Rich and poor both getting richer

Are the rich getting richer and the poor getting poorer?  That's what a regular consumer of mainstream media would guess.  Trouble is, it's only half correct as a recent Congressional Budget Office analysis of Census data shows.  Between 1979 and 2010, income for households in the bottom 80% of the income distribution increased by 36 to 49 percent.  Growth for the top 20% was higher -- over 60 percent, with the top 1% seeing 200 percent gains.  

The CBO narrative for the lower and middle income brackets is more positive than what you have heard elsewhere for two reasons: (1) it takes into account taxes; (2) it adds in income from the entire range of government benefits.  The latter include "Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans’ programs, workers’ compensation, state and local government assistance programs ... [plus] ... the value of in-kind benefits: Supplemental Nutrition Assistance Program vouchers (popularly known as food stamps); school lunches and breakfasts; housing assistance; and energy assistance and benefits provided by Medicare, Medicaid, and the Children’s Health Insurance Program."

How satisfied are execs with MBAs?

Poets and Quants reports that Hult Labs (affiliated with Hult International Business School) recently did a study "What Employers Want" focusing on how well business schools were meeting employer needs.  They interviewed 90 C-suite execs, managers and academics to gather their impressions about MBA programs.  There were three major concerns raised:
1.  Metrics: schools use grades to measure academic performance but they do not measure whether students are gaining skills in such critical areas as communication, leadership or team skills.
2.  Emphasis: MBA programs do a good job teaching traditional subjects such as finance and marketing but fall down in 10 areas: self-awareness, integrity, cross-cultural competency, team skills, critical thinking, communication, comfort with ambiguity and uncertainty, creativity, execution, and sales.
3. Theory vs. Practice: those surveyed think there is too much theory and not much application in most MBA programs.

My take: NC State's Jenkins MBA has a distinctive approach to management education that emphasizes applied learning.  All students must now complete a semester-long project sponsored by a real organization that forces them to apply theory from the classroom.  The program also provides strong training in most of the 10 areas cited above and is looking how to improve in all areas.  So in 2 of the 3 areas cited we are in much better shape than most business schools.  Alas we do give grades and probably should consider how to get real time feedback to students throughout the program on their communication and interpersonal skills.

The downside of cleaner vehicles: less gas tax revenue

The local N&O ran a front page story today about a dilemma facing federal and state governments.  They all use a gasoline tax to fund highway construction and maintenance.  Because of a combination of people driving less and cars getting more gas mileage, gas taxes are not generating enough revenue to cover highway costs.  Also the gas tax hits different road users in very different ways; if you own an electric vehicle you pay no tax, even if you use the roads as much as someone driving a truck or SUV.

The options are not attractive for policy makers.  One approach is to continue to raise gas taxes.  Another is to change the system and charge users by the mile driven.  This can be done via high tech (GPS) or low (annual odometer checks).  NC State experts are advising the state on another option: congestion pricing on urban freeways.

NC State faculty research in the news

My NC State colleagues David Henard and Christian Rossetti just had a paper come out in the Journal of Advertising Research that is getting international attention.  Titled "All You Need is Love? Communication Insights from Pop Music's Number One Hits," the paper has been featured in stories not just in the US, but also in the UK and Australia.

Henard and Rossetti find that the theme of popular hits has changed over the last 50 years.  Rebellion was in the air in the 1960s and 1970s (I know, I was there -- "Tear Down the Wall," as the Jefferson Airplane sang).   Today themes revolve more along desperation and inspiration (e.g., "Happy"), perhaps a reaction to 9/11.

Henard and Rossetti focus on number one hits.  It would be interesting to see if the results could be generalized; some of the most enduring music never hits the top of the charts (ask Neil Young who has had one number one in his lifetime)  Alternate acts like Bon Iver and Grizzly Bear have been used by Bushmills and Volkswagen to push product.  I am guessing rebellion is pretty strong no longer how you slice the 1960s data; I also am guessing romance has enduring power across the ages from Marvin Gaye's "Let's Get It On" to Drake's "Hold On, We're Going Home."

