Aging populations and the slow recovery

Macroeconomic analysis typically focuses on money markets, government spending, private saving, and the like.  When explaining the causes of recessions and recoveries, the analysis typically looks at variables such as exchange rates, interest rates, and tax policy.  Demographic factors typically receive scant attention.

But we know we have an aging society.  Japan has faced this challenge for 20 years and has had flat growth.  Most European countries are in the same boat, at least for their native populations.  So could aging have something to do with the not-so-hot recovery we have experienced over the last seven years?

A study by economists in the RAND Corporation and Harvard Medical School suggests there could be something to this.  (Click here for a WP summary.)  They explored different states of the US and found that the regions with the most aging had the slowest growth.

What might be going on here?  Obviously with more retirees, the labor force shrinks and that hurts economic growth.  Maybe today's more elderly population saves more because of uncertainty about Social Security, pensions, longevity and their own savings.  With an apparent surplus of savings chasing ever lower yields, this also could be a drag on growth.  The study finds that productivity falls with aging, a wrinkle that is hard to easily rationalize.

Bottom line: if this study is correct, then we may be in for a longer period of slow growth than anyone has anticipated.

Tuition: at private schools it is just the sticker price

Harvard's Danielle Allen (no relation) has a great WP op-ed today about tuition.  At private schools tuition is just the sticker price paid by the students with the wealthiest parents and little athletic ability.  Most students get some scholarship funding, which acts as a discount.  Those from low-income families pay no tuition.  At prestigious private schools, the posted tuition number is actually well below the full cost of schooling; the rest is paid through endowment income, grants, and other sources.

Allen argues that publishing a single tuition number has adverse effects.  When private schools increase their tuition, it also increases the demand for public universities, thereby allowing them to charge more tuition as well.  But in the publics, financial aid is much more limited and a much higher percentage of students are paying the sticker price.

Instead of publishing a single tuition number, Allen would have universities publish the full cost of education, the range of aid options, and how much aid the average student gets.

Job gains in the middle of the wage distribution

For at least two decades the data have shown a hollowing out of jobs in the middle of the wage distribution.  Job growth has been concentrated in the two extremes: the high end and the low end.

But that trend may be coming to an end.  Today's WP has a short article summarizing research by the New York Fed on job growth by wage tiers.  There was much more job growth in middle-wage jobs between 2013 and 2015 than there was in the low and high wage tiers.  Industries such as construction, education and transportation led the way.

Court ruling allows more MBAs to take tax deduction

Saturday's WSJ reports great news for MBAs for the coming school year: more of you will be able to write off your tuition against your tax liability.  Here are the rules as stated by the IRS:

To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) that your employer or a law requires to keep your salary, status, or job. However, even if the education meets either of these tests, the education cannot be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.

Professional MBA programs, such as NC STate's evening and online MBA, have qualified for some time, especially for those who plan to stay with their current firm.  The new ruling apparently opens the door for Executive MBA programs too.  Also, the new ruling allows a deduction even for those who are unemployed part of the year.

I am not sure these changes will make a big difference for NC State MBAs, but all MBA students need to be aware of the opportunity to take a tax deduction for their schooling expenses, including tuition, books and transportation.  

Join Amazon "Prime Student," get a deal on a student loan

I'm not making this up.  See WSJ for more details.  This is a partnership between Wells Fargo and Amazon.  Binge watch and binge borrow at the same time?

Fewer young men are working or in school. What are they doing?

Playing video games.  Seriously.  See this blog post about Booth Chicago's Erik Hurst in Marginal Revolution for details.

Apparently able to depend on parents, spouses or significant others, it is a bit hard to imagine these young men are going to be qualified for jobs or even looking for jobs anytime soon.  I am reluctantly concluding that we are getting as close to full employment as we are going to get.

How to Misuse Analytics

Catherine Tucker at MIT Sloan and Anja Lambrecht of London Business School have a great HBR piece on how to make big mistakes with analytics.  Here are what they see as the biggest challenges:

1. Size isn't everything.  Usually managers have to merge data sets from different sources that were designed for different purposes.  If the data sets cannot be cross-referenced in a meaningful way, their usefulness can be limited.  
2. Our ability to analyze structured data is well ahead of our ability to analyze unstructured data.  The authors observe that firms have had more success with unstructured data when analyzed in conjunction with structured data.  
3. Data processing skills are more critical to reaching meaningful conclusions than bigger data sets.  Companies need to invest in both.
4. Correlation is not causation.  Any well-trained PhD in economics has had this drummed into their head all the way through graduate school.  But now lots of employees are looking at computer-generated results, see a correlation and think they have something.  Field experiments on relatively small amounts of data are likely to lead to greater insight.  

NC legislature experiments with teacher incentives

Pay for public school teachers in North Carolina has been a big focus for the legislature over the last two years.  After no raises for many years, pay for starting teachers received a boost last year and pay for more experienced teachers is scheduled to increase this coming year.

This coming year's budget also includes two incentive plans that I would call unique.  One would allocate $10m to give a bonus to third grade teachers whose student growth scores place in the top 25%.  Bonus plans for individuals make sense when the employee has some control over the work environment and the metrics map reasonably well with employee effort and performance.  Although well-intentioned, I cannot help but wonder why the legislature did not consider two obvious problems with their scheme:
(1) Why put all the money on third grade teachers? Don't the other grades matter at least a little?
(2) Why didn't they select a more objective measure of actual learning?  The reward goes to the top 25%, regardless of how much or how little student growth took place.

The second plan pays a $50 bonus to Advanced Placement teachers for each student who passes the AP test.  So a student passes the AP Calculus test with flying colors, but is that because the AP teacher was so great or did it have something to do with the Algebra 1 and other teachers that they had before AP?  Also, what happens in parts of the state where school systems lack the budget to offer AP courses?  And should we be focusing incentive dollars on AP students or on those who are struggling to graduate?

The big mistake that legislators are making is the decision to use individual as opposed to group incentives.  Student achievement hinges on a collective effort of teachers from K to 12.  School-based plans are likely to be more effective than individual-based plans.

However, the third grade plan will solve one problem -- principals will not have any trouble filling open third grade positions!

Using workplace incentives to reduce carbon footprint

In a fascinating new NBER research paper by economists at Chicago and LSE, pilots at Virgin Atlantic Airways were offered recognition and incentives if they successfully took steps to reduce fuel consumption.  Separate targets were developed for pre-flight (how much fuel to load), during flight (course corrections), and runway decisions.  Over the eight month study, the researchers found a robust response to the incentive programs, saving Virgin over $500k.

Usually when the topic of carbon abatement comes up, the response from economists and policy makers alike is to impose caps, require new equipment or charge a tax.  This paper shows that there is another avenue that should be considered: adjust management decisions!

Why are waiters so anxious to grab your plates?

Have you noticed how quickly your plate disappears once you have finished?  Regardless of whether others in your party have finished or not!  This sends an awkward social signal, according to this recent WP blog entry:

When a server clears a plate before everyone is finished, he or she leaves the table with a mess of subtle but important signals. Those who are still eating are made to feel as though they are holding others up; those who are not are made to feel as though they have rushed the meal. What was originally a group dining experience becomes a group exercise in guilt.

