A higher minimum wage and the choice to study in higher education

We are back into teaching next week, and one of the first things we'll discuss in my ECONS101 class is the effect of opportunity costs and relative prices on decision-making. The opportunity cost of something is what you give up in order to get it. The higher the opportunity cost of something, the less likely you are to get it. The relative price of something is its price (or cost to you), relative to the price (or cost to you of something else). When the relative price of something goes up, we tend to do less of it, and when the relative price goes down, we tend to do more of it. Notice the two concepts (opportunity cost and relative price) are somewhat similar.

On that note, this article from the New Zealand Herald a couple of weeks ago provides a good example of both relative prices and opportunity cost:

Higher minimum wages have made it less worthwhile to get an education, a new study says.

The Ministry of Education study shows that your future income will still be higher if you get a degree - but the relative advantage of a degree is shrinking.

This is partly because of educational inflation - a lot more people are getting degrees, so the relative advantage of getting one over someone else is reducing.

But it also reflects big increases in the minimum wage, which have lifted the incomes of people with no qualifications faster than average wages, so incomes have become more equal.

Higher education provides gains, in terms of higher lifetime earnings (which is a point that I'll be covering with my ECONS102 class later this trimester). However, when someone weighs up the costs and benefits of higher education, as noted above a relevant consideration is the opportunity cost of that education - the earnings that they would give up while they are studying. If the minimum wage increases, then for some students (those that would have otherwise been earning the minimum wage), the opportunity cost of higher education increases. That should lead fewer students to undertake higher education.

Another way of thinking about this is that when the minimum wage increases, the relative price of higher education (the price of higher education relative to the alternative of continuing earning without higher education) has increased. That means that higher education is now more expensive in relative terms, because some students have to give up more in order to obtain it. And that should lead fewer students to undertake higher education.

Of course, it is interesting timing to release a report that seems to suggest that fewer students the net returns to higher education have decreased, just when we are entering an historic recession. Many of the jobs that are being lost (particularly in tourism and hospitality, as I noted yesterday) are at the minimum wage level, and for those people suddenly unemployed, the opportunity cost of higher education is suddenly lower than before. As I noted in yesterday's post, that suggests that now is an excellent time to be investing in retraining, for individuals as well as for government.

'Snap-back', 'gone forever', and the economic impact of the coronavirus pandemic

Ordinarily, I don't post on macroeconomic topics. However, this blog post by Bruce Wydick was so interesting, I couldn't resist following up:

My main contribution here is to categorize different types of goods and services in ways that will help us better understand the economic situation we are in.  I will do it across two dimensions.  First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.”  In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.  There is good reason to think that as the economy begins to open up, purchases of these items might even be higher than normal due to pent-up demand.  Even during COVID, things like household appliances break or need fixing, and because over the long run purchases tend to even out, buying less now means buying more later.

“Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever.  Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.  But when it becomes safe to go back to the barber chair, you’ll still only get one haircut.  The rest of your haircuts disappeared into the economic ether; they were (mutually beneficial) transactions that COVID—what we might call the “invisible anti-hand”—prevented from happening. 

The second distinction is more standard and will be familiar to anyone who has studied introductory economics.  These are the differences between goods with low versus high income elasticity.  To those untutored in navigating the dense forests of economic jargon, income elasticity measures the percentage increase in purchases of a good when incomes go up by 1%. It measures how sensitive purchases of different items are to changes in income. 

Wydick's categorisation leads to four different types of goods and services, as shown in his diagram reproduced here:

 

The key point about this categorisation is to identify what sectors of the economy are likely to be hurt most by the coronavirus pandemic lockdowns and the associated recession. The lockdown hurts the "gone forever" goods and services, because the "snap-back" goods and services receive catch-up spending after the lockdown is released, while "gone forever" goods and services don't. The associated recession and high unemployment will lower incomes, so those goods and services where purchases are more sensitive to changes in income (high income elasticity), will be worst affected longer term.

So, when goods and services are both "gone forever" and have a high income elasticity, we can expect the impact of the coronavirus pandemic to be most severe. Wydick identifies air travel, tourism, sporting events, hospitality, and transport (but not public transport). Everything else either snaps back and experiences some catch-up spending, or isn't as affected by lower incomes.

