Tuesday, December 31, 2013

Want to help micro-enterprises? Teach them something about business

Anyone who has ever visited a low-income country notices the very large number of very small enterprises that generate very little net income.  Would training in basic business concepts help these small firms?  To find out, three economists conducted a randomized study of 900 entrepreneurs in Zacatecas Mexico.  Half were invited to take a 48 hour course in business skills spread over six weeks.  They received instruction on costs, pricing, legal rights and organizations, product mix, marketing and sales skills.  Then the economists studied the experimental and control groups for the next 2.5 years.

The most striking finding is that those invited had more customers, higher sales and more profits than those who were not invited.  They also reduced costs and changed their product mix away from lower to higher margins.  The good news: profits grew by 20 percent; the sobering news, profits were initially $11 per day for all concerned.  

My take: it is hard to demonstrate the value of business education.  Simple comparisons of income by major or degree level are difficult to interpret because higher income of MBAs or business majors may be due to other factors such as diligence or skill.  The value of this study is that it provides experimental evidence that business training provides a genuine competitive advantage. 

Friday, December 20, 2013

What have the UI benefit cuts in NC done so far?

I just ran across three blog posts on what has happened to the North Carolina labor market since unemployment benefits were cut drastically in July.  One account is from the left, one from the right and one is data-focused.  (Aside: 2 of the 3 appeared in Tyler Cowen's Marginal Revolution website.)

Basic labor econ 101 says that the cuts in benefits will mean fewer unemployed persons and a smaller labor force.  Those collecting benefits must document job search efforts to continue receiving a check; if fewer people can collect checks, some of them will cut back on their search intensity and drop out of the labor force.

The impact on employment is more difficult to gauge.  One possibility is that the unemployed will become willing to work at lower wages and this would lead to faster transitions from joblessness to employment.  On the other hand, net income from a low wage job might not be all that much higher than the income generated from income maintenance programs and informal market activity, so there may be no change in employment.

I took a quick look at the data for NC from the US Bureau of Labor Statistics.  So far (June versus November) employment is unchanged, the number of unemployed is down by 18 percent, and the labor force has shrunk by 1 percent.  The unemployment rate is down from 8.8 to 7.4 percent, but it entirely reflects unemployed people dropping out of the labor force.  The good news is that there are fewer unemployed; the bad news is that they are not employed and have lower incomes.

Wednesday, December 18, 2013

A new twist on work hours

Work schedules are usually cut and dried.  The worker is scheduled for certain hours on certain days.  There is an implicit understanding that the worker may not be able to report in case of illness or accidents and that the job may not be there in case there is a flood or power failure.

Recently NPR ran a story about a new form of work scheduling at retail outlets.  Employees are still told to come in for specific shifts, but not as many as before.  Then they are given other shifts where they are instructed to call in two hours before to see if they are needed.  In essence the employees have to keep their schedule open so that the employers have a call option on their services.

Companies are selling software packages to help employers make better scheduling decisions.  According to NPR's account, the software advises managers to call more workers in on days when sales are running strong and vice versa.  Obvious problem #1 -- just because the noon rush is big, does that have anything to do with afternoon or evening sales?  Obvious problem #2 -- the focus here seems entirely on cost control; what about losing sales when lines get too long?

Thursday, December 5, 2013

Nonverbal communication matters

Entrepreneur magazine ran a piece by Maryville University professor Dustin York who did an experiment with four identical classes.  He brought in a guest speaker for all classes who had the same script and slide deck for each class.  In two classes the speaker followed best practices of nonverbal communication during presentations: eye contact, vocal variety, moving around, hand gestures, and enthusiastic facial expressions.  In the other two classes the speaker made minimal eye contact, spoke in a monotone, clutched the podium and had a flat facial expression.

York then quizzed the students at the end of each talk.  Guess which classes did 30 percent higher?  It is not just what you say; it is how you say it.  Students in NC State's MBA program get lots of practice at presentations; this practice yields a lifetime of high dividends.

Saturday, November 30, 2013

What will happen with a $15 minimum wage?

Seattle's SeaTac Airport is located in the town of SeaTac, a small blue collar suburb.  SeaTac voters appear to have approved a referendum that will set the minimum wage for hospitality and transportation workers at SeaTac Airport at $15.  Apparently other airports on the West coast also have such provisions; at LAX, the minimum wage is $15.67.  The SeaTac minimum wage is well above Washington state's minimum of $9.69, which in turn is the highest state minimum wage in the country.

Supporters of the higher minimum wage for airport workers point to full-time employees living below the poverty line.  Opponents argue that there will be fewer jobs and that airport customers will have to pay higher prices and receive degraded service.  The actual impact will depend on how price sensitive airport customers are to more expensive hot dogs and rental cars.  It also will hinge on how companies can substitute capital for labor; for a $5.31 increase in the minimum wage, we might soon see McDonalds customers inputting their orders and paying on iPads.  

Wednesday, November 27, 2013

A dirty secret about Black Friday

Some stores will open on Thanksgiving evening this year to get a jump on the traditional Black Friday sales.  (Maybe it's because the number of days between Christmas and Thanksgiving is at a minimum this year?)  Ads lead shoppers to believe that this is the best day of the year to make gift purchases.

The truth?  If you want the real bargains, stay home and rake leaves or watch football on Friday and do your shopping online closer to Christmas.  Yesterday's WSJ reveals the pricing strategy firms use year around to convince shoppers that they are getting a bargain.  It is a simple twist on versioning, a topic we cover each year in my MBA economics class.  Retailers start with an unrealistically high list price, one at which they know only the most dedicated followers of fashion will accept.  The price then comes down as time passes, either through direct markdowns or through sales and coupons.

Most consumers are not well informed about how much prices of close substitutes, so they use the sale or coupon as a signal that they are getting a good deal.  Money quote:

The red cardigan sweater with the ruffled neck on sale for more than 40% off at $39.99 was never meant to sell at its $68 starting price. It was designed with the discount built in.
To be fair, there will be a few items on sale Friday that are priced below cost, but these items serve as bait to get customers in the store.  Customers will make better informed decisions if they comparison shop online.  

Friday, November 22, 2013

Gaming your way into a job

Knack.it is a Palo Alto startup that endeavors to use gaming and big data and to lead to improved decisions on employee selection.  Knack has developed games such as Wasabi Walter and Balloon Brigade that test for personality traits.  Companies can then use the games to decide which traits are associated with good job performance and hire based on those measures.

MIT Sloan's Erik Brynjolfsson notes in a recent Business Week article, "People are our biggest resource, and right now a lot of them are mismatched."  Firms make screening decisions on such factors as interviews and number of short-term jobs held that in many cases are not reliable predictors of job performance.  Now they can have star employees play Knack and develop a profile of a successful hire that can be then matched against the Knack performance of job applicants.  The Economist reports that Shell and Bain are starting to use Knack; will this be the beginning of a trend?

Thursday, November 21, 2013

MBA job market quite strong

The Graduate Management Admissions Council just issued a report on placement for spring 2013 MBA graduates, and the news is very good.  Among US citizens 95% of the spring grads had jobs by September.  This is up from 91% last year and is the highest since the Great Recession.  The overall placement rate (which includes international students) is somewhat lower at 92%, reflecting a tough job market in Europe and difficulties in obtaining green cards in the US.

These stats are consistent with the experience NC State MBAs have had this year.  Hopefully the 2014 market will be even stronger.

Wednesday, November 13, 2013

Student loans - time for change in repayment options?

Jenkins MBA students at NC State will soon be getting their tuition bills for spring.  Many will be borrowing money to cover the bills.  How should repayment terms be established?  Today students are asked to pay off the entire borrowed amount over a 10 year time period, similar to a car loan or a mortgage.

For most students, investing in college and graduate school has an ROI of 10% or more.  But there is risk involved especially because the earnings streams of gradates vary tremendously both within the same field of study (some engineering grads earn more than other engineering grads) as well as across all fields of study (engineering grads earn more than liberal arts grads).

In a recent WSJ column David Wessel considers whether the repayment schedule should be set in terms of percentage of income.  Currently this is an option for borrowers, but very few select it.  Two Michigan economists propose that all borrowers be put into a system where repayment is based on income, with those having higher incomes having higher payments than those with lower incomes.  This has desirable risk sharing aspects as it automatically reduces debt repayment obligations if one's income falls.

However, it effectively acts like a tax that reduces the incentive to move into a higher bracket.  By itself the effect may be modest, but when combined with eligibility for other government benefits, the disincentives could be sizable.

