Is it time for more overtime?

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

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

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

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

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

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

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

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

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

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

Would we better off without PowerPoint slides?

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

Has the financial sector fully recovered from the Great Recession?

So says NYT financial columnist Neil Irwin.  The evidence:

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

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

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

John Nash has passed away

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

Another top 20 ranking for NC State Jenkins MBA

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

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

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

Do low wage employers get subsidized?

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

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

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

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

How testing is changing hiring

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

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

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

To tip or not to tip

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

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

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

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

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

Glaxo changes compensation plan for sales employees

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

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

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

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

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

What to make of last week's jobs report?

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

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

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

Should the Sysco and US Foods merger go forward?

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

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

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

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

Do minimum wages translate into higher prices?

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

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

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

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

A challenge to Piketty

French economist Thomas Piketty has become a media celebrity as a result of his "Capital in the 21st Century."  One of his central claims is that capital income grows faster than labor income, which necessarily dictates growing inequality over time.  Piketty does show this to be the case in the US and a number of other countries over the last 40 years.

A recent study by an MIT economist featured on an WSJ blog takes a closer look at capital income.  As it turns out, capital income is not limited to capital gains, interest, and dividends.  It also includes housing, and this is where it gets interesting.  If you break capital income into two components (housing and all other forms), the data show that all of the upward trend in capital income is the result of housing appreciation.  In other words, who is getting wealthier?  It is not the idle rich; instead it is homeowners.

This has important implications for the societal implications of growing inequality.  Ownership of stocks and bonds is relatively concentrated in the upper income brackets, whereas most Americans are homeowners.  If the returns to capital are being distributed in the form of rising home prices, then the impact on inequality across households will be relatively minor.

Some triangle restaurants find minimum wage not enough

Yesterday's N&O ran an article about how some RTP restaurants have decided to start paying more than the minimum wage.  Is this the result of a sudden infusion of social consciousness?  Maybe in some establishments whose owners feel strongly about social justice.  But why now, as opposed to three or five years ago?

Any full explanation of these pay raises has to include the fundamental forces of supply and demand. The restaurants cited in the article are not greasy spoons; Pizzeria Toro and Monuts Donuts get rave reviews on Yelp, TripAdvisor and Urbanspoon.  And to maintain the quality that their customers expect, these eateries need workers with experience and strong customer skills.  Higher wages reduce turnover and attract top job candidates.

Some restaurants also are starting to pool tips, with the goal of getting more cooperation among the wait staff.  Such a move also alleviates the risk of getting stuck with a table of stingy tippers.

Assuming no action at the federal or state level on the minimum wage, I envision a situation where those just getting started find minimum wage jobs in chains and small generic establishments.  Those who like the work and are talented move up to higher paying positions.

NC State 66, LSU 65

And the students at the Talley Center go wild!

Race against the machines

Over the Christmas holidays I read Erik Brynjolfsson and Andrew McAfee's "The Second Machine Age," an ultimately optimistic view of where IT is taking us.  I say ultimately because as the machines get smarter and more productive, there is going to be significant displacement of labor.

Traditionally economists have viewed technological change as an essential element of economic growth.  Although there are plenty of examples of workers being displaced (ask John Henry the steel-driving man), the economy has historically been able to absorb and reallocate them fast enough to avoid mass unemployment.

Now Brynjolfsson is not so sure that mass unemployment can be avoided, as reported in a recent WSJ piece.  Although self-driving cars are years away from U.S. interstates, an Australian mining company is already using self-driving trucks and automated trains.  Some experts think that between a third and a half of today's jobs will become obsolete by mid-century.  MIT economist David Autor fears that those that will be left will be either very high skill or very low skill.

The good news -- breakthroughs in health care and education, new jobs that we cannot yet imagine, opportunities for more free time as machines do more work for us.  Maybe even folding laundry?

Wages up at restaurants

Yet another front page WSJ story about wage increases, this time in the restaurant industry.  Job growth in restaurants and bars had outpaced other sectors since the economy started to recover in 2009.  But wage growth stayed very flat until the last six months of 2014, when restaurant pay went up by 3%, twice as fast as a year ago.

The article cites the experience of Pi Pizzeria in St. Louis which raised wages to reduce the quit rate and attract stronger job candidates.  Apparently many of those who had been cooks and waiters while waiting for the job market to improve are now finding better opportunities outside of food service.  Part of the story also seems to be good old-fashioned supply and demand.  More people are eating out (restaurant spending was up 11% last year way more than any other sector), thus putting pressure on restaurants to expand staffing.  In some states the minimum wage has increased, putting additional upward pressure on pay.