Pacific Island students had the lowest odds of degree completion;
  • Domestic students had significantly lower odds of degree completion than international students;
  • Special admission (or provisional entrance) students had significantly lower odds of degree completion than other students; 
  • Students who initially completed the Certificate of University Preparation (CUP) had significantly lower odds of degree completion than other students; and
  • Students initially enrolled in conjoint degrees had significantly lower odds of degree completion than students enrolled in single degrees.
The results are altogether not surprising if you have any experience with tertiary education, except perhaps for the last one. Most of the time it is top-achieving students who enrol in conjoint degrees. However, many students enrol in conjoint degrees because they can't decide on a single degree that they want to specialise in and so try to do a bit of everything. Conjoint degrees take longer to complete, and as such require a higher level of commitment to study - this may lead to discouragement and a higher level of non-completion. So, at the least there is one take-away from Jacinda's work, which is that maybe we need to target more pastoral care or mentoring and role models for conjoint degree students.

I expect that Jacinda and I will write up her analysis as a Department of Economics working paper in the near future.

[HT for the CSM article: Marginal Revolution]

Sunday, 19 April 2015

The Spirit Level, neo-liberalism and the retreat of government

A few weeks back, I wrote a post on how my views on inequality have changed over the last year. In that post, I noted I had read the Wilkinson and Pickett book The Spirit Level, and that I had one main objection to it that I felt hadn’t been addressed and where I think the book went wrong.

The challenge in this book is demonstrating that the effects of income inequality are causal, i.e. that income inequality causes the social problems they highlight in the book (violence, teenage births, obesity, drug abuse, etc.). In order to show that the relationship of one variable (the explanatory variable) on another variable (the dependent variable) is definitively causal and not simply correlation, you need (among other things) to be able to show that there isn’t a third variable that might be causing changes in both explanatory and dependent variables. In this case, the authors need to be able to demonstrate that there isn’t a third variable that might simultaneously affect both income inequality and social problems. Government ideological changes seem to fit the bill for me.

On page 190-191, in the chapter asserting the causality of the observed relationships between income inequality and social problems, the authors note that increasing neo-liberalism might explain changes in income inequality, but not social problems. They say:
“Another alternative approach is to suggest that the real cause is not income distribution but something more like changes in ideology, a shift perhaps to a more individualistic economic philosophy or view of society, such as the so-called ‘neo-liberal’ thinking. Different ideologies will of course affect not only government policies but also decisions taken in economic institutions throughout society. They are one of very many different factors which can affect the scale of income differences. But to say that a change in ideology can affect income distribution is not at all the same as saying that it can also affect all the health and social problems we have discussed – regardless of what happens to income distribution. Although it does look as if neo-liberal policies widened income differences (see Chapter 16) there was no government intention to lower social cohesion or increase violence, teenage births, obesity, drug abuse and everything else. So while changes in government ideology may sometimes be among the causes of changes in income distribution, this is not part of a package of policies intended to increase the prevalence of social problems. Their increase is, instead, an un-intended consequence of the changes in income distribution. Rather than challenging the causal role of inequality in increasing health and social problems, if governments understood the consequences of widening income differences they would be keener to prevent them.”
Simply asserting that the government didn't intend to increase social problems is not enough to allay concerns that ideological changes in government policy might simultaneously increase income inequality and social problems. Consider the retreat of government – the reductions in social support and income support that governments have provided over time. The foundation of the retreat of government is the neo-liberal view that the individual is best placed to make their own decisions about the allocation of financial resources, whether that be on health or whatever. So, this leads to a favouring of reductions in taxes and allowing the taxpayer to make choices of for-fee services that were previously provided by (or heavily subsidised by) government, like health care.

These tax reductions have decreased the progressivity of the tax system in most countries, which is naturally associated increasing (after-tax) income inequality. Meanwhile, increasing the costs of healthcare reduces the quantity demanded – this is simply the law of demand – and reductions in health care utilisation are naturally associated with worse health outcomes.

