Friday, July 24, 2015

How much is your free time worth?

One of the most important concepts in economics is opportunity cost.  When you think of the cost of an activity (e.g., going to a movie), you need to consider not just how much you pay (gas, price of ticket) but also the value of what you could have done in that time (walking your dog).

Putting a price on time is a tricky matter.  In a work context, economists use compensation as the measure.  But what is your time outside of work worth?  Clearly it must be worth more than you can earn in that time, otherwise you would be working!

A recent WSJ piece provides some useful guidance on how to price your free time.  Examples: do you take the flight with the three hour layover to save $100?  Do you do your own laundry or take it to the cleaners?  All of these questions end up revolving on how much you value your own time.

There is now a calculator to help you value your time at a website called Clearer Thinking.  I found out that my own answers were very inconsistent.  I wanted a lot more money to work an extra hour per week than I was willing to pay for a machine that would save me an hour each week.  I am guessing I am not alone in that regard.  Try it out!  Especially good for new MBA students who will need to be examining the value of every spare hour once school starts.

Saturday, July 18, 2015

Airlines and antitrust

On the peak holiday travel weekend the Justice Department announced that it was launching an antitrust investigation into the airline industry.  The four largest airlines in the U.S. now have 80 percent of the market.  Three of those airlines were involved in mergers, all of which were approved by the Justice Department!  The feds seem concerned that whenever an airline exec says the word "discipline" at an industry conference, it is secret code for "price fixing" or "capacity limiting."

A recent WSJ piece looked carefully at recent trends in air travel capacity.  It turns out that there are 12% more domestic seats for sale now than two years ago, hardly what you would expect for an industry with high fixed costs and (now with lower fuel prices) more modest variable costs.  Airlines are cutting back on flights but adding more seats to each flight by (1) reducing space between seats and making the seats smaller and (2) replacing small regional jets with larger aircraft.

If the feds are seriously searching for a factor limiting capacity in the industry, they might want to take a look at airports.  When was the last time a new airport was built in a major city?  When was the last time a new runway was added or more gates were added in the average city?  If local governments fail to invest in airport capacity, it will be hard for the airlines to put enough seats in place to meet demand.

Friday, July 17, 2015

Employees: cost or asset?

Companies pay a range of wages for what are essentially the same jobs.  For instance Costco pays higher rates than Walmart, and other retailers fall in between (with no doubt some even higher than Costco and others even lower than Walmart).  This violates the infamous "law of one price" in economics, so there must be something else going on.

I recently came across the research of Sloan MIT professor Zeynep Ton in a NYT column by Joe Nocera that addresses this issue.  Professor Ton has focused on supply chain management practices in retail.  She found that companies do a great job of getting product from China (or wherever else it is made) to the store.  But once the product hits the loading dock, things often went haywire.  The product needs to be in stock in the right place of the store, and apparently that is easier said than done.

Ton compared execution success to HR practices and found that companies that paid bottom dollar and provided little to no training were the ones that were having the most difficulty; the results were published in Harvard Business Review.  Her conclusion: "investing in employees can boost customer experience and decrease costs."

With more retail companies raising wages, it will be very interesting to see how the remaining low wage employers in retail react.

Friday, July 10, 2015

Why labor's share of income is falling: another take

Labor's share of gross domestic product has dropped from 66 to 61 percent over the last 20 years, contributing significantly to income inequality.  Most experts (myself included) have focused on globalization, technological change, and labor market institutions such as collective bargaining and the minimum wage as contributing factors.

Harvard economist Robert Lawrence has written a provocative paper about that suggests another strong possibility: that capital investment (structures, equipment, software and the like) has lagged and as a result labor income has declined as a share of GDP.  The story goes like this: technical change has augmented labor instead of capital; in other words, one person can now do the work of two or more persons.  If accompanied by inelastic demand, this increase in the effective supply of labor results in lower labor income.  Another key part of Lawrence's study: labor and capital are complements, not substitutes.

This runs completely counter to the view promoted by Piketty that capital growth has resulted in income redistribution.  Piketty recommends income redistribution through wealth taxes.  Lawrence's results imply the exact opposite -- we need to take measures to increase capital formation in order to help labor.

Tuesday, July 7, 2015

More job openings than ever before

The U.S. Department of Labor reports that last May there were 5.4 million open positions, more than ever before.  Although still considerably smaller than the 8.3 million who are unemployed, the ratio of open positions to unemployed persons is close to what it was before the Great Recession, according to WSJ.

This lends further weight to the argument that the job market really is beginning to tighten, despite the large drop in the size of the labor force and the number of workers who are in part-time jobs but would prefer full-time jobs.  It is a good time to be on the market!

Monday, July 6, 2015

Is it time for more overtime?

Last week President Obama announced new regulations that will expand the availability of overtime. Overtime is restricted to hourly employees, along with salaried employees who lack managerial responsibilities.  Defining the latter is dicy, so historically eligibility has been determined via a salary threshold.  Right now overtime is limited to those managers making less than $455/week.  The new regs kick that up to $970/week.

On the surface this would mean that about 5 million additional employees will now be eligible to collect overtime.  But we should expect employers and workers to make adjustments.  Under the old rules, exempt employees had an implicit understanding with their employer -- even though we do not get overtime, we are involved in a fair exchange where we provide so much work in so many hours and in return we receive so much income.

Employers looking to avoid the extra overtime charges have two options: cut hours so that they do not have to pay overtime rates or demand more work to be completed in the existing hours.  Assuming the overall workload stays the same, the first option will make sense for firms with low training costs and low spends on employee benefits (benefits are typically paid on a per person basis, rather than on a per hour basis).  Such firms can cut hours per person and hire more people.  The second option, which will usually involve downsizing, makes more sense when training new help is costly and benefits are expensive.

In deciding which course to take, employers have to make sure that they retain employees.  Whether they cut hours or increase workloads, employees will be worse off than before unless they start receiving some extra overtime pay.  Also, whatever deal is reached with the workers who are newly eligible will have to apply to those who were already eligible.  Bottom line: I expect to see adjustments along all three dimensions -- overtime hours worked (lower), workload expectations (higher), and overtime income received for newly eligible employees (higher).

Sunday, July 5, 2015

Time for a student loan? Don't ignore private lenders

Most student loans today originate directly from the federal government.  But this recent WSJ piece points out that, for some students, the private sector is a better option.  Three factors are critical: parental co-signers, credit scores, and wealth.  Borrowers will want to compare origination fees, ability to postpone interest while in school, and interest rates.  Some lenders even allow refinancing if interest rates fall.

Thursday, May 28, 2015

Good news for labor economists: LA raises minimum wage to $15!

The LA city council recently decided to raise the minimum wage to $15, joining San Francisco and Seattle in the battle to help the working poor.  I was resisting further commentary on the minimum wage until I saw todays Robert Samuelson column in WP.

Each side on the minimum wage debate cherry picks the economics research to support their politics. Samuelson provides a good summary of mainstream findings: there is some job displacement but it has been modest.  However, this is based on historical evidence for the nation as a whole or for entire states.  What is unique about these cases is that (1) the increases are quite large (67%) compared to historical changes (10 to 15%) and (2) there is much more room for employers to move jobs across city boundaries as compared to state or national boundaries.   Samuelson speculates that restaurant employment will not be affected as much as hotels and manufacturing.  (Who wants to drive 10 miles in LA traffic to save 50 cents on a cheeseburger?)

One guaranteed winner from all this: labor economists who will have a lab experiment for evaluating the impact of the $15 minimum wage.

Tuesday, May 26, 2015

Would we better off without PowerPoint slides?

WP headline: "PowerPoint should be banned."  Click through to see slides from actual presentations that should never have seen the light of day.  Slides are useful tools for summarizing information, but not so useful for audience engagement (but maybe that's the point).  Amazon and LinkedIn have banned slide presentations. Is this the beginning of a trend?  

Monday, May 25, 2015

Has the financial sector fully recovered from the Great Recession?

So says NYT financial columnist Neil Irwin.  The evidence:

  • Employment has returned to 2007 levels
  • The pay gap between financial services and the rest of the economy has recovered; it is now a 3.6:1 ratio!
  • Entry level pay for Ivy League grads at investment banks went from $70k to $85k this spring
  • Vacancy rates at prime Wall St real estate are down to 5%
This is obviously good news for those with aspirations of working in this sector.  But is it good news or bad news for the economy?  The article cites research by economists at the Brandeis, Chicago and NYU b-schools which suggests that the size of the financial services sector does not appear correlated with economic performance.  Financial markets are supposed to reallocate capital to firms with profit-making opportunity from those that are tapped-out.  In theory this should lead to increased productivity, but in practice the data show that a large financial sector leads to weaker productivity growth.  

One fear is that the recent rebound in employment is associated with regulatory compliance in an industry that now bears a more than striking resemblance to a public utility, thanks to Dodd-Frank.  If so, then the allocation of more resources to financial services should be lamented, not cheered.