Wednesday, September 30, 2009

Refunding textbook royalties

Ian Ayres wrote an article at the Freakonomics blog about how he refunds his textbook royalties to his students. Here's his chosen excerpt of a 2005 op-ed he wrote on the same subject:
[A]t the moment, professors’ incentives in choosing textbooks are in some ways more distorted than doctors’ incentives in choosing drugs. You see, I earn a $10.30 royalty on every copy of my textbook that a student buys. Instead of just trying to get the best book for my class (and to do so I should weigh both quality and price), I might also consider assigning my own book and increasing my profit.

This is a self-dealing transaction, which would be presumptively illegal if professors owed a fiduciary duty to students. Some professors realize this and donate to charity the royalties they earn when they assign students their own books.

So this year, I am going to do something different. I will give $11 to each of my contracts students who buys my book. That way, we will all know that I assigned the book for the right reason.

In his blog post, Ayres encourages students to ask their professors for a refund of royalties if they assign their own textbook. Upon reading that suggestion, I knew that some students would take Ayres up on that proposition. I immediately wondered how other professors would take the suggestion that they should refund their royalties.

Lucky for me, I didn't have to wait long to find out.

Just last week, Daniel Hamermesh wrote an article at Freakonomics on why he doesn't pay out royalties. In it, he discusses the role of transactions costs. On Ayres' article, Hamermesh says:

This has caused me trouble: one of my students read it and asked why I don’t do that as well for my little book, Economics Is Everywhere. I have done this before, when I assigned my labor economics text to a class of 35 students, but not in her class.

The reason I don’t now, I told her, is transactions costs. With 550 freshmen, there is no way to determine which students have bought the book or to hand out the money efficiently. Instead, I make a donation to the university about equal to the royalties earned from my class. My guilt is assuaged and my very scarce lecture time is not disrupted. But if the transactions costs (and my class) were smaller, giving the money back to the students would be a Pareto improvement: the students would be better off.

That's one perspective, but I have a different reason to be skeptical of Ayres' point: it tackles the wrong problem. The chief problem with textbooks is not that professors exploit a captive audience by writing subpar textbooks and then assigning them for massive profits. It is that professors are not sensitive to the full price that students pay for their textbooks.

I discuss this point elsewhere (here and here). Textbooks are expensive mainly because of the review/marketing/beautification process. Professors are insulated from costs of textbooks, and textbook companies want it that way.

In fact, textbook companies offer attractive incentives for professors to adopt a particular textbook. In a hybrid of marketing and review, they pay professors to review things like the table of contents and the preface (never the entire book). Afterwards, professors are asked if they would consider adopting the textbook for their own class, among other questions.

Moreover, textbook companies send professors piles of trial copies of textbooks. In my one year as an adjunct professor, I received more than 10 trial copies of textbooks. I didn't read them. The books just collected dust in my office until a second-hand bookseller knocked on my door, and bought them at a deep discount.

If only one year fetched me 10 textbooks, I imagine that Ayres has a similar second-hand market available to him. If so, shouldn't he refund a share of those profits to his students? Similar marketing efforts contribute to the cost of his own textbook. And, that's a significant fraction of his textbook price.

For example, Ayres' textbook costs $159.00 at retail price (currently on sale for $133.56 at Amazon). Ayres is happy to forgo his $11 share of that final price. Notice that even if the book has a production cost of $30, the middlemen more than triple the final cost of the textbook (from $41 to $133.56).

In short, I'm not impressed by Ayres' gesture to refund his royalty. That's because there are better options for his students.

If I were a student of his, I would be much happier if he took a $15 royalty, and used the extra compensation to pursue less expensive publishing options. On another note, I'd be much more impressed if Ayres presented me with a free (or very inexpensive) set of notes specifically tailored to the class. In addition to this, he could recommend his book as an optional reference, or perhaps, recommend his top three favorites.

I like Ayres' purported concern for his students' pocketbooks, but I would like to make his concluding point stronger. He concluded:

A small way to make professors more sensitive about the price of the books they are assigning is to think about the royalties they are generating for themselves.
Here's how I would change it:

A big way to make professors more sensitive about the price of books they are assigning is to try self-publishing. It's not that hard, your royalty can go up, and you can offer your book at a lower price... to your students and the world.