How best to help low-wage workers

President Obama has made two proposals to help low-wage workers: an increase in the minimum wage and expansions in eligibility for overtime.  On the minimum wage front, he already has increased it for federal contractors and wants Congress to approve a $10.10 minimum wage for all.  Economists are fairly split on the merits of increasing the minimum wage; to get a good idea of how split see these two links from Greg Mankiw (hundreds are in favor, hundreds are opposed).

As for overtime, employers hire workers as long as the extra revenue they generate offsets the cost of the worker.  Employees with supervisory responsibilities are not eligible for overtime if they make more than $455 a week.  Obama has directed the Department of Labor to raise that threshold so that more become eligible for overtime.  Once again economists have a split opinion on the desirability of this policy.  A reasonable case can be made that this would have zero impact.  Employers could offset the increased overtime costs by slowing the growth of base pay and cutting employee benefits.  Those who lack the flexibility to cut pay and benefits will trim back on overtime hours and employment.  The federal government can set pay rules, but it cannot repeal the law of marginal cost equalling marginal revenue.

The Earned Income Tax Credit is another mechanism for helping low-wage workers, as Princeton economist Alan Blinder argues in this recent WSJ op-ed.  This policy receives nearly universal support from economists.  However it is not so popular in Washington because it forces the federal government to come up with the extra cash for low-wage workers instead of trying to stick employers with the bill.

Student loans: more than meets the eye

Things we know: there is more than $1tr in student loan debt; a higher percentage of student loans are 90 days past due than credit card, auto or mortgage debt.  The popular press would have us believe that this is the result of rising tuition.

Reality is much more complicated, as a recent WSJ piece indicates.  Student loans are designed to cover tuition and living expenses.  The terms are relatively attractive and there is little to no screening for credit worthiness.  So student debt can be used to cover everyday expenses when there are no other funding sources available.  WSJ profiled one young man who was unemployed and signed up for part-time community college courses so he could borrow enough money to pay his rent.  A sad case, to be sure, but probably not what the designers of the student loan program had in mind.

If you take out an auto loan or mortgage, you get asked a series of questions designed to gauge the likelihood that you will pay the loan back.  The questions that should be asked about student loans -- which would reflect the odds of completing a program and the success of its graduates -- would shake the world of higher education to its very core.

More great ranking news for NC State Jenkins MBA

The US News MBA rankings came out today and, once again, the NC State Jenkins MBA is moving up.  The full-time program moved up 23 spots from #88 last year to #65 this year; the part-time program moved up 12 spots from #73 to #61.  According to Poets and Quants, only one other program made a bigger jump upward.

Why did the ranking go up?  On the full-time side there was improvement across the board: higher recruiter assessment score, higher starting salary and bonus, higher placement rates, higher GPA and GMAT, and more selective admissions.  On the part-time side the incoming class had more work experience.  Among local part-time programs, NC State ranks ahead of Elon (#77), UNC-Greensboro (#80), UNC-Wilmington (#175), Fayetteville State (#184) and East Carolina (#196).

Big changes for SAT; is GMAT next?

Today's big news story in higher education is the significant changes planned for the SAT.  The exam will make the essay optional, drop obscure vocabulary words, and no longer penalize for guessing the wrong answer.  Make no mistake -- none of this would be happening if the SAT had not been losing market share to the ACT.  Competition in the testing market will hopefully yield a better predictor of college performance.

But I would not be so sure.  The SAT now better measures knowledge obtained in high school.  But the main reason we have the SAT in the first place is that high school grades are a far from perfect predictor of college grades.  By testing different types of mathematical and verbal skills, it provided an independent measure of college potential, a second chance for students who had a bad year or two in high school.

The GMAT is facing a similar problem, losing market share as more schools (including NC State) accept the GRE or waive test scores for some applicants (e.g., those with masters degrees).  Poets and Quants reports that the volume of GMAT test takers dropped by 17% in 2013.

A testing operation has to add value to admissions decisions.  The GMAT works well for quant skills and deductive logic, not so well for leadership and communications.  If employers continue to take the former as a given for any MBA and place more emphasis on the latter, expect GMAT to either adapt or be replaced by other predictors.

NC State Jenkins MBA featured in Poets and Quants

Poet and Quants is a blog that regularly reports news about the world's most respected MBA programs.  Today P&Q posted a lengthy article about NC State's Jenkins MBA, highlighting our technology emphasis and industry partnerships.  Well worth reading!

