Good news for broccoli lovers

The New Zealand Herald reported yesterday:

New Zealand broccoli lovers are in for a treat, as a “phenomenal” season has resulted in great prices for consumers.

According to the latest Stats NZ Food Price Index, the price of broccoli dropped 32.3 per cent in April compared to the same month last year.

Foodstuffs North Island’s head of butchery and produce Brigit Corson said this time a year ago, fresh produce was at the mercy of extreme weather events which wreaked havoc for many growers, but good weather had since turned this around.

“Right now, we’re seeing great supply for produce like broccoli because we’ve had months of fantastic weather, making for near-perfect growing and planting conditions.”

Corson said the price of fresh produce depended on a few different factors, including if it was in season, the growing conditions and whether it was in abundance.

“If there’s been a bumper crop and great supply, that’s when the prices go down.”

It is easy to see why the price of broccoli has decreased, using the model of supply and demand, as shown in the diagram below. Last year, when the conditions for growing broccoli were not good, the supply was S0, and demand was D0. The equilibrium price of broccoli was P0, and the equilibrium quantity of broccoli traded was Q0. This year, with better growing conditions, the supply of broccoli has increased to S1. Another way of thinking about this is that, at each and every price, more broccoli would be supplied, shifting the supply curve out to the right (to S1). The result is that the equilibrium price of broccoli decreases to P1, and the equilibrium quantity of broccoli traded increases to Q1.

Overall, good news for broccoli lovers, and easily anticipated using the model of supply and demand.

Flapjacks, jaffa cakes, and the quiet simplicity of GST

Tim Harford wrote in the Financial Times back in March (and re-posted to his blog last month):

Earlier this year, two distinguished gentlemen, Judge Hyde and his adviser Julian Stafford, sampled a mineral-enriched flapjack — alas, a year past its sell-by date — and pondered its qualities. (Flapjacks are slabs of oats stuck together with a glue made of butter, sugar and syrup.) The question: was this unconventional flapjack, designed as a pre-exercise snack, “of a standard to be served to guests as a treat with afternoon tea”?

Much turns on the answer, since the enriched flapjack hovers in the liminal space between a muesli bar, which, in the UK, attracts value added tax at 20 per cent, and an ordinary flapjack, which, by long-hallowed British tradition, is a cake and, therefore, zero rated for VAT purposes.

I am serious about the long-hallowed tradition. His Majesty’s Revenue & Customs notes that “at the inception of VAT, traditional flapjacks were widely accepted as cakes of common perception”. When HMRC drew the line between cake and confectionery, it nodded through the idea of flapjacks-as-cakes because to insist otherwise would be to incite a revolution. Is it absurd that a British judge found himself pondering the qualities of a flapjack and the “slightly unpleasant mouth feel” of the protein-enriched brownie with which it was packaged? Of course, it is absurd. But it is an inevitable consequence of the way the UK’s VAT rules try to draw distinctions that cannot sensibly be sustained.

FT Alphaville rightly lavished 5,000 words on the flapjack tribunal, which we can add to the infamous Jaffa Cake controversy — in which what is self-evidently a fancy chocolate biscuit was ruled to be a cake for tax purposes, and to the more recent case of the giant marshmallows, which were ruled to be an ingredient for toasted-marshmallow-and-cookie sandwiches (zero rated) rather than a standalone sweet (20 per cent rated).

That post, and various other writings (including my own) should be required reading for any politician looking to carve out exceptions to GST. It should be required reading for journalists writing on the subject, and for academics writing 'expert opinion' for media, such as this one:

While economists have argued that removing GST from foods is an expensive and complex exercise in terms of administration, and public health experts have argued that the approach is inequitable because it is not targeted to lower-income households (both arguments raised by parties opposing the bill), we need to start somewhere and focus on the changes we can make now to relieve families of the burden of high food costs.

New Zealand’s approach to taxing food differs from that of comparable countries including Australia, Canada, and the UK, where most basic foods purchased at the supermarket are exempt from GST (or VAT, as it is known in the UK). In these countries, basic foods are viewed as essentials and are therefore not subject to a consumption tax, to keep the foods more affordable for consumers.

Yes, New Zealand's approach to GST is different to those other countries. Our approach is better. Do we really want resources being tied up in court cases deciding whether flapjacks are a muesli bar, jaffa cakes are a biscuit, or giant marshmallows are a sweet? That's what we would get as soon as we start to carve out exceptions to the comprehensive GST that we currently have.

New Zealand's GST has a quiet simplicity. There are no arguments to be had about whether a good or service attracts GST or not. The exceptions (financial services, residential rents) are for the most part clear and obvious. If government is concerned about the cost of food for low-income families, they should provide targeted assistance to low-income families, and leave GST alone. On the other hand, I am very much looking forward to starting up SpudCars (see here).

Read more:

• Judge rules that snuggies are blankets, not clothes
• Stephen Hickson on why we shouldn't remove GST from food
• We also shouldn't be debating removing GST from food

Mike Masnick on the social media-mental health debate

There's an ongoing debate about whether social media has a causal negative impact on mental health. The latest iteration of this debate was triggered by the release of Jonathan Haidt's  book The Anxious Generation. I wrote briefly about the debate between Haidt and Candice Odgers last month. Around the same time, Mike Masnick wrote a long article on the Daily Beast clearly against Haidt's perspective. Here's one important part of the article:

Reading Haidt’s book, you might think the evidence supports his viewpoint, as he presents a lot of it. The problem is that he’s cherry-picking his evidence and often relying on flawed studies. Many other studies by those who have studied this field for many years (unlike Haidt), find little to no support for Haidt’s analysis. The American Psychological Association, which is often quick to blame new technologies for harms (it did this with video games), admitted recently that in a review of all the research, social media could not be deemed as “inherently beneficial or harmful to young people.”

Two recent studies from the Internet Institute at Oxford used access it had obtained to huge amounts of data that showed no direct connection between screen time and mental health or social media and mental health. The latter study there involved data on nearly 1 million people across 72 countries, comparing the introduction of Facebook with widely collected data on mental health, finding little to support a claim that social media diminishes mental health.

To get around this unfortunate situation, Haidt seems to carefully pick which data he uses to support his argument. For example, Haidt mentions the increase in depression and suicide among teen girls from 2000 to the present. The numbers started rising around 2010, though they are still relatively low.

What’s left out if you start in 2000 is what happened earlier. Prior to 2000, the numbers were on par with what they were today in the late 1980s and early 1990s, when no social media existed. Across the decades, we see that the late ’90s and early 2000s were a time when depression and suicide rates significantly dipped from previous highs, before returning recently to similar levels from the ’80s and ’90s.

It’s worth studying why it dropped and then why it went up again, but by starting the data in 2000, Haidt ignores that story, focusing only on the increase, and leading readers to the false conclusion that we are in a unique and therefore alarming period that can only be blamed on social media.

Masnick also highlights that suicide rates (which are indicative of extreme negative mental health) have not seen an uptick in all countries since 2010, or even in all Western countries, pointing to these data:

I felt a bit obliged to include the figure, since it shown the overall downward trend in youth suicide rates in New Zealand. It doesn't break the data down by gender, and part of Haidt's argument is that the negative effects are concentrated among young women. However, if you look at data for young women for those same countries, you would have to squint really hard to see any uptick in suicide rates starting around 2010:

Masnick concludes that:

In the end, neither the data nor reality support his position, and neither should you. Kids and mental health is a very complex issue, and Haidt’s solution appears to be, in the words of H.L. Mencken: clear, simple, and wrong.