Friday, November 8, 2013

MBAs seeking out tech jobs, finance not so much

Earlier this week WSJ reported that nationwide we are seeing a shift in the types of jobs MBAs are seeking.  At schools like Cornell, Harvard, MIT, and Yale, the percentage of MBAs getting jobs in finance is dropping and the share of those seeking tech positions is rising.  At Stanford, more MBAs now go into tech than finance; two years ago finance grads outnumbered tech grads 3 to 1.

If you look at the academic offerings at most of these schools, you are not going to see the same shift. Finance and general management continue to dominate.  It will be interesting to see if students start showing more interest in schools with strong tech offerings.  I know one top 20 program that has tracks in supply chain, consumer innovation, high tech entrepreneurship and biosciences management.

Thursday, November 7, 2013

NC State Professional MBA ranked #20 by Bloomberg Businessweek

Great news to share with the NC State Jenkins MBA community: Today Bloomberg Businessweek released its 2013 Part-Time MBA rankings and we came in at #20, up 10 spots from two years ago.  NC State's MBA placed #10 in the country in academic quality; we earned an A in teaching quality and curriculum.  I am very pleased to see the program get the recognition that its students, alumni, faculty and staff have worked so hard to achieve.

Tuesday, November 5, 2013

Stacy Wood's research featured in WSJ

NC State marketing professor Stacy Wood is featured in today's WSJ article "The Biology of the Sports Fan."  Wood found in a 2011 article in the Journal of Consumer Research that traffic fatalities increased significantly after close football and basketball games, with the increase in fatalities directly related to the closeness of the contest.  For more information about the research, click here for an NC State news release and here for the entire article.  Professor Wood holds the Langdon Distinguished Professorship of Marketing and directs the Consumer Innovation Consortium in the Poole College of Management.

Monday, October 28, 2013

Have airline change fees gotten out of hand?

If you run an airline, load management is a key determinant of whether you make money.  Left to their own devices, customers would gladly reserve seats and then decide at the last minute whether to show up or not.  An empty airline sheet is like yesterday's newspaper - no one is going to buy it.  To create an incentive for passengers to book flights that they plan to take, airlines came up with cancellation fees 20 years ago.   In 1991 they generated $51m in revenue; today they generate more than $1b.  (Aside: these fees are not subject to federal air service taxes or local fees for airline use.  Ditto for baggage fees and other incidental charges.  We have seen airlines shift their revenue flow significantly over the last five years to these untaxed revenue sources.)

Airlines now charge between $150 and $200 to change a reservation.  For an international flight, this is a charge that is hard to avoid, especially if you already have completed one leg of your journey.  But for domestic flights, passengers can compare the cost of a one-way ticket home and the cost of changing their reservation.  WP reports that more and more domestic customers are booking their own return flights and, if warranted, pulling no shows at the gate. 

In a nutshell, the change fees may have gotten so high that airlines are now facing a problem with no shows.  Given the choice between paying $200 for changing a reservation and paying $150 for a one-way return, the no show approach makes economic sense.  Better to pay $150 and never engage with the airline that sold the ticket than to spend 30 minutes on the phone and pay more. 

My take is that companies usually think through their pricing structure strategically, but in this case they may need to reconsider.  They may need to think about changing the penalty for changing a booking to a percentage of the cost of the flight. 

Monday, October 21, 2013

Mexico to tax soft drinks and junk food

Mexico has passed the US in terms of obesity, with seven of 10 adults now categorized as overweight or obese.  President Enrique Pena Nieto is proposing a series of tax increases to fund increased spending.  WSJ reports part of the package is a one peso tax on sugary drinks.  LA Times reports that there also is a five percent tax on packaged food which has more than 275 calories per 100 grams.

Predictably, the tax is already getting slammed both by citizens upset with the higher cost of simple pleasures and by the companies whose products are being taxed.  From an economic perspective, taxing food to combat obesity is similar to the logic behind taxing alcohol and tobacco.  It would make more sense to have a generalized calorie tax combined with rebates to help the less fortunate.  However, such a tax would have all food companies up in arms, so there is a certain divide-and-conquer element to the government's strategy.  Also many of the leading packaged food and soft drink producers are companies headquartered outside Mexico, e.g., Coca-Cola and Nestle.

Denmark tried a similar tax in 2011 but repealed it after one year after there was no change in eating habits and a lot of junk food smuggled across the border.  Other countries will be keeping an eye on how the junk food taxes work in Mexico.  

Sunday, October 20, 2013

Economics Nobel Prize

Three American financial economists received this year's Nobel Prize in economics: Eugene Fama and Lars Hansen at Chicago and Robert Shiller at Yale.  MBA students will be exposed to Fama and Shiller's work in their finance classes.  Fama is considered "the father of modern finance" for developing the concept of efficient markets, where all new information about a stock is instantly absorbed into its price.  Shiller's work showed that financial markets were more volatile than one would expect from market fundamentals such as dividends.  He is especially well known for calling the stock market bubble in 2000 and the housing marker bubble in 2006.  Few, if any, MBAs will run across Hansen's main contribution -- the Generalized Method of Moments -- but their finance professors will have had to master this technique.  For more information, see this appreciation by my finance colleague Richard Warr.

Wednesday, September 25, 2013

MBA applications on the rise, especially at NC State

The final numbers for the fall 2013 entering classes of full-time MBAs are in.  Today both WSJ and FT report that overall applications are up, reversing a four-year decline.  GMAC does an annual survey of business schools around the world, 50% of which reported a larger applicant pool for 2013 than 2012.  Among American full-time programs, the average number of applicants increased by 5%.

NC State's MBA class did especially well on the applications front this past cycle.  The number of applications increased from 162 to 199, a 23% increase.  The program also did well on the Working Professional front.  Applications were down at 53% of part-time MBA programs, but they went up at NC State.  The number of new evening students went up by 10%, online jumped by 33%.

One reason these numbers are on the rise is the improved career outcomes for our graduates.  More on that in another post.

Friday, September 20, 2013

No way to fill the FRB chair

I do not ordinarily comment on political matters in this blog, but the highly unusual process that has been used to handle the selection of the next chairman of the Federal Reserve is likely to have lasting economic effects.  It started last June when the President made comments in an interview that, in effect, Ben Bernanke had overstayed his welcome.  Then we have seen the spectacle of Larry Summers and Janet Yellen being vetted for the job in the press.  Endorsed by Senator Foghorn, unendorsed by Representative A far cry from the day when Jimmy Carter introduced Paul Volcker and everyone applauded.

David Gergen points out the peril of having a public competition for the post in this CNN Opinion piece.  First, if you start disqualifying people who have taken strong stances on critical issues, you simultaneously discourage the best and the brightest from being considered for the job AND from saying what they really think in public forums.  Second, you turn what has been a nonpartisan position (Reagan kept Volcker, both parties kept Alan Greenspan and Obama kept Bernanke) into a partisan one.  The FRB chair is by far the most powerful economic position in government; do we want the best person or the person who has done the most to win favor with politicians.

Now that Summers has dropped out, the pressure is on the President to nominate someone with equal qualifications.  Janet Yellen would be great.  But will we get instead one of the lesser lights in the current administration who would do his masters' bidding?

Monday, September 16, 2013

"If you like your health care plan, you will be able to keep your health care plan."

Retiree health insurance has long been available to those who spent their careers at large companies that historically have paid above average wages.  These programs were designed to both bridge the time period between retirement and Medicare eligibility and to supplement Medicare.  The first goal makes sense from a company perspective.  By making health insurance a sunk cost, older employees know they can leave the firm without losing their benefits.  The firm gains because it can then replace the worker with a new hire making a much lower salary.

The second goal makes much less sense from a company perspective and IBM has become one of the first to make a move.  With health insurance soon to be available on government-sponsored exchanges, IBM retirees will receive a fixed dollar amount that they can use to buy their own policy.  IBM is moving from a defined benefit to a defined contribution approach, in all likelihood shifting most of the risk of rising premiums to retirees.

When will companies decide to do the same thing with their employees?

Tuesday, September 10, 2013

Is tipping an effective form of incentive pay?

Wait staffs depend on tips for most of their income.  In theory, this gives them an incentive to be well informed, courteous, and efficient.  From an economic perspective, there are some serious issues with this arrangement.  Suppose you are traveling and visit a restaurant that you know you will never visit again.  You and the wait staff are complete strangers.  The wait staff have no idea what kind of tip you will leave, making it unlikely that your tip will have any impact on their service.  Knowing that you will never go back, you have a monetary incentive to walk out the door and not leave any tip.

Sushi Yasuda in Manhattan caused a stir recently (NYT) when it raised its prices across the board and instituted a no-tipping policy.  Columbia b-school economist Nachum Sicherman argues that this approach is likely to lead to better performance.  Most patrons tip the same percentage regardless of service.  In most restaurants, tips are pooled and shared.  Also, waiters are but part of a complicated food production and delivery process; customers often fail to see that.  Sicherman thinks restaurant managers and owners are in a much better position to judge service than customers.

