Job interviews @ Google

William Poundstone has a new book coming out "Are You Smart Enough to Work at Google" and WSJ ran an excerpt last Saturday.   The book will no doubt get considerable attention for sharing the brain teasers Google has developed.  (Example: What is the next number in this sequence?  10, 9, 60, 90, 70, 66 … ?  I could not solve this even though my quant scores on the SAT and GRE are off the end of the charts.  But if you write the numbers out, you will then see a pattern; there is no single correct answer.)   

This raises two critical issues: (1) Why do Google and other firms do this?  Google gets 130 applications for each opening, so its selection problem is how to find the best people using a cost effective process.  With such a high applicant to hire ratio, Google has no problem attracting persons who meet job qualifications. 

Google isn't looking for the smartest, or even the most technically capable, candidates. Google is looking for the candidates who will best fit Google.

(2) What is the likely impact on labor markets and society?  The hiring process involves selecting predictors that will inform the decision and be cost effective.  Research has shown that traditional job interviews are not very good predictors of future performance and can result in bias (interviewers give high evals to people who are most like themselves).  Increasingly, firms use a work-sampling approach to make decisions. 

There is significant evidence that "work sampling," the use of tests similar to the work being performed, is a better predictor of future performance than the usual job-interview chit-chat. Google does a lot of work sampling, such as requiring coders to write code in the interview. The rationale for the creative-thinking questions is that they test the type of mental processes used in inventing a new product or developing a new business plan.

I doubt Google has experimental evidence that asking job candidates questions like "Suppose you were shrunk to a height of a nickel and dropped into a blender ..." actually works.  It is far from clear that giving a snap answer to such questions yields better decisions than an approach that allows for reflection and research (especially if the goal is creativity and innovation).  But until the ratio of applicants to positions shrinks, the practice is unlikely to change.  Suggestion to job seekers: websites such as glassdoor.com allow interviewees to post about their experiences; be sure to check it out before you get asked to design an evacuation plan for San Francisco.

Merger policy in the Obama administration

Have gone the last week without my laptop.  Try it sometime; highly recommended. 

Just as NC State was shutting down for the holidays, AT&T decided to give up its bid for T-Mobile USA, presumably because it decided the odds of approval were low.  (Disclaimer: I do have a modest personal stake in this, having bought an iPhone from AT&T at a time when they provided unlimited domestic data for $30/month.  I was hoping that the extra bandwidth obtained from T-Mobile would result in better service.)  WSJ produced a good post mortem that discerned a pattern in the Obama administration's merger policy: mergers between firms competing in the same line of business (called horizontal mergers) are being frowned upon whereas mergers between firms in different stages of the same value chain (called vertical mergers) seem to be ok.  Recent examples of vertical mergers that have been approved include Comcast and NBC Universal and Ticketmaster's hookup with Live Nation. 

It will be interesting to see how tight a standard the current Department of Justice will apply.  Will we go back to the days of the infamous 1966 Von's Grocery decision, which zapped a merger between Von's and Shopping Bag because they would have had an eight percent combined market share in the LA metro area?

Nobel laureate @ NC State commencement

Nobel laureate Rajendra Pachauri gave the commencement address at NC State's graduation on Saturday.  Pachauri earned a joint PhD in industrial engineering and economics at NC State in 1974.  He received the Nobel because he co-chaired (with Al Gore) the Intergovernmental Panel on Climate Change (IPCC). Gore and Pachauri were recognized for their efforts to build awareness about climate change.  Pachauri is the head of The Energy and Resources Institute (TERI), a New Delhi-based research organization doing scientific and policy research on environmental issues.  

Pachauri said in his talk that he became interested in economics when he took Economics for Nonmajors from my colleague Thomas Grennes and read Edwin Dolan's TANSTAAFL (There Ain't No Such Thing as a Free Lunch).  Although there was no Poole College of Management at that time, we are proud to call Dr. Pachauri an alum. 

Feldstein on euro crisis

Harvard Professor Marty Feldstein offers his take on the euro crisis in last week's WSJ, one that is well worth reading.  Feldstein says we should ignore all the claims from the last summit that the crisis has been resolved (sounds familiar, huh?) because there is no enforcement mechanism in the agreement. This makes him very skeptical about greater economic and political integration being a long term solution. 

Instead he thinks that we need to take a country-by-country approach.  Feldstein is relatively optimistic that Italy will be able to have a balanced budget by 2013, which should dramatically lower its borrowing costs.  He considers Greece to be a lost cause and predicts it will default and replace the euro with a much-devalued drachma.