Clearly, there is more to come in this debate. I remain agnostic, but very cautious about claims on both sides that are not supported by clearly causal evidence.

[HT: Marginal Revolution]

Read more:

• Quitting Facebook might make you happier
• The more you use Facebook, the worse you feel
• Does the Internet make people happier?
• What happens when you disconnect from Facebook?
• The latest NZ research on social media and mental health is nothing special
• Online social networks, social capital, and wellbeing
• Jonathan Haidt and Candice Odgers debate the relationship between social media and mental health

More impatient people are more likely to commit crime

Gary Becker's famous model of rational crime suggests that criminals weigh up the costs and benefits of crime (and engage in a criminal act if the benefits outweigh the costs). Time preferences matter in this model, because the benefits of a criminal act are usually realised immediately, whereas the greatest costs (including the penalties of being caught occur in the future. So, someone with a higher discount rate (a greater preference for the present over the future) will be more likely to commit crime, because the costs will be more heavily discounted. In other words, people who are more impatient (and therefore have a greater preference for the present) will be more likely to commit crime.

Is there evidence to support this idea that more impatient people are more likely to commit crime? This new article by Stefania Basiglio (Universitá degli Studi di Bari), Alessandra Foresta (University of Southampton), and Gilberto Turati (Universitá Cattolica del Sacro Cuore), published in the Journal of Economic Psychology (ungated earlier version here), provides some supporting evidence. They make use of data from the National Longitudinal Survey of Youth 1997 (NLSY97), using data from the 2008-2011 survey waves (with a sample of nearly 6000 observations), when the cohort was aged 24 to 31 years old. Their dependent variables are self-reported measures of whether the survey respondent engaged in property crimes, violent crimes, or drug crimes, in the previous twelve months.

One of the interesting aspects of this study is how Basiglio et al. chose to measure impatience. Because the NLSY doesn't include a survey measure of time preference, they instead use a variety of variables that are expected to be correlated with impatience. As they explain:

...we consider several similar observed variables 𝑋, available in the NLSY97, which represent individual behaviors for which impatience plays a role: the saving rate 𝑋1 is defined as the ratio between total savings and income; smoking 𝑋2 and drinking 𝑋3 are measured by the average number of cigarettes smoked in the past month and the average number of drinks consumed in the past month, respectively; obesity 𝑋4 is defined by a dummy which is equal to one if the Body Mass Index is equal or higher than 30; risky sexual behavior 𝑋5 is measured by the number of sexual partners that the individual had in the previous 12 months; 𝑋6 is a dummy for using hard drugs (like cocaine or meth) in the previous 12 months; 𝑋7 is a dummy for participating to a worship service at least once a month; finally, we define a dummy about marital status 𝑋8, which takes value one if the individual is married.

Basiglio et al. then use factor analysis to extract a single factor (a single variable) that best summarises the information contained in all eight of those variables. This is a useful approach to reducing the dimensionality of data, but also a handy way to proxying for a latent variable like impatience. The proxy variable seems to pick up the right correlations with each of the variables, being the same correlation that we would expect with impatience:

Factor loadings take up the expected signs: we find a negative correlation between being married, obesity, and having attended a worship service and the extracted common factor 𝐹1, while we find a positive association for all the other proxies. Consistent with our expectations, the strongest positive linkages are with drinking (0.260), smoking (0.204), and hard drug use (0.203); the strongest negative linkages are with attending a worship service (−0.267) and being married (−0.210).

Using this proxy variable as their measure of impatience, and controlling for age, ethnicity, education. occupation, and whether the individual had been jailed in the previous year, they find that:

The marginal effect for impatience is positive and significant for all types of crimes... The result suggests that being more patient is associated with a lower probability of committing crimes. The correlation of our proxy for impatience is stronger for drug crimes.

One of the main problems with the proxy variable is that it doesn't have a natural interpretation in terms of the size of the coefficients. However, taking the results as given in Table 4 of the article, a one-standard-deviation increase in the impatience measure is associated with a 5.4 percentage point higher probability of having committed any crime, a 1.8 percentage point higher probability of having committed a violent crime, a 3.1 percentage point higher probability of having committed a property crime, and a 6.4 percentage point higher probability of having committed a drug crime. Those are substantial effects, given that the baseline probability of committing those crimes are 6 percent for any crime, 2 percent for violent crime, 4 percent for property crime, and 6 percent for drug crime.

Basiglio et al. then look at differences by demographic group, and find no differences between men and women, or between people whose parents have college education compared to those whose parents have no college education. They do find some evidence that the effects of impatience are larger for non-Black/non-Hispanic men than for other men, for total crimes and drug crimes only. It is difficult to see what we can take away from the demographic analyses though - we would need some theory as to why impatience would affect different groups' crime decision-making differently.

Basiglio et al. also find that the results remain after controlling for risk preferences, which is an important robustness check, since people who are more impatient may also be those that are willing to take on more risk. Now, the results are not causal, but they do suggest that impatient people are more likely to commit crime.

If we accept these results, what are the policy implications? Basiglio et al. suggest that education may be a solution to reducing crime, to the extent that it both increases the opportunity costs of crime and makes people more patient. However, I think that there is a more immediate solution, which is to make the punishment of crime more immediate and more certain. If people who heavily discount the future are more likely to commit crimes, then the costs of committing crime (and being caught) have to be more severe, or (and this may be more effective overall) the punishment needs to come more quickly after the crime is committed. Either way, that probably means more resources devoted to policing and the criminal justice system.

This week in research #23

Here's what caught my eye in research over the past week (another quiet week, it seems):

• Kenny (open access working paper) outlines the good and the bad of the World Bank's extreme poverty line (could this finally signal the end of the debates about this measure?)
• Bloem and Rahman (open access) show that how statements are framed have a substantial effect on the measurement of attitudes
• Krauss (open access) looks at the Nobel Prize winners in economics, and finds that major advances in the field of economics are mainly brought about by methodological innovation, that is, by developing new and improved research methods

New York restaurants find a new way to respond to the minimum wage

The New York Times (paywalled, but also available here) reported last month:

At Sansan Chicken in Long Island City, Queens, the cashier beamed a wide smile and recommended the fried chicken sandwich.

Or maybe she suggested the tonkatsu — it was hard to tell, because the internet connection from her home in the Philippines was spotty.

Romy, who declined to give her last name, is one of 12 virtual assistants greeting customers at a handful of restaurants in New York City, from halfway across the world.

The virtual hosts could be the vanguard of a rapidly changing restaurant industry, as small-business owners seek relief from rising commercial rents and high inflation. Others see a model rife for abuse: The remote workers are paid $3 an hour, according to their management company, while the minimum wage in the city is $16.

The workers, all based in the Philippines and projected onto flat-screen monitors via Zoom, are summoned when an often unwitting customer approaches. Despite a 12-hour time difference with the New York lunch crowd, they offer warm greetings, explain the menu and beckon guests inside.

The jobs that are most often used to explore the disemployment effects of the minimum wage include fast food workers and retail workers. If those jobs can increasingly be off-shored to foreign workers not subject to the minimum wage, then it seems to me that the disemployment effects of the minimum wage (which are still contested in the literature - see the links at the end of this post) are likely to become more substantial.