Admittedly there would be sticker shock in menu prices, which would have to go up 15 to 20 percent to cover lost tips.  Tips are not subject to sales taxes, so I would expect some redistribution of income from customers, wait staff and restaurant owners to state and local governments.  The most challenging aspects of any new pay system for wait staff would be providing incentives and managing risk sharing.  Managers will want to avoid a straight salary or hourly wage system, because it does not reward performance and shifts more of the risk of slow nights back to the establishment.  Wait staff who get higher than average tips (e.g., those who turn tables more quickly or have more engaging personalities) will not like a salary-based system; those who get lower than average tips will welcome it.  Highly popular restaurants would be the ones most likely to dump tips.  Maybe Ashley Christensen, owner of the always-mobbed Poole's Diner, will be the first to take the plunge.

Sunday, September 1, 2013

Living wage - McDonald's isn't lovin' it

Last week fast food workers in a number of cities (including here in Raleigh) walked off their jobs in a symbolic strike in support of higher wages.  Some are pushing for adoption of a "living wage," up to $15/hour. 

Most of the recent publicity has gone to workers in the fast-food industry.  Thanks to a labor market that remains deep in recession, there are more adults working in the industry than ever before.  With many making within $1/hour of the minimum wage, they are having a hard time making ends meet. 

The economic questions to consider are (1) how big of a negative impact would a higher minimum wage have on unemployment, (2) would the gains of those who can still get jobs at a higher minimum wage be large enough to offset the costs to those who no longer will have jobs, and (3) even if the answer to #1 is "small to none" and the answer to #2 is "yes," are there other policies that would achieve the same or better results (in terms of helping those in poverty) with fewer adverse side effects on employment? 

As the results of this poll by Chicago Booth of the country's top economists show, there is a wide range of opinions on #1 (if the minimum only goes up to $9, not $15) and most think the answer to #2 is "yes."  Most studies have found relatively small dis-employment effects, so these two answers are consistent. 

However, in the past the minimum wage has never increased by 100%, which is what a jump from $7.25 to $15 would amount to.  Given the already high levels of unemployment we are facing, it is hard to see how the labor market could absorb such an increase without a massive loss in jobs.  That is why I think more emphasis needs to be placed on other approaches, such as the earned income tax credit and investments in education and training. 

Saturday, August 31, 2013

Should ed school accreditation standards be changed?

WSJ reports that the Council for Accreditation of Educator Preparation is planning to change their standards as part of a push to increasing teacher quality.  Incoming freshmen would need to have a 3.0 GPA in high school, as compared to the current 2.5.  Freshmen also would be expected to have SAT/ACT scores in the top 50% by 2017, rising to the top third by 2020.  Ed schools also would be required to track their graduates' performance in the classroom, which presumably means more emphasis on test scores. 

This all sounds very well-intentioned.  But unless teacher salaries adjust to the top third of the college graduate salary distribution, I am skeptical that ed schools will be able to meet these goals.  Also, I wonder if more attention should be paid to what actually happens in teacher ed programs, especially in terms of opportunities to get ed students classroom experience well before they graduate. 

Friday, August 30, 2013

Another threat to higher ed's business model

Universities all over the globe (except NC State, for whatever reason??) are rushing to develop MOOCs.  MOOCs are an effective means of disseminating knowledge and have the potential to be quite engaging.  But by themselves, MOOCs are no threat to the business model of the modern university unless they are accompanied by some means of credibly certifying to employers that the person who passed the MOOC actually has mastered the material. 

Enter certification exams.  These have long been available in such field as computer science, finance  and project management.  Now we have a certification exam for four year undergraduate degrees, according to WSJ.  The Collegiate Learning Assessment will be open to anyone willing to pay the $35 fee.  Employers are embracing the test as a more reliable signal of student knowledge than GPA or university selectivity. 

Some schools are jumping on the bandwagon as well, mainly because such tests help them meet assurance of learning standards for accreditation.  An exam for MBAs has been developed, but has not yet caught on.  Yet. 

Wednesday, August 28, 2013

Technological change and labor market opportunities

An age-old question in labor economics has been how technological change impacts the labor market.  The standard answer has always been that change has mixed effects, eliminating the mrket for some tasks but creating new market opportunities.  For instance computers have been deadly for typewriter repair people but have created great opportunities for software engineers. 

This week MIT economist David Autor has a NYT think piece with the misleading title "How Technology Wrecks the Middle Class."  Autor deflates what the economists call the "lump of labor" fallacy, which maintains there is only so much work to be done and any technological change reduces job opportunities.
Labor-saving technological change necessarily displaces workers performing certain tasks — that’s where the gains in productivity come from — but over the long run, it generates new products and services that raise national income and increase the overall demand for labor. In 1900, no one could foresee that a century later, health care, finance, information technology, consumer electronics, hospitality, leisure and entertainment would employ far more workers than agriculture.
But with computing costs steadily falling, will this time be different?  Autor argues that this is unlikely for the most and least skilled workers.  Computers are not ready to take over most abstract, problem-solving tasks, nor are they ready to do most service work.  Autor is worried about some middle class jobs that are routine and could be outsourced or taken over by software. But he still sees opportunity:
Middle-skill jobs that survive will combine routine technical tasks with abstract and manual tasks in which workers have a comparative advantage — interpersonal interaction, adaptability and problem-solving. Along with medical paraprofessionals, this category includes numerous jobs for people in the skilled trades and repair: plumbers; builders; electricians; heating, ventilation and air-conditioning installers; automotive technicians; customer-service representatives; and even clerical workers who are required to do more than type and file.

Friday, August 23, 2013

Can feds lower college costs?

President Obama announced a plan to lower college tuition yesterday.  The key elements are a new set of college performance rankings (done this time by the US Dept of Education, not US News) that will eventually be linked to federal financial aid.  As WP's Ezra Klein points out, the rankings piece can be done without Congressional approval, but Congress would have to approve any changes to the formulas regulating how federal aid is divvied up. 

I have long felt that informational asymmetries have been an issue that require some regulatory action by state or federal governments.  Colleges do not report in any accessible, systematic way their graduation rates or what happens to students when they graduate.  College is a huge investment, but there are no data on graduation rates, placement rates, and salaries by major at most institutions of higher learning.  Collecting such data is not an easy task and publishing it in a way that will inform decisions while protecting the privacy of individual students will be a challenge. 

But (as you might expect) there is much, much more to the Obama plan than a dictate to collect and publish more data.  I am skeptical of any pay-for-performance scheme the feds would cook up.  Suppose the feds include graduation rates as a key part of their performance measure -- what do you think colleges might do to make sure they have high graduation rates?  Any formula can be gamed and, trust me, if fed funds are at stake there would be a whole lot of gaming going on.  And do we really need another Race to the Top for colleges and universities????

Although college-bashing has become routine in the media, keep in mind two facts: (1) the rate of return to a completed college degree is much higher than anyone is likely to see in the financial markets and (2) the U.S. system despite its flaws remains the envy of the world and is one of the few sectors where we run a trade surplus. 

Thursday, August 22, 2013

Oregon rethinks college tuition

Today President Obama is announcing a new federal push to make college more affordable.  The Oregon state legislature is rethinking the very fundamentals of student loans -- should your loan payments be based on the current system (how much you borrowed times a given interest rate), or should they be a set percentage of your income after you graduate?  (See WSJ for details.)

The Oregon plan is called "Pay It Forward, Pay It Back" is modeled after comparable plans in Australia and the UK.  It deals effectively with one risk -- uncertainty about income after graduation.  Two students could have the same $50,000 debt but have vastly different capabilities of repaying it depending on whether they get good or not-so-good jobs after graduation. 

However, there are a bunch of catches -- will students who expect high earnings (e.g., engineering and business majors) participate or not? What does Oregon do between now and 20 years from now in terms of covering the loans? What impact would the repayment obligation have on work effort?  No easy answers here. 

Monday, August 19, 2013

Georgia Tech to offer masters degree for $6600

Many schools have developed MOOCs (Massive Open Online Courses) that have attracted vast followings.  But most students who start a MOOC never finish and those who finish rarely get academic credit. 

What would happen if a well-respected research university decided to offer an entire degree based on MOOCs?  We are about to find out, as Georgia Tech is launching an online masters in computer science in January.  They expect to attract up to 10,000 students annually, mostly from countries with low per capita income levels.   The tuition will be a very modest $6600 for the entire degree, well below the on-campus cost of $45000. 

NYT reports that the courses actually will be offered free to everyone.  Those who pay tuition will be able to "take proctored exams and have access to tutoring, online office hours and other support services." 