Feldstein's biggest concern is that private lending will dry up -- as it did in the US in 2008 -- because "banks are uncertain about the liquidity and solvency of potential counterparties."  Solution: have the European Central Bank step in and provide liquidity to banks with adequate collateral. 

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Privatizing dormitories

This week the University of Kentucky announced that it was going to transfer all of its dormitories to a private firm.  Do not be surprised to see other universities (maybe even NC State?) move in this direction soon.  Most dorms were built for the boomer generation in the 1950s and 1960s and let's just say they need some work.  Money for new construction or modernization is scarce, especially in states with significant pension and retiree health care obligations.  Privatization gets UK out of a business that is poorly aligned with its core competencies of teaching and research.  Most universities have exited the bookstore business.  Perhaps privatizing dorms is the first step toward getting out of the property management business altogether.

Dallas Fed chief: bust up TBTF banks

Richard Fisher, CEO of the Dallas branch of the Federal Reserve, gave a blistering speech a few weeks ago at Columbia University about TBTF (too big to fail) banks.  After the dust has settled from the financial crisis, we have fewer big banks that are all now much bigger than before the crisis.  Small and medium sized banks are routinely allowed to go belly up, so why not the big ones?  Fisher takes note of the traditional argument -- that the big banks are so tightly interconnected with each other that a failure at one bank could take down others. 

Fisher thinks that the increased capital requirements under Dodd-Frank will help some.  But he does not think it is enough:

Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.  As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.

Now this is coming from a Fed branch president/CEO, not someone from Occupy Wall Street.  I wonder if any of our presidential candidates will pick up on this.

Hiring practices at elite firms

Just came across a blog entry by Bryan Caplan who summarizes fascinating research by Kellogg's Lauren Rivera on hiring practices at elite firms in consulting, law and investment banking.  Rivera interviewed 40 hiring managers in each of these industries.  Her major findings:

1. Most resumes land in the trash
2. There is no standard rubric used to evaluate candidates; each manager uses his/her own criteria
3. Having a degree from a super-elite Ivy League school matters a lot; GPAs not so much
4. These credentials are important, but not because the super Ivies provide a better learning experience.  Instead the fact that a job candidate survived the admissions process at Harvard or Princeton was taken as a signal this person was smarter or more able.
5. Extracurriculars matter as well, especially if you achieve elite status in that regard (e.g., don't just swim at the gym, instead be an Olympic swimmer)

So do not be surprised if you get dinged by McKinsey.  Apparently even the top "public Ivies" like Michigan and Berkeley are considered second tier by these elite firms. 

Why airlines now charge for baggage

Simple answer: taxes.  As a Saturday article in the N&O indicates, the U.S. Department of Transportation is concerned that it is losing tax revenue because airlines have started charging fees for checked baggage, in-flight meals and services, or aisle seats.  DOT maintains that ticket prices have held steady or even slightly decreased whereas airline revenue from the ancillary fees has steadily increased.  This has enabled airline revenues to increase while tax revenues have fallen off.  As an airline consumer, these extra fees are often annoying, but if pillows and blankets were taxed at the same  rate as the flight itself, the airline would have no incentive for a la carte pricing. 

This can explain why airline pricing concepts have not been adopted in other industries.  Hotels sometimes charge for internet usage, but not for soap. 

Not so good news on unemployment after all

WSJ headline: "Jobless Rate Nears Three Year Low."  At first glance a drop of unemployment from 9 to 8.6 percent would seem to be a welcome development.  But a reduction in unemployment does not necessarily mean an equal increase in employment.  The reason: people stop being classified as being unemployed if they quit looking for work. 

As another WSJ blog post shows, the number of unemployed persons (as measured by the household survey) fell by 594k and roughly half of those got jobs and the other half dropped out of the labor force.  But were there really nearly 300k new jobs?  The more reliable employer survey indicates that payrolls grew by a much smaller 120k. 

Why have lending standards tightened so much?

Supposedly the US credit crunch is over, but ordinary borrowers still have difficulty getting access to credit.  David Wessel has an interesting WSJ column that shows how higher credit scores are now needed, even among those with steady jobs and a good credit history.  This keeps buyers out of the home market and makes it more difficult for those with homes to refinance. 

While no one wants to see a return to the days when a person could get a home loan for zero percent down, one has to wonder why lending standards have swung so far the other way.  Many of the people Wessel talked to pointed their fingers at our old friends Fannie Mae and Freddie Mac.  Burned by so many bad loans, have they now become too risk averse?

Mark Albion global webinar

Mark Albion and I took classes together at Harvard and he went on to Harvard Business School, wrote books on business that people actually read, and co-founded Net Impact.  Mark is giving a free global webinar on career development, targeted especially to those who want to make an impact for the greater good.  Check it out here. 