Monday, September 28, 2009

Learning Economics on a Budget: Part I

For the last month, I have been creating video lectures on economics and statistics, and posting the resulting videos to YouTube. I have two goals with this project:
  1. I want to create an online course for basic understanding of microeconomics and its applications.
  2. I want to make basic economic knowledge available at low opportunity cost.
Aside from using it to learn economics on your own, I view this video lecture series as a great complement to in-class learning. Even though my videos follow my own textbook, plenty of courses have a similar sequence of topics. Therefore, my videos should still be useful if you're taking a similar class and using a different book.

The project is still a work in progress, but I have finished the first unit. I will post the embedded videos for each unit as I finish producing them. The posts will be right here on the blog. Speaking of a completed unit, here's my first unit on Supply and Demand.

Unit I: Supply and Demand

This first video describes the difference between moving along a demand curve and shifting a demand curve.

The logic is similar for supply curves.

In the second video, I work an example of solving and graphing a linear system of supply and demand equations.

In the third video, I extend the example of the second video to implementing a per-unit tax.

And, in the last video of the unit, I extend the applicability of supply and demand analysis to a wider scope (and I introduce the normative-positive distinction).

For a complete understanding of supply and demand, there is certainly more to these topics. I just hope the lectures clarify some of the more difficult issues. The rest can be learned by studying the right reference.

Saturday, September 26, 2009

Poll: Would you refund your textbook royalties to your students?

This week's poll question is:

Would you refund your textbook royalties to your students if they bought your textbook?

(a) Yes
(b) No

For some background reading, here's a link to Ian Ayres discussion of the issue, and here's Daniel Hamermesh's response (both at Freakonomics). I feel passionately about this issue, and I can't resist offering my thoughts on the topic (see my next post on Wednesday). As with all polls, vote early and often on the sidebar (---->).

Wednesday, September 23, 2009

The Power of the Poor... and institutions

The institutional framework in developing economies blocks economic opportunities for the world's poor. As the following video argues, a wall of paperwork stands between the poor and genuine economic opportunities.

The video is hopeful: The world's poor are an untapped resource, which is the key to ending poverty.

But the fact remains they are still excluded from the formal economies by a wall of paperwork. Burdensome regulations push well-meaning people into informal economies where the government offers no legal protection. If the government won't stand behind you (or worse yet, wants to take the fruits of your labor), what are your incentives for productive activity?

To mitigate the cost of expropriation, citizens in informal economies either produce less and don't save or expend effort on unproductive activities that make it difficult for the government to take their savings. In either case, citizens fearing expropriation are poorer on account of being excluded.

On this observation, the solution is obvious: simplify the complicated struture of the institutions. That will encourage the world's poor to join in the formal economies of the world. With protection for their private property, the world's poor can tap their own resource, and thereby, achieve prosperity.

That solution sounds simple, but it is not. In Institutions, Institutional Change, and Economic Performance, Douglass North explains that institutions evolve organically and incrementally over time. Moreover, a country's institutions are no accident. Institutions are a product of history, and in many cases, institutions are formed at the will of the country's elite. As a result, institutions are doggedly persistent. This nature of institutional change requires that reformers work within the institutional framework of underdeveloped countries.

Change has to come from within, but there is promise. For example, the National Institute for Judiciary Quality (NIJQ) is streamlining judicial institutions in Brazil. Surprisingly, the legal system in Brazil is so complicated that even some judges don't understand how bad it has gotten. Simple civil court cases that require several hours of work languish for months in courts, and contribute to the paper wall that excludes many from the formal economy.

The NIJQ works from within Brazil to reduce legal paperwork and expedite the legal process. They educate judges, and they push for a simpler legal structure, and importantly, their efforts come from within the legal system. As North would predict, the NIJQ's efforts are progressing slowly, but the NIJQ is a good first step toward reducing the size of the paper wall.

Informed people who work within the institutional framework of underdeveloped nations are the key to unlocking the potential of the world's poor. By encouraging organizations like NIJQ, we lay the foundation for improving the lives of the world's poor.

The solution is not simple, but it is not fundamentally misunderstood either. Do your part by tuning in to learn more. The Power of the Poor airs October 8, 10 PM ET (or check your local listings) on PBS, and tell your friends. We can improve institutions, one step at a time.