The key to success will be whether Georgia Tech can scale up from its regular academic faculty to a much larger team that can engage students.  My guess is that the online students will not have as rich an academic experience as the on campus students, but given the cost savings they will be fine with that. 

And no, although NC State's Jenkins MBA is looking to grow its online program, we have no immediate plans to launch any MOOCs. 

Tuesday, August 13, 2013

US DOJ sues to block American-US Airways merger

Imagine two airlines, one going through bankrupcy and the other having successfully reinvented itself after a series of acquisitions.  The airlines could economize on overhead expenses.  They would still face competition on virtually every route from airlines of comparable size.  Also they would still have to worry about market entry from low cost startups and corporate aviation. 

One would think that this is a case where a merger would serve both customers and shareholders.  But think again.  Today the Antitrust Division of the US Dept of Justice filed a suit to stop the proposed merger between American Airlines and US Airways.  DOJ claims that the merger would reduce competition in too many markets, increase fares and reduce availability. 

The irony is that the same Obama-administration DOJ has approved mergers between United and Continental and between AirTran and Southwest.  This is consistent with policy under the Bush administration DOJ which approved the Delta-Northwest merger.  Now customers, employees, and shareholders will have to wait and see what the courts have to say.  The stock market already has spoken -- US Airways is down 8%.

Tuesday, August 6, 2013

How do customers respond to calorie data in restaurants?

Suppose you walk into a Panera craving a salad on a hot summer day.  Suppose also you are either trying to lose weight or maintain your current weight.  You see that your choices range in calories between 375 (strawberry poppyseed with chicken) and 970 (chopped steak and blue cheese).  Which choice do you make?  The real low-cal option would be to take the strawberry poppyseed and drink water.  But maybe you adjust your order to include the chocolate chipper cookie as well (440 calories) since you saved so many calories on the entree.  Add a bag of chips or a smoothie and your calorie savings go poof!

Last week WSJ ran a piece summarizing recent research on how customers react to calorie information when dining out.  As a general rule, dishes you select in restaurants will have more calories than if you fixed comparable items at home because chefs add more oil and butter to make them taste better. 

Two recent studies find that calorie counts have modest effects on behavior.  One study found that only 1 in 6 customers paid any attention to the calorie data and that group consumed 96 fewer calories per visit.  Another found a 6% calorie drop overall. 

Some restaurants are starting to change their recipes as well.  Cheesecake Factory has reduced the sauce on each serving of Bistro Shrimp Pasta so that the calorie count drops from 2980 to 2440.  Applebee's now has an under 550 calorie menu with steak, chicken and pasta options.  But not everyone has jumped on the calorie moderation bandwagon; we still have Hardee's and the 2/3 pound Monster Thickburger (1290 calories). 

Bottom line: People eat more food away from home now than ever before.  I am convinced that this is contributing to the our obesity epidemic.  Calorie counts appear to give customers a small nudge toward moderation. 

Wednesday, July 31, 2013

DC considers living wage requirement

Earlier this month the city council of the District of Columbia passed the "Large Retailer Accountability Act," which would require retail corporations with annual sales of $1b or more that have stores with 75k or more square feet to pay $12.50 per hour.  The minimum wage in DC is $8.50, so this amounts to almost a 50% increase. 

This is carefully crafted legislation, the Economist notes.  There are very few big box stores in the District, and those that are present (Giant Foods, Safeway) are unionized.  The law does not apply to existing stores for four years.  "That leaves only Walmart, which had planned to open six new stores in the District."

Walmart's reaction: no surprise, plans for three stores have been trashed and the other three are on the ropes.  Whatever your opinion of Walmart, the net impact will be fewer jobs in DC and a chance for DC residents to take advantage of Walmart's lower prices without going to Maryland or Virginia.  Further proof that demand curves slope downward -- making labor more expensive means fewer jobs. 

Saturday, July 27, 2013

Location and economic mobility

Earlier this week NYT ran a front page story about a study by four economists from Harvard and UC-Berkeley that looks at how economic mobility varies across different parts of the country.  The study has received a lot of attention because it is accompanied by a map that shows mobility rates by city and region.  Six of the seven cities with the highest upward mobility are in the west; the ten cities with the lowest rates are in the south or midwest.

The story has received a lot of play, and most of that focus has been on the south.  All of the human interest anecdotes in the NYT piece come from Atlanta, the city with the lowest mobility rate.  The N&O version included a quote from a UNC law professor: "I think of the South as the national home of poverty."

The odds that a child in a family in the bottom fifth of the income distribution will end up as an adult in the top fifth are very, very low no matter where that child lives.  The highest odds are in Salt Lake City, San Francisco and San Jose (11%); the lowest are in Atlanta and Charlotte (4%) with Detroit a notch above at 5%.

The factors associated with higher mobility include low percentages of households headed by single parents, high percentages of households attending church, higher quality schools, and higher percentages of middle class households.  Residential segregation by income also plays a role; areas where low income households are segregated from middle income households have lower mobility.  Tax policy does not seem to matter all that much. 

Thursday, July 25, 2013

More evidence of a rotten recovery: "missing households"

I learned about a new economic statistic in yesterday's WSJ: missing households.  Young people make choices about living arrangements, whether to be on their own, have a roommate, or continue to live with their parents or other relatives.  One can calculate how many households we would have if every person or family lived in their own housing unit.  Compare this to the actual number of households and you get an estimate of the number of missing households.

As the economy started to go downhill in 2008, there were 900k missing households.  By 2011 the number peaked at 2.6m.  It is now down slightly to 2.4m.  Most of those in missing households are between the ages of 18 and 34. 

One does not have to do a lot of fancy economic modelling to infer that a good chunk of these 2.4m people are not staying in their parents' house by choice.  This is a further reflection of the truly difficult labor market that we face today.  It also suggests that we are not going to have a serious recovery in housing until the labor market gets better. 

Tuesday, July 23, 2013

NC legislature's impact on the labor market for teachers

The about-to-be approved NC budget will have a far-reaching impact on the teaching profession in NC.  As reported in today's N&O, tenure will be eliminated for newly-hired teachers.  Teachers who earn masters degrees in the future will not receive any salary premium.  The NC Teaching Fellows program is kaput.  Plus teachers, like all other state employees, will receive no pay raise. 

The net effect of all of these steps is likely to be a sharp reduction in the number of young people who enter the teaching profession.  In a free market, salaries would increase should a shortage arise.  But with many years of tight budgets ahead (thanks to the tax cuts passed by same legislature), raises are not in the cards.  So expect the legislature to open up more channels for individuals who do not have teaching certifications to enter the profession. 

Thursday, July 18, 2013

Do MBAs have realistic salary expectations?

QS TopMBA.com recently did a survey of full-time MBA applicants from around the world.  The results, reported at the MBA news website Poets and Quants, show that U.S. applicants expect to make $140k per year upon graduation.  The average pre-MBA salary of the applicants is $58k.  So if their expectations were realistic, the full-time MBA would yield a 240% salary bump.

In many other countries, expectations are even less realistic.  For instance Russian applicants expect to pull in $144k versus their current salary of $37k.  The worst case is India, where applicants expect to make $112k, a 469% increase over their current $24k salary. 

Harvard MBA grads brought in $124k last year; the numbers from most MBA programs are much lower.  So something is seriously amiss.  There is plenty of MBA salary data available on the web, so it is hard to imagine ignorance is a factor.  One possibility is that applicants are over-confident on two counts: (1) underestimating the odds that they will get into a top 10 school and (2) overestimating their salary potential regardless of which school they get into. 

At NC State the salary bump for full-time Jenkins MBA grads has been running about 50 percent over the last two years, which is consistent with what you see at most large, public research-intensive universities.  The MBA remains a great investment.  In fact Forbes shows that five years after graduation, students make 2 to 2.5 times their pre-MBA salary.  But applicants should not expect to double their pre-MBA salaries immediately upon graduation. 

Wednesday, June 26, 2013

No country for young men

WSJ ran a nice analytical piece about the jobless recovery yesterday.  Even though GDP continues to recover, the job market lags far behind.  The 7.6% unemployment understates the true degree of joblessness because it ignores the drop in labor force participation.  In the 1990s and 2000s, two-thirds of working age adults were in the labor force, meaning they were either working or looking for work.  Last month only 63.4% were in the labor force, a three point drop since the recession started.  Further, the labor force participation rate has kept dropping even as the unemployment rate improved. 

Labor force participation is dropping off for two reasons: (1) the first wave of baby boomers has hit retirement age and (2) a sharp drop in participation among workers under 25.  Part of the latter drop reflects increased school attendance, but a big chunk is due to lousy job market opportunities. 