So what is going on here?  Are restaurants running lean inventories of plates and tableware?  Do customers get really upset if their empty plate isn't removed instantly?

George Mason economist and Marginal Revolution blogger Tyler Cowen thinks that economic forces are at work.  Land prices in urban areas are going up and that means higher rents.  As a result, restaurants feel more pressure to turn tables so that they can get more customers per day.

Incentives matter: the case of Medicaid

A critical challenge in designing income maintenance programs is the tradeoff between benefit generosity and the incentive to work.  In a recent WP column, Catherine Rampell compares work incentives in the states where Medicaid has expanded under Obamacare to the states (including North Carolina) which have kept the pre-Obamacare system.  In the 19 states that have rejected the Medicaid expansion under Obamacare, if a working parent earns more than 61% of the poverty line ($12,300 for a family of three), then that household loses ALL of their Medicaid benefits.

Rampell suggests that a sliding scale be used instead, so that as the parent starts earning more than $12.3k, the family loses a fraction of their Medicaid benefits as opposed to the whole amount.  The current practice in effect penalizes work effort that generates more that $12.3k, locking millions of households into poverty.

Now there is a catch -- a sliding scale means that more families become eligible for Medicaid.  Benefits might not be entirely phased out until the parent earns $25k or more.  But as more parents work more hours, extra revenue gets generated because (1) their families rely less on Medicaid and other income maintenance programs and (2) they pay more income and payroll taxes.

I expect this to be a big issue in the NC gubernatorial contest this year.  Gov. McCrory famously turned down federal funds that would have provided significant increases in health care for poor North Carolina families.  They have a big incentive to remember that on Nov. 8.

Words that needed to be said

Today in Bret Stephens "Global View" WSJ column:

Meanwhile, let’s state clearly what shouldn’t need saying but does: Americans are blessed to have Mexico as our neighbor and Hispanics as our citizens. On this point, disagreement is indecency.

Stephens notes that the murder rate in Mexico is about the same as Philadelphia (and less than Miami), no one from Mexico has attacked the US since Pancho Villa, Mexico is the 2nd largest purchaser of US products, and more Mexicans are headed south of the border than in the opposite direction.  

The myth of the unemployed college grad

Great online NYT piece on unemployment of college grads.  Last week's jobs report put the US unemployment rate at 4.7 percent.  The NYT article leads off with a quiz that had been part of a Google survey:  The unemployment rate for high-school grads between the ages of 25 and 34 is 7.4 percent; guess the unemployment rate for college grads in the same age range!

Here are the answers they received: the average Google respondent thought the unemployment rate for college grads was 9.2%, whereas the average NYT website respondent thought it was 6.5%.  

These answers are way wrong: the actual unemployment rate for 25-34 year old college grads is 2.4 percent.  Keep in mind that this represents all college grads -- all majors, all types of schools (even the for-profits).  

So what is going on here?  One obvious lesson is that the mainstream news media have been running so many stories about unemployed college grads (usually with heavy loan obligations as well) that anecdotes have become accepted as data.  Maybe the unemployment rate for journalism majors is a lot higher than for other majors?  Maybe journalism schools don't teach their majors how to find labor statistics, so they keep writing these misleading stories.  

Rethinking the full-time versus part-time equation

Today 27m Americans are working part-time and 6.430m of them would prefer to have full-time jobs.  The latter number is only slightly smaller than the number of unemployed persons (7.436m).

An employer thinking about whether to hire full-time or part-time help has to consider the following factors:

1. Differences in compensation cost per hour: full-time workers must receive health insurance and usually receive other employee benefits as well, whereas part-time workers typically just receive hourly wages.  Also, hourly wages in part-time jobs tend to be lower than in full-time jobs.  Advantage: part-time.
2. Costs of hiring and training workers: It takes twice as much effort and time to find and develop two part-time workers as it does for one full-time worker.  Also, turnover is much higher for part-time workers, so that means even larger hiring and training costs.  Advantage: full-time.  

A recent WSJ article shows that some companies are rethinking this tradeoff and hiring more full-time workers.  The Sheetz convenience store chain found that 83% of its part-time help left within a year, much lower than the 25% of its full-time hourly help.  Sheetz also finds its full-time workers are more committed to customer service.  Buffalo Wings & Rings finds that full-timers ring up more sales and have lower rates of absenteeism.  

There is a simple economics lesson here:  you cannot just focus on cost comparisons; you also need to think about productivity.  As the unemployment rate keeps getting lower and more individuals drop out of the labor force, expect to see more companies calling up Sheetz's CEO.  

Private unemployment insurance

People buy all types of insurance -- health, auto, home -- as a mechanism to manage risk.  One of the biggest risks is losing one's job, an event likely to lead to months of zero earnings followed by a new job that pays much less than the one you had.  

Each state has an unemployment insurance system funded by payroll taxes.  The benefits are modest, usually about 25-33% of wages.  Their duration varies by state and with economic conditions; the unemployed typically can get benefits for a year or more during recessions whereas the cap can be three to six months in peak economic conditions.  Relying on state unemployment benefits when jobless is comparable to relying on Social Security when retired -- you better have other sources of income or have some savings you can draw down.

NYT reports that the private sector has come up with a new alternative -- an insurance product called IncomeAssure.  Employees pay a monthly premium and receive insurance that covers the gap between state unemployment insurance and 50% of their before-tax earnings.  As you might expect, the top benefit is capped at $125k.  Also there is a six month lag between the time you pay the premium and the time you are eligible to collect benefits.

To be successful, IncomeAssure will have to make wise decisions on pricing.  Premiums vary by location and occupation to reflect differential risks of being laid off; construction workers pay more for the same benefit than public school teachers.   IncomeAssure also will have to worry about having enough funds to pay promised benefits when the next recession hits.  And their customers should worry about this too!

Historically I have used unemployment insurance as an example of a product that the private market was unlikely to provide.  Maybe IncomeAssure will prove me wrong.

Should tuition be lowered to $1k/year at five UNC system schools?

NC State Senate Bill 873 proposes lowering tuition to $1k/year at five UNC system schools: Elizabeth City State, Fayetteville State, UNC-Pembroke, Western Carolina, and Winston-Salem State.      As reported in Friday's N&O, the UNC Faculty Assembly has criticized the proposal because it does not specify how the campuses will make up for the lost tuition revenue and because the plan would undermine the mission of four historically minority campuses.  Tuition ranges between $2800 and $3900 at these campuses.  In contrast, tuition is $6407 per year at NC State; mandatory fees move the annual cost up to $8880.

The bill's sponsor Sen. Tom Apodaca (a WCU graduate) argues that this would make college education more affordable.  However, if affordability is the main concern, this bill is the wrong way to go.  Students from all income levels would be applying to these campuses, many of whom could afford to pay much more.  Also, the bill does nothing to make tuition at the other UNC campuses more affordable.

The legislature's sudden concern with rising tuition coincides with an election year.  The Faculty Assembly report points out that legislatures over the last seven years have cut state funding per degree by $6865 while (not coincidentally) tuition per degree has increased by $6537.  Cause and effect?