Should employers be asking job applicants for SAT scores?

Today's WSJ discusses how employers are asking job applicants to submit their SAT scores.  The SAT is designed to predict academic performance in the first year of college.  So how could such scores inform hiring decisions, especially for experienced employees who took the test decades ago?

Not many employees spend their time calculating the area of a triangle or doing sentence completion exercises (unless their job is to write SAT questions for the College Board). Managers might logically use the SAT if they thought it predicted job performance, but a well run company would do a validation study to make sure this is an evidence-based decision.  Google used to use GPAs and the SAT but stopped the practice two years ago because they were poor predictors.

Will your pilot soon be earning the minimum wage?

The labor market for airline pilots is going through some unexpected turbulence.  Recently WSJ reported that a combination of boomer retirements and new training requirements (1500 hours of flight experience compared to 250 originally) were causing some regional airlines to drop their least profitable flights.  Aspiring pilots can amass tens of thousands of dollars in debt to get the flight time needed to meet the training requirements.  So why do they do this, especially since regional airline pilots earn an average salary of $22,400 and some earn only about $15k?

The answer -- eventually the pilots hope to land a position with a major carrier that pays well into six figures.  That is why they are willing to accept positions that barely pay more than the current minimum wage (and would be below the aspirational minimum wage of the Obama administration).   My expectation: expect to see salaries for regional pilots increase as always happens when there is a shortage and markets are allowed to operate.

Economic impact of Comcast - TWC merger

Take two cable monopolists, combine them and stir.  How does this change:

• Consumer choices: Not at all.  You are still going to be stuck with one cable option for television.  You will have Direct TV and Dish as satellite options and in many areas AT&T U-verse through your phone wire (if you have one).  Comcast and TWC do not compete in any market head to head.  Both are notorious for abysmal consumer service and negligible innovation; no reason to expect any improvement here.  
• Prices: Possibly a plus.  By combining overhead functions, the merger should produce some economies of scale.  More importantly, the combined company will have more bargaining power with content providers.  People see the rising cable bills year after year and blame the cable provider; they do not see the upward ratchets in content costs, so they give Walt Disney (owner of ESPN) and NBC Universal (owner of Weather Channel, along with Blackstone and Bain) a pass.  
• Internet speed: If you are thinking about cutting the cable cord, realize that in most places the cable company is likely to be your fastest source for internet.  Triple play pricing makes the cost of basic cable plus internet not all that much higher than basic cable by itself.  Pray that Google Fiber will come to your town soon.  
• Number of cable subscriptions: Still likely to fall.  Too much good stuff for free or at low cost on the internet; sports is the only exception and you have to think ESPN and the major networks will soon figure out a way to sell sporting events on the spot market instead of sticking to the cable bundle.  

Another blow to the UAW

The last 40 years have been pretty tough for the American Big 3 automakers and the United Auto Workers.  First came Japanese imports, followed by outsourcing and Japanese and European transplants.  Once the Big 3 and UAW had a monopoly chokehold on the auto consumer; now their market share is well below 50%.

The UAW's only hope for survival is to organize the transplants.  They had a golden opportunity with the Volkswagen plant in Chattanooga.  Volkswagen offered no resistance to the UAW; in fact, they gave it an open mike to promote itself.  But just like a Road Runner cartoon, the outcome in Chattanooga was the same as in other big union organizing campaigns -- the workers chose to remain nonunion (WSJ report here).

In retrospect, the outcome is no real surprise.  VW workers were earning almost as much as their Big 3 counterparts (new hires at VW actually make more than their Big 3 counterparts), so why pay union dues?  Also for better or worse, the UAW has earned an anti-management reputation and receives much of the blame for the demise of the Big 3.  (Aside: making lousy cars also played a role.)  Bottom line: the VW workers weren't buying what the UAW was selling.

What would happen with a $10.10 minimum wage?

Yesterday the Congressional Budget Office issued a report on what would likely happen to American labor markets if the federal minimum wage were increased from its current value of $7.25 to $10.10 by 2016.  Two conclusions have received considerable attention in the press: (1) there would be 500k fewer jobs and (2) the number of persons living in poverty would fall by 900k.