A few more interesting details:
  • The layoff rate has returned to normal levels but the new hire rate is still well below what we have seen in earlier recoveries
  • We still have over 4m workers who have been unemployed 6 months or more and those workers have only a 10% chance of getting work in any given month
  • There are still 2.4m fewer jobs now than at the start of the Great Recession

Monday, June 24, 2013

Food prices and obesity

Fascinating study by three economists affiliated with NBER concerning how food prices are linked to obesity.  They looked at a national sample of 12 to 18-year-olds and examined how clinical measures of body mass index and percentage body fat related to food prices in their county.  The key findings were that
  1. Youths who lived in counties with expensive calories were less obese than those who lived in counties with inexpensive calories.  This applied to both calories associated with foods purchased to be consumed at home and calories purchased at fast-food restaurants (McDonald's, Pizza Hut and KFC, to be precise). 
  2. Obesity was lower in counties with inexpensive prices of fruits and vegetables than in those where fruits and vegetables were more expensive.
Over the last 30 years, food prices -- both overall and for fast-food in particular -- have been falling, making them a prime suspect as a cause of rising obesity.  Prices of fruits and vegetables have been rising, so this re-enforces the overall trend.  

Over the centuries, falling food prices have proven to be a blessing, freeing much of the world's population from the most fundamental concerns about subsistence.  This may no longer be true as our society adopts more sedentary lifestyles.  Expect to see more discussion of calorie taxes in the future, along with exercise credits. 

Saturday, June 22, 2013

Retirement savings incentives in Australia

The problems facing Social Security in the US are well known.  Australia has developed a retirement savings system that seems to be much more secure and it offers lessons for how we can get our system back on a solid footing.  Australia runs two systems, according to a recent BW article.  One is a means-tested system funded by taxpayers that provides benefits to 75% of those over 65.  The other is a mandatory retirement savings plan that requires 9 percent contributions to self-managed funds.  Workers have the option of saving more; some companies provide matches.  The result is that the aged have a safety net, while individuals create their own nest eggs. 

Wednesday, June 19, 2013

Has Daft Punk gotten lucky?

Alan Krueger, President Obama's chief economic advisor, generated some controversy last week when he gave a speech about economics at the Rock and Roll Hall of Fame.  Krueger, one of the few economists to have taken a careful look at the economics of rock and roll, shared some data that showed the richest rock stars are getting richer relative to their less fortunate competitors.  This is happening for a number of reasons, including technology, scale and globalization (see the speech transcript for details).

Krueger raised some eyebrows, however, when he brought up the subject of luck.
I said “best artists,” but I also could have added luckiest artists. Luck plays a major role in the rock ‘n roll industry. Success is hard to judge ahead of time, and definitely not guaranteed, even for the best performers. Tastes are fickle, and herd behavior often takes over.
Out of context, this sounds an awful lot like his boss's "You didn't build that" line from last summer, and way off the mark.  Groups like the Stones and U2 can generate huge box office yields whenever they tour; most economists would argue this has more to do with having a solid customer base than luck. 

The role of luck becomes more critical when one asks why some groups or songs are more successful in obtaining a customer following.  Reviews from rock critics are one way of measuring quality, but their perspective is not the same as the general public.  Critics have a lousy history of predicting commercial success and artists who get poor reviews often go on to become quite well known (e.g., Katy Perry, Justin Bieber). 

In our world of big data, research should now be possible to get better insights into how some acts can break into the big time (e.g., Taylor Swift, Kanye West) whereas others stay in the shadows (Deerhunter gets rave reviews, but you will not see them in any stadiums any time soon). 

Disclaimer: I have known Alan for almost 30 years and consider him one of the best labor economists around, although we do not see eye to eye on politics all the time. 

Tuesday, June 18, 2013

Panic in Detroit

The end game is nearing for Detroit's bondholders and retirees.  The city skipped a debt payment last Friday.   Retirees will face either sharply reduced benefits or whatever judgment they get from a bankruptcy court (for details, see these accounts in today's NYT and last week's WSJ), depending on how negotiations play out over the next 30 days.  

Look for the final outcome to result in a reassessment of the safety of municipal bonds overall, as well as the risk premium associated with different types of bonds.  Much of the debt is insured, good news for debtholders but not so good news for cities that will have to pay higher insurance premiums in the future.  As for the retirees, those 65 and over will have Medicare and the remainder will have Obamacare; both groups will have higher medical expenses and, in all likelihood, smaller pension checks. 

It took decades for Detroit to get into this mess and it will take a long time for it to work through any solution.  The city's population and tax base have shriveled; crime rates remain high and large swaths of the city have been abandoned.  Public employee unions focused on the present and ignored the inevitable future.  The state of Michigan has provided some assistance but it is politically naive to expect that to continue forever; as Detroit has shrunk, so too has its political clout.

This is what happens when governments allow public services to deteriorate and rely on excessive borrowing over prolonged periods.  Do not expect Detroit to be the last chapter in this story; other cities and some states will experience the same thing. 

Sunday, June 16, 2013

More college graduates entering labor market

Most stories about higher education in the media focus on rising cost and spiraling debt.  Here's a new twist -- recent data show that more young Americans are completing college than ever before, according to NYT.  To economists this is not surprising for two reasons.  First, despite the attention given to tuition and fees, the biggest cost of college for most young people is lost earnings.  Time allocated to school is time that could have been allocated to a job.  In a down economy, the lower odds of getting full time employment reduce the lost earnings cost of school attendance. 

Second, the economic gap between those with college degrees and everyone else remains massive.  The best paying jobs continue to require college degrees.  Recently, many customer-facing jobs that do not require college skills for the actual tasks involved (think hotel desk clerk) nonetheless require college degrees because employers believe that college graduates have better communication and organizational skills.  Growing use of information technology and statistical quality control also is driving the trend. 

A continued increase in college attendance and completion rates would result in an increase in GDP and productivity, as well as a reduction in income inequality as the supply of low skill labor shrinks relative to that of highly skilled labor.  In other words, a win-win for the economy!

Saturday, June 15, 2013

WP's Samuelson on farm subsidies

WP columnist Robert Samuelson bemoans the looming passage of another massive, wasteful farm bill.  Despite the federal budget crunch, expect taxpayers to continue to pay $15-20b each year.  Samuelson points out why this policy no longer makes any sense.  Almost all of the subsidies go to mega-farms; the days of the small family farm are over.

Sure, farming is risky, but not exceptionally so.  Resort properties depend on good weather to make money and no serious person would suggest that we need a federal program to protect them from extreme weather.  Further, farmers can use options to hedge their risk.

Money quote:
The survival of farm subsidies is emblematic of a larger problem: Government is biased toward the past. Old programs, tax breaks and regulatory practices develop strong constituencies and mindsets that frustrate change, even when earlier justifications for their existence have been overtaken by events.

Wednesday, June 5, 2013

Entrepreneurship on the wane?

Yesterday's WSJ ran a front page piece citing economic evidence that risk-taking and entrepreneurship are on the wane in the U.S.  The article cites four trends: (1) companies are very slow to add new positions, (2) investors have not been putting as much money into new ventures,  (3) fewer businesses are starting up, and (4) workers are less likely to quit their job or relocate. 

Putting all this together, the implication is that the supply side of the economy now reacts to new opportunities much more sluggishly.  This could help explain why the recovery has been so slow. 

Saturday, June 1, 2013

Tom Friedman's take on "How to Get a Job"

Great NYT column this week on the changing job market.  Employers continue to be swamped with applications but have difficulty finding people who are ready to add value.  Colleges are not preparing students with many of the skills they will need to be successful in the workplace.  Demands for Excel expertise have ramped up a lot (better know how to "Pivot Tables"), as have the more traditional issues associated with writing and speaking.  Employers are developing their own tests to determine if applicants have the skills they really need AND know how to apply those skills. 

Friedman's advice:

People get rejected for jobs for two main reasons, said Sharef. One, “you’re not showing the employer how you will help them add value,” and, two, “you don’t know what you want, and it comes through because you have not learned the skills that are needed.” The most successful job candidates, she added, are “inventors and solution-finders,” who are relentlessly “entrepreneurial” because they understand that many employers today don’t care about your résumé, degree or how you got your knowledge, but only what you can do and what you can continuously reinvent yourself to do.

Tuesday, May 28, 2013

Lee Craig's bio of Josephus Daniels getting attention

Kudos to NC State economist Lee Craig, whose recently published biography of Josephus Daniels received a resounding "thumbs up" from WSJ on Saturday.  Daniels was a white supremacist who was instrumental in disenfranchising blacks after reconstruction in his role as publisher of the Raleigh News & Observer.  He later became Secretary of the Navy under Woodrow Wilson.  Coffee came to be known as a "Cup of Joe" after Daniels banned demon rum from all naval bases and vessels. 

Monday, May 27, 2013

A pleasant Obamacare surprise?

I promise this will be the last Obamacare post for awhile, but I saw this WP post today and thought I should share it so that readers continue to get a balanced perspective.  In 2009 experts were predicting that monthly premiums would be about $450 for a "silver" plan.  Most media coverage since then has warned of stiff increases in premiums. 

Now California has posted the actual rates for 2014 and the results are encouraging.  The lowest pre-subsidy price is $276; the second lowest is $294.  After subsidies, the rates will be in the $100-110 range. 

If this turns out to be the case in most states, then it is quite likely that more individuals than expected will opt to buy insurance instead of paying the penalty for being uncovered.  Although the penalty will be a relatively low $95 in 2014, it rises to a much heftier $695 in 2016. 

Sunday, May 26, 2013

Two-tiered health system coming?

Forbes columnist John Goodman (the health economist, not the actor) sees a have-and-have-not future for health care.  The wealthy will pay a premium of about $2k/year for concierge medicine, with quick and easy access to one's regular doctor and no surgery delays. 

Most everyone else will be dealing with a rationing-based system, not unlike Canada's.  Goodman sees rationing coming quickly because
  1. Obamacare will create more demand for medical services
  2. But it does nothing to increase the supply of doctors
  3. Many doctors will accelerate their retirement to avoid dealing with heightened regulation
  4. More and more doctors will shift from small practices (where they get paid more if they work more hours) to hospitals where they will pull a fixed salary; as a result, doctors are likely to cut back significantly on their work hours
In other words, supply down, demand up and price not allowed to adjust -- the classic recipe for a shortage. 

Thursday, May 23, 2013

Another Obamacare surprise

Three years after the Affordable Care Act (ACA) was passed and signed, significant new details about the law's provisions continue to drip out.  This week WSJ reports that consultants have discovered that the law treats large and small employers very differently.  Policies sold to individuals and small employers must provide extensive coverage (including hospitalization) whereas policies sold to companies with more than 50 employees only have to provide "preventive services" costing in the range of $40 to $100 per month.  This cost is well below the $2000 penalty for failing to provide insurance. 

The tradeoff for employers: a cheapo health plan will result in higher turnover and lost loyalty but maybe the cost savings make it worthwhile.  One further complication: employers get dinged $3000 if a worker opts out of the cheapo health plan and buys an individual policy at one of the new exchanges. 

Point to ponder: insurance companies are jacking up rates of individual and small group policies in anticipation of losing the ability to deny coverage for pre-existing conditions.  Will the higher rates and the relatively small penalty for not being covered result in an outcome where ACA yields no increase in health insurance coverage?

Sunday, May 19, 2013

Picking stocks

Harvard economist Greg Mankiw has a great column today in NYT regarding what stocks he should by.  Economists get this question all the time and Mankiw's answers are noteworthy for being solidly based on economic research.  Here is a quick, high-level summary:
  1. Markets always know more than you do.  So unless you have inside info or you see things no one else sees, you should realize your insights are priced into the market's valuation.  Buy index funds to save costs. 
  2. Many price moves cannot be explained, even after the fact.  Deal with it.
  3. You better own some stocks.  All the research shows that they outperform other assets over the long haul.  
  4. Don't put all of your eggs in one basket.  Folk wisdom and high-powered econometrics yield the same conclusion.  
  5. Think global.  The US represents slightly less than half of total global valuation; get yourself some EU, Japanese and emerging market stocks.  
I have followed most of this advice, although I must admit my global exposure is a bit out of balance.  Mankiw recommends Vanguard's Total World Stock exchange traded fund FWIW.

Monday, May 13, 2013

How to run a meeting

I must sheepishly admit that NC State's MBA program does not cover the important subject of how to run a meeting.  Now I do not have to worry, because I can point students to an excellent article on the subject by Donald Rumsfeld in last weekend's WSJ.  Here is a quick summary of the key issues he raises:
  1. Ask whether you really need to have the meeting.  If it is purely informational, why not use an email or memo?
  2. Think hard about who really needs to attend.  
  3. Start and end on time.  
  4. Do everything in your power to make sure all views get articulated.
  5. If people are not prepared, end the meeting and reconvene later.
  6. If everyone agrees that an idea is brilliant, encourage questions and concerns.  
  7. At the end, be sure to summarize key points and identify action items.  
He also says leaders should have stand-up desks so that walk-ins do not linger.  Not sure I buy that one.  

Sunday, May 12, 2013

Feldstein on quantitative easing

In a WSJ op-ed last Friday, Harvard economics professor Martin Feldstein casts serious doubt on whether the fed's quantitative easing (QE) policy is doing much good.  Frankly, I have wondered this myself, since it is hard for interest rates (short or long) to get much lower.  But lower long-term rates are but one of a host of mechanisms through which QE is supposed to stimulate the economy.  Another key part, Feldstein argues, is a "portfolio-balance" effect.

Here is how it works: the Fed buys so many long term securities (government bonds and mortgage-backed securities mainly) that investors have to buy stocks in search of yield.  This raises stock prices, makes people wealthier and (in theory) they should spend more. 

Feldstein shows that even if ALL of the recent run-up in stock prices between 2009 and now has been caused by QE, the impact on spending would be small (0.3% of GDP) because one dollar of stock wealth is associated with only four cents of extra spending.  It is highly unlikely QE is the only factor behind the stock market, other things like earnings per share and new savings also are at play.  So the real net impact has to be even smaller than 0.3% of GDP, he claims. 

Monday, May 6, 2013

Dr. Doom on the Fed

NYU Stern's Nouriel Roubeni takes a hard look at the Federal Reserve's quantitative easing policy in a recent blog post.  Roubeni, aka Dr. Doom for calling the 2008 recession, thinks the Fed is creating another asset bubble that will end badly.  With interest rates at historic lows, investors are pumping more and more cash into risky assets: stocks, junk bonds, and emerging markets.  Of course there is a significant downside to increasing interest rates, a move that likely would decrease investment.  Roubeni thinks the Fed is likely to keep interest rates too low for too long, and we will see a repeat of the same movie we saw in 2006 and 2007 with the same sad ending. 

Sunday, May 5, 2013

Increasing access to health insurance: does it make people healthier?

The results of a Medicaid experiment in Oregon have the econ blogosphere ablaze.  In 2008 the state had enough funding to expand Medicaid to 10k people.  Problem was that way more than 10k applied, so there was a lottery to decide.  Economists then started following both the winners and the losers, so they could learn how much difference Medicaid coverage made. 

The study has been running two years now, and here is a succinct summary of the results from the Daily Beast's Megan McArdle:
No statistically significant treatment effect on any objective measure: not blood pressure.  Not glycated hemoglobin.  Not cholesterol. 
These findings have surprised nearly everyone.  The theory was that lack of insurance coverage prevented poor people from getting treatment for conditions which, as a result, will adversely impact their health.  Increased coverage did increase spending on health care, but health itself did not improve.  Perhaps the benefits of health care are an illusion?  Perhaps the guidance from doctors was not followed?

One good bit of news: health care spending went down a lot among the experimental group.  Also depression went down, even though there was no change in the use of anti-depressants.  Maybe the new Medicaid recipients were relieved because they did not have to worry about paying their doctor bills? 

Although one should be wary about putting too much weight on one study, similar results were obtained in a large scale experimental study conducted by the RAND Corporation in the early 1970s. 

Wednesday, May 1, 2013

Prelude to Friday's job report

First quarter GDP growth was disappointing, so all eyes will be on the April jobs report that comes out on Friday.  But we should all heed the words of Stanford Business School professor (and former chief economist for Bush 43) Ed Lazear in a recent WSJ op-ed: "The initial reports are often inaccurate and don't say anything useful about where the economy is heading." Research has shown that the monthly job number is, on average, off by 73k jobs.  Sometimes the revision in later months is in the hundreds of thousands. 

Bottom line: even if the new jobs number is a lousy 25k or a marvelous 200k, we should neither despair or celebrate too much. 

Monday, April 29, 2013

Some uncomfortable data about earnings of university graduates

Over the last 40 years the earnings gap between workers with and without college degrees has steadily widened.  Even allowing for recent increases in tuition and student indebtedness, for the average student college continues to be one of the best investments he or she can make.

But is it still the case?  Weekend WSJ ran a piece by Jeffrey Selingo who raises some legitimate questions about returns to higher education.   Two of his key points have been established in a number of recent studies: (1) there is a lot of variation in earnings by major (engineers and business  do better than liberal arts) and (2) there is a lot of variation by university (Harvard grads do better than U of Phoenix grads).

