Wednesday, July 30, 2014

Why some restaurants pay much more than the minimum wage

Some cities and states are raising the minimum wage to $10 an hour or more.  McDonalds workers in big cities are threatening to go on strike for $15/hour.  Judging only from the headlines, one would think the restaurant industry, especially fast food chains, is dominated by low wage jobs.

This recent NYT piece shows otherwise.  Chains such as Shake Shack and In-N-Out Burger pay over $10 an hour simply because their owners think that is the right business decision.  Higher wages allow managers to hire from a more talented applicant pool.  They also reduce turnover and encourage longer term investments in training.  In some cases the personal values of ownership also play a role in wage setting.

The tougher question is why does In-N-Out pay relatively well and other chains stick to near the minimum wage.  After all the core business at McDonald's and In-N-Out is the same and the prices are comparable.  One possible difference is that more skill or training may be needed at In-N-Out where everything is made fresh.

Monday, July 28, 2014

What have we learned from NC's cuts in unemployment benefits?

Not very much, argues Michigan economist Justin Wolfers in Sunday's NYT.  NC cut extended unemployment benefits a year ago and there is little evidence that this has helped promote employment.  The state unemployment rate is down but this is because more have given up looking for work versus more people accepting jobs.  If you compare trends in NC to adjacent states that did not make any cuts in benefits, it is very hard to discern any difference in either unemployment or employment.

My take: unemployment benefits in the US are relatively low compared to European countries, so low that they by themselves do not play a driving role in job search decisions.  But one must be careful to consider other forms of assistance -- especially food stamps and Medicaid.  Job search intensity depends heavily on two variables: (1) the perceived odds of finding a job and (2) the difference in income between working and not working.  If there are not many jobs around and unemployment benefits are not very large, then cutting the number of weeks of eligibility for benefits is not going to make a big difference in the job search behavior of the unemployed.  It is going to make a modest difference in their income and economic well being.

Sunday, July 27, 2014

Secrets to success after college

This Friday WSJ piece references a very interesting study about what determines success and happiness after college.  Released last May by Gallup and Purdue University, over 30,000 graduates of a wide range of educational institutions were surveyed about their engagement at work, their overall well-being, and how both relate to their college experience.

Two results stand out: (1) workplace engagement is more or less unrelated to what type of school you went to (exception: graduates of for-profit schools report much lower levels) and (2) the key variable predicting workplace engagement is successful engagement in college.  In other words, if you did nothing more than attend classes, hand in assignments and get passing grades you missed the boat. There is little payoff in workplace engagement unless you develop a close relationship with one or more professors, had an internship, or worked on a project that took a semester or more to complete.  (Aside: the payoff is even better if you do all three.)

Friday, July 25, 2014

More on the minimum wage

Back from vacation and back to blogging.  While I was gone WSJ ran a piece by David Neumark who is in my view the leading expert on minimum wage economics.  Neumark's main point is that the minimum wage is a highly ineffective policy tool for poverty reduction.  A large share (34% by Neurmark's calculation) of minimum wage workers are secondary earners in a household that overall is well above the poverty line.  A bigger problem is that a higher minimum wage is not going to help people who are poor because they cannot find full-time jobs, even at $7.25 per hour.  Needless to say their quest becomes much more difficult if employers become obliged to pay them $10 to $15 per hour!

So why are lefty pols so interested in raising the minimum wage?  This gets us into the murkier discipline of minimum wage politics.  My take is that supporting a higher minimum wage (1) makes it look like the pols are doing something to help the poor and (2) requires no funds from any government budget, all costs are shifted to employers who in turn adjust by raising prices and reducing employment and hours per person.

Monday, June 30, 2014

You don't miss your water ...

Want to know why there is a water shortage in California?  Is it the drought? Too many lawn irrigation systems?

Of course not!  It's the government's byzantine system of pricing and distributing water.  Stanford GSB Professor Ed Lazear tells the full story in this WSJ piece.  Preserving the delta smelt is an additional complication.

Thursday, June 26, 2014

Maybe fears about student loan debt are overblown

Tuesday's NYT ran a story summarizing some recent research by two Brookings Institution economists regarding student loan debt.  The punchline -- maybe this is not such a big deal after all.  (For amusement be sure to see this Bloomberg Businessweek piece that links to a "sky is falling" NYT story on student debt that ran just two days earlier!)

The Brookings research makes two main points: (1) even though the debt numbers are up, so are incomes streams; the ratio of monthly student loan payments to income has not changed much over the last 20 years and (2) roughly 75% of those with debt owe no more than $20k; only 7% have more than $50k.

Of course there are still some serious issues, especially among those who borrow but do not complete degrees and those who complete degrees in fields with limited labor market opportunities.  But maybe students have a much better idea of what they are getting into than we think!

Sunday, June 22, 2014

Wage increases on the horizon?