Don't hold your breath expecting to see the old funding return.  Yet if the legislature is truly concerned about UNC system tuition being affordable, it should focus on increasing financial aid for low income students at all campuses.  To be innovative, the legislature could consider tying cash grants for tuition now to income-based repayments to the state later.  To be even more innovative, the repayment schedule could be lower for those who choose to live in NC (and who would be paying NC taxes).

New overtime regs go into effect

A year ago I posted about proposed new federal regulations on overtime.  This week a revised version  went into effect.  Under the old regs, salaried workers earning over $23,660 had to be paid overtime each week they worked more than 40 hours.  Now the salary threshold has kicked up to $47,476, making 4.2m employees newly eligible.

The net effect will be to increase the cost of labor which will lead to reduced labor hours worked.  Hours worked per person will definitely fall, but employment may or may not change much.  Some employers will add more workers to avoid having to pay overtime, whereas others will substitute capital for workers.

The basic economics of the new overtime rules are very much like those of the minimum wage.  Some workers will come out ahead (those getting overtime that did not used to get it), whereas other workers are worse off because their hours get cut or their job vanishes.  Employers and their customers are worse off because costs have risen; after all, someone has to pay the higher overtime wages.  

Is the TSA a lose-lose proposition?

The Transportation Security Administration has been in the headlines lately as wait times in Chicago O'Hare, Charlotte, and other airports have hit three hours and passengers have missed flights.  Although some passengers will enroll in PreCheck (I just did and it is pretty easy to do) and be able to get through faster, many are starting to ask whether the TSA can pass a basic cost-benefit analysis.

The TSA spends about $5.5b per year on airport security and employs 47k security officers.  According to NYT, TSA claims that tighter budgets have forced personnel cutbacks, whereas TSA critics have responded that the agency has failed to plan and failed to prioritize.

Although the cost side is pretty clear in terms of budget and passenger wait time, the benefits are much harder to measure.   I have yet to hear of a TSA screen confiscating materials that were to be  used in a terrorist attack.  Think of the movie that could have been made, with Melissa McCarthy as the heroic screener catching Murray Abraham with a ticking bomb!

Does fear of apprehension by the TSA deter would-be terrorists?  The evidence on this front is not encouraging, as reported in today's WP:

Agency watchdogs have documented that undercover security operatives managed to smuggle 67 illegal weapons or simulated bombs past TSA security on 70 tries last year, that TSA officials were unable to properly vet 73 aviation employees who had links to terrorism, thereby allowing them access to secure areas, and the senior managers have a long history of bullying whistleblowers who identify potential problems.  

Another potential benefit is peace-of-mind for passengers.  It could be that even if TSA is totally useless for preventing terrorist acts, passengers may value the service and be reluctant to fly in its absence.  The agency is partially funded by passenger fees.  In the future it would be worthwhile to (1) conduct research to measure the value of peace-of-mind and (2) figure out a way for air passengers to pay the entire cost.

Raleigh-Durham ranked as #4 startup hub

WRAL's TechWire reports today that the Raleigh-Durham area has been ranked as the #4 hub for startup businesses in the US.  Boston was #1, followed by the Bay Area at #2 and Denver as #3.  RDU ranked ahead of San Diego (#5) and Austin (#6).  The full report sponsored by the US Chamber of Commerce Foundation, 1776, and Free Enterprise can be found here.  Rankings are based on how well the cities "attract talent, increase investments, develop specializations, create density, connect the community, and build a culture of innovation."  Raleigh received especially high marks for talent (#5), connectivity (#3) and culture (#1).

NC State's Poole College of Management has long played an active role in the Raleigh startup community.  Our Jenkins MBA students have long been actively involved in commercializing new technologies on campus.  Recently our undergraduate and MBA students have been working with startup firms at the incubator HQ Raleigh.  Students wanting to learn about entrepreneurship should certainly be giving NC State a hard look.

The future of set-top boxes

Two recent news items on set-top boxes:
1) The Federal Communications Commission has proposed a new regulation that would force cable companies to allow customers to provide their own set-top box.  Today most cable customers pay about $10 per month per box.  The FCC argues that once companies can compete for customer's business, costs will fall and consumers will be better off buying instead of renting boxes.
2) Comcast, the largest cable provider, has come up with a new program that will allow owners of recent models of smart TVs to have full access to Comcast programming without using a cable box.  

Looks like Comcast is The Road Runner and the FCC is Wile E. Coyote! Beep beep!

Professional MBAs take 1st place

Kudos to Professional Jenkins MBAs Pierre Marcella and Graham Ransom who took 1st place yesterday in the Poole College of Management's 8th Annual Leadership and Innovation Showcase.  Teaming with College of Design student Sunny Su, Marcella and Ransom have developed a smart coffee device that can roast, grind AND brew coffee.  Buyers will be able to save a lot of money by doing their own roasting, plus they will get a much tastier brew.

Their project comes from MBA 555 Product Innovation Lab, a course that has been very well received over the years including recognition from Forbes as one of the ten most innovative MBA courses.

Marcella and Ransom will both graduate by the end of the year and they plan to turn their project into a business.  They already have a working prototype.  Looking for a great investment opportunity?

Kudos also to the second place finishers full-time Jenkins MBAs Dana Magliola and Lindsay Schilleman for their research project that measured the size and economic impact of North Carolina's supply chain.

Fuqua prof's secrets to time management

Business schools do a great job training their MBAs to handle big picture items such as strategizing and execution items such as budgeting (especially if they can be performed on spreadsheets).  I can safely say that MBA programs totally ignore a critical skill everyone needs to have to be successful: personal time management.

One book I found helpful is David Allen's Getting Things Done.  But who has time to read a 300 page book?

Luckily Fuqua's Dan Ariely has an opinion piece on Observer.com that will rescue many minutes each day for you.  Needless to say, meetings and email are on Ariely's list.

On living standards

Over the last few months, we have frequently heard politicians (and a real estate tycoon) claim that living standards have not increased over the last 20+ years.  That conclusion is based on comparing the rate of growth of wages (or weekly earnings) to the inflation rate.

Let me illustrate: average wages were $4.96 per hour in March 1976 and were 4.31 times higher ($21.37) in March 2016.  The Consumer Price Index increased by a factor of 4.13.  So the gain in wages after inflation turns out to be quite modest (4 percent over 40 years).

Here's the rub: there are well known problems with estimating average wages and inflation.  For instance, the composition of the work force has changed tremendously; today there are more women and immigrants than 40 years ago and more service and fewer manufacturing jobs.  Also the mix of goods changes a lot; no one bought iPads in 1976 and no one buys typewriter ribbons today.

Another way of looking at the living standards question is to compare consumption patterns.  For instance, one can compare housing, food consumption, and car ownership patterns.  If this shows the same 4 percent growth over 40 years then the Labor Department numbers hold up.

Yesterday's WSJ reported on airline travel.  If we were to time travel back to 1971, 49% of the adult population in the US had flown at least once in their lifetimes; today more than 80% have flown.  If you slice the data to look just at who flew last year, 45% flew in 2015 compared to 21% in 1971.  This is not broken down between business and leisure travel, but the overall implication is that living standards in this dimension have increased.