To see why, consider the price (wage) elasticity of demand for labour in fast food restaurants (or retail). One of the factors that affects the price elasticity of demand is the availability of substitutes. Foreign workers in the Philippines connecting virtually to the restaurant are substitutes for in-person workers in New York. When new substitutes become available, demand becomes more elastic - the buyers become more sensitive to the price. In this case, the availability of cheaper foreign workers makes employers' demand for local workers more elastic.

To see why the disemployment effect would be larger with more elastic demand for labour, consider the diagram of the labour market below. The equilibrium wage is W0, and the equilibrium quantity of labour is Q0. The minimum wage is shown by WMIN. At that wage, the quantity of labour supplied (the number of workers wanting a job) is QS, and with the original (more inelastic, or steeper) demand for labour (DL0), the quantity of labour demanded (the number of jobs available) is QD0. The minimum wage creates unemployment equal to the difference between the quantity of labour supplied (QS) and the quantity of labour demanded (QD0). The disemployment effect of the minimum wage is the number of jobs lost, which is the difference between Q0 (the number of jobs without the minimum wage) and QD0 (the number of jobs with the minimum wage). Now, if the demand curve is DL1 (more elastic, or flatter), then the quantity of labour demanded is QD1. The amount of unemployment is the difference between QS and QD1, which is larger than when the demand curve is less elastic. The disemployment effect of the minimum wage is the difference between Q0 and QD1, which is also larger than when the demand curve is less elastic.

So, the takeaway message from our model is that we can expect the transition to more remote workers in fast food and retail will increase the disemployment effects of the minimum wage.

[HT: Marginal Revolution]

Read more:

• A bunch of research findings on minimum wages in New Zealand
• The disemployment effects of Canadian minimum wages
• Jeffrey Clemens on the disemployment effects of the minimum wage
• The impact of an online minimum wage
• Seattle's minimum wage, revisited
• The latest evidence supports negative employment effects of the minimum wage
• Latest research suggests the minimum wage DOES reduce employment
• More empirical support for the disemployment effects of the minimum wage
• The minimum wage and job vacancies
• The minimum wage and hiring standards
• The employment effects of the minimum wage, from American Community Survey data
• The minimum wage and homelessness

Homebrewing as the gateway to craft brewing

Despite some fluctuations and concerns about reaching the peak, one of the key trends in the brewing industry (both in New Zealand and in most Western countries) has been the rise of craft brewing. However, craft brewing remains quite concentrated in some areas rather than others. What might explain the regional concentration of craft brewing?

That is essentially the question that this 2019 article by Michael McCullough (California Polytechnic State University), Joshua Berning (Colorado State University), and Jason Hanson (History Colorado), published in the journal Contemporary Economic Policy (sorry, I don't see an ungated version online). Specifically, they look at the effect of legalising the homebrewing industry on brewing across states in the U.S. As they explain:

Amendment XXI, ratified in 1933, repealed Prohibition and made the commercial production of beer and other alcoholic beverages legal again in the United States, although it left it to the states to allow and regulate brewing, vinting, and distilling within their borders. Importantly, the amendment solely omitted homebrewing, the brewing of beer at home for personal consumption, from the list of legal activities...

From 1933 to 1978, 13 states affirmed the right to homebrew in spite of the federal ruling... In 1978, President Carter signed H.R. 1337 which legalized homebrewing, although federal law deferred to state statutes. At that time, only an additional nine states opted in to legalize homebrewing. The remaining 28 states gradually legalized homebrewing over the next 35 years, with Alabama and Mississippi being the last in 2013.

McCullough et al. look at how the date that a state legalised homebrewing affected the commercial brewing industry, hypothesising that:

...states that legally restricted homebrewing may have hindered the development of future brewmasters and therefore the expansion of their own brewing industry...

However, there are some challenges here, because states that legalised homebrewing earlier may have done so because of high demand for beer, so any relationship between brewing and legalisation of homebrewing would arise because both are driven by beer demand (a common cause, or confounding). Or, large breweries might lobby for less restrictive laws on all brewing, thereby cultivating a homebrewing culture that would also lead to more demand for their products (reverse causation). So, a simple model that looks at the relationship between legalisation of homebrewing and brewing would not demonstrate a causal relationship, just correlation.

McCullough et al. solve this problem using an instrumental variable model, which involves finding an instrument that is correlated with homebrewing legalisation, but which would have no effect on commercial brewing more generally. They argue that the number of years since each state repealed their antimiscegenation laws (laws prohibiting marriage between different races) is such an instrument, because it represents "that measures a state’s willingness to pass legislation in favor of individual rights", and because these laws were pure-and-simple racism, they aren't related to brewing [*].

Using data from 1970 to 2012, McCullough et al. find that:

...the legalization of homebrewing has a positive effect on the average number of breweries per capita. The estimate suggests roughly 7.1 breweries per 1 million people.

McCullough et al. also show that there is an increase in the growth rate of brewing after homebrewing is legalised. Moreover, when comparing how legalisation of homebrewing affected breweries of different sizes, they find that:

...the change in homebrewing laws had a significant effect on the number of small breweries. There were roughly 5.6 more breweries per 1 million people. Furthermore, the number of breweries is growing over time... Looking at medium-sized breweries... we find that the effect of legalization is smaller and not growing significantly over time...

There is no significant change in the number of larger breweries per million people following changes in homebrewing laws...

These results are consistent with their hypothesis, because if homebrewing leads to the development of brewmasters, you would expect a greater number of small breweries to develop, since that's what the brewmasters would create first (to become a middle-sized or big brewery, you probably have to start out as a small brewery first). McCullough et al. also show that there is a statistically significant effect on craft beer production, where:

...craft production increases significantly following the legalization of homebrewing. The estimated impact is roughly 85,000 barrels per million people.

So, it seems clear that homebrewing is the gateway to craft brewing. As McCullough et al. conclude:

While one cannot draw the conclusion that the mere legalization of homebrewing was the main driver for the existence of the beer brewing industry as it is today, one can say that it would not exist in its current fashion without such political action.

*****

[*] However, as McCullough et al. partially note in the paper, states that are more religious and conservative may be more likely to maintain antimiscegenation laws, and more likely to be in favour of temperance. McCullough et al. wave this away by saying that they control for alcohol laws like Sunday sales bans, as well as state fixed effect, but including those variables is only likely to partially allay concerns about the instrument.

More results on role models and the gender gap in economics

The gender gap in economics remains difficult to shift, and lots of economists are working on ways to make a difference at the margin. Back in 2018, I wrote about an intervention that brought female role models into class that seemed to have a positive effect on female students continuing their studies in economics beyond the first-year paper (based on this paper by Porter and Serra). It seemed promising, so I tried something similar in my classes later that year, bringing in female and Māori alumni to give some short guest lectures. It didn't appear to have a great effect (and isn't something I could test experimentally, as there is no obvious control group), squeezed the rest of the curriculum, and was challenging to coordinate. So, the trial was short-lived.

Perhaps I should have persisted? This 2023 NBER Working Paper (sorry, I don't see an ungated version online) by Arpita Patnaik (Charles River Associates), Gwyn Pauley (University of Wisconsin-Madison), Joanna Venator (Boston College), and Matthew Wiswall (University of Wisconsin-Madison) broadens the case for having role models come into class for short guest lectures. In their experiment undertaken at the University of Wisconsin-Madison:

...we invited alumni who graduated from the department to give a fifteen minute presentation to the Econ 101 courses in the sixth week of classes. The study took place during the 2018-19 academic year, encompassing the Fall 2018 and Spring 2019 semesters...

The alumni speakers were given a series of questions as prompts, including questions about their first jobs out of college, their experiences in economics course work, the skills they think they gained in the economics courses, and how an economics degree helps them in the work force.

Like the Porter and Serra experiment, this one is fairly low-key. Patnaik et al. evaluate it by comparing students who were in lecture groups where the guest speakers presented with students who were in lecture groups where no guest speaker presented. They also look at the results separately by gender, and the results for different gender combinations of speakers and students. They find that:

...the alumni intervention increases the likelihood that students continue in economics by taking intermediate microeconomics by 2.1 percentage points or 11% more than the baseline level. We find that these effects are much larger when we look at the effects separately by gender of the speaker and gender of the student. A male speaker increases the likelihood that male students take intermediate microeconomics by 8.1 percentage points or 36% (from the base rate of 22.5%) and has no significant effect on women. Female speakers increase the likelihood that female students take intermediate microeconomics by 5.0 percentage points or 40% (from the base rate of 12.4%) and have no significant effect on men.

They also find that:

...students are affected by speakers similar to themselves. Our speakers were all White and two worked for a Wisconsin-based company... We find that the effects of the intervention on course take-up are larger for White students and state residents.

They show that the additional economics majors are mainly shifting from business majors. Finally, they show that there are negligible impacts (if any) on student grades, either in the current course or in following courses in economics.

Taken all together, these results suggest that we probably should bring in alumni speakers to talk to students, if we want to encourage greater enrolment in the economics major. The effects are surprisingly large (an increase from 12.4 to 17.4 percent of female students going further in economics), which suggests that they are probably worth what is likely to be a fairly modest cost. And we need to be willing to pay the cost - as I noted above, we stopped the trial in my classes in part because it became difficult to coordinate the guest speakers.

However, we need to be mindful about who we bring in as guest speakers. If we also want to close the gender gap, we should be inviting more female speakers than male speakers. And, if we want to close the gap for other underrepresented groups, we should be inviting speakers from those groups.

None of the results from this paper are terribly surprising, but it is important that we keep these things in mind. Low-touch interventions can sometimes have important positive impacts.

[HT: Marginal Revolution, last year]

Read more:

• Could role models close the gender gap in economics?
• Could closing the gender gap in economics be as simple as providing students with information?
• Disappointing results on simple information interventions to close the gender gap in economics
• The positive effect of mentoring for female economists

If a salary seems too good to be true, it's probably a compensating differential

The New Zealand Herald reported last week:

It’s not often you get a chance to relocate to a coastal town with a beautiful white sand beach along with a whopping pay rise.

But that’s exactly what is on offer, and it’s right on Kiwis’ doorstep - sort of.

Western Australian beachside community Bremer Bay is offering one lucky person an eye-watering $300,000 to $450,000 wage, a rent-free five-bedroom home and a car if they relocate to their remote town.

So what does the job entail?

Bremer Bay, located on the south coast between Albany and Esperance, is in desperate need a new general practitioner (GP).

According to Indeed, the average Australian GP earns an annual salary of $233,304.

As I've noted before, when a job offers a pay package that is far higher than elsewhere, you ought to be thinking: what's wrong with this job? There must be something about the job that means the employer has to pay a much higher salary in order to attract people to work there.

Wages differ for the same job in different firms or locations. Consider the same job in two different locations. If the job in the first location has attractive non-monetary characteristics (e.g. it is in an area that has high amenity value, where people like to live), then more people will be willing to do that job. This leads to a higher supply of labour for that job, which leads to lower equilibrium wages. In contrast, if the job in the second area has negative non-monetary characteristics (e.g. it is in an area with lower amenity value, where fewer people like to live), then fewer people will be willing to do that job. This leads to a lower supply of labour for that job, which leads to higher equilibrium wages. The difference in wages between the attractive job that lots of people want to do and the unattractive job that fewer people want to do is called a compensating differential.

Is the high salary on offer for a GP in Bremer Bay a compensating differential? Consider this:

Bremer Bay is a five-and-a-half hour drive from Perth and as of 2021 had a population of just over 200.

Over the past 10 years, the beachside town’s population has swelled as high as 6500 people during the Christmas and holiday periods.

The successful applicant will be the only GP in a rural community that's a long way from urban amenities (that might be a positive aspect for some people, but negative for many). However, being the only GP for 6500 people during summer has to be a strong downside. A beachside job sounds great, but if you spend your summer working flat out instead of enjoying the sun, that kind of destroys the positive aspect of it. And that is probably why the town is having trouble attracting anyone for this position, and why they have to offer such a high salary.

Read more:

• Reason to be wary if a job in Taumarunui offers an Auckland salary
• The compensating differential for rural GPs must be enormous
• Compensating differentials are alive and well in Tokoroa
• Rural Australia sets a new high bar for compensating differentials
• The $300,000 job that no one wants

This week in research #22

The blog has been pretty quiet this week, while I've dealt with a number of other things. However, research marches on, and this is what caught my eye over the past week:

• Ng and Riehl (with ungated earlier version here) find that less-prepared students have higher earnings returns to selective STEM programs than more-prepared students in Colombia, even though they are less likely to complete these programs
• Kunaschk (open access) finds negligible overall employment effects of the minimum wage on hairdressers in Germany (a group of workers that haven't really been looked at in detail in this regard)
• Saez (open access) gives us the lowdown on last year's John Bates Clark medal winner, Gabriel Zucman
• Ruggles (open access) discusses how the 2020 U.S. Census Confidentiality Program has not solved the privacy issues from earlier Census data, and has reduced the quality of the available data

And the latest paper from my own research (or, more accurately, from the thesis research of my successful PhD student Mohana Mondal, on which I am a co-author along with Jacques Poot):

• Our new article (open access) in the journal New Zealand Population Review describes the development, calibration and validation of a dynamic spatial microsimulation model for projecting small area (area unit) ethnic populations in Auckland - this was a very ambitious undertaking as part of Mohana's PhD research, and demonstrates that microsimulation can be a useful tool for small-area population and ethnic projections, over the short term

Study abroad in the Erasmus programme doesn't make students worse off

One of my ECONS101 tutors is off on study abroad later this year, to the University of California at Berkeley. What an incredible opportunity for her! I am constantly surprised, though, at how few of my students take the opportunity for a trimester abroad. In many cases, it is possible to do the period of study abroad while only paying New Zealand university fees (plus the costs of travel and accommodation, of course).

If a rational student is weighing up whether to study abroad for a trimester (or a whole year), they should be weighing up the costs and the benefits of that decision. The costs are the incremental (extra) costs of studying abroad, while the benefits are the value of the incremental learning (if any), as well as the international experience, cultural competency, and so on, or at least what those 'transferable skills' are worth in the labour market after graduation.

Sadly though, study abroad has a reputation for slowing down student progression, meaning that they take longer to graduate. That may be because not all credits studied while overseas will cross-credit back to the student's original university, or the student doesn't put in as much effort while overseas, when faced with the competing priorities of study and sightseeing.

However, that reputation for slowing progress may not be deserved, as shown in this new article by Silvia Granato (European Commission, Joint Research Centre) and co-authors, published in the journal Economics of Education Review (open access). They look at the outcomes for students at the University of Bologna who applied to participate in the Erasmus programme, which allows students to study abroad for up to a year in another European Union country.