So it is not unreasonable to expect that increasing income inequality might be observed alongside worse health outcomes, even if income inequality doesn't directly cause worse health outcomes. The mechanism is government policy changes driven by ideology. This is particularly true given the countries (and U.S. states) that The Spirit Level uses in its comparisons – places where neo-liberal thinking has been on the rise.

We could tell a similar story about other social problems. So, while The Spirit Level provides us with some good evidence on the associations (or correlations) between income inequality and social problems, I think it falls short of definitively showing that income inequality is the root of all evil here.

The main problem with this is that it affects the policy prescription. If the cause of the increased social problems is income inequality, then tackling income inequality (through redistributive policies, for example) would simultaneously reduce the social problems. However, if neo-liberal policy is the cause of both increased income inequality and increased social problems, then tackling income inequality may reduce the inequality, while having little or no effect on the other social problems.

Friday, 17 April 2015

Are pornography and marriage substitutes for young men?

Apparently they are, according to a recent IZA Discussion Paper (PDF) by Michael Malcolm (West Chester University of Pennsylvania) and George Naufal (IZA). Using data on young males from the 2000, 2002 and 2004 waves of the U.S. General Social Survey (for which the data are freely available online for most waves), the authors investigated whether the number of hours spent on the internet each week and self-reported use of the internet to view pornography lowered the probability that respondents were married at the time of the survey.

There are a couple of obvious problems here, which the authors acknowledge. The first is reverse causality – married people are likely to have less opportunity to view pornography (what with their wife looking over their shoulder at what they are working on). Second, people with poor interpersonal skills are less likely to get married, and more likely to use the internet, which would confound the issue.

To overcome these problems, the authors use instrumental variables analysis (which I have earlier discussed here): they essentially find some variable that is expected to be related to pornography or internet usage, but shouldn’t plausibly have a direct effect on marriage rates. In this case, the authors use father’s education level as an instrument for hours of internet usage (because more educated people used the internet more, particularly in the early 2000s), and use urbanisation as an instrument for pornography usage (as more urbanised areas have better internet, and hence pornography, access).
The results show that pornography is indeed a substitute for marriage for young men:
“For pornography consumption specifically, the magnitude of the marginal effect also varies across models, but again all are negative and significant at the 10% level. Using the bivariate probit model, each 1% increase in propensity to look at pornography is associated with a 0.6% decline in the probability of being married. Across other models, the estimated marginal effect ranges from 0.07% to 5.3%.”
Can we be sure this is the effect of pornography, and not just general internet usage (which also had negative and significant effects on marriage)? Based on other results from the paper it seems likely, since self-reported use of the internet for other things (visiting finance sites, news sites, education sites, health sites, or sports sites) each had smaller marginal effects than visiting porn sites. Interestingly, visiting religious sites was associated with a higher probability of being married.

What does all this mean? One interpretation is that greater access to pornography via the internet lowered the cost of sexual gratification. As we know from simple demand theory, if ‘goods’ are (close) substitutes and you lower the cost of one, the demand for the other will fall. To the extent that marriage is also a source of sexual gratification, the demand for marriage has reduced, and this is consistent with marriage and pornography being substitutes. I tell a similar story in my ECON110 class, about the increasing availability of casual sex, and its effect on the demand for commercial sex services over time (the evidence is in the decrease in the price of commercial sex services, an example described in the Levitt and Dubner book SuperFreakonomics.

[HT: Bill Cochrane]