Of course air travel is a small share of overall spending in today's economy and comparisons of other goods and services undoubtedly will point in the other direction.  Economists use data on total spending rather than physical units consumed, making it hard to separate price and quantity changes. More basic research into consumption of goods and services that can be measured accurately would shed light on this issue.

How big is the gig labor market?

The internet has enabled online transactions for real time services between service customers and providers.  You can reserve an overnight stay in someone's home or apartment.  You can get a ride to work in someone's car.  You can get a voiceover narration performed by someone in the Czech Republic.

The gig economy provides new options for workers to make money when they want and how they want while providing customers with more choice.   But it also undercuts existing business models.  Licensed cab owners are less than fond of Uber; hotels are hardly enamored with Airbnb.  Also because Uber drivers are independent contractors, there is no guarantee of a minimum hourly wage and they are unable to organize into unions (as if unions could organize any private sector workers anyway).

With all the headlines, my colleagues Larry Katz at Harvard and Alan Krueger at Princeton set out to measure the size of the gig labor market.  The results, as reported in WSJ: a mere 0.5% of workers were engaged in a typical week.  Uber accounts for two-thirds of this modest number.

Wave of the future?  We would do well to suspend judgment.

NC State Jenkins MBA climbs in US News rankings

The US News rankings of graduate programs came out yesterday; NC State's Jenkins MBA had its best performance yet.  The Jenkins Professional Evening program came in #34 in the part-time rankings while the full-time program came in at #52 in the full-time rankings.  Historically both programs have been in the 60s and 70s.  Last year full-time was #70 and part-time was #103 (which was a total outlier that none of us have ever figured out).  We moved up 18 spots in the full-time ranking, the second largest move of any school.  

What happened?  On the part-time side, the deans’ assessment score increased, selectivity increased and GMAT scores increased a lot.  For full-time, recruiter assessment was up, GPA was up, selectivity increased, starting salaries were up, and placement rates were up. 

This has been a remarkable year for the Jenkins MBA in terms of external recognition.  We have been #15 for US News Online MBA, #29 for Bloomberg Businessweek Full-time MBA, and #45 for Bloomberg Part-Time MBA.  

I think the best is yet to come.  The forthcoming improvements to the curriculum will put us on the cutting edge for working professional MBAs.  We have fantastic professional staff to enrich the applicant/student experience and enhance career success.  Add these ingredients to the outstanding opportunities that our faculty provide in the classroom and our hands-on “Think and Do” attitude and we have a recipe for continued success.  

Jay Bilas on how to select teams for NCAA Tournament

Puzzled why mediocre teams from power conferences (I'm talking about you Vanderbilt and Syracuse) get into the NCAA men's basketball tournament while deserving teams from smaller conferences have no chance of getting in if they lose a game in their conference tournament?  

Jay Bilas, Duke alum and ESPN announcer/analyst has a plan:

• Tournament selection committee would meet prior to the conference tournaments and rank the top 68 at-large teams. 
• Teams that win conference tournaments receive automatic bids. If that team is not one of the 68 teams, the lowest-ranked team in the field of 68 is knocked out.

In practice this would help the best of the smaller conference teams.  Using RPI as a measure of overall team quality, they placed 28 teams in the top 68, with 40 from the power conferences.  There are about 20-25 teams that get into the conference as automatic qualifiers that would not be in the top 68 and the displaced teams would come almost equally from the big name and smaller conferences.   

Additional advantages of this approach would be (1) enhanced transparency and (2) greater emphasis on the regular season.  As a Kentucky fan who is still trying to figure out why his team could beat Texas A&M and then be seeded behind them, let's just say I am open to suggestions for improvement.    

NC State MBA team excels in case competition

The Kellogg School at Northwestern took 1st; other participants included Duke, UNC-CH, Chicago Booth, Oxford and Manchester.   Kudos to Graham Givens, Shannon O'Shea, Anindo Chatterjee, Mike Vigars, and Rafael Estevez for representing the NC State Jenkins MBA program so well.  

NC State placed second at the Invest for Impact competition at UNC-Chapel Hill
last Friday.  This is a unique competition where students play the role of investors looking for opportunities that pay off socially as well as financially.  They evaluate business plans for three potential startups, decide which one is most worthy of funding and make a pitch for that startup.  Actual investors and entrepreneurs participate in the process as well, with the investors serving as judges.

Why tuition is rising

As Margaret Spellings takes over as the new UNC system president, I am sure that tuition in the UNC system will be getting a careful look.  Harvard economist Greg Mankiw recently did an NYT Upshot column where he noted three key factors:

1. No increases in productivity accompanied by rising costs.  Higher education remains a labor-intensive industry with limited opportunities for capital-labor substitution.  There has been some labor-labor substitution as schools use more non-tenure-track and part-time faculty.  But this has not been enough to offset rising salaries for faculty and staff.  
2. The widening gap in earnings between highly educated labor and less educated labor.  Colleges make extensive use of workers with advanced degrees and such workers are about the only ones getting ahead in today's economy.  If colleges employed more roofers and gardeners than professors, their labor costs would be holding steady or even dropping.  
3. Sticker versus actual prices.  Everyone knows the sticker price at Harvard, but no one knows the actual price paid by the average student.  Mankiw shows that list prices have risen by 70 percent over 20 years, whereas the net price (after scholarships) is up 32 percent.  

Two other factors that may be at work behind the national trend: (a) rising financial aid and loan access serves as a subsidy and pushes prices even higher and (b) declining teaching loads for tenure-track faculty.  

In the UNC system we have seen declining state support lead to tuition increases over the last eight years.   

Spellings has put a stake in the ground around expanding access to higher education.  Looking forward, I imagine the UNC system will be looking at innovative ways to deliver education in a more cost effective manner. 

NC State Online MBA ranked #15 by US News

The NC State Jenkins MBA received more great rankings news this week.  US News and World Report issued its most recent ranking of online MBA programs and NC State placed at #15.

This is very close to where we finished in 2015.  The program was most highly rated in the area of student engagement (#9).  We also did well on admissions selectivity (#37) and student services and technology (#39).

For whatever reason we did not do as well on faculty credentials and training (#69), despite the fact that -- unlike most other online MBAs -- the faculty teaching online are the same as those teaching our and face-to-face students.  The top two schools on this dimension are Arkansas State and California Baptist; well-regarded schools such as Carnegie-Mellon, UNC, Indiana, and Arizona State are not even in the top 10.

Student interest in the NC State Online MBA continues to grow by leaps and bounds.  We are meeting the market test, as well as scoring well on the rankings.  I expect the best is yet to come.

More competition for full-time MBAs

Competition in the full-time MBA market is heating up.  The University of California at Irvine just announced that all newly admitted full-time students who are California residents will automatically get a fellowship of $10k.  This follows recent announcements by Arizona State and UMass-Amherst that full-time students will get free tuition.

Now here's the fine print: In-state tuition at UCI is $40k and change per year.  Here at NC State the full two-year cost of the degree is $45k for in-state and $74k for out-of-state.  Over half of our full-time students get a graduate assistantship or fellowship, which makes NC State an even greater value.

