Labor shortages in manufacturing

Op-ed in today's WSJ about the problems manufacturing companies are having with keeping up with demand.  A Deloitte survey finds that 5% of all jobs are unstaffed because companies cannot find qualified, trained workers.  Even though unemployment continues to be over 8 percent, skill shortages persist.  Great quote from a community college president in my home state of Kentucky: "In the 1980s, U.S. manufacturing was "80% brawn and 20% brains, " but now it's "10% brawn and 90% brains."

Funny how neither political party is talking about this.  Low hanging fruit in an election year. 

NC State wins statewide case competition

Kudos to MBAs Ben Mathew, Mansi Shah, and Michael Donahoe and MAC student Alyssa Jaklitsch for winning the Association for Corporate Growth Private Equity/M&A case competition.  The team beat three teams -- Duke, UNC, and Wake Forest -- with investment banking experience to take the top spot.  Last year's team took 2nd place; aced out by exec MBAs from Wake.  The team will be recognized at an ACG meeting in April in front of over 50 private equity and investment banks.   

Kudos as well to Professor Ken Marks, who helped prepare the team.  This is the type of recognition that helps put NC State's MBA on the map.  

Minimum wage hike as a stimulus

That's what some pols in NY and NJ are pushing for.  The minimum wage is currently $7.25 but Democrats and some Republicans in the NJ legislature are looking for an election year bump to $8.50.  Why?  They can claim they are helping the working person, plus it does not have any effect on the state budget. 

To provide some perspective, the federal minimum wage was increased in three steps from $5.15 at the beginning of 2007 to $7.25 by the end of 2009, right at the time the labor market was in its worst shape since the 1930s.  I have not seen any careful studies yet, but you can bet that the minimum wage increase made the unemployment rate higher than it would have been otherwise.  If the NJ increase goes through, it would amount to a 65% increase in just five years. 

Studies have shown that most recipients of the minimum wage are teens and young adults, few of whom are heading households and many of whom are working part-time.  One predictable consequence: their employment will fall.  Doubt the pols want to take any credit for that.

Regulating higher education

For years colleges and universities have participated in federal financial aid programs.  Now some strings are starting to be attached.  As I noted in an earlier post, the higher education community is viewing this development with some concern. 

Today's NYT editorial on the subject illustrates some examples of what might be in store.  The new Consumer Financial Protection Bureau has drafted a one page shopping sheet (NYT's terminology, not mine) that every school would have to make available showing annual cost (tuition, housing, books, etc. net of scholarships) and how it compares to national averages.  This would be a big step forward; I can tell you from personal experience that one of the hardest items to find on any university's website is the tuition. 

The Department of Education is working on a College Scorecard reporting data on cost, graduation rates, indebtedness, and employment.  This also would help parents and students make more informed decisions. 

Now I am sure there are other ideas out there that I will not be so crazy about, but it strikes me that the cost of providing this information will be modest compared to the benefits. 

Two cheers for the payroll tax cut extension

Not so much for the extension itself.  The economic evidence on this front is overwhelming: temporary tax cuts provide little to no stimulus.  Also by extending the ability of workers to collect unemployment benefits for more than one year, Congress is locking in additional unemployment.

But we all knew the tax cut and benefit extensions were going to happen anyway in an election year.  To partially "fund" these goodies, Congress took two positive steps:

1) Changes to the Unemployment Insurance: WSJ reports that workers on involuntary part-time schedules now will be allowed to collect some benefits, which may encourage employers to keep workers on the payroll part-time (as opposed to layoffs).  Also programs such as Georgia Works, where the unemployed can collect benefits while going through training programs, also will expand.  Finally, the self-employed will now be covered by UI; not sure how this is going to work.

2) Spectrum auction: To fund the extra UI benefits, Congress agreed to auction off spectrum currently held by television stations to expand wireless networks.  NYT reports the auction is expected to raise $25 billion and will help us all play more games and watch more streaming videos on all our iDevices.  Some of the spectrum also will go to first responders.

Rethinking classroom utilization

Across literally thousands of colleges and universities, faculty members present the same information in essentially the same way to students in lectures.  Why do we need thousands of new lectures on elasticity of demand or sunk cost every semester, plus no doubt a few hundred more every summer?  With today's technology, aren't we leaving some pretty huge economies of scale on the table.