It is easy to reconcile the two results.  Some workers would get raises and there are enough workers making between $7.25 and $10.10 who will keep their jobs to offset the income loss associated with those who lose their jobs.  Interestingly CBO notes that only 19% of the wage increases will go to persons who reside in households with a living standard below the poverty line.  In contrast 30% of the wage increases will go to persons who reside in households with income three times higher (or more) than the poverty level; these would be secondary earners in such households.

The CBO analysis appears to omit to other key elements of a minimum wage increase: reduced profits of business owners (some of whom are struggling) and higher prices charged to customers.

Lessons from a MOOC @ Chicago Booth

John Cochrane, a finance professor at Chicago-Booth runs a blog he calls The Grumpy Economist, which is well worth a look once or twice a week.  Cochrane taught a MOOC last fall on "Asset Pricing" at the PhD level.  The course lasted nine weeks; students were expected to work 10-15 hours each week.  Reflecting on his experience in this post called "Mooconomics," Cochrane makes these points

• Fixed costs are very, very high
• The Coursera software for assessments is limited to multiple choice and numerical answers
• Faculty need help with instructional design, video and IT to make the transition
• The "flipped classroom" worked very well with his on campus students who studied the videos before class 
• Look out faculty!  Money quote: 

But a warning to faculty: Teaching the flipped classroom is a lot harder! The old model, we pretend to teach, you pretend to learn, filling the board with equations or droning on for an hour and a half, is really easy compared to guiding a good discussion or working on some problems together.

With high fixed costs and zero revenue, Cochrane asks how can universities monetize their MOOC investments.  One possibility is that MOOCs replace textbooks and schools charge other schools to use their materials.  Another is that universities will use MOOCs to build brand awareness and closer relationships with alumni.  The fixed costs will be high, but then again football teams, libraries and labs aren't cheap either.

Dealing with long term unemployment

Ran across this worthwhile piece by Bloomberg columnist Megan McArdle a couple of days ago where she discusses the question of what we should be doing to reduce the severe problem of long term unemployment.  We still have 3.6 million people who have been out of work for 6 months or more.  Should we be supporting them by extending unemployment benefits?  Or should we be creating incentives that would be creating more opportunities for them to be hired?

McArdle cites research by Alan Krueger (just returned to Princeton after two years being Obama's top economic advisor) that shows what happens to the newly unemployed.  At first they intensively search for positions.  Then once they have tapped out their network, most become passive waiting for something to come along.  Finally there is another burst of intense search as benefits run out.

Why does search effort follow this pattern?  Some might see it as a rational response to poor market opportunities; faced with a tough market, why spend tons of time beating one's head against the wall.  Others would see it as a rational response to living off the dole; this could very well be true in Europe where the ratio of benefits to lost salary income is fairly high (however, in the US benefits replace less than half of income).  Krueger found that heightened anxiety may play the most important role; rejection is unpleasant and a less intensive job search means fewer fruitless encounters with potential employers.

One idea that merits consideration, McArdle argues, is the Danish system where the long term unemployed have to accept job retraining.  Other options include tax credits to firms that hire the long term unemployed or grants to individuals who leave high unemployment regions to take jobs elsewhere.

Valentine's Day economics

Two great links to share on VDay:
1)  Stanford b-school economist Paul Oyer shares his thoughts in NYT on how to use economic reasoning to become a better valentine with three tips:

• Signal your love -- don't get generic gifts like roses or candy; instead do something special for your sweetie such as cooking a favorite dish
• Invest in yourself -- make yourself a better mate, either by getting more training and education so that your earnings power is enhanced or by enhancing your appearance to make your baby's eye candy all that much sweeter
• Love the one you're with -- economics is all about optimization but too many people mistakenly think the proverbial grass may be greener and do not understand the costs and risks involved.

2) My colleague Craig Newmark found this story containing 14 Valentine's that economists might send (but hopefully only if their loved one is an economist as well).  My favorite:

The S&P was in the red,But I wasn't blue,Because I shorted the market, And went long on you.  