Dr. Doom on Europe, China and the US

NYU Stern Professor Nouriel Roubini, aka Dr. Doom, offers his thoughts on the economic situation in Europe, China and the US in last Saturday's WSJ.  Great quote in the 2nd paragraph: 

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier.

Roubini thinks that Europe will be the first to stumble, with a Greek default, a banking crisis and a severe recession across most of the continent.  He thinks China's days of can-kicking are limited as well, as state-owned enterprises stay committed to an overly rapid expansion strategy that leaves consumers with inadequate income to purchase what is being produced.  Roubini is more optimistic (!) about the US, believing that long-awaited fiscal reform and continued population growth will carry the day. 

Roubini will always be remembered as being the only economist with solid academic credentials who called the 2008 meltdown months in advance.  Until he totally blows a forecast, people will continue to listen carefully when he speaks. 

Evidence on income mobility

Today the Occupy Wall Street protestors were escorted off the premises.  Love em or loathe em, they have certainly brought attention to income inequality issues.  In an earlier post, I noted that social concerns about having significant amounts of income concentrated in the hands of the top 1% hinge on whether the same people are in the top 1% year in and year out. 

Carl Blalik, aka WSJ's "Numbers Guy" does his best to pin down the facts.  Blalik reports that of workers who were in the top 20% of earnings in 1996, 61% were in the top 20% in 2005.  Of those in the bottom 20% in 1996, 55% were still there in 2005.  Turning to the top 1% in 1996, 40.3% were still in the top 1% nine years later.  This suggests some fluidity in the far right tail of the income distribution.  However, those who leave the top 1% do not have much of a risk of falling very far down the income scale -- overall 86% remain in the top quintile.  

Why we have fewer science and engineering majors

Easy answer, sez WSJ and NYT in articles that ran last week: science and engineering courses are very hard and grades have not been inflated as they have in other disciplines.  An additional turnoff: salaries for STEM graduates are out of line with the workload.

Science, technology, engineering and math majors who stay in a related profession had average annual earnings of $78,550 in 2009, but those who decided to go into managerial and professional positions made more than $102,000.   

The downside -- many employers say the combination of a technical undergraduate degree and an MBA (especially a tech-focused one like we offer at NC State) -- is the ideal combination for leadership in business.

Business, finance and consulting firms, as well as most health-care professions, are keen to hire those who bring quantitative skills and can help them stay competitive.

Thoughts on teacher pay

This week WSJ ran an op-ed by Andrew Biggs and Jason Richwine who claim that public school teachers are overpaid by a whopping 52% compared to what they could earn in the private sector.  The authors concede that salaries are comparable, so one would need about a 100% difference in benefits to yield a 52% gap in total compensation.  Then things get sloppy -- unpaid summer months get labelled vacation, defined benefit pensions are converted arbitrarily to defined contribution plans, and retiree health insurance gets labelled a giveaway that one never observes in the private sector.  So what we have is a comparison of what the average teacher gets in the public sector to what a WalMart employee gets in the private sector.  The authors do note that teachers do have much more job security than private sector workers, but it is hard to assign a market value to this benefit.  Their analysis is interesting (and their full paper cites by NC State colleagues Bob Clark and Melinda Morrill) and does provide the foundation for further work on this important subject.

Another fundamental question is whether public teacher pay is sufficiently high to attract the calibre of instructors that we need to maintain the US's position as a global leader in human capital.  Biggs and Richwine note that education majors entering college score in the 40th percentile on standardized tests.  In countries such as Finland, Singapore, and South Korea, the education majors undergo a more rigorous selection process.  Pay in Finland is roughly the same as in the US, but the Finnish teacher salary is much closer to the average salary for college graduates than is the case in the US.  My take: growing wage inequality means greater opportunities outside of teaching for our most talented young people, so we would actually need to raise teacher salaries if we were to seriously upgrade teacher capability in future generations.

Jenkins MBA hits Business Week top 30 part-time programs

Great news from Business Week!  The Jenkins MBA was rated in the top 30 (right at #30) in this year's Business Week rankings of part-time MBA programs.  Jenkins also was ranked the 5th best program in the South. 
http://www.businessweek.com/business-schools/

The ranking hinges on three major components: student satisfaction, academic quality and post-graduation outcomes.  Jenkins ranked 23rd in the country on post-graduation outcomes, representing the percentage of students receiving promotions and the average pay increase, where it ranked 18th.  The program came in 37th in academic quality; we had high scores on student's work experience and percentage who complete the degree, whereas our GMAT average pulled us down a little bit.  Students gave high marks to the caliber of their classmates and teaching quality, but were less pleased with facilities (hopefully fixed with the new RTP campus). 