According to an article in last week's WP, some big-name universities are starting to rethink how they use classroom time, including live lecturing.  One advantage of a lecture is that it allows a professor to combine perspectives from a wide range of sources beyond a textbook in a seem-less fashion.  But why not record the lectures in advance so that students watch them before class, and then make the classes much more interactive?  Some schools are starting to experiment with active dialog between the class and the professor; others are using small group interaction.  Clickers can be used to see if students are mastering the basics.

On disability

Most of the headlines on deficit/debt issues focus on Social Security retirement benefits and Medicare.  In the last ten years, Social Security's disability program has been getting increased attention.  In yesterday's WP, columnist Robert Samuelson laid out the basic facts:

In 2010, Social Security's disability program cost $124 billion plus another $59 billion for Medicare (after two years, disability recipients automatically qualify for Medicare). This exceeded $1,500 for every U.S. household. For the past two decades, disability spending has increased at a 5.6 percent annual rate, compared with 2.2 percent for the rest of Social Security. As a result, disability represents nearly one in five dollars of Social Security spending, up from one in 10 in 1988.

The irony is that fewer and fewer jobs are in sectors with high rates of injury or occupational disease such as agriculture, mining, construction and manufacturing.  So why are disability rates soaring?  MIT economist David Autor isolates two causes: the overall labor market has been crummy and the eligibility criteria for disability have been widened to include mental problems.   Disability eligibility is all or nothing; once certified as disabled, a person cannot work.  Hence rising joblessness and additional strain on federal budgets.  Don't expect any changes in this program this year. 

TrueCar vs. "I'll check with the manager"

Automobiles are mass produced by a limited number of sellers, but historically pricing has been far from transparent.  The sticker price is taken as an upper limit (although there are sometimes two stickers: one from the manufacturer and one from the dealer) and it is up to the individual customer to negotiate something lower.  Some people hate to negotiate and thus pay top dollar.  Others relish the process and sometimes can buy at well below dealer cost (once the car is on the lot, the cost to the dealer is sunk so the salesperson will take the best price they think is attainable in the market -- as MBA 505 students all know). I always use it as my first example of first degree price discrimination. 

Recently TrueCar.com has emerged as a useful intermediary.  Potential buyers register at the site and get data on the dealer's true cost along with a guaranteed price from dealers in their area.  Dealers pay $299 to TrueCar for each lead that becomes a sale; customers get multiple bids they can use as leverage before they even enter a showroom.  (I used it recently; the only downside is a continued stream of junk emails from the dealers.)  Of course some dealers are less than delighted with this arrangement, as noted in a story in today's NYT. 

Ultimately one must wonder when a car company will decide to buy out its dealers and revolutionize the retail process.  You would have showrooms with a limited number of demos; after a test drive, customers would order exactly what they want on the web. 

Kellogg announces major changes

I attended the annual GMAC Leadership Conference in Miami last week and the closing session discussed the major trends that are affecting the strategies of business schools.  So far higher education has avoided the competitive pressures from globalization and technological change that have transformed other industries.  I think the clock is ticking, especially for schools that rely on "sage on a stage" for information delivery.  (Aside: Why should literally tens of thousands of b-school professors be giving the same lectures semester in and semester out?  Schools could tape the very top profs and sell their lectures to other schools and both sides would end up ahead.) 

Back in the office yesterday, I got a note from Adrienne Jablonski (formerly an NC State colleague, now at Oklahoma) with a link to this BWeek article on Kellogg's new strategic plan (here is another take from the Economist).  Here are the major changes afoot:

• The size of Kellogg's highly regarded two-year, full-time MBA program will shrink by as much as 25 percent over the next three to four years--from 1,115 students to about 850--and enrollment in the executive MBA program would also come down. At the same time, the size of the one-year MBA program will double or triple, from 80 students to as many as 240.

• New, one-year master's degrees will be added to the Kellogg portfolio. These would be alternatives to the MBA. One such degree that the b-school is considering is a fifth-year master of science degree for undergraduates.

• The entire Kellogg MBA curriculum and research program will come in for a major overhaul, its first since 2002-03 and its deepest in nearly 30 years. It will be structured around four areas: markets, customers, and growth; "architectures of collaboration," or managing relationships with suppliers and customers through the use of technology; innovation and entrepreneurship; and the role of public policy in private enterprise.

• New, short-term certification programs will be established in international locations, including Sao Paulo and Shanghai. The non-degree programs, which lack the academic heft of an actual degree, will allow students to earn a Kellogg certificate for taking a group of courses on a specific topic. Faculty will be reviewing this idea in coming months.