Saturday, September 19, 2009

Poll: Have you ever ordered at a restaurant only to discover you forgot the money to pay?

Last night, my wife and I went out to dinner to cap off a great week at the condo with my parents. We went to my favorite restaurant in Chicago, Leona's. While we were driving to the restaurant, I noticed that I had forgotten my wallet. As we were nearly to the restaurant, it would be a huge hassle to return home to get my wallet for our night out. Fortunately, my wife had her purse, and she said "I'll put it on my credit card."

Just then, we pulled into the parking lot, planning on my wife paying for dinner. We had a wonderful dinner -- filled with homemade soup, lasagna and my favorite Leona's sandwich. Then, the bill came.

My wife reached into her purse, and could not find her billfold. She had forgotten her wallet at home as well! So, there we sat -- with a bill for food we had already eaten, and no way to pay for the bill without one of us going home.

I told the waitress what happened, and excused myself to drive home (quickly) to get my wallet. All the while, my wife sat at the table deleting accidental cell phone photos. We were both really embarassed by the whole incident.

But that brings me to the poll question of the week:

Have you ever ordered something only to discover you forgot the money to pay?

(a) Yes
(b) No

Vote early and vote often (on the sidebar ---->). The poll is open until next Saturday. Tell your friends, relatives, and waitresses to vote. If you want to share a similar experience, feel free to leave a comment in the comment box below. That's why it's there! I look forward to hearing what you have to say.

Wednesday, September 16, 2009

The Carnival of Economic Fun #2

Welcome to the second edition of the Carnival of Economic Fun. This carnival had 40 submissions, but to keep your reading list sane, I whittled it down to the 14 best articles. Thanks to everyone for your submissions. They were fun to read (and they still are... have a look below). Please join me again next month.

For now, let's get on with the carnival!

1. I have heard of people buying cars online. It's an interesting idea. According to this first article in the carnival, GM is partnering with EBay to sell vehicles online. Here's a question to ponder: Who stands to gain? Who stands to lose?

Chris McClelland presents GM to start selling cars on ebay? posted at Lucrative Investing.

2. This next post takes one agriculture bill in Congress and dissects what it means for consumers and farmers (big and small). If you like reading about governmental capture and subsidies for big business, you'll love reading this one. If you don't, you'll be outraged, which is the point.

Mikkal Travvis presents Fascism On The Farm: H.R. 2749 - The Food Safety Enhancement Act of 2009 posted at The Truth

3. Have you ever thought of relocating to work in China? Me either, but it turns out to have some things going for it. The next article breaks down some of the costs and benefits of finding a job in China. What do you think?

Wise_Bread presents Need a Job? Try Searching in China posted at Wisebread.

4. How much controversy can a talk show personality get away with? Glenn Beck is pushing the limits, and this next post questions whether it will cost him his job. I'm not sure it will, but maybe.

Chris McClelland presents Can advertisers get a "journalist" off the air? posted at Lucrative Investing.

5. This next article is a good list of things to consider when choosing an online bank. I appreciate the shout out to ING Direct's easy-to-use user interface. It really is user-friendly.

MatthewPaulson presents What to Look for Other Than Interest Rates with an Online Bank posted at American Banking News.

6. The sixth article in the carnival asks the question that is on everyone's mind: Is the recession really over? It sounds like we could define our way out of this one. I bet the question people really want to know is "When will the good times start rolling again?" That's probably not for a while.

Silicon Valley Blogger presents Is The Economic Downturn Over? posted at The Digerati Life

7. The next piece offers some good advice for shoring up your finances in a recession. These tips work even when our economy is not in a recession. It's a fun article and well written.

The Smarter Wallet presents A Personal Financial Plan To Survive The Economic Recession posted at The Smarter Wallet

8. This next article poses an interesting/morbid dilemma: Should we legalize organ trafficking? On one hand, it's not fair that only those who can afford to buy an organ get to live. On the other hand, is it fair to let everyone die? Morbid, I know, but strangely... fun.

jim presents Your Take: Legalize Organ Trafficking? posted at Blueprint for Financial Prosperity

9. The next article is a great reminder that you don't need to buy books to read them. The public library is a great way to save money and still enjoy some good reads (and more). Check out all of the ways your library can save you money.

Patrick presents Library a money saver in tough economy posted at A Man with the Answers.

10. Do you drink a lot of coffee? Do you have a lot of time? Do you care about the environment? Here's an article for you.

Vera Lang presents Starbucks Coffee Cup Cozy ~ Easy Craft For The Beach posted at Fine Craft Guild .com

11. Adam Smith once said that local commerce has a cost advantage in that it doesn't have to pay the transportation costs. So, a natural and happy consequence of free trade was that stuff would be traded locally. To the extent that transportation costs stayed high, local commerce prevailed and flourished, but that's no longer the case. This article makes the point that buying local shouldn't get hold the moral weight it does. In the title, I think the not is in the wrong spot. What do you think?

AleB presents Top 5 Reasons NOT to go Local posted at

12. The next article has some really cool graphs that show how topsy-turvy our stock market has been over the past 10 years. Darn those bubbles anyway.

nickel presents Investment Performance: It’s a Matter of Perspective posted at

13. Most people think you should know your FICO score, but here are 15 reasons that you should ignore it. Be sure to read through all 15 of them.

MoneyNing presents 15 Reasons Why You Should Ignore Your FICO Score posted at Money Ning

14. And for the last article that made the cut... Commemorative coins are a silly phenomenon, but I hope this guy is joking. If he is, his post is hilarious. If not, you can still laugh as you spend your "plain, ugly coins and bills." Enjoy:

Prior Adams presents Major Cause of the Economic Crisis: Commemorative Coins posted at Prior Adams

That's our Carnival! Submit your blog article to the next edition of the carnival of economic fun using our carnival submission form. Past posts and future hosts can be found on the blog carnival index page.

Thanks again to all who submitted articles to this carnival. Join us again next month for Edition #3 on October 14th.

Saturday, September 12, 2009

Poll: Should an employer allow employees to take vacation days they have not yet earned?

I am fascinated at the wide variety of ways that employers pay their employees. Not only is the basis for compensation varied (hourly pay versus commission versus salary), but the fringe benefits and the inner workings of vacation pay are especially interesting.

In the spirit of employer-employee compensation, this poll is about how companies pay out vacation pay. I have seen three ways that employers give their employees paid vacation.

1. Give employees an account of vacation days at the beginning of a year. When the days are deposited into that account, the employee owns those days. Therefore, at resignation, the employer must pay the employee for untaken days.

2. Give employees vacation days as they earn them. In this scheme, the days accumulate in the vacation-day account as the employee works more hours. As in (1), the employee owns all days that are in the account. Therefore, at resignation, the employer must pay the employee for untaken days.

3. Give employees an account of vacation days, but specify that these days are to be earned over the coming year. The employee does not own these days until he works the full year, but can own a fraction of the days as he works that same fraction of the year. The employee can take all of the vacation upon receiving the vacation days, but in so doing, becomes indebted to the company. At resignation, the year is pro-rated and either the employee owes the company, or the company owes the employee.

For example, suppose a company deposits 18 days into an employee's account, the employee works 1/2 of the year before resigning, and the employee takes 10 of the vacation days as vacation in the first half of the year.

In the first case, the company would owe the employee for 8 days untaken.
In the second case, the employee could have only taken 9 days vacation, and so, would not owe or be owed any money.
In the third case, the employee would have taken one day more than he earned. Therefore, on resignation, the employee would owe the company for one day of vacation.

So, based on this connundrum, here's the question of the week:

Should an employer allow employees to take vacation days they have not yet earned?

(a) Yes
(b) No

Please vote (early, often, and on the sidebar ---->) and tell your friends to vote. And if you have any ideas, I'm interested in hearing what you have to say in the comment box. The poll is open for a week. I'm excited to see your response.

Wednesday, September 9, 2009

Creating your own economy with Becker

I often start, but don't finish good books. This probably happens for one out of every three books I start to read. For example, I started (but did not finish) The Life of Pi, Catch 22, The Hobbit, Homage to Catalonia, and Gang Leader for a Day. And even though I stopped reading those books, I really enjoyed reading the parts of those books that I actually read.

Why do I bring up this nasty habit? I am afraid that it is happening again.