What is going on in the full-time MBA market?  We see some schools (Wake Forest, Virginia Teach) dropping the degree whereas others are doubling down to attract students.  The real challenge all full-time MBA programs face is that the biggest cost to students is not the tuition; it is two years' lost earnings.  If a school cannot deliver post-graduation a significant bump in income, then that school will have trouble attracting students.

The real numbers applicants should be looking at are these: (1) where am I now?  (2) where will I be immediately after completing the degree? (3) where will I be five years later?  In the most recent Bloomberg Businessweek full-time MBA rankings, their survey of 2007-09 NC State Jenkins MBA alumni found that
-- pay more than doubled between the start and finish of the program
-- pay almost doubled again five years later

That is a big reason NC State's Jenkins MBA placed #25 in alumni satisfaction and #29 overall in the Bloomberg Businessweek rankings!

Judgment versus algorithms in hiring decisions

Companies now have massive amounts of data about employee performance.  Is it possible to find meaningful correlations between performance and indicators that can be measured before a job offer is made?  If so, then there is room for algorithms based on these correlations to make improved hiring decisions.  

Economists at Harvard, Toronto and Yale business schools recently did a study that examined this question.  They examined the hiring of low-level service workers at 15 firms.  They focused on what happens when an employee is hired based on the algorithm versus what happens when a hiring manager overrules the algorithm and hires based on his or her own judgment.  

The results, summarized in Bloomberg Businessweek and available in National Bureau of Economic Research Working Paper No. 21709, are sobering.  Job candidates picked by the algorithm stay longer and perform better than those picked by hiring managers.  Also, there was a strong correlation between algorithm predictions and actual performance.  

One caveat: this study looked at relatively unskilled jobs where performance could be measured objectively.  What would happen in more complex jobs such as trial lawyers or university professors?   My guess is that we will find out in the not too distant future.  

Launch event for McLaughlan Leadership series

The kickoff event for the McLaughlan Leadership series last Friday at the Poole Clubhouse was a tremendous success.  All 24 members of the initial class attended.  They had the opportunity to meet Russ and Cara Mclaughlan and network with each other.

This series is a watershed event for the NC State Jenkins MBA program.  Our ultimate goal will be to make leadership development training available to all Jenkins MBAs and to have a more intense experience available for those who can best benefit.  Click here to learn more about the experience planned for the McLaughlan Leadership participants this coming spring.  

Student financial aid: debt versus equity

Have been meaning to share this article from the Economist regarding how to best provide student financial aid.  In the US the dominant approach has been student loans.  But as any finance student knows, why can't equity be an option as well?  Why not let students sell shares of future earnings in return for up-front funding for college?

In pure financial terms, such loans would be viewed as very risky.  Would the student finish their undergraduate degree?  What earnings stream would the student generate once schooling is completed?  There is a company called Upstart that is doing this on a peer-to-peer platform; think crowdsourcing your degree!

There also would be a moral hazard problem.  Students receive the funds up front and then may choose to select a low income career or even have no career at all.  Funders would want some sort of collateral to offset this, but if you could post collateral you probably do not need a loan.

Income-based loan repayment plans are a variant on this theme.  When Yale experimented with this approach in the 1970s, it found that students who expected to have high earnings preferred traditional methods of loan repayment and those who expected no to low earnings took the "pay a percentage of earnings" repayment method.

What happened to construction workers

Today builders say they are facing a profound shortage of qualified, trained workers.  Yet construction employment dropped by 2.3m jobs between 2006 and 2011 and is still 1.3m below the 2006 peak.  So what happened to over one million workers?  Why aren't they coming back in the market?

WSJ's Real Time Economics blog has the answer: some have switched to other industries but many have dropped out of the labor force.  At the same time hiring of young workers has been slow, so now there are not enough trained workers to meet demand.

This evidence further supports the view that despite the lowest employment to population ratio we have seen in 40 years, the labor market is close to having a balance between supply and demand.  Those who have dropped out of the labor market after they lost their jobs in the Great Recession do not appear to be coming back.

An MBA for free

Arizona State recently announced that it would not charge tuition any more for its full-time MBA program.  In addition, ASU plans to expand the size of the program.  Right now ASU charges $54k to in-state students (over two years) and near $90k for out-of-state students.  The free tuition offer could cost ASU as much as $20m each year.

ASU is betting on a stronger applicant pool generating more employer interest and higher rankings, resulting in a rankings boost.  To their credit ASU is taking a big risk to better position its MBA program.  They are investing money from their own endowment.

What impact will this have on the MBA market?  The answer depends on how the offer changes the matching process between students and schools.  I doubt students originally bound for Stanford and Harvard will now go to ASU for free tuition.  Also, many schools in ASU's tier already give lots of financial aid to full-time students.  If ASU already was supporting half of its class, another 50 to 60 free rides will not have a dramatic effect on the entire market.

Most importantly, tuition costs are but one part of the MBA ROI calculation.  Lost earnings are a much larger component.  The earnings bump from the degree is also critical.   Arizona State does a good job in that regard (#41 in employer satisfaction in the latest Businessweek rankings), but I have to wonder whether ASU would have been better off spending less than $20m and focusing on the student experience (#62 in alumni and #61 in student satisfaction) and employer development.

At NC State, we provide full tuition graduate assistantships to a significant share of our full-time MBA students.  In exchange, these MBAs support faculty teaching and research.  Other students receive scholarships that offset some tuition costs.  Our key differentiator is not our tuition policy; it is the "think and do" spirit of NC State and the company-sponsored projects that are a key part of our classroom experience.

NC State MBA vaults to top 30 in Businessweek full-time rankings

The NC State Jenkins MBA program made a huge leap to #29 in the US in the prestigious Bloomberg Businessweek full-time rankings, up from #54 a year ago.  Harvard was #1, Duke was #8 and UNC-Chapel Hill was #17.  NC State was ranked ahead of many well-established MBA programs, including Michigan State, Maryland, Vanderbilt, Ohio State and Wisconsin.

Why did NC State jump so high, so quickly?  Just ask employers, which is exactly what Businessweek did.  NC State ranked #20 in employer satisfaction.  This reflects the "think and do" spirit our graduates bring to the workplace, especially the skills they develop in the company-sponsored projects that are a cornerstone of the program.  We also did very well in terms of alumni (#25) and student (#38) satisfaction.

The part-time program also received a solid ranking at #45.  This is down from two years ago, but we should be very proud to be one of just 26 schools that received top 50 recognition for both the full-time and part-time program.

Kudos to the alums, faculty, staff and students who have made the NC State Jenkins MBA such a special program.  This latest ranking, along with the #9 online ranking from US News earlier this year, shows that NC State's MBA program is on the move.

Will those who left the labor force ever come back?

Everyone who has been looking at labor markets over the last five years has been asking, "What is going to happen to labor force participation (LFPR)?"  We know unemployment is down to near normal levels, but LFPR remains at its lowest point in almost 40 years.  The question is important because it cuts to the heart of the issue of whether we are at or near full employment.  The unemployment numbers say yes; the LFPR numbers say no.  So what are the odds that those who have left the labor force will actually return?

Today a WSJ blog reported one relevant item of evidence, based on a sector of the economy that I have researched heavily in the past -- the construction industry.  We all know what happened to construction in 2007-08; it tanked.  That means there are a lot of former construction industry workers out there who have the skills to return.

But are they coming back?  So far the evidence is that they have found other things to do and that this has put construction contractors in a bidding war for scarce talent.  Employment is still well below 2007 levels, yet builders are having a hard time finding qualified help.  This would imply that we should take the unemployment numbers more seriously as an indicator of aggregate labor market conditions.

Inc. magazine lauds RTP as an entrepreneurial hot spot

Brian Hamilton, Chairman of the Board at Sageworks, has a nice piece in Inc. magazine about why the RTP area is an entrepreneurial hotbed.  Brian came here to get an MBA at Duke, which makes his comments about NC State even more compelling:

NC State is a true hidden gem that, to me, produces by far the strongest engineers and employees of the three.

One "tax" that makes economic sense

I ran across two pieces this week about the "Cadillac tax" on high-cost health insurance plans.  This tax, part of the Affordable Care Act, goes into effect in three years.  It will tax as ordinary income employer-provided health insurance premiums in excess of $10,200 for individuals and $27,500 for families.  It has been in the news because a number of politicians (including Hillary Clinton) have endorsed its repeal.

Ritu Agarwal, a b-school prof at the University of Maryland, argues the tax is an essential element of any policy that can successfully reform our health-care system.  The revenue from the tax finances ACA subsidies for health insurance purchases.  Also, the tax will force employers to shift more health care spending to individuals, who will be more careful with their own money than with someone else's when making decisions about their own care.  This will help bring down costs.

WP columnist Catherine Rampell points out another benefit from this tax: it will increase take-home pay.  One reason employee benefits represent at least 25% of the cost of labor is that many of these benefits are tax-deferred or are not taxed at all.  If the employer spends $1000 on wages, the employee takes home less than that after taxes.  If the employer spends $1000 on health insurance, the employee gets full value.  But total spending on compensation must equal the value created by the employee for the company, so an extra dollar spent on health insurance means one less dollar in wages.  And as premiums rise over time, wage growth slows.  So the Cadillac tax, which will lead employers to cut back on premium expenditures, will mean a raise for many employees!

Most economists would go one step further and tax all employer-provided health insurance premiums.  Why should individuals buying insurance on their own get no tax benefits, whereas those with employer-provided insurance get a big break?  Rampell points out that employer-provided health insurance was quite rare until wage controls were imposed during World War II.  Employers then used health insurance as a way to get around the controls and raise pay as labor became more scarce.

We are already in the 2016 election cycle and whoever is elected to national office will have to make a decision on what to do with the Cadillac tax.  Will they let it go into effect in 2018?

Why student loan debt has grown

The media continue to be obsessed with stories about indebtedness on student loans.  But I had yet to see any tough analysis of microdata on where the growing debt burden has been coming from until a few days ago when a NYT blogger reported on a new study by a Stanford PhD student and a Treasury Department economist.  The study matched student loan records from colleges with earnings profiles from 1040s over the last 20 years, with all other identifying information removed of course.

Here are the main findings (direct quotes from the study's abstract):

• Most of the increase in default is associated with the rise in the number of borrowers at for-profit schools and, to a lesser extent, 2-year institutions and certain other non-selective institutions, whose students historically composed only a small share of borrowers. 
• In contrast, default rates among borrowers attending most 4-year public and non-profit private institutions and graduate borrowers—borrowers who represent the vast majority of the federal loan portfolio—have remained low, despite the severe recession and their relatively high loan balances. 

A couple of anecdotes from the study: (1) In 2000 the school whose graduates and former students had accumulated the greatest collective debt burden was New York University and they had piled up $2.2b.  In 2014 the school with the greatest debt burden was The University of Phoenix with $35.5b.   (2) Borrowers from for-profit and two-year institutions account for 70 percent of student loan defaults.  

Bottom line: despite all of the stories we read in the media about students who left Stanford with $100k in debt, the focus of future research needs to be on for-profits, 2-year schools and non-selective institutions.  Completion rates at these institutions are low and earnings opportunities after school attendance are often quite limited.  Loan applicants need to know that before paying their first tuition check.  

The new federal College Scorecard is a step in the right direction.  Prospective students can now get solid data on completion rates, indebtedness and earnings after attendance.  NC State fared very well on all measures, by the way.  

What is the ROI from investing in employees?

A study released last April by Harvard Law School looks at whether there is a connection between investing in employee development and financial success.   Based on a review of 92 papers, the authors conclude that there is a strong connection between human capital investment and financial rate of return.  The connection is so strong that the authors claim that financial analysts should start paying more attention to human resource policies when they are evaluating firms.

Such an analysis is not easily performed.  We lack ways of measuring training in ways that are consistent across different organizations.  But with rising social interest in triple-bottom-line analysis, this could end up being an active research topic in the years ahead.

Upskilling

I ran across the term "upskilling" this weekend when I read this WSJ piece about Wal-Mart.  It seems that the term is of recent origin, and is meant to indicate the opposite of downskilling.   A Google search points to a White House initiative called "UpskillAmerica," encouraging employers to make investments in on-the-job training, employee education, and internal career paths.

Wal-Mart has already made the decision to increase entry level wages.  Recently it announced a new training program that will be rolled out to over 4500 U.S. locations, focusing on entry-level workers.  Both of these steps make sense economically if the cost savings from reduced turnover and higher productivity offset the cost of higher wages and more training.

Employee turnover costs money—by industry estimates as much as $5,000 per front-line worker, or 20% to 30% of an entry-level salary. Standard turnover in retail is 50% in the first six months. If Wal-Mart can reduce this churn, persuading people to stay at least 12 to 18 months, it will save “tens of millions of dollars a year.”

Increased customer satisfaction is another possible payoff.  A key issue will be how responsive turnover really is to higher wages and more training.  Unless Wal-Mart plans to build a lot more stores, I have to question its ability to create long term career options for its entry-level help.

Employers are keenly aware of training costs.  If they think workers can be persuaded to stick around, they will consider investing in skill development.  Otherwise they will either avoid training altogether or shift the cost to the worker via lower compensation.  Over the last seven years, the trend has been toward reduced investment in employee development.  If the tide is turning now, that is a pretty good signal that we are getting near full employment and employers are fearful of labor shortages.

Has student loan debt eroded startup activity?

Since 2006 there has been a slowdown in the rate at which new companies have been created.  Is rising student loan debt a possible culprit?  We know student loan debt has been growing rapidly since 2000.  Unlike other forms of debt, there is no collateral for student loan debt, which is why it is so difficult to get out of such debt in bankruptcy.  Also growing amounts of student loan debt can discourage all sorts of asset acquisition and investment, so it is natural to think that business formation could suffer as a result.

Three economists at the Philadelphia Fed took a careful look at how new business formation across counties is related to student loan indebtedness, along with other types of debt.  (Summary here; full study here.)  The counties where student loan debt grew the most were also the ones with the slowest rates of new businesses being started, especially for businesses with fewer than five employees.  This is not necessarily proof of causation, but it certainly means that the subject merits further research.