We have started one new one-year degree at NC State -- the Master of Global Innovation Management -- and have a couple of others on the drawing board.  I clearly see pressure to shorten the time needed to complete the MBA.  I also see increased pressure to make sure that we are delivering as much value added as possible in each credit hour.  We continue to live in interesting times.  For more details on Kellogg's plan, click here.

Good news on the jobs front

Two bits of good news in the last 4 days.  First the January jobs report was the best since April, with the economy notching a net of 243k new positions.  Unemployment fell to 8.3 percent, the lowest since February 2009.  Sectors showing the largest gains: health services, professional and business services, and manufacturing.  Construction is still flat.  The other bit of good news: job postings from employers are up. 

Should the federal government hold universities more accountable?

Last week President Obama proposed sweeping changes in how the federal government handles financial aid programs at colleges and universities.  According to NYT, the President wants to put more money into Perkins loans, work-study programs and Supplemental Education Opportunity Grants.  The catch, and it is a big one, is that institutions "would instead be rewarded for lower net tuition prices; restrained tuition growth; enrolling and graduating low-income students; and providing education and training that help graduates get jobs and repay their loan." 

Since virtually every degree-granting institution participates in these programs, this would end up being a sweeping mandate.  A few reactions:
1) Most public universities have seen huge budget cuts over the last four years.  Some have reacted by raising tuition aggressively; others (including NC State) have done their best to hold the line on tuition. 
2) More transparency in higher education would be a good thing.  Why not require all schools to publish graduation rates and placement data by major?  We do this routinely in MBA programs.  Why not do it for liberal arts, agriculture and engineering?
3) The professoriate tends to be much more liberal than the general population.  So presumably they will see the wisdom of more micromanagement from Washington and there will be nary a complaint on any college campus. 

Résumés, RIP?

That day may not be too far off, according to WSJ.  Union Square Ventures does not want to see them, instead preferring indicators of an applicant's web presence.  Twitter, tumblr and YouTube are in; text is out.

From an economic perspective this is a bit surprising.  In today's labor market the ratio of applicants to open positions remains quite high, so a résumé should still be useful for narrowing the field to a smaller set of qualified applicants before a manager starts looking at tweets.  The article points out that most companies still use résumés as part of the screening process, but others are starting to use surveys that are tailored to the opening and others are asking for work samples. 

Ultimately companies use screening criteria (e.g., education and experience requirements) that make economic sense (is value of information greater than cost of collecting and interpreting?) and are legally defensible.  I imagine the résumé still has some mileage, but in many ways it is refreshing to see companies relying more on actual competencies and less on credentials. 

On SOPA

I have refrained from posting about the Stop Online Piracy Act (SOPA) because, frankly, I do not have either the time or expertise to make sense of all the legal details.  Proponents argue that we need it to deter theft of intellectual property; others say it goes too far and holds companies liable for actions over which they have no control.

Yesterday's WSJ ran an op-ed by UT-Dallas economics professor Stan Liebowitz who, sometime co-authoring with my NC State colleague Steve Margolis, is one of the country's leading experts in the economic issues associated with digital property rights.  Liebowitz' research shows that music sales (both CDs and online) are down 50% since 1999 and that the main reason is theft (aside: you may call it downloading, but it really is theft.) 

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Closing thought: it is one thing for the U.S. to pass a law banning and punishing online piracy, another thing to enforce it.  Chasing and punishing digital thieves overseas may be like whack-a-mole.

If you were wondering about the gold standard

Political campaigns make for great entertainment, as they always feature supposedly "new" ideas about how to help the economy.  Newt Gingrich and Ron Paul have been urging the public to consider going back to the gold standard.  That would mean there would be a fixed exchange rate between the dollar and the price of gold.  There is a long history on how fixed exchange rates in general and the gold standard in particular operate.  Like any other form of price control, there's lots of deadweight loss involved. 

But why take my opinion?  Chicago-Booth polled 50 leading economists concerning the desirability of moving back to the gold standard.  These are economists coming from the full range of the political spectrum and all of them have published regularly in the very top journals.  The results showed a strikingly rare degree of unanimity: every single one of them disagreed and most disagreed strongly with the proposition that the gold standard would improve price stability and living standards for the average American. 

A couple of priceless comments: "Gold is intrinsically close to useless, so its price is determined as a "bubble" from Daron Acemoglu (MIT) and "Why tie to gold? why not 1982 Bordeaux?" from Richard Thaler (Chicago). 

Should we worry about "complexity risk" from banking regs?

Maybe we should, says NYT columnist Joe Nocera, reporting on recent research by Karen Petrou at Federal Financial Analytics.  Petrou is concerned that there is so much complexity in the various mandates from Dodd-Frank that the regulations themselves could become a source of risk. 