Still lots of prime age men without jobs

Last week's WSJ has a long front page story on a trend that needs to be getting more attention: the steady decline in the percentage of 25 to 54 year old men who are jobless.  Here are the facts: in the early 1970s only 6% were jobless, a percentage that increased to 13% in 2007 just before the Great Recession.  The jobless rate peaked at 20% in 2009 and now sits at 17%.

There are a few partial explanations: more students attending graduate school, a higher incarceration rate and a larger percentage on disability (although the direction of causality on the latter is far from clear; are more people getting sick or injured or have disability claims have risen because of poor job prospects?).  Another possible culprit is declining inflation-adjusted wages.  Prime age men do not usually qualify for income maintenance programs other than disability.

So what to these idle men do all day?

Surveys find that most of the jobless spend their days in the same way working men spend their weekends -- watching TV, working out, sleeping.  

The story then goes in depth into the situations of four different men.  In each case there is a common thread: initially in a job that is a good fit with their training and experience, each experienced a layoff over the last few years and was unable to get any traction in the job market afterwards.

Red letter day for NC State

Today was a red letter day at NC State.  President Obama visited the campus and gave a speech where he announced that NC State has received its biggest grant ever -- a $140 million contract for energy research.  Half of the funding comes from the US Department of Energy; the remainder comes from private companies (including ABB, Cree and Toshiba) and the state government.  The research will focus on new advanced semiconductor technology that has the potential for huge energy savings.  

Thoughts on the job market

We were starting to see a lot of happy talk in the press about the economy turning the corner in 2014.  Believe me, I hope the optimists are correct.  But Friday's jobs report was a big bucket of cold water.  Employment grew in December by 74k, well below the 180 to 200k that was expected.  Employment now is still over 1m jobs below its peak level in January 2008.  The unemployment rate dropped from 7 to 6.7% but only because more people dropped out of the labor force.

As I have said before, monthly jobs data are noisy and maybe the weather threw things for a loop. Looking at 2013 as a whole, WSJ reports that average monthly job growth of 182k was basically unchanged from 2012.

WSJ also has an interesting graphic showing how employment growth has varied by sector.  The biggest job losses have been in manufacturing and construction.  Retail and wholesale trade and financial services also have fewer jobs now than they did six years ago.  One legitimate concern is whether these jobs are ever coming back.

Should universities rethink some of their PhD programs?

January is peak season for the academic labor market, as graduating PhDs await news of whether they will get on-campus job interviews or come up with a Plan B.  In business and economics the market for PhDs is very strong.  In most scientific disciplines new PhDs move on to post-docs.  Then we have the humanities and liberal arts, where tenure-track jobs are few and far between and those with academic aspirations face years of one year appointments.  

Bloomberg's Megan McArdle had a stimulating (as always) post last week where she points out that academic labor markets have become tournaments, where a lucky few get great positions but most people miss out.  The performing arts and professional sports are two prime examples of tournament markets.  Potential athletes learn at a relatively early age whether they are going to make it or not.  Aspiring actors or rockstars end up devoting their best years to the pursuit of fame, and McArdle thinks academic labor markets are like this as well.

Her suggestion will be viewed as heresy inside the hallowed halls of academe: start shutting down PhD programs in disciplines where there is a glut of doctoral candidates compared to available positions.

That constant flow of grad students allows professors to teach interesting graduate seminars while pushing the grunt work of grading and tutoring and teaching intro classes to students and adjuncts. It provides a massive oversupply of adjunct professors who can be induced to teach the lower-level classes for very little, thus freeing up tenured professors for research. 

Unfortunately, I’m essentially arguing that professors ought to, out of the goodness of their heart, get rid of their graduate programs and go back to teaching introductory classes to distracted freshman. Maybe they should do this. But they’re not going to.

I agree that the professorate is not going to do this on its own.  But will state-funded universities start to see pressure?  Will those private schools who are cash-strapped see opportunity?

NC State Jenkins online MBA ranked in top 40 by US News

The US News rankings of online MBA programs were officially released today and I am proud to be able to announce that the NC State Jenkins MBA came in at #36, tied with Michigan Tech and Denver.  We were the highest ranked program in North and South Carolina and came in ahead of such established programs as Syracuse (#39), Florida State (#1 in football but #43 in online MBA), Northeastern (#51), Thunderbird (#51), East Carolina (#58) and George Washington (#64).