Equal time for the Donald

There are too many Presidential candidates for me to pick on every policy proposal that is grounded on less than sound economic logic.  Because college loan debt is so poorly understood, I jumped on the Clinton proposal yesterday.  But I do not want anyone to think that the Democratic frontrunner has a monopoly on economic nonsense.  So let me quickly flag two items from the Republican frontrunner that came to my attention yesterday.

My gut tells me that Trump is the frontrunner because he has played the age-old "blame all of society's troubles on [fill in the blank: immigrants, religious minorities, ethnic minorities]" ploy very successfully.  In an era when the whole world is becoming more tightly connected because of declining costs of communication and transportation, Trump wants to turn the clock back 100 years.

Case 1: immigration.  Trump's position paper argues we should build a wall on the Mexican border, invest significantly more in border patrols and employment verification, and force employers to hire all the unemployed before any more green cards get issued.   The facts: more Mexicans are now leaving the US than entering.  Although most illegal immigrants come from Mexico, as many as 50 percent of all illegals from all sources get here by overstaying their visa.  Perhaps Trump will have the immigration office put chips on each visitor to the US, so we can trace them and escort them out if they stay too long?

Case 2: monetary policy.  Trump is a big fan of currency devaluation to enhance economic competitiveness.  As this WSJ column shows, there is a long history of countries trying this approach and it is a history of failure.  If currency devaluation were the road to riches, Argentines and Mexicans would be on top of the world.

On the Clinton college affordability plan

Imagine a new federal investment that would cost $350 billion over the first ten years.  How could such funds be invested for the highest social ROI?  Lots of candidates: health care, transportation infrastructure, carbon reduction, and the like.  In the education arena, Nobel prize winning labor economist James Heckman has argued for significant increases in spending on pre-kindergarten so that all children would start school on a more equal footing.

Former first lady, US Senator, and Secretary of State Hillary Clinton came out last week for spending $350b on debt relief for college students and alums.  A political stroke of genius, no doubt.  But who wins from this?  College graduates tend to come from upper income households and earn, on average, 60 percent or more over their lifetime as high school graduates.  Most of the spend would go to those who would have attended college anyway.  Why would debt relief for this crowd be such a high priority?  Recall the much more serious mortgage debt crisis in 2008 and how few politicians advocated federal intrusion into the mortgage business.

And what would colleges do?  To be eligible, they would have to show they are taking steps to control costs and that their students repay their loans.  But how many schools would be cut off from participating in the program if they do not make their numbers?  The feds have run a very loose ship on this front for decades.  In basic microeconomics, subsidies lead to more output and higher costs of operation.

As for Clinton's claim that the plan would be financed through higher taxes on the rich, be wary.  Congress is really good at coming up with new entitlements, not so good on coming up with ways to pay for them.

Bottom line: a new entitlement for the upper income brackets at a time when there are many, many higher priorities for public investment (if such investments can be wisely made in light of the other commitments our society already has).  The proposal also ignores some of the fundamental problems in the student loan market, especially the universal availability of loans regardless of odds of repayment.

First year MBAs get a taste of the market

As part of orientation, all 10 teams of first year, full-time NC State Jenkins MBAs participated in Marketplace.  Each team was given $100 and had two weeks to come up with a product or service that they would sell in an actual market.  They could use up to $100 of their own funds as well.

The Marketplace event happened last Friday at HQ Raleigh.  NC State Jenkins MBA students, alums, and staff attended along with invitees from the local startup community.  Each visitor had 50 "MBAbucks" that they could spend.  Entrepreneurship professor Lewis Sheats and a panel of judges picked a winner.

Observations:
1) Many of the products were food-related, including ice cream, snow cones, popsicles, popcorn, fresh organic produce.  Some people are always hungry, right?
2) Pricing strategies were interesting to say the least.  I paid 7 MBAbucks for a small scoop of ice cream and 3 MBAbucks for a quart of fresh organic tomatoes.  In a real marketplace the tomatoes would have cost more.
3) The winners: Jenkins PopCo -- flavored popcorn in appealingly designed bags.
4) The biggest challenge to most students I talked to was coming up with a concept on such a tight deadline.  Welcome to the world of business.

For more details, see this article in Triangle Business Journal.  Kudos to Claire Jefferies, Lewis Sheats, the MBA office, and the student teams for pulling off this great event.

A chance to refinance your student loan

Recent WSJ piece reports that some private sector lenders are now offering refinancing options to college graduates with student loans.  The offers are selective, going to those with sound credit scores and well-paying jobs.  One student was able to lower her interest rate from 7.2 to 4.7 percent.  Lenders mentioned include Social Finance, CommonBond, Citizens Financial, Earnest Operations, and Darien Rowayton.

The economic logic behind this market: the feds (and a few private lenders) offer one-size-fits-all terms for student loans -- an interest rate around 7% and a repayment period around 10 years.  These same terms are available to all borrowers, regardless of their ability to repay the loan.  After graduation private lenders can identify which students are good bets to make repayments and can profitably invest in those who appear to have great career prospects.  In today's credit markets, 4.7% repayment options are very attractive.

This changes the mix of the risk pool for the feds.  If the best repayment bets increasingly move to private sector funding, guess who remains in the pool?  And guess who will eventually have to cover a rising percentage of bad loans in that pool?  The parallels to the health insurance market are uncanny, with the private sector being more than willing to cover those with good health prospects while at the same time leaving the government to cover everyone else.  It would be naive to think that the federal government will allow the private sector to have a free hand in the student loan market for an extended period of time.

How much is your free time worth?

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

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

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

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

Airlines and antitrust

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

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

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

Employees: cost or asset?

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

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

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

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

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

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

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

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

More job openings than ever before

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

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

Is it time for more overtime?

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

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

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

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

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

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

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

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

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

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

Would we better off without PowerPoint slides?

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

Has the financial sector fully recovered from the Great Recession?

So says NYT financial columnist Neil Irwin.  The evidence:

• Employment has returned to 2007 levels
• The pay gap between financial services and the rest of the economy has recovered; it is now a 3.6:1 ratio!
• Entry level pay for Ivy League grads at investment banks went from $70k to $85k this spring
• Vacancy rates at prime Wall St real estate are down to 5%

This is obviously good news for those with aspirations of working in this sector.  But is it good news or bad news for the economy?  The article cites research by economists at the Brandeis, Chicago and NYU b-schools which suggests that the size of the financial services sector does not appear correlated with economic performance.  Financial markets are supposed to reallocate capital to firms with profit-making opportunity from those that are tapped-out.  In theory this should lead to increased productivity, but in practice the data show that a large financial sector leads to weaker productivity growth.  

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

John Nash has passed away

Nobel laureate John Nash passed away yesterday in an auto accident on the New Jersey Turnpike.  Veterans of MBA 505 will all certainly recall the Nash equilibrium concept in game theory.  Others will remember the movie "A Beautiful Mind," where Nash was played by Russell Crowe.  See the NYT obit for a solid recap of Nash's contributions to economics and mathematics.