The University of Bologna is the oldest university in Europe, and the second largest public university in Italy, so the results may have broader applicability. Granato et al. take advantage of the fact that students who apply to the programme are assigned a score, based on a combination of their GPA, their motivations for studying abroad, and their language proficiency. By comparing students just above the cutoff, and students just below the cutoff, Granato et al. can establish the impact of the Erasmus programme on student outcomes (this is what we refer to as a regression discontinuity design [*]). The impact of the Erasmus programme measured in this way is a good estimate of the causal impact of the programme, for students who are close to the cutoff score. For students further away from the cutoff, the effects could be different.

Anyway, Granato et al. use data from students who made an application between the 2013/14 and 2018/19 academic years. They look at Bachelor's and Master's degree students separately, and find that:

...spending a portion of university studies abroad does not have an impact on the probability of graduating on time for either group. Moreover, it has a positive effect on the final graduation mark of bachelor’s students only. The estimates show that the latter obtain a 2-point premium in their final grade, which is approximately a third of one standard deviation of the final grade in the estimation sample.

Then, looking at the heterogeneity of the effects, they find that:

...the effect on the final graduation mark is remarkably stronger for graduates in science, technology, engineering and mathematics (STEM) and students who apply for the Erasmus programme earlier in their studies, suggesting that the observed impact might be related to the content of exams taken during the study period abroad.

So, while students do achieve a slightly higher grade overall in their studies, that is driven by their performance while overseas. Exploring this further, Granato et al. find that:

...the positive effect on the final graduation mark appears to be driven by programmes in host institutions of relatively lower quality – and thus arguably with a relatively lower quality of learning inputs – and, in particular, when the duration of the period abroad is longer.

Taken altogether, this doesn't suggest that students are really benefiting from their study abroad. However, it isn't making them any worse off either. But what about after graduation? On that point:

We merge student administrative data with survey data on student choices and outcomes one year after graduation and investigate the potential impact of study abroad on the probability of continuing studies and of being employed. We do not find significant effects on these outcomes, although our analysis is likely hampered by the small sample size.

Although statistically insignificant, Bachelor's degree students are 10.2 percentage points more likely to enrol in a Master's degree programme abroad after participating in the Erasmus programme, and Master's degree students are 7.7 percentage points more likely to be employed and 4.2 percentage points more likely to be employed abroad. That is suggestive evidence of positive outcomes of the study abroad period.

Overall though, the best we can see is that the programme doesn't make students any worse off. Again, it is worth reiterating that these results apply to students who are close to the cutoff score. Students who are well above, or well below, the cutoff score may experience different impacts (and we know nothing about those impacts from these results).

*****

[*] Actually, because not all students who are offered a place accept the offer, the assignment to the Erasmus programme is not perfect. This actually makes identification of the causal effects of the programme even stronger, since Granato et al. can use an offer as an instrument for completing a period of study abroad, in what we refer to as a fuzzy regression discontinuity design (it's fuzzy because of the imperfect assignment to treatment).

Read more:

• The impact of study abroad on student language skills and personality traits

Investor sentiment and stock prices

Last week in my ECONS101 class, we covered (among other things) the economics of financial markets. In particular, we looked at explanations for why the value of financial assets rarely represents the expected value of future cash flows or profits (the asset's fundamental value). As part of this, we discussed the formation (and the bursting) of asset bubbles.

Asset bubbles form because of self-fulfilling prophecies: If investors believe that the price of a financial asset is going to go up, many will buy the asset. This raises the demand for the asset, and the price of the asset goes up, which is exactly what investors expected to happen. Because the price is increasing and this increase is due only to investors’ expectations about the future, the price of assets gets pushed beyond the asset’s fundamental value – this is an asset bubble.

Notice the key role of expectations in the formation of asset bubbles. Investors' expectations can be affected by any number of different things, one of which is their general mood (as shown in this research). In other words, investor sentiment is an important component of investors' expectations, and is therefore an important factor in asset prices. As John Maynard Keynes wrote in The General Theory of Employment, Interest and Money:

...the market will be subject to waves of optimistic and pessimistic sentiment, which are un-reasoning and yet in a sense legitimate where no solid base exists for a reasonable calculation...

Knowing that I would be covering this topic, and the importance of sentiment I was interested to read this article in The Conversation by Jedrzej Bialkowski and Moritz Wagner (both University of Canterbury), back in May. They have developed an index of investor sentiment for New Zealand. As they explain:

Market sentiment refers to the overall attitude of investors. It is commonly summarised as bullish (expecting increasing prices), bearish (expecting decreasing prices), or neutral (expecting no or only little changes in price). Such sentiment is not always based on fundamentals such as revenue, profitability and growth opportunities...

Every week since January 2020, we asked registered members of the NZSA whether they expected the stockmarket to increase (bullish), decrease (bearish) or stay the same (neutral) over the next six months. The NZSA has about 1,200 members, a quarter of whom receive email invitations to participate in the survey.

Bialkowski and Wagner then use their index of sentiment to explore the New Zealand equity market:

During the first four weeks of this year, expectations that stock prices will rise over the next six months remained elevated at 40%. In other words, 40% of the surveyed investors believe the NZ equity market will increase in the first six months of 2024. At the same time, bearish sentiment, expectations that stock prices will fall over the next six months, fluctuated around 16%.

So, despite the mounting global and local uncertainties, retail investors are optimistic about the equity market. Bullish sentiment is stronger and bearish sentiment weaker than the historical average levels of 28% and 36%, respectively.

On the back of last year’s strong market performance and a better-than-expected economy, investor optimism carries forward.

However, since sentiment is known to be a contrarian indicator, informed investors should be cautious going further into the new year.

There is definitely some hedging of bets in that last sentence. It will be interesting to see how this measure of investor sentiment performs over time, and whether it has any predictive value.

This week in research #21

Here's what caught my eye in research over the past week:

• Cakmakli, Demiralp, and Günes find that political leaders' political commentary affects the level and the volatility of exchange rates, bond yields and the risk premium in Türkiye, while for other countries (Brazil, Colombia, Hungary, New Zealand, and the US) only exchange rate volatility is affected
• Atay, Asik, and Tumen (open access) find that graduating with an honours degree increases the entry wages of males from non-elite universities (but not elite universities) in Türkiye by about 4% on average, with no effect on female graduates (at either elite or non-elite universities)
• Taralashvili (open access) finds that interstate soft conflicts (such as diplomatic restraints, renegotiation of relations, protests, or boycotts) have a sustained negative impact on bilateral trade flows, using a gravity model of trade

Book review: Doing Economics

Last year, I reviewed The Economist's Craft by Michael Weisbach and noted that:

The book does an excellent job of exposing the tacit knowledge of academia - the things that academic economists otherwise learn 'on the job', from the PhD through to the end of their academic career.

Weisbach's book was published in 2021, and barely a year later Marc Bellamare's 2022 book Doing Economics was released. The overlap in the two titles is extensive, as both aim to reveal and explain the tacit knowledge of academic work as an economist. Bellamare's book is subtitled, "what you should have learned in grad school - but didn't".

While I was highly impressed with Weisbach's book, I actually think that Bellamare does an even better job of collating the important advice. The book is separated into several chapters, each devoted to one aspect of work as an academic economist: writing papers; giving talks, navigating peer review, finding funding, doing service, and advising students. Each chapter outlines the key things that academic economists need to know, and importantly, the intended audience is not students in top US PhD programmes, and this may be one aspect that sets this book apart from Weibach's earlier book. Bellamare was unsuccessful in getting tenure at a top university, and is a Professor at the University of Minnesota (which, to be fair, is still a good university - it's just not Cornell, where he did his PhD, or Duke, where he was an assistant professor), and that may explain the different focus.