NC State Jenkins online MBA scored very high on admissions selectivity (#9 in the country) and also did well in terms of faculty credentials and training.  We just graduated our first online MBAs in fall 2013 and look forward to climbing higher in the rankings next year.

How the feds might rate universities

The federal Department of Education is working on its own rating system for universities, one under which those with the lowest rating would no longer be eligible for federal student aid support.  Bloomberg Businessweek recently ran a story on how Tennessee has been rating its institutions of higher education, a system cited as a model by the President.

Tennessee used to base educational funding entirely on enrollment.  Now it has a system where state-supported schools are evaluated on 10 criteria, including graduation rates, degrees awarded, research grants, and job placement.  The weights given to these factors vary by class of school, so research grants count a lot at the flagship school UT-Knoxville but it gets zero weight at schools where teaching is the primary mission.

Tennessee's system applied to state-supported schools, but the federal system will apply to private schools as well. Forcing disclosure on key variables such as graduation rates and job placement would be a useful step forward.

The way in which the rating system is designed will have a significant effect on university behavior.  Already schools take steps to game the ratings in US News.  For instance schools US News rewards schools with a large percentage of classes with fewer than 20 students and punishes those with a large percentage of classes with 50 or more.  So some schools have literally changed their class size constraints; there are a lot more classes with 19 and 49 students than there used to be.

The feds promise to rate schools in categories, such as exceeds standards, meets standards, near standard and deficient.  That may mute the gaming in some dimensions.  But wait until the feds try to deny financial aid to a school; you can bet they will hear from that schools congressperson and senators.

Insurance coverage and ER visits

Science just published the results of a new study showing what effect increased Medicaid coverage has on emergency room visits.  As reported in WSJ, Oregon conducted a controlled experiment where Medicaid coverage was randomly provided to 10,000 low income residents.  By comparing the health and health expenditure data for those who won the insurance lottery and those who did not, one can discern how much impact Medicaid expansion has on health and consumer behavior.  (Aside: the lottery was necessary because more people applied than anticipated so there were not enough funds to cover everyone.)

What should happen when more low income people get health insurance?  One possibility is that they will now go to doctors' offices during normal hours, so ER use will fall.  The other possibility is that the increased insurance coverage leads to increased purchases of medical services across the board, including ER visits.  

The answer is quite clear in the Oregon data: ER use increased by 40% for those newly covered by Medicaid compared to those who did not get coverage.  So as Medicaid coverage expands in most states as the Affordable Care Act comes into effect, we should expect a lot more ER visits.  

For further insight, be sure to check this post by Bloomberg columnist Megan McArdle.

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

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

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

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

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

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

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

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

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

A new twist on work hours

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

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

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

Nonverbal communication matters

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

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

What will happen with a $15 minimum wage?

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

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

A dirty secret about Black Friday

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

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

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

The red cardigan sweater with the ruffled neck on sale for more than 40% off at $39.99 was never meant to sell at its $68 starting price. It was designed with the discount built in.

To be fair, there will be a few items on sale Friday that are priced below cost, but these items serve as bait to get customers in the store.  Customers will make better informed decisions if they comparison shop online.  

Gaming your way into a job

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

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

MBA job market quite strong

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

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

Student loans - time for change in repayment options?

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

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

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

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

MBAs seeking out tech jobs, finance not so much

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

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

NC State Professional MBA ranked #20 by Bloomberg Businessweek

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

Stacy Wood's research featured in WSJ

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

Have airline change fees gotten out of hand?

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

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

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

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

Mexico to tax soft drinks and junk food

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

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

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

Economics Nobel Prize

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

MBA applications on the rise, especially at NC State

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

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

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

No way to fill the FRB chair

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

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

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

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

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

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

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

Is tipping an effective form of incentive pay?

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

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

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

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

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

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

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

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

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

Should ed school accreditation standards be changed?

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

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

Another threat to higher ed's business model

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

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

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

Technological change and labor market opportunities

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

This week MIT economist David Autor has a NYT think piece with the misleading title "How Technology Wrecks the Middle Class."  Autor deflates what the economists call the "lump of labor" fallacy, which maintains there is only so much work to be done and any technological change reduces job opportunities.