The national unemployment rate is almost back to where it was before the Great Recession.  Ordinarily that would lead us to expect a tighter labor market with rising wages and shortages in certain occupations.  But the economy has been anything but ordinary, especially the labor market.  The labor force participation rate has plummeted and many analysts think that once the labor market looks better, more people who are currently sitting on the sidelines will start looking for work.  If this happens, there likely will not be an uptick in wages for the average worker.

Many CFOs are expecting to have to give larger raises, according to Saturday's WSJ.  Wage rates have been flat since the recession started.  In a survey jointly performed by the Fuqua School of Business and CFO Magazine, CFOs expect wages to increase by 3% in the coming 12 months.  WSJ thinks that firms will have to accept smaller profit margins as a result, although raising prices or cutting non-labor costs are other options.


Thursday, June 19, 2014

Pricing student loan risk

One peculiarity of the student loan market is that loan contracts are the same for all forms of post-secondary education.  This means that someone borrowing for a Harvard MBA pays the same interest rate and has the same repayment terms as someone borrowing for a degree from a Bible college or a barber school.  This happens, Bloomberg Businessweek argues, because (1) the federal programs make no distinctions and (2) FDIC rules forbid banks from making such distinctions.  Ironically, banks can have different terms across individuals for auto or home loans, but not student loans.  Default rates on student loans vary tremendously by college and program, below 2 percent at Stanford and Duke but 42 percent at Arizona Automotive Institute.

This is not an easy problem to fix.  Most students are young and do not have a work or credit history that provides good predictions about what their credit worthiness will be five to ten years into the future.  On the other hand, the bulk of the defaults are coming from schools that heavily rely on federal loan support for their very existence but are currently not being held accountable for their graduates' behavior.  Balancing access to higher education with responsible pricing will not be easy.

Friday, June 13, 2014

Teacher tenure and civil rights

A California judge ruled Tuesday that teacher tenure locked so many incompetent teachers in place in poor performing schools in distressed neighborhoods that students in those schools were being deprived of their right to an education.  Prominent economists were hired as expert witnesses in the case.  Judge Treu cited the work of Harvard economist Raj Chetty who found that a single year in a classroom with an ineffective teacher costs the students $1.4m in lost lifetime earnings.  Tom Kane, another Harvard economist, testified that one year with an incompetent teacher costs 9.5 months of learning.

California teachers go up for tenure after only 16 months on the job.  Once tenured it takes 2 to 10 years to remove an ineffective teacher at a cost of $50 to $450k, the judge noted in his ruling.  With such a daunting process and a far from certain outcome, principals choose to leave such teachers in place.

So how does this become a civil rights issue?  The judge cited testimony that inept teachers tend to be clustered in "high-poverty, low-performing" schools with large concentrations of minorities.

Of course the ruling will be appealed and the next judge may weigh the testimony differently.  Looking at the economic and management issues at stake, here are some key questions:
1) The judge cited testimony from an expert witness hired by the defendants that 1-3% of all teachers in California are ineffective.  Ineffective teaching is not an easily measurable trait such as height or weight. If the ruling holds up, how would teaching effectiveness be measured and how would one use those measures to make decisions at the individual level?  In practice performance measures are always noisy, so the consequence would be that some good teachers would be fired because of bad metrics.
2) Who replaces the fired teachers?  Would the replacements be more or less effective in the classroom?
3) Would principals use the power to fire?  Dismissal procedures are not any fun for either party.
4) If tenure is removed, this reduces the economic rewards for entering the teaching profession.  How much will salaries have to be increased to attract the same caliber of faculty?
5) There are many issues facing inner city schools and their students; if every ineffective teacher were replaced by an ideal teacher (think Mr. Chips, Sidney Poitier in Blackboard Jungle, or Robin Williams in Dead Poets) how much would the lives of the students in those schools change?  The roles of neighborhoods, parents and culture would remain more or less the same.

Thursday, May 22, 2014

NC State MBA a top overperformer

Poets and Quants published an article this week on brand perception for MBA programs, pointing out that perception of program quality by deans often lags reality.  They have a nice table showing how little the dean assessments for top 20 schools change; over the last two years no school changed by more than 0.2 on a five point scale.  

But reputation often lags reality, as many schools outside the top tier do very well on objective measures of program success, such as employment outcomes for graduates.  P&Q came up with a list of the top over-performers, defined as schools whose overall rank is well above their dean assessment score.  NC State's Jenkins MBA came in tied for 4th (with Alabama and Binghamton), with the top three slots going to UT-Dallas, Rutgers and BYU.  Here is a direct quote from the article: 
For years, North Carolina State (Jenkins) was a recruiter’s dream, an unheralded program with a tech-driven, hands-on, multidisciplinary curriculum. While the program is no secret to companies like IBM, it has seemingly been stuck in neutral among academics, posting its second consecutive 2.7 score (despite soaring 23 spots overall from #88 to #65). With the school continuing to build partnerships within the nearby Research Triangle Park to complement its STEM roots, Jenkins is definitely a school to watch for innovation.

NC State is working to continuously improve the MBA experience.  In time the deans at other business schools will recognize what great opportunities we provide.