Mostly, that suggests that a lot of the economy will survive fairly intact. However, that potentially misses the key point. Tourism and hospitality is going to be crushed, and continue to be in severe trouble for a long time. That's potentially a problem for a country like New Zealand, where the economy is (maybe overly) dependent on tourism and hospitality (tourism alone, not including hospitality, generates nearly 6 percent of GDP according to Statistics NZ's Tourism Satellite Account). It is also a problem because it is a sector with relatively high employment density (the Tourism Satellite Account shows about 8.4 percent of total employment is in tourism, again not including hospitality).

That means New Zealand faces a big and lasting hit to GDP, and (perhaps more importantly) a big and lasting hit to employment. Trying to prop up those sectors (like giving millions of dollars to bungy operators) may be an overly expensive way of retaining employment. Instead, perhaps using those millions to promote re-training and up-skilling of displaced workers might be money better spent. On the other hand though, keeping an existing business at a minimum viable level and ready to ramp back up when conditions improve is potentially less costly to the economy than closing the business down, losing the specific human (and other) capital, and then setting up a new similar business later.

What is best here probably depends on what you believe about the longevity of this crisis. The government's approach suggests that they think the economy will bounce back quickly. I would have erred in the other direction, taking this as an opportunity to up-skill the workforce. Of course, given that I work in the education sector, you'll just have to accept that I may have some bias here.

[HT: Marginal Revolution for the Wydick post, and Michael Doyle on the Waikato Economics Discussion Group for the bungy subsidy article]

Book review: The Misfit Economy

I just finished reading The Misfit Economy, by Alexa Clay and Kyra Maya Phillips. The subtitle is "lessons in creativity from pirates, hackers, gangsters, and other informal entrepreneurs". Clay and Phillips define a misfit as "a person whose behavior or attitude sets them apart from others in an uncomfortably conspicuous way", and the book is essentially a collection of 30 or so case studies, ranging from camel milking in the US, to Somali pirates.

Unsurprisingly, the motivations for being a misfit include reputation and esteem, and/or financial gain. Clay and Phillips use their case studies to illustrate five principles they argue are ways of "unleashing your inner misfit":

1. Hustle (a determination to take your destiny in your own hands, and an ingenuity that allows you to make something out of nothing);
2. Copy (bring about incremental improvements and allow products and functions to evolve);
3. Hack (follow the hacker imperative: the driving need to understand how systems work and then put them back together in enhanced forms);
4. Provoke (step out of reality, imagine something different, and get others to wake up to different possibilities); and
5. Pivot (enact a dramatic change in the course of your life to pursue greater fulfillment and inspiration).

Overall, I found the book to be well written and a good read. However, I didn't really feel like the narrative cohered too well. Some of the case studies were better than others at fitting the principles that Clay and Phillips were trying to illustrate, and the distinction between the different principles is not always clear (copying and hacking are closely related, as are hustling and pivoting). The case study approach makes the book easy to read, but it results in a fairly shallow treatment. It definitely falls short of offering "lessons in creativity", other than the authors' assertion that these five key principles exist.

Some readers might find the stories inspiring, and may indeed unleash their 'inner misfit' after reading. For me, I just found it a collection of interesting stories.

The persistent impact of autocratic rule on social capital

Social capital is the capital that is embodied in inter-personal relationships. It encompasses networks, alliances, shared norms and values, reciprocity, and trust. The level and forms of social capital are determined by people's attitudes and beliefs. So, if political or economic institutions alter those attitudes or beliefs, then the level or form of social capital might also be altered.

That is the thesis underlying this working paper by Melanie Xue (Northwestern University) and Mark Koyama (George Mason University), which looks at the impact of autocratic rule in Qing dynasty China on subsequent measures of social capital. Specifically, Xue and Koyama look at the impact of literary inquisitions. As they explain:

Following the Manchu occupation of China in 1644, and the establishment of the Qing dynasty, imperial China saw a sharp increase in political repression and an entrenchment of autocratic rule. Intellectuals, the most influential figures in local society, saw new restrictions imposed on them. One watershed event was the intensification and routinization of literary inquisitions - investigations which targeted the speech and writings of intellectuals.