The biggest surprise, however, is that in some states recent graduates from community and technical colleges are earning more than recent graduates from four-year schools.  A website called CollegeMeasures.org now tracks earnings data by school and major in five states and the community and technical college grads were doing better than the college grads in all five.  This is not an apples to apples comparison, because it does not take into account tuition costs, odds of finishing, odds of being employed, who was continuing their education after finishing school, and wages of graduates who move out-of-state.

The second biggest surprise is that some big-name schools had mediocre earnings records.  The University of Colorado at Boulder ranked sixth in the state, behind Metro State, Denver, Regis, UC-Denver, and Colorado School of Mines.  Colorado State was tenth, just behind Colorado Mesa.  

Sunday, April 28, 2013

More on big data and hiring

Today's NYT business section has a lengthy article about how some firms are using big data to predict performance of job applicants.   Much of the piece centers on Gild, a new startup that has developed algorithms to review programmer code and expertise from a wide range of open source websites.  Gild identified a programmer with no college as the best available person in the LA area, interviewed him and hired him a $115k/year job.  So far he seems to be performing well on the technical aspects of his position. 

Two obvious caveats mentioned in the article: (1) this might work great for jobs where the skills necessary to be productive can be easily identified, but not so well for highly complex jobs and (2) the algorithm focuses on computer programming, not interpersonal skills. 

Thursday, April 25, 2013

MBA team takes 1st place in Poole Leadership Showcase

Kudos to 2nd year NC State Jenkins MBAs Caroline Chamblee Lewis and Mike Westrich for winning first place in the Poole College of Management leadership showcase earlier this week.  Caroline and Mike project came from their Product Innovation Lab class last fall.  Working with students from the Colleges of Design and Engineering, they developed a personal health monitoring device for Chronc Obstructive Pulmonary Disease.  The device provides comfortable, continual monitoring along with automatic alerts to medical personnel if needed.  Another great example of MBA students learning by working on real world research projects. 

Monday, April 22, 2013

Free gas in Caracas

Gas in Venezuela costs less than six cents per gallon.  This has helped maintain political support for the ruling party, but as a recent WSJ piece points out, has been ruinous for the economy.  Every gallon of gas sold is a missed opportunity for government revenue; Venezuela's budget deficit represents 12% of GDP.  Consuming gasoline at home rather than exporting it means that the country has shortages of goods such as milk and flour.  Another example of the extortions resulting from price controls. 

Sunday, April 21, 2013

Big data and human resource management

Two recent pieces on how analytics and big data sets are being used to make more informed decisions about employees:

(1) Today's NYT cites how companies are starting to take a more scientific approach to measuring and evaluating human resource decisions.  Not only are big data dogs IBM, Oracle and SAP in the chase; eHarmony also is looking at how to make better employee-employer matches.  Initial applications appear to be focusing on high-turnover service jobs in places like fast-food restaurants and call centers.  The story is full of anecdotes; the most insightful one for me was Google's decision to stop worrying about GPAs and SAT scores in deciding who to hire.  I wonder what they use now?

(2) A recent piece in the Economist (link courtesy of Freakonomics) also discussed how big data capabilities are being used in HR.  Two of the examples came from Evolv, a San Francisco company that has become recognized as a leader in work place analytics.  One client learned that the choice of browswer used by a job applicant was correlated with higher job performance and less turnover (those who used preinstalled browsers like IE and Safari do not do as well as those who installed their own browser, such as Firefox or Chrome).  Another learned that there was no real difference in performance between those with criminal records and those without. 

Saturday, April 20, 2013

Disability benefits and the labor market

Great in-depth WSJ analysis last week about the growing percentage of the labor force going on disability.  Originally designed to protect employees who have suffered severe injuries or illnesses that preclude them from working, the eligibility criteria were widened in 1984 "to place greater weight on applicants’ own assessments of their disability, especially when it came to pain and discomfort; to replace the government’s medical assessments with those of the applicants’ own doctors; and to loosen the screening criteria for mental illness, among other things."

Historically, workers are much more likely to apply for disability during recessions.  In December 2007 there were 7.1m workers on disability, which increased to 7.6m at the "official" end of the recession in June 2009 and to 8.9m in March 2013.  The ratio of those receiving disability to the size of the adult labor force (employed plus unemployed) rose from 1.7% in 1970 to 5.4% in March 2013, despite significant improvements in health and workplace safety. 

The benefits are far from generous, averaging $13,650 per year.  But combined with other social insurance programs, the payoff to searching for work appears to be quite modest.  In 2011, only 0.5% of beneficiaries got jobs.  Assuming this pattern continues, we should not count on very many of those who lost their jobs in the recession and ended up on disability to return to the labor force. 

Thursday, April 18, 2013

Time to sell?

All stock indexes are at historic highs.  We have seen this movie before; remember 1987, 1999 and 2007?  A sharp drop has to be around the corner, right?

Not so fast, say some financial experts at leading business schools quoted in a recent NYT story.  NYU Stern's Richard Sylla (formerly a colleague here at NC State) has shown that buying at market highs sometimes ends up being a wise strategy.  Wharton's Jeremy Siegel says potential buyers need to look carefully at market fundamentals, which he thinks support further increases in stock prices. 

Friday, April 12, 2013

JC Penney believes in pay for performance

JC Penney recruited former Apple exec Ron Johnson to turn the company around.  And he did, albeit not in the direction that the JCP Board had in mind. 

Usually when we see a CEO depart, we also hear about a 7 or 8 figure separation package.  Johnson walks away with the stock he received when he became CEO -- stock that is worth 50% less.  Nothing more, unless he qualifies for unemployment benefits.  WSJ reports that Johnson walked away from $107m of Apple stock when he became JCP CEO. 

This is a unique case of very high-powered incentives where the well being of the CEO was perfectly aligned with that of the shareholders.  Chicago Booth's Steve Kaplan notes in WSJ that most CEOs negotiate a termination package on the way in as a form of insurance.  Not sure how much insurance an exec like Johnson really needs (he made $138m in his last years at Apple after cashing out his options), but one must always be aware of earnings opportunities elsewhere that execs walk away from when they take a new job. 

Friday, March 29, 2013

Cost of health care mandate: not an easy exercise

Yesterday's WSJ ran a piece that gave some new insights into how the new health insurance mandate will affect employer costs and insurance coverage.  Fast food chains such as Wendy's, Chipotle, Popeye's and Jack in the Box are now lowering their cost estimates because they think many employees will decline the opportunity to have employer-sponsored health insurance.  The premiums charged by these companies will end up being cheaper than the fine on the employee for not being covered, so many will just pay the fine.  Others will rely on Medicaid or coverage from other family members. 

Recall, however, that other chains are doing everything they can to keep worker hours under 30 per week so they are not covered by the new mandate.  So the overall effect on disposable income for employees and cost to employers remains to be seen.  And at the end of the day, how much will health insurance coverage actually expand?

Wednesday, March 27, 2013

Another hopeful sign

The labor market is still mired deep in the Great Recession, but we are starting to see some signs of hope.  Housing is taking off in some parts of the country.  Today's WSJ reports that businesses are increasing capital investment in the first quarter.  This is a good sign for two reasons: (1) more private sector spending of any kind means more job opportunities and (2) it signals that businesses are becoming more confident that a real recovery is around the corner.  Let's keep our fingers crossed. 

Thursday, March 21, 2013

Reversal of the gender gap

Today's NYT summarizes research by MIT economist David Autor that examines why men have been losing ground economically over the last three decades while women have been advancing.  (Click here for the full study.) The raw data show that women are now much more likely to attend and complete college than men, the percentage of men who are in the labor force has been falling, and male earnings have been falling. 

There is a real puzzle here: we all know the returns to higher education have grown tremendously over the last 50 years.  So why would men not take advantage of this opportunity?  Theories abound.  Some think women are more adaptable; others think men have become less industrious.  Autor thinks changes in family structure may be partly to blame.  More and more children grow up in single parent households (where the parent is female most of the time) and some research has shown that boys in these households do worse than girls. 

A vicious cycle also ensues: with fewer men available who can contribute economically to a marriage, more women in all socio-economic strata are having children on their own.  Which naturally creates another generation of boys and young men who are economically disadvantaged. 

Although overall men still earn more than women, among younger workers the gap is narrowing and may soon reverse. 

Tuesday, March 19, 2013

Crude Keynesianism

Columbia Professor Jeffrey Sachs wrote a persuasive critique of what he calls "crude Keynesianism" (for a leading example, see NYT columnist Paul Krugman) in the Huffington Post last week.  Sachs goes after four central concepts:

(1) The belief that multipliers on tax cuts and transfers are stable, predictable and large;
(2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management;
(3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession;
(4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending

For each one, he makes a strong case that the government's ability to stimulate the economy through fiscal policy is quite limited.  Not sure I buy into Sachs' ideas on what we should be doing instead (renewable energy??), but the article is well worth a quick read. 

