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.

Do minimum wages translate into higher prices?

When the minimum wage increases, something has to give.  Companies have the option of cutting work hours, passing on the wage increase to customers, receiving smaller margins, or some combination of the above.

Most minimum wage research has focused on employment and hours worked.  Stanford economist Tom MaCurdy has a forthcoming study that represents the first careful look at prices.  MaCurdy finds that when the minimum wage was increased 21% in 1996, it induced a 2% increase in the price of food consumed away from home.  The prices of retail services, groceries and household personal services also went up.  Combining all of these effects, MaCurdy found that the overall price increase was greater for families in the bottom 20% of the distribution than for those in the top 20%.

What does this mean for low-income families?  MaCurdy shows that minimum wage earners are distributed evenly throughout the income distribution; one in five households has a member receiving the minimum wage.  In low income households minimum wage recipients are more likely to be primary earners, whereas they tend to be secondary earners (think teenagers) in high income households.  So if low income households receive the same boost in earnings but pay higher prices, they actually end up worse off.  MaCurdy concludes:

... more poor families were losers than winners from the 1996 hike in the minimum wage. Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices.