95.8% of Averages Are Nonsense

Sent to Marketplace today:

Your interview with Jules Pieri on the morning of May 27th concerning Title IX for business missed a crucial point. Pieri assumes that such a large gap in venture capitalist money (only 4% to women) is due to sexism.

But men tend to pursue degrees in the sciences, such as engineering and computer science. These skills more easily translate into start-up ideas compared to the softer sciences women tend to major in. Even a study NPR reported on in March found investors chose businesses proposed by men 68% of the time, not 96%. There's a lot more going on than the raw averages suggest.

Venture capitalists make money by investing in good ideas. But at the heart of Pieri's Title IX proposal is a bizarre notion: these capitalists care more about being sexist than about being profitable.

I am deeply disappointed you didn't question her on this all-too-common over-simplification.

Sincerely,
David Youngberg
Asst. Professor of Economics
Montgomery College

Poor Prioritization

Sent yesterday to NPR concerning this story.

Dear Ms. Michel Martin,
 I was disappointed when I heard your story today concerning the connection between the career of Barbara Walters and the kidnapped Nigerian girls. Rather than emphasizing the large gap in opportunity that exists between people in different countries, you focused on the tenuous gender income gap within the United States.
 As you briefly acknowledged, the comparison is complex and there are many logical reasons why women earn less. But moments later, you casually ignored that complexity and claimed a woman earns less simply because she's a women. But women earn less because of the choices they tend to make, not simply because of their gender.
 When you control for all the complexities--women tend to take more time off, they tend to pursue low-paying fields, they tend to work less dangerous jobs, etc.--the pay gap all but disappears. These complexities are at the heart of the conversation. To brush them off as you did is disappointing and distracts from more important issues.
 Attention is a scarce resource. Sexism, while terrible and still in place in modern day America, is not the most crucial issue of the day. It is, thankfully, rarer now than it was decades ago when Walters began her career. Equating the pay gap of today to the rampant anti-women terrorism in Nigeria does a great disservice. There are much more important lessons to draw from the tragic story of the kidnapped Nigerian girls.
 Sincerely,
David Youngberg
Asst. Professor of Economics
Montgomery College

Efficiency Wages Are Not Free Lunches

President Obama visited a CostCo today to champion the wages they pay their workers and boost support for increasing the minimum wage. Other businesses should follow suit, he said, as a higher wage “helps build a strong workforce and profitability over the long run.” And he's right: the main motivation for CostCo's wages is because it builds employee loyalty. Henry Ford knew this well. One hundred years ago he offered twice as much as other employers which led to boosted productivity and low turnover. But that logic does not translate to the larger economy. To use it as a justification for increasing the minimum wage is completely backwards.

Economists call the strategy an "efficiency wage." It's a wage purposely set above the market wage so they improve the pool of job candidates, retain good workers, and encourage productivity. Because it's above market wage, this high wage will attract the best workers. Because it will be hard to find a comparable wage elsewhere, they are less likely to quit and more likely to work hard.

But if everyone has a higher wage, many of these benefits disappear. It becomes an expectation, not a perk, and because everyone offers it, fewer workers will be particularly motivated by it.

If politicians think companies should embrace raising the minimum wage because it will increase their profits then they should remember that these companies don't need government permission to increase them. If they're not doing it on their own, one can only conclude it's not the free lunch the President is telling us.