Poets and Quants, the #1 MBA blog, has just issued its ranking of the top online MBAs and the NC State MBA comes in at #17. Carnegie-Mellon is #1, followed by UNC-CH, Indiana, Maryland, and Penn State. More great recognition for our up-and-coming program!
Many of you will be on a plane this Labor Day weekend; 1.5% of you should expect your flight to be cancelled. Amy Cohn, an industrial engineering professor at Michigan (a great university with unfortunate choices in school colors and mascot), explains the logic behind flight cancellations in this New Republic piece.
Simple economics would focus on marginal revenue and marginal cost. That is, if the savings in jet fuel and labor hours offset the costs of rebooking passengers then it makes sense to bump the flight. For instance if there are 8 am and 10 am flights from Raleigh to Detroit and both are half-empty, it makes sense to cancel one.
Cohn points out that network effects need to be considered. The 8 am flight to Detroit is likely to go on to as many as eight other locations by the end of the day, all of which can be messed up by a cancellation. Also, flights now are much fuller than they were 20 years ago, so rebooking can be quite expensive for the airlines in terms of bumping would-be passengers who would have paid a hefty premium to book a last minute seat on a later flight.
Chicago Booth finance expert (and all-around free-market kind of guy) John Cochrane has a great WSJ piece on how and why the Federal Reserve Board has made the right call on a set of very big decisions. If you happen to run into a politician ranting against the Fed, I strongly encourage you to ask him/her how he/she disagrees with Cochrane, a world-class finance expert who expresses his views on his well-read blog Grumpy Economist. My guess is that you will not get a straight answer.
I appeared on WUNC-FM's "The State of Things" today, along with Jeff Hirsch, associate dean at the UNC-CH law school. The first ten minutes of the clip is an interview with Keith Ludlum, who led the battle to organize employees at Smithfield Foods. Jeff and I engage at 10:20. By the way, I am a labor economist not a labor lawyer!
Interesting point that emerged from the discussion is that once Smithfield was organized by the United Food and Commercial Workers Union, the plant remained economically viable. In fact Smithfield as a whole did so well that it was bought out by a Chinese company. One has to ask what was the ROI on all of the money Smithfield spent to keep the union out.
Continuing on the recent blog theme on why is the U.S. labor market doing so poorly in terms of jobs and wage growth, I came across this study by a team of highly respected MIT economists that looks carefully at the impact of growing imports from China. The news is not good and, frankly, not surprising.
Our central estimates suggest net job losses of 2.0 to 2.4 million stemming from the rise in import competition from China over the period 1999 to 2011.
This study focused only on Chinese imports, missing out on the impact of imports from the likes of Bangladesh and Nicaragua.
Take one dose of import competition, another of technological change, and yet another of reduced fluidity and you might very well have a very convincing explanation of why employment remains so low.
Although the unemployment rate is near 6 percent, the employment population ratio continues to be well below where it was in 2007. Chicago Booth economist Steve Davis and Maryland economist John Haltiwanger (DH) presented a paper yesterday at the Kansas City Fed conference in Jackson Hole WY that lays out evidence that our labor markets have become less fluid and that this has contributed to lower employment.
In a labor market context fluidity refers to the sum of the rate at which jobs are created and the rate at which they are destroyed. DH show that fluidity has dropped by a sizable margin since 1990. Part of this can be explained by an older labor force and a smaller number of young firms today compared to 25 years ago. The rest of the story is harder to figure out now, but DH consider changes in business models and supply chains, increased training requirements, job lock associated with health insurance, court rulings that have limited employment at will, and occupational licensing as possible contributors.
Of course if there are fewer jobs being destroyed, that means fewer unemployed workers. However with fewer jobs being created there are fewer opportunities for those looking for work and spells of unemployment become longer. After crunching the numbers DH find a strong correlation between reduced fluidity and lower employment.
The study has already received press attention (NYT story here, thanks to Marginal Revolution for the link) because of its implications for economic policy. DH argue that the labor market has faced structural issues for the last 15 years. The numbers looked better than they should from 2001-2006 because of the housing boom and looked much worse since 2008 for obvious reasons. Zero percent interest rates are not going to fix this problem.
Two recent pieces on labor shortages, following up on my earlier post:
1) Today's WSJ reports a looming national shortage of less-educated workers. Two things going on: more high school grads are obtaining some post-secondary education (supply down) and demand is picking up in sectors that need less-educated workers (demand up). So what does econ 101 (or for NC State MBAs MBA 505) tell us is going to happen? If the claims about shortages are real, wages will rise; if the claims are just management bellyaching, nothing will change.
2) Wharton HR expert Peter Cappelli has been arguing that one reason employers are having trouble finding qualified workers is that the corporate world has vacated the training business. Workers now obtain skills on their own (usually through education) or obtain them through gradual observation and absorption on the job (learning-by-doing). He tells BusinessWeek that employers will have to start investing more in training to turn this around. Such investments are risky unless trained employees can be retained. So maybe they will have to be paid more???