Sunday, March 17, 2013

More Obamacare surprises

Two recent pieces about hidden aspects of the Affordable Care Act that are just coming to light, almost three years after the law was passed.  Friday's WSJ reported that employers are just now learning about a $63 per person fee that companies will have to pay for each person they insure.  The proceeds will go to insurance companies to cover the higher medical costs they will face when they can no longer bar coverage to people with pre-existing conditions.  Naturally employers will pass some of this tax on to their workers, either through smaller raises or reduced health benefits.

Unions, once strong proponents of ACA, are now having second thoughts, reports the Weekly Standard.  Some union leaders expected that their plans would be given waivers from ACA requirements, but so far most of them are still waiting for their waiver.  Also, the most generous plans are subject to the "Cadillac tax," and -- surprise, surprise -- employers are not too crazy about paying union workers extra money to cover the tax. 

Saturday, March 16, 2013

Developing farm to table supply chains

Do you want your tomatoes from a local farmer, picked within the last 48 hours?  Or would you rather have them come from California or Mexico, picked within the last month, or two?  For the discerning food buyer, this is an easy choice.  However the supply is not there right now to meet the demand. 

Supply chain Professor Rob Handfield is working with NC State's Center for Environmental Farming Systems on a five year $4m grant from the US Department of Agriculture that will help local farmers develop distribution channels to plug into local restaurants and groceries.  Right now local farmers are not large enough and dependable enough to meet the needs of major grocery chains and large food distributors.  Their option is to sell at farmer's markets or roadside stands.  Is there a way that farmers can work together and develop distribution networks that would give farmers access to the retail market?  MBA students will be working with Professor Handfield to find out the answer. 

To learn more about the project, read today's story in the N&O

Thursday, March 14, 2013

Cable TV bundles about to unravel?

There once was a time when there were four major television networks and no recording devices.  Now there are 100s of networks and all sorts of opportunities to watch any show at any time.  But consumers of satellite and cable TV do not have the opportunity for a la carte pricing.  Instead they must select among various bundles of channels.  In Raleigh, Time Warner is the largest service provider and consumers choose between basic cable, various tiers of digital cable, along with HD options and premium channels. 

In essence cable and satellite TV is like a restaurant where everyone must order a full meal at a set price rather than being allowed to pick and choose which dishes they want.  This is not necessarily bad for consumers; imagine a menu where appetizers are $8, dinners are $15 and desserts are $6.  If you can get a three course meal for $25 and you were going to get all three courses anyway, then you are better off than buying each course separately.  So if basic cable is $25 per month and the 200 channel package is $45, a lot of people think they are getting a bargain with the extra surcharge. 

But cable has become so specialized that many viewers do not watch more than 10 channels, which makes them wonder why they should pay for 200.  Some watchers are cutting the cord altogether and relying on broadcast channels, Hulu and Netflix for their TV fix.  WSJ recently reported that Cablevision Systems sued Viacom for antitrust violations because Viacom was forcing them to buy channels they really do not want in order to keep carrying Nickelodeon and MTV. 

My take: over the next five years TV is going to go through the same revolution as the music industry.  Consumers will select the shows they want and watch them when they want.  The companies that catch onto this first will be the winners. 

Sunday, March 10, 2013

MBA still a smart investment?

Not according to Dale Stephens who, in a recent WSJ weekend essay, claims that young people can do better investing MBA tuition in other activities.  Stephens shows a misunderstanding of today's MBA education at multiple levels.  He claims that students can get the same educational content through open courses.  There are many great online resources now for many subjects, but they lack opportunities to engage and get feedback from faculty and fellow students. 

Stephens also seems to think MBA education is nothing more than textbooks and case studies.  At NC State, students do research projects, often working with corporate sponsors, in most classes.  Our experience is much more like an apprenticeship, especially in the advanced courses.  Stephens suggests students focus on programming skills as they offer a higher return, and misinterprets MBA salary data in the process.

Stephens claims that students do not need MBA connections to network; I am guessing he must be much luckier than anyone else in getting Harvard and Stanford MBAs to return his emails and voice messages.  Stephens has a book to sell ("Hacking Your Education") and a website UnCollege.org that lists educational resources that may be helpful (it is down right now, so I cannot really tell).  He has no college degree, but he is an authority on MBA education -- somehow this does not add up.

Friday, March 8, 2013

Spain's paradors face austerity

The scope of government activity varies tremendously across different countries.  The US federal government spends most of its dollars on income maintenance programs (Social Security and Medicare mostly) and defense.  Except for USPS and the national park system, the feds tend to stay out of businesses that compete with private enterprise (ok, there's Government Motors too). 

Let's hop the pond and take a look at Spain where the national government runs a high end hotel chain.  For decades the government has purchased historic structures (churches, castles, convents, monasteries and the like) and turned them into upscale resorts.  NYT ran a travel piece last weekend about how these properties are holding up now that Spain has to make significant spending cuts.  The travel reviewer visited four properties and gave them all a thumbs up. 

The article also touched upon the business and political difficulties facing the paradors.  Initially Spain wanted to close seven paradors and have many more close for at least four months each year.  But this ran into a buzzsaw of criticism from the unions representing the employees and part of the plan was scuttled. The paradors do have new management and they are trying to update the marketing approach and manage costs more effectively.  They have their work cut out for them:
As a government enterprise, the paradors also have a bulky and inflexible staff ...  As government workers, they expect to be employed for life.  “If you have 12 people eating in the dining room, do you need 15 people in the kitchen? A private chain would adapt to the off-season numbers, cut back on staff or close for a time. But the paradors have not been doing that. They have been paying 200 people to work full time on union business alone.”
Yet as the Spaniards try to get more bang per buck on their paradors, what will happen to the staff who get downsized?  Will they be able to get jobs in hotels and restaurants in the private sector, or will they be stigmatized for their government employment?  No easy answers.   

Wednesday, March 6, 2013

Minimum wage in the news

President Obama has proposed that the federal minimum wage be increased from $7.25 to $9 and be indexed to automatically increase with inflation in the future.  The economic effects are straightforward: some low-skilled workers will be priced out of the market.  In cases where employers cannot find substitutes for labor, the result will be either higher prices or reduced profit margins. 

Christina Romer, Obama's chief economist in his first term, is not so sure that increasing the minimum wage is such a great idea.  Although intended to help the working poor, some of the beneficiaries are teenagers in well-to-do families.  She suggests that boosting the earned income tax credit would be a more effective approach.  

Thursday, February 28, 2013

Has the rate of innovation slowed down?

Economists are having a hot debate on whether the economic payoff from innovation has slacked off and The Economist recently ran a long article summarizing the main issues.  Why, in an age of smart devices and gene mapping, would one think that innovation is slowing down?  One reason is the growth statistics; GDP per capita grew 2.5-5% annually in the 1950s and 1960s but only grew 1% annually so far in the 21st century.  The second argument is that today's innovations are less life changing than those of years past.  As cool as nanotechnology may be, it is not yet having the same effect on people's well being as indoor plumbing, air conditioning, kitchen appliances, and automobiles. 

So should we expect life in 2050 to be about the same as today?  I seriously doubt it.  Other economic research has shown that there are significant lags between the introduction of a new technology and its full adoption.  As the Economist notes, it took a full century for the steam engine to have its full effect; four decades for electricity.  Another reason to expect more innovation: rising levels of education in countries across the globe.  This means more researchers and more innovations.  We also should expect continued improvements in health and longevity, thanks to the innovations in IT and life sciences.  

Wednesday, February 27, 2013

More on holding colleges accountable

As a general rule, I think free markets work pretty well.  But they tend not to work so well when buyers lack critical information before they engage in a transaction.  Sometimes the private market does an excellent job of filling information gaps; examples include online reviews or car magazines.  Other times critical information is costly for outsiders to collect, (calorie counts, condition of a used car) and government regulation requiring disclosure can result in more informed decisions when the cost of data collection and dissemination is low compared to the gains from the information. 

The private market (US News) provides lots of data about colleges, but most of the guides and rankings focus on inputs (class size, SAT scores) rather than outcomes (learning, careers).  Senators Marco Rubio (R, FL) and Ron Wyden (D, OR) -- note the bipartisanship -- have introduced a bill ("The Right to Know Before You Go Act") that would require colleges to tabulate and publish placement rates and salaries by major.  Students and their families would then be better positioned to decide for themselves whether college is a wise investment. 

Obtaining and tabulating such data will not be an easy task.  Not all students will report post-graduation plans and salaries.  WSJ notes that publishing fresh data each year by major will raise privacy concerns in small departments and programs; a three year average makes more sense than annual numbers.  Ten states are already releasing such information; the other 40 (and DC) should join them.