Essentially, Xue and Koyama compare prefectures that had had at least one literary inquisition (the 'treatment' group in this quasi-experimental research) with prefectures that had not (or had not yet) had any literary inquisitions (the 'control' group). They look at both historical measures of social capital (e.g. the number of local charities) and more modern measures (e.g. generalised trust).

This is a very detailed paper. Their first step is to demonstrate that political repression through the literary inquisitions affected attitudes and beliefs. Looking at the number of 'reputable individuals', which is based on a compendium that listed people who were:

...well known for reasons that included prominence in science and technology, medicine and healthcare, education, classical and literary scholarship, history, art, or poetry.

Comparing matched treatment and control prefectures over the period 1640-1819, they found that:

...literary inquisitions led to fewer reputable individuals and that this decline was more pronounced among individuals who came of age in the decade of a literary inquisition... This concurs with historical accounts that individuals withdrew from public life and sought to evade attention in order to keep a low profile...

Next, they looked at the contemporaneous impact on social capital. Charities are a good measure of social capital in this context because:

...the level of charity provision reflects the degree to which individuals are willing to volunteer time and resources to help other members of society...

They found that:

...after a prefecture was first exposed to a literary inquisition case, the number of local charities in that prefecture fell by an average of 38% in the following decades, relative to prefectures that never had a literary inquisition, or prefectures that had not yet experienced a literary inquisition. Mapping out the full dynamic response of charity formation, we characterize the evolution of social capital after exposure to literary inquisitions, and show that the “charity gap” between prefectures which had and which had not been affected, kept widening for the next four decades before stabilizing. This effect did not go away towards the end of the charity data series in the early 20th century.

So, the impact of political repression on social capital was relatively large. It also endured for some time. Looking at data from the Chinese General Social Survey (CGSS), they found that:

...Qing persecutions are associated with lower generalized trust. This effect is economically significant: in our main specification, political repression is associated with a decline of 0.179 in trust, which is 16.7% of its standard deviation...

In contrast, there is no effect on trust in family members, so the impact of political repression is on trust outside of the family. Xue and Koyama also demonstrate negative effects on literacy levels among those educated in the early 20th Century, when education was decentralised and so relied more on social capital for its delivery. They also show that those effects don't depend on other political and social events such as the Taiping Rebellion, the exodus to Taiwan in 1949, and the Cultural Revolution (the latter two events might affect the earlier results because they change which people would be observed in the CGSS sample). They also provide evidence using instrumental variables analysis that their results are causal - the literary inquisitions in Qing China caused the differences in literacy rates in 20th Century China.

Finally, they also show impacts on modern political attitudes and behaviour:

Starting with attitudinal questions, we find that individuals in prefectures with a legacy of literary inquisitions are less likely to say that people like themselves can have an impact on decisions made by government... and less likely to believe that their suggestions to the government will be adopted... reflecting greater political apathy in affected prefectures... Next, we examine participatory behavior... Our main findings are that survey respondents from affected prefectures are less likely either to volunteer on local committees... or to make suggestions to local committees...

We find that individuals in prefectures with a legacy of literary inquisitions are less likely to agree with the following statements: “Western-style multi-party systems are not suitable for China”... “Free speech is ‘Western’ and will only lead to chaos”... and “Modern China needs to be guided by wisdom of Confucius”... For other questions in the survey, such as those regarding social issues, there is no systematic difference in individual responses between prefectures with a legacy of literary inquisitions and those with no such past.

There is a lot to digest in this paper. The authors conclude that:

Both the results from the historical panel and those from post-Qing cross sections suggest that political repression permanently reduced social capital. The effect of literary inquisitions on social capital has survived, even after local institutions were transformed by the modern socialist state...

We establish social capital as a missing link to understanding the dynamics of state-society relations. Autocracies can provide order and public goods when social capital is low. For this reason, autocracy may appeal to individuals in societies with low social capital. Hence, by reducing social capital, autocratic rule can introduce a self-reinforcing cycle that favors its survival and persistence.

This self-reinforcing cycle has implications for many modern societies that have tried unsuccessfully to adopt more democratic norms. It demonstrates the persistence of autocratic rule, and the norms and attitudes that sustain it.