If we don’t understand the cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage to the sound, stable and — yes — profitable financial industry regulators say they support and the economies sorely need.

Why does this matter?  For one, it will raise costs.  Also, it is likely to make banks more cautious, not because the underlying deal is financially unsound but because of the fear of regulatory interference.  In the current slow-growth environment, does this really make sense? 

Petrou argues that Dodd-Frank be simplified and changed so that the regulators themselves can be held liable.  We'll see how fast that happens. 

Surging productivity and stagnant hiring

Productivity continues to grow at a rapid clip.  Today's WSJ takes a closer look at why.  Without even reading the article, students with a firm grasp of economics should suspect that either the cost of capital has fallen, the cost of labor has risen, or both. 

The answer is all of the above.  Capital costs have fallen because interest rates are nearly zero and companies could write off 100% of investments made in 2011.  Uncertainty about future labor costs (health care and taxes) makes employers averse to new hires.  As a result we see modestly rising output and it is coming from increasing output per worker rather than increased employment. 

Michael Mandel takes a deeper dive into the productivity issue in this article.  He points out that outsourcing is another important factor behind the increase in output per unit of input.  The reason is that we use value added, the difference between total revenue and labor and materials costs, as our measure of output.  When supply chain managers find cheaper sources of materials (or services), that increases margins and output with no change in labor or capital. 

Historically increases in productivity lead to higher standards of living; at least that was the case in the 20th century when society first shifted out of agriculture to manufacturing.  Now we are shifting out of manufacturing to services; hopefully the increase in living standards is just around the corner.

Not-so-cheery news from Dr. Doom

The December jobs report was encouraging.  The stock market has been doing well over the last 30 days.  Maybe the economy is finally turning the corner?

Not really, according to NYU Stern economist Nouriel Roubini, aka Dr. Doom.  He still sees consumers as being "income-challenged, wealth-challenged, and debt-constrained." On top of that, the federal fiscal stimulus is being dialed back and Europe is a ticking time bomb. 

Economists adopt ethics code

Economists regularly consult for companies or organizations.  They also may receive research support from parties that have an interest in how the research comes out.  Last week the American Economics Association formally adopted rules that require disclosure in academic work whenever conflict-of-interest issues may be present.  According to WSJ,

Authors submitting papers to academic journals must disclose to the journal's editors all sources of financing for the research and all "significant" financial relationships with groups or individuals with a "financial, ideological or political stake" in the research. The policy defines "significant" as financial support to an author and immediate family members totaling at least $10,000 in the past three years.

Technically, the policy only applies to only the seven journals edited by the AEA but most observers expect all of the leading journals to adopt similar policies soon.  Economists also are encouraged to disclose potential conflicts in other contexts, e.g., op-ed pieces, press interviews, and testimony. 

These rules should apply to bloggers as well.  I received support from a wide range of sources over the years, with most dollars coming from the US Department of Labor, Interamerican Development Bank, National Science Foundation, Financial Industry Regulatory Authority, and AFL-CIO Building Trades. 

Do private equity buyouts destroy more jobs than they create?

Fascinating new NBER working paper by a team of economists that includes Chicago Booth's Steve Davis and Harvard's Josh Lerner.  They put together a data set of 3200 firms and 150,000 operating establishments that were targets and match them to comparable establishments (to serve as a control group).  In the establishments that were taken over, employment fell by 6 percent more over five years after the buyout compared to the control group.  Job losses were concentrated in retail and service sectors.

Sounds like the answer is yes.  But wait.  The authors then ask about the creation of new establishments and find that buyout targets were more likely to open new ventures than the controls.  Once this is taken into account, the net job loss becomes less than 1 percent.

The study also looks at the process of job creation and destruction in the target and control firms and finds that the overall churn level is 13% higher in the target firms.  This is consistent with the "creative destruction" theory of Austrian economist Joseph Schumpeter, who in essence argued that you have to break some eggs to make an omelet.

Best majors for employment

Have a son or daughter in college, or soon to enter?  Then you might want to look at a Georgetown University study (see WP for a summary and here for the study) that shows how unemployment rates vary by college majors.  Recent graduates in health and education had the lowest unemployment rates (5.4%); majors in agriculture and natural resources, business, engineering, psychology and social work, and science also did relatively well (all between 7 and 8%).  Majors to avoid if you are worried about joblessness: architecture (13.9%) and the arts (11.1%); humanities and social sciences also have higher than average unemployment rates (9%).