Tuesday, 7 April 2015

It turns out that diamonds aren't forever

Or at least spending more on engagement rings is associated with shorter, rather than longer, marriages. So says a SSRN paper last year by Andrew Francis and Hugo Mialon of Emory University, which has been sitting on my must-read-this list for far too long. The wedding industry would have us believe that more extravagant weddings are associated with longer-lasting weddings. However, Francis and Mialon find:
...little evidence that expensive weddings and the duration of marriages are positively related. On the contrary, in multivariate analysis, we find evidence that relatively high spending on the engagement ring is inversely associated with marriage duration among male respondents. Relatively high spending on the wedding is inversely associated with marriage duration among female respondents, and relatively low spending on the wedding is positively associated with duration among male and female respondents.
What might be causing this observed negative relationship between wedding expenses and marriage duration? The authors posit that expensive weddings create more debt-related stress, and that may create problems for the marriage. They show that: the sample of all persons, sample of men, and sample of women, spending less than $1,000 on the wedding is associated with an 82% to 93% decrease in the odds of reporting being stressed about wedding-related debt relative to spending between $5,000 and $10,000.
However, as I discussed in this post last year, weddings are a way of couples' signalling the quality of their wedding to others. Signalling is necessary when you have a problem of asymmetric information. At the risk of repeating myself, I'll quote from that earlier post. A problem of asymmetric information:
...happens when one party (the informed party) has private information that the other party (the uninformed party) doesn't know, and (importantly) the informed party uses that information to their advantage and to the detriment of the uninformed party. The classic example that we use in ECON100 and ECON110 is the used car market. Sellers know the quality of the car, but buyers don't. Since buyers don't know whether they are being offered a good car or a lemon until after they have bought it, sellers can easily misrepresent the car as being good quality even if it is a lemon.
Crucially, asymmetric information is only a problem if it leads to market failure. In the used car market example, since buyers don't know the quality of the cars in the market, they have to assume that any car on offer is low quality. This lowers the amount that they are willing to pay for a car, and drives the good quality cars out of the market (since sellers of good quality cars can't convince buyers of the quality of their cars, and buyers aren't willing to pay enough to buy them). The market for good cars collapses (of course, the market has developed mechanisms that deal with this market failure, such as test drives, pre-purchase inspections, etc.). We call this an adverse selection problem, since those that select to remain in the market are those with the lowest quality cars (when at least some buyers want those with the highest quality cars, not the lowest quality)...
Signalling is one way that markets have adapted to deal with adverse selection problems. With signalling, the informed party finds a way to credibly reveal the private information to the uninformed party. There are two important conditions for a signal to be effective: (1) it needs to be costly; and (2) it needs to be more costly to those with lower quality attributes. These conditions are important, because if they are not fulfilled, then those with low quality could still signal themselves as having high quality. Sticking with used cars as an example, offering a warranty on the car is a good example of signalling. It is costly (since if the car breaks down, the seller must pay the cost of repair), and it is more costly to those with low quality cars (since they are more likely to break down).
How does this apply to weddings? Couples have private information that wedding guests don't know about: (1) the quality of their relationship; and (2) their social status. Again, quoting from my earlier post on the topic of weddings:
Starting with (1), guests don't know the quality of the relationship that is about to be formalised, but the couple does (hopefully!). Does this create market failure? That is, can the couple take advantage of this information asymmetry to their advantage and to the detriment of their guests? Maybe, if we consider wedding gifts. Guests would probably give less valuable gifts if they believed the marriage wouldn't last (i.e. if the marriage is low quality), than if they thought it would last a long time (i.e. high quality). So, if guests can't be sure about the quality of the marriage, then they may assume the marriage is lower quality and buy less expensive wedding gifts (or no gift at all) as a result. So, high-quality couples need to find some way of signalling their quality, and this may be through the cost of the wedding. This may be an effective signal, because it is costly (obviously), and more costly to low-quality couples since they may expect to marry more than once over their lifetime. So, lower quality couples may be less willing to spend a lot on their wedding than high quality couples.
What about (2)? This isn't an adverse selection problem at all, since there is no market that will fail. However, there is still signalling here - the couple may want to signal their social status to the community. Higher social status is linked with wealth, which means that couples with high social status are likely to be able to afford a more lavish wedding celebration than couples with lower social status. This is of course conspicuous consumption (where spending is intended as a way of maintaining or attaining social status). And, there is at least some evidence to support this (gated, here is an earlier ungated version) - even though the evidence is from India, it doesn't seem much of a stretch that there is something similar at play in a lot of weddings in the western world as well.
Now if we believe what I wrote about signalling above, then we should expect more expensive weddings (or engagement rings) to be associated with more successful (i.e. longer) marriages, not shorter marriages. So, what is going on? I think that there is a crucial conflict between the two types of signalling I discussed above. In the first case, the couple are trying to signal that their relationship is high quality and will only tend to do so (the payoff is only worth it) if the relationship is indeed high quality. So holding social status constant, higher wedding spending should increase marriage duration. In the second case, the couple will increase their wedding expenditure to signal high social status even if their relationship is not high quality. So holding relationship quality constant, higher social status should increase marriage duration. These results are in conflict for couples whose relationship is low-quality, but who want to signal high social status.

Francis and Mialon's results provide some support for both propositions. If we take some of their variables (respondent-spouse differences in age, race, and education; whether they knew their spouse very well before marriage; the length of time they dated before marriage) as indicators of relationship quality, those variables are statistically significantly associated with marriage duration in the expected direction after controlling for income and education (both of which are indicative of social status). And higher income and higher education are both positively associated with marriage duration (controlling for the relationship quality variables). To investigate these relationships more thoroughly though, it would have been good to test whether interactions between wedding expenditure and the relationship quality variables, or between wedding expenditure and income or education, were statistically significant. That is, are there differences in the relationship between marriage duration and wedding expenditure between high-quality and low-quality relationships, and between high income (or education) and low income (or education) couples?

On another note, the couple's private information (about their relationship quality) might not be kept private from all potential wedding guests - some will know more than others. We can expect guests to be less likely to attend a wedding if they expect that the couple's relationship is low quality (e.g. if they believe the marriage will not last). Francis and Mialon find some support for this as well. Wedding attendance is strongly associated with marriage duration - higher wedding attendance was significantly associated with longer marriage duration.

Finally, Hugo Mialon must have one of the most interesting research portfolios. I've blogged before about one of his papers on the economics of faking orgasm (ungated here).

[HT: Marginal Revolution, last October]

Sunday, 5 April 2015

Have we reached peak economist in Australasia?

Perhaps we have. Last month one of my colleagues pointed me to a depressing article from Agenda by John Lodewijks (University of New South Wales) and Tony Stokes (Australian Catholic University), entitled "Is academic economics withering in Australia?" (PDF). In the article, the authors discuss the increasingly sorry state of academic economics in Australian universities, with many closing or downsizing their economics departments:
The recent news reports that the La Trobe School of Economics is being forced to reduce its established positions from 28 to just 10 is the latest in a series of cutbacks being imposed on academic economists in Australia. At La Trobe the proposed cuts include three professorial positions and three Associate Professors. Its stand-alone economics degree will no longer be offered from 2015. The developments at La Trobe are a carbon copy of what happened at the University of Western Sydney starting in late 2012. Four Economics professors were made redundant, along with seven other staff, and their B.Ec. no longer admitted students from 2013.
These have been high-profile media events. Less well-known is the disappearance of Victoria University’s Department of Applied Economics, with staff scattered across Finance and International Business. A similar story of economics being subsumed within Business unfolded at the University of Newcastle, the University of New England, the University of Tasmania and James Cook University. Griffith University has reduced the number of offerings in Economics and there are reported upper-level enrolment concerns at ANU.
Something similar has been underway in New Zealand, including the recent downsizing and narrowing of focus at the University of Canterbury. What is behind this reduction in the size of academic economics departments across Australasia? Lodewijks and Stokes point first to perceptions of economics among the public:
It can be conjectured that the reported failure of economists to predict the global financial crisis might be one reason for the declining enrolment... Perhaps of greater importance is the negative way that economics is often portrayed in the media. Many commentators have heaped scorn on economists and economics... Very rarely do we see stories of the positive contribution that economics has made to public policy debate and overall economic prosperity in this country... The profession needs a whole new image as a vital contributor to business and policy debate.
This may well be true. Certainly, there's no shortage of complaints about economists in the media. Second, the authors also point to the way economics is taught at university level:
The often narrow content of economics instruction blocks students from wider backgrounds doing double-majors with economics in areas such as psychology, political science, sociology, anthropology and geography. 
and at high school level:
The BEA raised serious concerns regarding the low numbers of economics graduates going into teaching... Schools had little choice but employ teachers with one unit of economics (business economics) or no economics to teach economics to years 11 and 12 students... Another key issue associated with having school teachers with limited or no qualifications in economics is that they tend to favour the subjects in which they are qualified and may turn students away from studying economics. In addition, schools may not offer economics as a subject if they cannot get an economics teacher. All of this worsens the situation in schools and, subsequently, universities.
The lack of specialist economics teachers is definitely true at a lot of high schools, not just in Australia but in New Zealand as well. In many cases, accounting teachers are co-opted to teach the economics curriculum, or schools are choosing not to offer economics at all. I'm aware of a number of schools that have cut economics from their curriculum in recent years.