I started, but probably won't finish, Create Your Own Economy by Tyler Cowen (of Marginal Revolution fame). I read the first three chapters, which puts me on page 65 of 228. I have really enjoyed the book so far, but other cultural bits are demanding the use of my time, and I found that the narrative in the book is being told in other places. I'll probably take up Cowen's narrative in those other places.

So, what's in the book that I am not going to finish?

The big idea behind Create Your Own Economy is that our chaotic world -- filled with Google, Blackberries, iPhones, netbooks, Twitter, Facebook, IM, and e-mail -- is a product of our own choices. We choose to be bombarded with a firehose-stream of information because we can take the little bits of our chaotic world and weave together beautiful narratives. In other words, we use the little cultural bits as inputs to "create our own economy."

It's a beautiful way to look at apparent chaos. It really resonates with the way I browse the Internet, use Facebook and Twitter, and check my e-mail.

For me, Cowen was re-telling a narrative I have seen developing in my own surfing of the web. But, it is also a re-telling of my favorite economic model, Becker's household production model (which I applied here). In Becker's model, households produce their own commodities, using both goods inputs and time inputs. Households do this with every commodity they consume.

Applying Becker to Cowen's setting, a "balanced musical experience" is a commodity that households produce using an iPod, some time to enjoy the music, some time to find the music and organize it, and perhaps some digital copies of the music. The fact that we see people "creating their own economy," is an artifact of the technological improvements that make mixing and remixing tiny cultural bits much easier.

That's precisely the point Cowen makes, but as nearly as I can tell in the first three chapters, he does so without reference to Becker's clear and simple way of thinking about the problem. So, I'll definitely continue my Create Your Own Economy narrative, and I may return to Chapter 4.

This morning, I will probably listen to Cowen's EconTalk podcast, then head over to the Becker-Posner blog, and maybe watch some Jon Stewart. And, if you don't like my information stream, don't judge me. I'm just creating my economy. Go create your own.

Monday, September 7, 2009

My labor-leisure tradeoff

In the first five months of the blog, I wrote a new post every day. I have posted daily for a couple of reasons:

A fun challenge. The commitment to writing every day is a challenge that keeps me grounded in ideas that people find interesting. Writing an essay per day has been a great way to work on my writing, and to express my ideas. More than being an outlet for my ideas, the blog has been a source of creativity.

A consistent flow of ideas. Daily posting works best to attract regular readers. If the content is good, daily posting can beget habitual reading. In other words, I posted daily to keep readers' attention. I feared that posting sporadically would eventually lose readers who are eager for new content.

Keeping these overarching goals in mind, I recently re-evaluated the labor-leisure choice for my blog writing. I view this blog as an exciting hobby. And, posting daily is too much for a blog that is a hobby. Effective this week, I am scaling back the frequency of my posting.

Keeping in mind that regular, consistent posting is convenient for my readers, I will continue to write on a regular schedule: twice weekly. On Saturdays, I will post my weekly poll. On Wednesdays, I will write other economics articles.

How did I arrive at this conclusion?

First, my blog writing was encroaching on other important leisure activities like spending time with my wife. The daily posting commitment was a good challenge for me, but I value a well-rounded personal life. Commiting to a lighter schedule will help me to achieve better balance. As a window into this other side of my leisure activities, here's a video I produced from our recent vacation to Michigan.

Second, I am a budding economist with legitimate research interests (in fact, a paper of mine was recently accepted to the Journal of Law and Economics, forthcoming 2010). Moreover, my academic life places significant demands on my time. In the near future, I expect to spend a lot of time working on academic research, as well as some on coursework. To meet my standards for my academics, I need to make time in my schedule.

I am making this change to achieve better balance, personally and academically. On account of these other experiences, I hope to provide better-quality content on this blog, but my primary motivation is selfish. Sometimes, you just have to enjoy life.

Sunday, September 6, 2009

Economics for your inbox

A while back, I set up daily e-mail subscriptions to my blog posts. When I set it up, I was unsure of the idea. Understandably, I was skeptical that the automated e-mails would live up to their Feedburner hype. But, the automated e-mails have exceeded my expectations. If you like what's going on here at my blog, you should sign up for the daily e-mail. Here are three reasons why:

1. The format is great. I thought that the text of my blog posts would be garbled by the time they reached your inbox, but they actually have a clean, simple and readable format. I actually prefer it to my blog's format. Here's an example screenshot from last week:

Isn't that something you could wake up to seeing in your inbox? I know it puts a smile on my face.

2. It's automatic, so you don't forget. If you came here, you probably like what's going on at my blog. Maybe you even love my writing. But sometimes, for whatever reason, we forget to check websites that we love. The great thing about e-mail updates is that they're automatic. They arrive everyday I write a post. That way, you don't have to fret about checking.

3. It is easy to subscribe. Here's how you do it: (1) Enter your e-mail address in the textbox just below the weekly poll, (2) Verify that you're human by entering the Captcha Text, and (3) Click on the link that arrives in your e-mail (hopefully not in spam).

Even if e-mail updates are not for you, I'm glad you stopped by. Come back tomorrow. I promise to have a more economically-minded post.

Saturday, September 5, 2009

Video Poll: What is this video to you?

I came across the following video in my Tweetstream (@catoinstitute) the other day. The video was shown at an elementary school in Utah to kick off their year, which is themed on "service."

Regardless of your political persuasion, the video is worth a watch (all four minutes of it). The video is professionally crafted, and no matter how you feel about our nation's politics, you'll be moved.

After watching the video, here's this week's poll question:

How would you characterize the video?

(a) An inspirational call to service.
(b) Leftist propaganda and brainwashing
(c) A thought-provoking public service message
(d) Silly (but harmless) enviro-fluff

I'm interested in hearing what you have to say. Please vote on the sidebar (--->). The poll will be open for a week, so vote early and/or often. Tell your friends to vote, and tell some random elementary students to vote too.

As always, I'm interested in hearing your comments. If you have constructive thoughts, please voice them in the comment box below.


Note: Comments are moderated and I won't be available to moderate them until I have calmed down from the start of the college football season. If your comment has not yet appeared, it's likely because I am cheering on the Montana State Bobcats.

Friday, September 4, 2009

Unemployment and health care

I conclude unemployment week by discussing the unfortunate link between unemployment and health care in the United States. Most people who have health insurance in the United States obtain it at the courtesy of their employer, as an untaxed fringe benefit.

In the words of Milton Friedman (in a wonderful article entitled How to Cure Health Care), here's how employer-provided health insurance came to be:
The revival of the company store for medicine has less to do with logic than pure chance. It is a wonderful example of how one bad government policy leads to another. During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit. That benefit proved particularly attractive to workers and spread rapidly.

Initially, employers did not report the value of the fringe benefit to the Internal Revenue Service as part of their workers’ wages. It took some time before the IRS realized what was going on. When it did, it issued regulations requiring employers to include the value of medical care as part of reported employees’ wages. By this time, workers had become accustomed to the tax exemption of that particular fringe benefit and made a big fuss. Congress responded by legislating that medical care provided by employers should be tax-exempt.
So, employers provide health insurance benefits because of a historical fluke. What are the consequences of this fluke?

First, individuals rarely shop for health insurance, comparing plans to one another. They even less frequently shop for specific health care services. Employers do this work for individuals by selecting an insurance plan (or set of plans) to provide as a fringe benefit. Because these plans are untaxed, employers can be more generous than if they were paying salary.

Notice that generosity (not cost-saving) is the virtue in this transaction: more comprehensive plans are praised as "wonderful benefits," rather than criticised as excessive spending. I suspect that change in tone is responsible for some of the overspending on health insurance plans.

For a discussion of some of the consequences of this system, see this video.

As Stossel reports in the video, when people pay for their own health care (or at least profit from cutting back on expenses), they shop around and at great cost savings.

Second, employer-provided health insurance means that when a worker loses his job, he loses the subsidy to his health insurance as well. With the outrageous price of health insurance, individuals who lose their jobs are stuck paying premiums so high that many choose to go uninsured.

In the United States, if you lose your job, you lose health insurance. That's the greatest injustice of our current health care system. If health reform is to fix one problem, it should break the link between unemployment and health care. In a recession, it's tough enough to be out of a job, but when losing your job excludes you from proper health care, that's a tragedy.

Thursday, September 3, 2009

How do mandatory employee rights affect unemployment?

In one of my first posts on this blog, I wrote about how the faculty at my alma mater voted to unionize. As a former undergraduate, graduate student, and adjunct professor at Montana State University, my first reaction was ... "huh?" Accordingly, I said:
I'm skeptical that professors at MSU (even adjuncts and non-tenured faculty) have much to gain from unionizing. [...] When I worked at MSU, I could not complain about the pay for two reasons: (1) I loved the work, and (2) the pay was actually pretty good. Honestly, having a university job in a town like Bozeman is living the good life. Pushing for better treatment seems horribly out of place at Montana State.

I went on to describe the findings of a paper by Cole and Ohanian on the macroeconomic implications of unions and cartels. Basically, union power leads to mandatory employee rights, which correspondingly tie the hands of firms to negotiate with employees about the conditions of their work. In other words, mandatory rules (government-issued or union-negotiated) raise the costs of hiring employees, and hence increase the frictions working in the labor market.

Last week, I came across another interestingly-put argument on this topic. In letter written to the president of the American Association of University Professors, Donald Boudreaux of George Mason University made some excellent points about mandatory employee rights: They might not be the best thing for the employees. In his letter, he disputes the notion that eliminating "at-whim employment" is a noble task:

If you make the dismissal of adjunct professors more difficult, you’ll thereby raise colleges’ costs of hiring adjuncts. As a result, fewer adjuncts will be hired. So it’s doubtful that your efforts will help the very persons whose well-being you claim to champion.

What is clear, though, is that success at increasing the cost of hiring adjunct professors will benefit those of us who work as full-time faculty. Because adjuncts compete with full-time faculty, making adjuncts more costly to hire will raise the demand for, and hence raise the salaries of, full-time faculty. It will also prompt colleges to hire greater numbers of full-time faculty. Each of these consequences benefits us full-timers, both by fattening our wallets and by improving our access to full-time scholars in our fields.

Now, try a thought experiment: Apply this mandatory rule everywhere, to every profession. The natural consequence is that employers will screen potential employees much more reluctantly. Just for the sake of hiring someone that they cannot fire, employers are going to take more convincing to hire qualified applications.

To the extent that being convinced (and convincing reluctant employers) is costly, some potential employees will give up and some employers will stop looking for workers. That's means more unemployment, or at least lower employment.

Lastly, I'll leave you with a link to a video investigation by John Stossel. He makes the same points as above, but with reference to the special legal protections for women in the labor force (specifically, for maternity leave). One unintended consequence, it turns out, is unwillingness of firms to hire women.


This was the fifth post in unemployment week on This Young Economist. Tomorrow, I close out unemployment week by discussing the unfortunate relationship between unemployment and health care. See you then.

Wednesday, September 2, 2009

Structural, frictional, and cyclical unemployment

In my previous unemployment week posts, I explained what the unemployment rate means and how economists look at the consequences of unemployment, both in the long run and in the short run. Today, I revert to a more classical description of unemployment that may shed some light on why unemployment is so persistent during this recession.

I classify unemployment into three types: Each is defined with reference to the reason that people are unemployed.

First, there's frictional unemployment, which occurs naturally in any economy. People have to search to find an employer who needs their specific skills. Finding the right employee-employer match takes time and energy. Individuals have to look for the right job, and firms have to screen individuals for the right qualifications. This takes some time. Therefore, there will always be some level of unemployment in the healthiest of economies.

Second, there's cyclical unemployment, which rises and falls with busts and booms in the macroeconomy. When the economy is booming, cyclical unemployment declines. In ordinary recessions, cyclical unemployment rises.

Finally, there's structural unemployment, which comes from a fundamental imbalance between the skills of workers and the needs of employers/industries to utilize those skills.

For example, if too many people invested in financial services skills because of a bubble in the financial sector, then we should expect structural unemployment in that sector just after the bubble pops. The level of structural unemployment will decline as people acquire skills necessary to switch industries.

The industries in any economy are declining and rising dynamically over time. As a result, there's never a perfect match between the skills employees have and the jobs employers are offering. Therefore, some structural unemployment is inevitable. Nevertheless, in hard times, when several important industries go bust or contract sharply (as is the case with the housing bubble and financial meltdown), there's a large degree of structural unemployment.

And, I expect that is a significant component of our current unemployment woes. Big auto companies are either going under, or laying off a significant fraction of their workforce; Financial firms have gone bust. And, these events have left many individuals with specific skills that are no longer in high demand.

So, what does this mean for our current unemployed workers?

First, if you are a worker in one of these suffering industries, my advice to you is to look at your skill set and ask whether you can use your skills in some other industry or occupation. If you're lucky, you can. If you're unlucky, I would suggest developing skills that make you employable elsewhere. That's rough advice, but if your industry has gone away, it's the best advice I can offer.

Second, if you are a policymaker trying to make economically sensible policy, I would suggest that you emphasize programs that retrain workers in these blighted industries. The natural temptation is to prop up these old industries with programs like Cash for Clunkers, but that's not a good idea. Subsidies to the auto industry will merely encourage people to stick with a dying industry longer than they should.

The declining auto industry is a signal that our workers should be trained to do something else. It may be painful to retrain our unemployed workers now, but that's a better option than setting them up for another collapse several years from now. If the government is compelled to intervene, it should offer workers the option to find employment elsewhere.


This is the fourth article for unemployment week on This Young Economist. In tomorrow's post, I discuss the relationship between mandatory employee rights and unemployment. See you tomorrow.

Tuesday, September 1, 2009

What does it mean to be idle?

In economics, the predominant view of an unemployed worker is that the worker is an idle resource. From the perspective of the macroeconomy, unemployment is a wasted opportunity. If someone wants to do something productive, but the right employer has not yet hired that worker, that smells like waste.

Standard economic theory counts houshold-provided labor as a resource to be used in a firm's production function. Therefore, we've branded unemployed individuals with an unfortunate label -- an idle resource. I say this label is unfortunate because it is easily misconstrued, and it colors the way people think about unemployed workers.

In this post, I object to the term idle resource in an effort to clarify what (exactly) unemployed workers do. I have XX main points.

1. The term idle resource suggests that something valuable (workers' time) is doing nothing.

Then, the tacit implication is to put that resource to use in doing something, anything -- because anything is better than nothing. If an unemployed worker is labeled as an "idle resource," it's natural to think that putting them to work in any job is an improvement.

But, that's clearly wrongheaded. A sizeable fraction of the unemployed would turn down a signed-sealed-and-delivered job offer from McDonalds. In addition to avoiding the social stigma from taking a McDonalds job, people value their free time at a higher rate than many employers -- not just McDonalds -- are willing to pay.

In other words, an unemployed worker's time isn't doing nothing. Perhaps the worker is exercising more, cooking more meals at home, enjoying a book he never got around to read, spending more time with his children, and so on. These activities have incredible value, and they are all part of the broad (and broadly-neglected) category of leisure.

My point? Unemployed individuals are looking for a job, but they won't accept any job. That's because their time still has value as leisure. Let's not pretend that it doesn't.

2. The term idle resource suggests that unemployed workers aren't actually doing anything.

The image of an idle, unemployed worker is that of someone just waiting by the telephone for an employer to call. This suggestion that workers aren't doing anything is offensive. Finding a job is a difficult task. Depending on search intensity, looking for a job can be a full-time job

Moreover, a typical job search requires filtering out bad matches, reflection on job qualifications, careful crafting of resumes, writing of cover letters, and interviewing with potential employers. Looking for a job is not easy, and there's no pay aside from the prospect of landing a job.

Even worse, from a social perspective, none of this effort creates anything of value, and it takes away from other activities (i.e., leisure, investment in skills, etc.) that would surely produce value. For this reason, I view too much searching for employment as a misdirected resource -- rather than idle resource.

So, my view of unemployment is one part worse and one part better than the standard idle resource view. On one hand, devoting all of your time to searching for a new job while unemployed is a waste of your (and society's) resources, more so than just sitting there. On the other hand, being unemployed means that you have loads of free time, and you can use that time for valuable leisure activities.

Enjoy your time because whether or not you have a job, time is your ultimate resource.


This is the third post of unemployment week on This Young Economist. Tomorrow's article, "Structural, frictional, and cyclical unemployment," discusses the different types of unemployment with reference to the unemployment we see in today's economy. See you tomorrow.