I must admit a certain amount of bias in preferring this book though. Bellamare's advice is scarily similar to advice that I already give to students. So, recommending this book is a little like recommending my own advice. For example, Bellamare recommends developing skills in writing and understanding the literature by engaging in what the American philosopher Mortimer Adler referred to as 'inspectional reading':

...reading the introduction, looking at the methods and results, and (maybe) reading the conclusion before moving on to the next item on one's reading list.

While I don't recommend this to PhD students, it is an approach that I frequently recommend for undergraduate students, such as those in the Waikato Economics Discussion Group. Bellamare also recommends that, in terms of reviewing journal articles:

...the first journal you ever send a paper to sends out your manuscript to two reviewers, and they both recommend that your paper be accepted "as is." This means that for your one submission, you have benefited from two reviewers giving your manuscript a thorough read. In this hypothetical scenario, for the system to work, you should perform at least two reviews.

This 'net zero' approach to the number of reviews to undertake is one that I have applied for many years, of course noting that the exact number of reviews to undertake depends on whether the papers you submit have co-authors, how many different journals you submit to that provide reviewer comments, and so on. Bellamare moderates this advice though, by noting that early on, emerging researchers should review as often as possible, as that gives them exposure to bad papers as well as good papers, and is an excellent learning tool. In my career, I did far more reviewing when I was a new and emerging academic, almost never refusing a request to complete a review (I'm a lot more selective now). As Bellamare notes:

Many economists see refereeing as an unfortunate tax they need to pay to get their own papers reviewed and published. Unlike a tax, however, there is almost always something to be learned from reviewing - and from reviewing widely.

And on responding to reviewers, Bellamare suggests an exhaustive approach that is very similar to my practice, which involves copying the new text from the revised paper into the response to reviewers, so that reviewers don't need to refer back to the paper to confirm that you have addressed their comments. It's an approach that works wonders in getting papers accepted from the revise-and-resubmit stage, without further rounds of review.

The book has so much good advice, that it is difficult to do justice to it. However, not all of the advice is good. When discussing poster presentations, Bellamare starts by noting that "I must confess to having never prepared a poster for presentation at a conference". He probably should have stopped there, as the advice on posters is not great. There are resources that he could have used to provide some value in this section, but instead the advice is banal and largely unhelpful.

Nevertheless, that is a small gripe about a book that is otherwise excellent. The outline of Keith Head's formula for the introduction of a paper (which you can read here) is a great reminder of how to structure that section of a paper. There are also great sections on what to put in an abstract, and why separate literature review sections are generally unnecessary for most journal articles.

Current or future PhD students and early career researchers should definitely read this book, and supervisors of PhD students should recommend that their students read it. While I previously considered giving my PhD students a copy of Weisbach's book when they reach confirmed enrolment (after the first six months of their PhD journey, when their full research proposal is complete and has been approved), I'm going to switch to this book instead. Or perhaps, I will give them one, and encourage them to read the other. Highly recommended!

The consequences of free drivers licence test resits

The New Zealand Herald reported this morning:

On October 1, at the Labour Government’s directive, NZ Transport Agency Waka Kotahi (NZTA) changed driver licence fees to an all-in-one fee for each stage of testing and the fees to resit a driver test, or to cancel or reschedule, were removed.

The intention was to help ease costs for people going through the driver licensing system. The Transport Minister at the time, Michael Wood, said the changes would save drivers on average $86 each and cumulatively save $5.5 million every year altogether.

But delays to practical test bookings have followed since the change. Average wait times for the week ending April 14 were 44 days for a full licence test throughout the country and 55 days for a restricted test.

The longest delays for a full test were 52 days in the Bay of Plenty, and 68 days in Wellington for a restricted test.

The issue is affecting all regions in New Zealand. As an example, at 10am on April 3 there were only 15 available spots nationwide for a full licence test and only 10 for a restricted licence test.

It should be no surprise that when you lower the price of something, without that price change being driven by a decrease in costs or a decrease in demand, you end up with a shortage. This can be seen in the diagram below. At the original market price for a driver licence test of P0, the quantity of driver licence tests is Q0. That quantity (Q0) is both the quantity of tests demanded, and the quantity of tests supplied (the number of tests available for drivers to take). We can say that the market clears, because quantity demanded is equal to quantity supplied (the market is in equilibrium).

With the market price below equilibrium, at P1, [*] the quantity of driver licence tests demanded is QD, while the quantity of driver licence tests supplied is QS. Since QD is greater than QS, there is excess demand (a shortage). That is what we are seeing, with long waits for driver licence tests.

There are other problems as well. From the same New Zealand Herald article:

[VTNZ’s national technical manager for vehicle testing, Craig] Basher said a large factor of the delays has been the amount of people not showing up to tests, with 2000 no-shows for booked practical tests in the last month.

He has also received feedback that more drivers are turning up unprepared and with unfit cars, making simple mistakes and trying to rebook straight away without further practice.

When a learner driver has to pay for another driving test when they miss an appointment, that creates an incentive to show up, and to show up prepared and with a good quality vehicle. When the learner driver doesn't have to pay, the incentive to show up is much less. In other words, the opportunity cost of missing a driving test is lower when learner drivers don't have to pay for the next appointment. When the opportunity cost of something decreases, people tend to do more of it. In this case, that means more missed driving test appointments.

None of this is surprising to an economist. And the solution is obvious:

[Minister of Transport, Simeon] Brown said he is talking with NZTA and the Ministry of Transport to deal with the issue, which he said could include reintroducing resitting fees.

Some may argue that increasing the number of test slots, and increasing the number of driving instructors, would decrease the shortage. However, that ignores that part of the problem is the number of missed appointments. Both the shortage and the excessive number of missed appointments could be alleviated if the price of repeat driving tests was allowed to increase. Learner drivers would have to pay a little more to get their licence, but they wouldn't have to wait as long, and would have a stronger incentive to show up for their driving test well-prepared.

*****

[*] Notice that the price doesn't fall all the way to zero, because the first drivers test is not free, only the resits. So, the average price of a drivers licence test is not zero.

This week in research #20

Here's what caught my eye in research over the past week:

• Ciancio et al. (open access) study the impact of a randomised information intervention on risky sex in Malawi, and find that treated individuals are less likely to engage in risky sexual practices one year after the intervention (not dissimilar to this research)
• Litina and Fernández show that societies more exposed to solar eclipses grew more, and that solar eclipses are associated with deeper and more intricate thinking among peoples in societies more exposed, and that total solar eclipses increase curiosity both at the social and individual levels

Finally, in very exciting news, the first issue of Australasian Journal of Regional Studies (AJRS) with myself as Managing Editor has just been published (although it is backdated to December 2023, due to some unexpected delays in getting the articles online). This issue has four papers, as well as my editorial:

• Cochrane, Poot, and Roskruge (open access) look at the uptake of social security benefits in New Zealand territorial authorities after the Global Financial Crisis and after the COVID-19 pandemic, and show that the most resilient territorial authorities had a low unemployment rate and a large public sector prior to the shock (this paper won the John Dickinson Memorial Award for the best paper published in AJRS in 2023)
• Ho (open access) looks at migration and rural-urban wage differentials in Australia, and finds that high wage growth in the year following rural-urban migration is most likely explained by the migrant taking jobs that below their ability upon arrival
• Vidyattama, Yudhistira, and Husna (open access) explore descriptively the impact of COVID-19 on the economies of provinces in Eastern Indonesia, and how the provincial governments responded
• Parkin and Hardcastle (open access) look at population trends and policy in South Australia's Limestone Coast region, especially in the wake of the COVID-19 pandemic

Jonathan Haidt and Candice Odgers debate the relationship between social media and mental health

Does social media worsen mental health for young people, especially young women? It has become an article of faith for many that it does. And there is bountiful anecdotal and research evidence that supports the view. Take, for example, the furore that erupted back in 2021 around Frances Haugen's leaking of internal Facebook research showing the negative impacts of Instagram on young women.