In a recent paper in New Zealand Economic Papers (I can't find an ungated version), Stephen Hickson (University of Canterbury) notes that the number of students studying economics at high school has fallen 31% between 2003 and 2012, while the number of students taking economics at university has declined 20% between 2008 and 2012. Hickson attributes the decrease in high school numbers to the gradual replacement of economics with 'business studies'. The decrease in university numbers probably relates to the reduction in the economics core in the commerce degrees at Canterbury and Auckland.

Is there something wrong with the way we teach economics though, that isn't attracting students? Lodewijks and Stokes think so:
The point, however, is that we have slanted our teaching to mimic our research focus and not to cater to the composition of the student body we now face. At least at the lower levels of undergraduate teaching we need to impart, and to let students apply, the basic skills and techniques that make economics so valuable as a policy science. At a macroeconomic level, we need policy simulations so that students can select different parameter values and themselves see what it does to macroeconomic targets and how shocks affect aggregate performance... Combined with this they need to be able to use basic quantitative techniques without always having to derive the theory behind them from first principles. At a microeconomic level it is the repeated application of a small set of basic principles relating to opportunity cost, decisions at the margin, price–quantity interactions, externalities, competitive dynamics and, particularly, cost–benefit analysis that is needed... It is these skills that set us apart and raise the employability of our average graduates. The other bells and whistles can be covered at higher levels and particularly during the Honours year. We should not be selfreplicating Ph.D. trained academics when we teach the bulk of students we encounter. I think we need to face the fact that a vast majority of our students are not going to do a Ph.D. but only complete an undergraduate degree with often just minimal exposure to economics.
Caroline Saunders (Lincoln University) said something similar in the latest issue of Asymmetric Information (PDF) - the newsletter of the New Zealand Association of Economists:
The trouble is we’re not very good at getting across what economics is about. We’ve been a bit complacent about teaching it because we had captured compulsory first years, so we focus on the techniques and the models, as opposed to what economics can do for you and the underlying pinning of economics. So when these business management courses come along, that are relatively easy, they tend to get more popular.
It's pretty clear to me that, in general as a discipline, we do a poor job of selling the value of economics to students and non-students. This is why our first-year core management (ECON100) paper at Waikato is specifically designed to focus on the intuition of economics and not the mathematics of economics. And also why our other first-year economics paper (ECON110) focuses on the applications of economics to a range of policy and social issues.

In spite of our efforts at first year, our number of economics majors at Waikato have been in decline - although this may be about to change, as our intermediate microeconomics class has recovered this year from an all-time low last year. We also have an extremely enthusiastic group of students involved in the new Economics Discussion Group that I set up last year.

As I have reported before, there are lots of reasons why students should be studying economics (see here or here or here). To add to that, Dutch website NRCQ reported last month that economists and econometricians are in high demand (in Dutch). There is nothing to suggest that the demand economics or analytical skills has fallen in Australasia recently. So if we believe our own supply-and-demand models, when the supply of graduate economics students is decreasing we should expect that the remaining graduates should be able to take advantage in the form of better job prospects and higher entry-level salaries. I know a number of Bachelors graduates who have secured jobs this year and last, that in recent years would have only gone to honours graduates. Reaching peak economist might be a temporary situation, and a good one for our forthcoming graduating classes.

[HT: Dan Marsh for the Lodewijks and Stokes article; Jacques Poot for the NRCQ article]