Business Week and US News are the two most widely respected rankings of business schools.  I am pleased to see our students, faculty and staff receive the recognition they deserve. 

How Steve Jobs would have created jobs

Interesting tidbit earlier this week in WSJ about Steve Jobs' dinner with President Obama and a few other tech CEOs.  As part of the dinner conversation, Jobs told the President about the factories that Apple operates in China instead of the US because Apple cannot find the engineering talent needed here.  He and the other CEOs told the President that we needed to allow foreign students who major in engineering to obtain visas.  Jobs was very disappointed in the response he received: the President thought this question needed to be addressed in the broader context of immigration reform, which was not possible in the current political environment.  

"Jobs found this an annoying example of how politics can lead to paralysis," Mr. Isaacson writes. "The president is very smart, but he kept explaining to us reasons why things can't get done," Jobs said. "It infuriates me."

Ballooning student loan debt

The Occupy Wall Street movement has brought attention to student loans.  Student loan indebtedness is large and growing.  The Economist reports that student debt is at least $500b and could be as much as $750b, and will soon reach $1tr.  The federal government has taken over most student lending but has failed to consolidate a bewildering array of programs.  Roughly 10 percent of loans are in or near default, a much higher ratio than for credit card debt.  Unlike mortgage debt, it is hard to walk away from student loan debt, even in bankrupcy. 

The OWS crowd wants student loans to be forgiven.  President Obama is not quite ready to go that far, but has eased repayment terms.  A few personal observations (and a disclaimer -- a federally insured student loan with interest subsidies helped me pay Harvard tuition; I repaid on schedule):

1. It is difficult to imagine a way in which private capital markets could by themselves finance anything close to the existing volume of student loan demand.  Put yourself in the position of a financier trying to guess which members of the freshman class each year will graduate and become successful.  Which ones would be worth betting on?  
2. Any government-run program is going to be politicized in some way.  One must ask, however, whether there might be some useful role for regulation of which academic programs are eligible for student loans.  Do we want to continue to support programs with extremely low graduation rates or abysmal career prospects?  See this post on Marginal Revolution about the MFA from UConn who specialized in puppetry and ran up $35k in debt -- who is now occupying Wall St. 
3. Critics charge that student loan programs help create a vicious cycle of rising tuition that feeds into more loan demand. Roughly one-third of all undergraduates take out student loans.  Making student loans more difficult to obtain could very well have a bigger effect on enrollment than on tuition.

About that one percent

I have done a fair amount of research on wage and income distributions in the US and Latin America over the years.  Unfortunately I was not clever enough to focus on the top 1 percent (I worried about medians and deciles), otherwise maybe the work would have drawn more attention and/or notoriety.  A household must make (after taxes) more than $350k to be in the top 1 percent, whereas $140k will put a household in the top 5 percent.  

Regardless of how you cut the data, they show that the share of income going to the top 1 percent of the distribution has increased dramatically over the last 40 years.  I hate to sound like a climate scientist, but one really cannot have an argument about this.  One can have a legitimate argument about what this really means.  Here are a few of the major issues (for more, see this post):

1. The data that are most frequently used in public discussions pertain to households.  Forty years ago a large share of those households consisted of a working adult make, a nonworking adult female and some children.   As any watcher of "Modern Family" knows, today's households rarely fit that mold.  Most women work, and highly educated women with significant earnings potential in the labor market are more likely to marry males with a similar profile.  That puts two high income individuals in the same household and increases that household's share of the overall GDP.  Also, there are more single person households.  Bottom line: it is hard to compare apples to apples in the income distribution because of demographic changes. 
2. The same households are not in the top 1 percent every year.  You can land in the top 1 percent if you sell a business or cash out stocks at just the right time.  There also is fluidity across the various deciles.  Some studies have shown that the amount of fluidity from year to year has gone down, which is a matter of concern.  Bottom line: Warren Buffett and LeBron James are in the top 1 percent every year but they get a lot of one time wonders as company each year.
3. Most studies use self-reported income from Census Bureau phone interviews.  This measure excludes taxes and often does not include transfer payments, especially in kind payments such as Medicare and Medicaid.  
4. Some recent studies show that inflation rates vary across different income groups.  The median income family shops at WalMart and Kohls, whereas the top 1 percent shop at Saks and Neiman Marcus.  Prices have increased much less slowly at the former than the latter.  This point becomes important when one makes 40 year comparisons of average income at different ranges of the income distribution. 

Has there been a widening of income inequality?  No doubt.  But some studies exaggerate the increase because they fail to control for all of the important variables.