Labor-saving technological change necessarily displaces workers performing certain tasks — that’s where the gains in productivity come from — but over the long run, it generates new products and services that raise national income and increase the overall demand for labor. In 1900, no one could foresee that a century later, health care, finance, information technology, consumer electronics, hospitality, leisure and entertainment would employ far more workers than agriculture.

But with computing costs steadily falling, will this time be different?  Autor argues that this is unlikely for the most and least skilled workers.  Computers are not ready to take over most abstract, problem-solving tasks, nor are they ready to do most service work.  Autor is worried about some middle class jobs that are routine and could be outsourced or taken over by software. But he still sees opportunity:

Middle-skill jobs that survive will combine routine technical tasks with abstract and manual tasks in which workers have a comparative advantage — interpersonal interaction, adaptability and problem-solving. Along with medical paraprofessionals, this category includes numerous jobs for people in the skilled trades and repair: plumbers; builders; electricians; heating, ventilation and air-conditioning installers; automotive technicians; customer-service representatives; and even clerical workers who are required to do more than type and file.

Can feds lower college costs?

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

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

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

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

Oregon rethinks college tuition

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

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

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

Georgia Tech to offer masters degree for $6600

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

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

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

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

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

US DOJ sues to block American-US Airways merger

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

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

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

How do customers respond to calorie data in restaurants?

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

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

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

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

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

DC considers living wage requirement

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

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

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

Location and economic mobility

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

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

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

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

More evidence of a rotten recovery: "missing households"

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

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

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

NC legislature's impact on the labor market for teachers

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

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

Do MBAs have realistic salary expectations?

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

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

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

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

No country for young men

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

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

A few more interesting details:

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

Food prices and obesity

Fascinating study by three economists affiliated with NBER concerning how food prices are linked to obesity.  They looked at a national sample of 12 to 18-year-olds and examined how clinical measures of body mass index and percentage body fat related to food prices in their county.  The key findings were that

1. Youths who lived in counties with expensive calories were less obese than those who lived in counties with inexpensive calories.  This applied to both calories associated with foods purchased to be consumed at home and calories purchased at fast-food restaurants (McDonald's, Pizza Hut and KFC, to be precise). 
2. Obesity was lower in counties with inexpensive prices of fruits and vegetables than in those where fruits and vegetables were more expensive.

Over the last 30 years, food prices -- both overall and for fast-food in particular -- have been falling, making them a prime suspect as a cause of rising obesity.  Prices of fruits and vegetables have been rising, so this re-enforces the overall trend.  

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

Retirement savings incentives in Australia

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

Has Daft Punk gotten lucky?

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

Krueger raised some eyebrows, however, when he brought up the subject of luck.

I said “best artists,” but I also could have added luckiest artists. Luck plays a major role in the rock ‘n roll industry. Success is hard to judge ahead of time, and definitely not guaranteed, even for the best performers. Tastes are fickle, and herd behavior often takes over.

Out of context, this sounds an awful lot like his boss's "You didn't build that" line from last summer, and way off the mark.  Groups like the Stones and U2 can generate huge box office yields whenever they tour; most economists would argue this has more to do with having a solid customer base than luck. 

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

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

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

Panic in Detroit

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

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

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

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

More college graduates entering labor market

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

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

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

WP's Samuelson on farm subsidies

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

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

Money quote:

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

Entrepreneurship on the wane?

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

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

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

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

Friedman's advice:

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

Lee Craig's bio of Josephus Daniels getting attention

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

A pleasant Obamacare surprise?

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

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

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

Two-tiered health system coming?

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

Most everyone else will be dealing with a rationing-based system, not unlike Canada's.  Goodman sees rationing coming quickly because

1. Obamacare will create more demand for medical services
2. But it does nothing to increase the supply of doctors
3. Many doctors will accelerate their retirement to avoid dealing with heightened regulation
4. More and more doctors will shift from small practices (where they get paid more if they work more hours) to hospitals where they will pull a fixed salary; as a result, doctors are likely to cut back significantly on their work hours

In other words, supply down, demand up and price not allowed to adjust -- the classic recipe for a shortage.