I've written on this topic several times before (most recently here, but see the list of links at the bottom of this post as well). My take is that much of the research on social media and mental health, or social media and subjective wellbeing, shows correlation, but not causation. The challenge here is that perhaps people with mental health issues (or people with lower wellbeing) are more likely to use online social networks, in which case there is reverse causality (the causality runs from mental health to social media, not from social media to mental health).

So, I was interested to read this recent article in Nature by Candice Odgers, reviewing the new Jonathan Haidt book The Anxious Generation (which I have yet to read, but it is currently on my Amazon Wish List). Odgers really takes Haidt to task, claiming that all that Haidt is demonstrating is correlation, not causation:

The plots presented throughout this book will be useful in teaching my students the fundamentals of causal inference, and how to avoid making up stories by simply looking at trend lines.

Hundreds of researchers, myself included, have searched for the kind of large effects suggested by Haidt. Our efforts have produced a mix of no, small and mixed associations. Most data are correlative. When associations over time are found, they suggest not that social-media use predicts or causes depression, but that young people who already have mental-health problems use such platforms more often or in different ways from their healthy peers...

Odgers then suggests some alternative explanations:

There are, unfortunately, no simple answers. The onset and development of mental disorders, such as anxiety and depression, are driven by a complex set of genetic and environmental factors. Suicide rates among people in most age groups have been increasing steadily for the past 20 years in the United States. Researchers cite access to guns, exposure to violence, structural discrimination and racism, sexism and sexual abuse, the opioid epidemic, economic hardship and social isolation as leading contributors...

The current generation of adolescents was raised in the aftermath of the great recession of 2008. Haidt suggests that the resulting deprivation cannot be a factor, because unemployment has gone down. But analyses of the differential impacts of economic shocks have shown that families in the bottom 20% of the income distribution continue to experience harm... 

Haidt responded, initially on X, but then in thorough detail in this post on After Babel. He starts by pointing to the range of published evidence:

Zach Rausch, Jean Twenge, and I began to collect all the studies we could find in 2019, and we organized them by type: correlational, longitudinal, and experimental. We put all of our work online in Google Docs that are open to other researchers for comment and critique. You can find all of our “collaborative review” documents at AnxiousGeneration.com/reviews

The main document that collects studies on social media is here:
Social Media and Mental Health: A Collaborative Review

Then notes that:

In that document, we list dozens of correlational and longitudinal studies...

In that document, we also list 22 experimental studies, 16 of which found significant evidence of harm (or of benefits from getting off of social media for long enough to get past withdrawal symptoms)...

In that document, we also list nine quasi-experiments or natural experiments (as when high-speed internet arrives in different parts of a country at different times), eight of which found evidence of harm to mental health, especially for girls and women...

I am not saying that academic debates are settled by counting up the number of studies on each side, but bringing so many studies together in one place gives us an overview of the available evidence, and that overview supports three points about problems with the skeptics’ arguments.

First, if the skeptics were right and the null hypothesis were true (i.e., social media does not cause harm to teen mental health), then the published studies would just reflect random noise... and Type I errors (believing something that is false). In that case, we’d see experimental studies producing a wide range of findings, including many that showed benefits to mental health from using social media (or that showed harm to those who go off of social media for a few weeks). Yet there are hardly any such experimental findings. Most experiments find evidence of negative effects; some find no evidence of such effects, and very few show benefits. Also, if the null hypothesis were true, then we’d find some studies where the effects were larger for boys and some that found larger effects for girls. Yet that’s not what we find. When a sex difference is reported, it almost always shows more harm to girls and women. There is a clear and consistent signal running through the experimental studies (as well as the correlational studies), a signal that is not consistent with the null hypothesis.

Haidt supports this with a further footnote:

Yes, there could be a “file drawer problem” if researchers on one side are systematically discouraged from publishing, so the missing “positive” studies are all sitting in file drawers in researchers’ offices. But because findings of benefits would be unusual and newsworthy, I don’t believe that there is a strong or consistent bias against the skeptics. 

However, simply asserting that there is no file drawer problem is not the same as showing that there isn't. That's where meta-analysis comes in. Haidt could easily conduct a meta-analysis with these studies to demonstrate what the overall effect is, and whether there is evidence of publication bias. In fact, he even cites some meta-analyses that have already been conducted (such as this one, which found "mildly significant" publication bias in one of two tests of bias, with the other being statistically insignificant).

Haidt then goes on to address Odgers' suggested alternative explanations, focusing on her assertion that the Global Financial Crisis explains the sudden change in adolescent mental health. Haidt concludes that:

Odgers has pointed to an alternative causal explanation that A) does not fit the timing in the U.S., B) does not fit the social class data in the U.S., and C) does not fit the international scope of the crisis.

Having satisfied himself that he has rebutted Odgers' critique, Haidt then reiterates some solutions from the book:

In contrast, if leaders and change makers were to embrace my account of the “great rewiring of childhood,” in which the phone-based childhood replaced the play-based childhood, what policy implications follow? That we should roll back the phone-based childhood, especially in elementary school and middle school because of the vital importance of protecting kids during early puberty. More specifically, we’d try to implement these four norms as widely as possible: 

1. No smartphones before high school (as a norm, not a law; parents can just give younger kids flip phones, basic phones, or phone watches).
2. No social media before 16 (as a norm, but one that would be much more effective if supported by laws such as the proposed update to COPPA, the Kids Online Safety Act, state-level age-appropriate design codes, and new social media bills like the bipartisan Protecting Kids on Social Media Act, or like the state level bills passed in Utah last year and in Florida last month).
3. Phone-free schools (use phone lockers or Yondr pouches for the whole school day, so that students can pay attention to their teachers and to each other)
4. More independence, free play, and responsibility in the real world.

Note that these four reforms, taken together, cost almost nothing, have strong bipartisan support, and can be implemented all right now, this year, if we agree to act collectively.

Even if Haidt is wrong about the causal relationship here, I agree that these reforms are relatively low-cost, and the precautionary principle suggests that they might be appropriate. However, I have argued previously that we should be cautious about regulation that allows parents discretion over their children's social media use. Odgers even partially agrees at the end of her review:

Many of Haidt’s solutions for parents, adolescents, educators and big technology firms are reasonable, including stricter content-moderation policies and requiring companies to take user age into account when designing platforms and algorithms. Others, such as age-based restrictions and bans on mobile devices, are unlikely to be effective in practice — or worse, could backfire given what we know about adolescent behaviour.

It will be interesting to see how this debate progresses. Odgers clearly needs to step things up, because Haidt was very well-prepared for her critique, and had clearly anticipated the points that she (and other skeptics) would raise. I look forward to reading the book after I place my next book order.

[HT: Marginal Revolution for the Odgers article, and Haidt's initial response on X]

Read more:

• Quitting Facebook might make you happier
• The more you use Facebook, the worse you feel
• Does the Internet make people happier?
• What happens when you disconnect from Facebook?
• The latest NZ research on social media and mental health is nothing special
• Online social networks, social capital, and wellbeing

The impacts of home care vs. day care of young children

The second half of the 20th Century involved some massive social change in Western countries. One of those changes was the rapid increase in female labour force participation, including an increase in labour force participation among mothers of young children. As mothers have increasingly gone to work, fathers have in the main not compensating by decreasing their work time. So, childcare has become increasingly important over time. On top of that, there is a lot of tension (and judgment) associated with the decision by mothers to return to work or not.

A useful question to consider, then, is what is the impact of mothers working on their child's outcomes, compared to the mother staying out of work to care for the child. That is essentially the question addressed in this 2023 NBER Working Paper (ungated version here) by Jonathan Gruber (MIT), Tuomas Kosonen (VATT Institute for Economic Research), and Kristiina Huttunen (Aalto University School of Economics). They look at the case of Finland, where they look at the effects of:

...the Finnish Home Care Allowance program (HCA). This program provides substantial payments to mothers who stay home with their children from age ten months through 3 years old, rather than placing the children in formal child care, which is almost exclusively publicly-financed and of relatively high-quality in international comparison. The HCA program has a long tradition in Finland. It was introduced in 1985 and more than 80% of mothers in Finland utilize the HCA. As a result, the share of children in formal child care is much lower in Finland than in other Nordic countries...

Gruber et al. exploit variations in the value of HCA across municipalities, because each municipality could provide a supplement to the HCA, and many have done. The value of these supplements changes over time, and that is the variation that is key to assessing the impact on mothers and children. Essentially, they look at how differences in the amount of HCA assistance affect mothers' work, and children's outcomes, using linked data from the Finnish population register, birth registry, tax and benefits records, early childhood data from clinical assessments of children's readiness for school, and education and youth crime records for when the children were older. The early childhood data are interesting:

The individual tests we consider for four years olds (from 2010 onwards) are Cross (needing to draw a cross, where the two lines intersect), Ask (the child is able to ask following types of questions: when and where?), Details (the child is able to explain details from a specific picture), and Colors (the child is able to identify three out of four main colors from a color card). The tests for five years old (prior to 2010) are Circle (the child can cut a circle from a paper with scissors), Square (the child is able to draw a square on paper), Human (the child can draw human that has at least head, body and limbs come out of body, not from head), and Instruct (the child is able to follow three-part instructions).

Gruber et al. apply a difference-in-differences approach with a continuous treatment variable (the amount of HCA assistance received), which essentially estimates how a 100-Euro change in the HCA supplement amount affects outcomes between the years before and after the supplement changes. The results in terms of mothers' employment are summarised in Figure 1 in the paper:

Notice the big drop in employment that occurs at Time 0, which is when there is a 100-Euro increase in the HCA supplement. However, eyeballing the figure, while the point estimates are negative, it looks like they are not statistically significant (at the 5 percent level). When they move to a more standard difference-in-differences (rather than a dynamic DID approach), the results are statistically significant. Nevertheless, for this analysis Gruber et al. note that:

Maternal labor supply then falls by about 1.5% for each 100 euro increase in the homecare allowance and remains at that level in the municipalities that increased their supplement amount. So supplements are clearly reducing maternal work in favor of at home care, and the effect corresponds to about 5 percent reduction when compared with mean share of employment of mothers of one-year-old children.

Gruber et al. also show that the HCA supplement leads to a decrease in maternal labor income, but an increase in total income." Interestingly, they go on to show that their:

...estimates are large enough to explain the entire difference between the Finnish and (for example) Danish levels of short run child penalties of 20%.

Turning to children's outcomes, they find that:

...children become more likely to fail the cognition test at age four or five when their parents were eligible for higher HCA supplements at child’s age 1...

After an increase in supplement when one year old, enrolling to academic high school declines and committing a youth crime increases.

Needless to say, these are all bad outcomes for children. Gruber et al. then move onto a standard DID approach in order to better quantify the effects, and find that:

...the impact of receiving a 100 euros per month supplement when the eligible child is one year old is to reduce the employment of mothers by -1.27 percentage points, which is a roughly 5% decline in the odds of working... the impact on annual labor earnings is –194 Euros. Given the increase in HCA of 273 Euros... this suggests an almost three-quarters “crowdout” of the income benefits of HCA; that is, for every dollar of HCA received, mothers offset 72 cents through lower labor earnings... the effect of supplement on all income including earnings and taxable income transfers (including HCA and supplements). The effect on this outcome is 237 Euros.

So, mothers work less, earn less labour income, but receive higher total income as a result of the HCA supplement. In terms of child outcomes though:

...a 100 euro per month increase in the supplement leads to a statistically significant 1.78 percentage point increase in the odds of failing a test; the effect size represents about 7% increase from the baseline failing rate...

...higher HCA in form of supplements when the child is one year old leads to -.6 percentage point decline in the odds of enrollment in an academic high school, which is about 1 percent of the sample mean...

...each 100 euros per month of supplement leads to a rise in youth criminal sentencing of .22 percentage points, off a mean of 4 percentage points, a roughly 6% effect...

All of those effects are statistically significant. And they all point to the homecare supplement having negative impacts on children's short-term and long-term outcomes. Perhaps that is uniquely due to the homecare supplement? Gruber et al. go on to investigate a daycare reform in 1997 that unified daycare fees across the country. As a result, some families ended up paying higher daycare fees, while others paid lower fees. A 100-Euro increase in daycare fees should have a similar (but opposite direction) effect to a 100-Euro increase in the HCA supplement. Indeed, Gruber et al. find an effect of the daycare fee change that is of a similar magnitude, but in the opposite direction, to the HCA supplement results.

That they find similar effects based on changes in HCA supplement and daycare fees should provide some confidence in the results. However, we should treat them with a little bit of caution for at least a couple of reasons. First, as I noted in this post, the 'two-way fixed effects' approach that they have adopted has recently attracted a lot of criticism (which is nicely outlined in two posts on the Development Impact blog, here and here, as well as this post). The short version is that the two-way fixed effects approach is likely to lead to biased estimates of the treatment effect. Gruber et al. do try a few ways of dealing with this, and the results are robust to the approaches they adopt, but given that their dynamic DID results are statistically insignificant, this still leaves me concerned. Second, Finland is somewhat unique in the pervasiveness of homecare. As they note in the paper, 80 percent of mothers make use of the homecare allowance, which is a high take-up rate. It's not clear that similar effects would be observed in other countries.

This external validity problem is the biggest issue for me. Mothers are essentially choosing between homecare, where they look after the children and teach them the basics required to prepare them for school (with whatever resources and support they have available to them), or they send the children to a daycare service, which employs professionally-trained early childhood educators to perform the task. There are pros and cons either way, but in terms of school readiness, the daycare may have the edge. On top of that, Finland has a high-quality, publicly funded daycare system, which further tilts the balance in favour of daycare. In countries where the daycare system is of lower quality, the negative impacts on child outcomes are likely to be smaller, or perhaps absent entirely.

Gruber et al. conclude that:

...there may be limits to general international lessons from such policy analyses, and that conclusions are best drawn on a country-by-country basis.

Given the issues of external validity I've noted above, I'd say that further research in other countries is imperative, before we definitively conclude that homecare of children is bad for them.

[HT: Marginal Revolution, last year]