Yale economist and Nobel laureate Robert Shiller published a NYT piece today on stock market valuations. I have always taken Shiller's word on this subject very seriously; not too many stock pickers have Nobels on the mantel above their fireplace!
Shiller was instrumental in designing the CAPE (cyclically adjusted price-earnings) ratio, which is now near its historic highs. Today the CAPE ratio is above 25. It has been above 25 three times before: 1929, 1999, and 2007. In each case the market crashed within a year.
Does this mean we should all rush to dump stocks? Not necessarily. CAPE is not an indicator of market timing. And US stock prices could get higher before they go lower. But it looks like a good time to be exploring other assets, even if the returns are low. A safe 1-2% beats -25% every time.
Two big news items about the NCAA last week. First, it approved new rules for the ACC, Big Ten, Big Twelve, Pac 10 and SEC conferences that will allow them more autonomy (ESPN report here). The most likely consequence is that athletes at these schools will be allowed to receive "cost-of-attendance" stipends of $2-5k per player, a modest increase over tuition, room and board.
But the big news came from U.S. District Judge Claudia Wilken who found the NCAA guilty of antitrust restaint-of-trade violations (CBS Sports report here). The NCAA and its member schools profit from the use of athletes names and images. For instance last year Texas A&M sold truckloads of football jerseys with Johnny Manziel's name and number and received millions for televising his image. But Johnny received zero revenue from this activity.
This will no doubt change as a consequence of the antitrust ruling, assuming it stands upon appeal. Colleges will still be bound, for a while, by whatever compensation rules their conferences come up with. But let's just suppose a school like Alabama in football or Kentucky in basketball decides to start paying something close to market prices to attract student-athletes. This will force a significant redistribution of income and resources. Currently the TV dollars support huge athletic department budgets. When students start getting a larger share, expect big changes. Coaching and support staffs will shrink; some non-revenue sports will vanish (in a gender neutral way of course, thanks to Title IX).
Other things to expect:
Left to a free market, five-star recruits will get nicer packages than three-stars.
All recruits will get the same performance bonuses that we see in the pros. Future Johnny Footballs will be paid by the touchdown. And maybe dinged in the wallet for each interception.
Another judge will allow students to transfer to another school without sitting out a year; the current rule is no doubt another restraint of trade.
Interesting question: will athletes vote for unions to redistribute the loot from the Anthony Davises and Jabari Parkers to the average players and the benchwarmers?
The unemployment rate has fallen to almost six percent, but with the employment/population ratio at a 30 year low I have been reluctant to argue we are anywhere near hitting labor force capacity. However, I have run across a couple of news stories in the last week that signal the possibility that some shortages are starting to appear in some markets.
Story #1: Neil Irwin's NYT piece on the shortage of truckers. Training requirements are not especially high and wages have lagged behind inflation over the last five years. But big companies claim they are having a hard time finding qualified applicants and some are starting to pony up, a $2k bonus here and an increase in mileage there.
Story #2: The local N&O reports that a big multifamily residential construction project in Cameron Village has been slowed down because of a shortage of qualified workers. The contractor claims that similar shortages are facing the industry nationwide. Frankly, this one is a bit hard to believe given the drastic downsizing the construction industry has undergone. But maybe folks who lost their construction jobs five to six years ago have found something else they prefer to do.
Just ran across this fascinating discussion with two Wharton profs about the role MOOCs are likely to play in higher ed (kudos to Craig Newmark's blog, where I first saw the link to this transcript of the video). Christian Terwiesch and Karl Ulrich have taught MOOCs on operations and innovation. They estimate that the cost of producing a MOOC at Wharton is about $70k in upfront development and $7k in cost per section for delivery. In contrast it costs about $50k to teach each section of a face-to-face course. So development costs are covered by variable cost savings once once two sections are delivered!
Of course no one is going to pay Wharton $120k tuition to take their MOOCs, which they already are giving away. Students will still value the networking and career resources of a top b-school, plus the brand reputation garnered by becoming a Wharton grad. Terwiesch and Ulrich envision three scenarios on how what they call SuperText (the technology behind the MOOCs) will impact MBA programs: (1) technology enables enrollment growth (unlikely because it waters down the brand and there aren't that many $100k/year jobs for 26 year olds); (2) technology enables cost savings by reducing faculty lines (bound to happen in my view); and (3) business schools fall by the wayside as students can pick and choose from an array of MOOCs the chunks of knowledge they need when they need it (in other words, MOOCs become like iTunes where you grab the songs you like not the entire album).
The article also provides some great insights into the economics of a top five private business school. Did you know that it costs $400k to produce an "A journal" article?
Steve Allen is Associate Dean for Graduate Programs and Research in the College of Management at NC State University. He has appointments in the Department of Economics as well as the Department of Management, Innovation, and Entrepreneurship. Steve also is a Research Associate of the National Bureau of Economic Research, a non-profit research organization located in Cambridge, Mass.