Another top 20 ranking for NC State Jenkins MBA

Princeton Review today released its first ranking of the top 25 online MBA programs.  The NC State Jenkins MBA came in at #20.  This is the third top 20 ranking the program has received in the last year and a half, joining a #9 online MBA ranking from US News this year and a #20 ranking of the Professional MBA from Bloomberg Businessweek in November 2013.

Princeton Review's rankings are based on surveys of students and school administrators.  UNC-Chapel Hill was rated the #1 online MBA, followed by Indiana, IE (Spain), Arizona State and Temple.

Click here to see what NC State Jenkins Online MBA students have to say about academics and here to see what they say about how the program has helped their careers.

Do low wage employers get subsidized?

So claims a study from UC-Berkeley that was summarized recently by NYT.  It is true that many employees of companies such as McDonalds and Walmart receive some form of public assistance.  But when economists think of subsidies, we usually think of payments designed to encourage production of certain activities, such as higher education and corn.  In other words the more the company produces the more the government pays them!

The situation with low wage employers (large and small) is fundamentally different.  Public assistance programs are designed so that as people work more hours their assistance levels go down.  A low wage worker at McDonalds does not make enough money to be off public assistance, but the public assistance payments are LOWER than if he or she were not employed at all.  How this gets translated into a subsidy is beyond my comprehension.

Nonetheless I find the picture painted in this story very disturbing.  In a well functioning labor market, single mothers in their 30s should have better options than working in fast food or greeting shoppers at Walmart.  Part of the problem is that globalization and technological change have eliminated a lot of jobs.  Another part is that these workers do not have enough skills to qualify for whatever better paying jobs might be available.

How can we devise a way to get these workers the education or applied skill training that would open more opportunities?  I expect more creative use of online learning opportunities could make a difference.  But that does not seem to fit into the platform of either major political party; one seems to want to turn back the clock while the other is under the illusion that markets solve all ills.  

How testing is changing hiring

Companies have used personality tests to screen job applicants since the 1950s.  But now the tests have evolved and, because of advances in information technology, become cheaper to administer and more effective predictors of performance.  A recent WSJ article reports that eight of the ten largest employers in the US are using personality assessments to fill some jobs.

Employers are taking longer to fill positions, according to research done by Booth Chicago economist  Steven Davis.  They see how their best employees do on the tests and then seek applicants who give similar answers.  If companies have trouble filling a position, they simply post on more jobs boards until they find someone who is a good fit.

A key benefit of more careful selection is that turnover (both quits and layoffs) has gone down by about 25% over the last 10 years, according to Davis' research.

To tip or not to tip

Tipping is expected in restaurants, cabs, and a variety of other service industries.  At its most basic, the concept is simple -- the customer is in the best position to judge service quality, so why not have an incentive scheme where the voice of the customer speaks loudly?

Once you think more deeply about the motives associated with tipping, it starts to sound less appealing.  In many cases a customer will be at a particular establishment only once, so there is no financial penalty if the customer is a cheapskate and leaves no tip at all.  Also, service depends on a number of factors beyond the control of the person being tipped; the waiter cannot control backups in the kitchen and cabbies cannot control crosstown traffic.  Customers do not know that and penalize waiters unjustly.

A recent WP article reports that more restaurants are moving to a flat 20% service charge, and some are using this revenue stream to raise wages.  The benefit to employees is quite clear -- a steadier and larger stream of income.  Also most customers tip the same percentage (around 20% actually) all the time, so this process is not such a radical departure.

But what do customers get?  Now instead of voting with their tip dollars, customers would have to communicate directly with management about good and not so good service.  If they speak up, this would actually help management make more informed personnel decisions.  However, a customer might just as easily keep quiet about poor service and simply take his business elsewhere.

Shared tips or a flat fee also create incentives for waiters to cooperate, something management should encourage.  Finally, regardless of whether the waits get paid by tips or a percentage fee, I will still usually hear "Dr. Allen would you like to see the dessert menu?"  Restaurant owners will still have an incentive to get you to buy more.

Glaxo changes compensation plan for sales employees

Companies adopt compensation plans to better align the incentives of employees with those of the owners.  Commissions have traditionally been used in many sales jobs to encourage employees to sell as much as they can.  But that can lead the sales team to push product to every potential customer, regardless of whether the customer can use the product or not.

Bloomberg reports that GlaxoSmithKline is considering changes in its Patients First pay plan for sales employees.  The plan, launched in 2011, shifted the emphasis away from sales and toward "scientific knowledge, selling competency, customer evaluations, and overall performance of the representative's business unit."  The general idea is to reward the competencies that are believed to lead to strong customer relationships, as opposed to rewarding short-term, hardball sales tactics.  GSK is looking at making some adjustments to Patients First, including testing sales reps for product knowledge.  Looks like remembering those organic chemistry formulas has a payoff after all!

Is Uncle Sam the most predatory lender? A rant on student loans

Ran across this from a link today on the Real Clear Politics website

While our federal government continues to chase many mortgage lenders for so-called "predatory lending" practices, perhaps we should check in on the situation of far and away the biggest predatory lender of all, the federal government itself.  Its most odious practices are in the area of student loans.  I find the term "predatory" a stretch when applied to a mortgage loan for a house, given that in the worst case the borrower got to live in the house, and even if he gets foreclosed and has a deficiency balance he can normally discharge that in bankruptcy.  Not a pleasant process, but sometimes life can be tough.  Compare that to federal student loans, where the government lends inexperienced 18 - 24 year-olds open-ended amounts, often for dubious and overpriced trade schools, and then flatly forbids discharge in bankruptcy.   Many borrowers' finances are ruined for life, and they don't even have marketable job skills to show for it.  Now that's predatory!

What to make of last week's jobs report?

After months of jobs growth in the 250k range, the report for March shows a marked slowdown.  Jobs growth in March amounted to 126k and the numbers for January and February were revised downward.

Usually one bad month is not cause for alarm, but this news, combined with other recent reports of slowing economic activity, suggests that we are hitting a rough patch.  One possible reason is the stronger dollar has reduced export opportunities.

Despite recent wage increases announced by Walmart and McDonalds, wage growth continues to be slow.  This WSJ report indicates wages are growing at the top and the bottom of the distribution but not in the middle.

Should the Sysco and US Foods merger go forward?

Today's Raleigh N&O reports local restauranteurs' reaction to the proposed merger between Sysco and US Foods.  The FTC is trying to stop the merger, claiming that the combined firm would have 75% of the market.

Reaction to the merger appears to be mixed.  Some support the merger, believing that it will result in greater bargaining power for those who buy the products needed for food service operations and that the price cuts will be passed along to them.  Others are concerned that the competition between Sysco and US Foods will vanish and that prices will rise.

Much hinges (as it always does in antitrust cases) on the question of market definition.  In other words, 75% of what market?  The FTC claims the market definition should be "broadline food-service distribution;" in other words, the 18-wheelers that make the rounds every day.  Sysco says this definition vastly understates the options available to restaurants, who can deal with smaller distributors or even go to the farmers' market and Costco.

One last note: I was a bit surprised to see a number of local restaurants that pride themselves on their close relationships with local farmers on their menu, but still depend on Sysco for a good chunk of their food supplies.