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

Latest on the Minimum Wage Studies

The famous Card and Krueger study examined the effects of a minimum wage increase in New Jersey by comparing workers hired there with workers hired in the neighboring state of Pennsylvania. What makes this study noteworthy is that despite its good design, its conclusion defied economic theory: the minimum wage didn't increase unemployment.

There are lots of studies showing the opposite but Card and Krueger was noteworthy not just in its conclusion but in its approach: they looked at local effects. Economist Arindrajit Dube did a more systematic study, looking at several state borders. His confirms the Card and Krueger study. Dube recently spoke to the Real News:

Dube’s findings indicate that a higher minimum wage helps service retailers attract and retain employees, increasing their productivity. He said that a restaurateur, for example, is likely to reduce his employees when the wage goes up if only one restaurant raises their wage, but if most of them raise it, the added cost is passed on to the consumer who is likely to absorb it without decreasing their demand.

In other words, people are very sensitive to the increases in price of one store but less sensitive to the increase in price of all similar stores. That makes sense: there are fewer substitutes for all stores than for one store. I wouldn't say "without decreasing their demand" as I'm sure it's decreased somewhat, but that's probably a media translation, not Dube.

But it still doesn't make sense. The idea of offering a higher wage, even one above what we would typically call a market wage, to attract good workers isn't a new idea in economics or business. Economists call it an efficiency wage: higher wages attract better workers which increases the chance that you'll hire a good worker. (It's hard to tell good workers from bad ones.) Firms use efficiency wages all the time because a good worker is a huge advantage over a competitor. The higher productivity worker pays for the higher wage. There's no reason why in this scenario a firm increasing their wages would feel the need to cut employment. Each worker pays for himself. You don't need a sector-wide increase. In fact, you prefer it. If everyone's getting the benefit of the higher wage, then much of the competitive advantages drain away. (It's not all the competitive advantage, though, as you attract workers from other sectors.)

That Dube was able to replicate the Card and Krueger study makes me less suspicious of it (as the study, while well designed, wasn't perfect...though no interesting study is!) and I'm more open to the idea that minimum wage laws can increase employment than I was yesterday. But I have yet to hear solid economic reasoning as to why this would occur.

HT: Mark Thoma

On Racism and Income In America

During a heated discussion with my girlfriend the other day, I brought up the graph below from a post I saw on Marginal Revolution. It's summary data from an adoption study when primarily Korean children were adopted by American families of various incomes between 1970 and 1980. Now in their 20s and 30s, the graph summarizes their parents income (presumably at the time of adoption, hopefully adjusted for inflation) along the x-axis and the child's average income along the y-axis.


This, I said, is a very interesting study: adopted kids did about the same (on average) regardless of who brought them up. But when they are the natural kids of the parents, they do better on average. Since it's reasonable to say other effects are constant across incomes (such as how parents treat an adopted child), the data suggests that genetics play a critical role in determining income and that the wealthy are not wealthy simply because their parents were. (Note there is still a high level of income mobility in the data: 10K a year parents averaged almost 40K a year kids; 200K a year parents averaged only about 78K a year kids...though the latter point could be argued by wealthier kids opting for jobs with fewer financial awards and more non-pecuniary benefits.)

Tanya didn't agree on a few levels, for one arguing that it suggests low black incomes are low because blacks are stupid. But the study doesn't say that environmental factors don't influence future prospects (though I am admittedly surprised to see how uncorrelated adopted incomes were with their parents) nor was it a perfect study. Since adoption agencies are ethically bound to make sure the couple could provide for the child before adoption, the selection bias would overestimate the success at the lower levels of income.

Tanya was also concerned about effects embedded in the adoption. Since the kids were Korean, they were clearly adopted. Thus, she argues, issues of racism and the stigma of being adopted washed out and overshadowed any advantage wealthier kids had. Sure, this exists, but I'm not convinced these factors are so strong it would wash away all environmental advantages. Yes, the children grew up in the 70s and 80s, where racial tension was likely stronger compared to now, but such tension tends to lean toward the Afro-American and (to a lesser degree) Hispanic populations, not Southeast Asians.

Really, I have don't know how much racism is in America. Most people don't know. Of course, it still exists and minorities will have first hand experience with it. But that doesn't mean it's common. Similarly, most white people I know (myself included), are good people and most scared of a misunderstanding being mistaken for racism. That does not mean most white are not racists. And surveys done on the issue are going to have major credibility issues about the honesty of people's responses. I can say with confidence that black incomes are rising, interracial couples are more common, and companies are very concerned with being thought of as inclusive; at least things seem to be getting better.

Pay Grades in the Extralegal Sector

In Peter Leeson's new book, The Invisible Hook, Leeson notes the pay grade was quite flat (pirate captains were paid twice as much as the lowest member of the crew, compared to merchant captains of that same era which were paid five or six times as much). He argues it's to encourage solidarity, discouraging envy and encouraging unanimous approval to continue on their plundering ways (a skewed system would encourage those at the top to stop and those at the bottom to keep going, thus creating tension).

But the same could be said of drug dealers, who have a very skewed pay scale. As Steven Levitt and Stephen Dubner note, the top drug dealers earns about 100 times that of the lowest earner. But gangs of this sort don't show the lack of harmony or disloyalty that should be plagued by Leeson's explanation. So how do we reconcile these two different worlds?

The key difference between a pirate ship and a drug-dealing gang is the level of entanglement with their surroundings. A pirate ship is basically a floating island and because it's so isolated, it's relatively easy for anyone to see how the game is played. A gang, on the other hand, is entangled with the larger surroundings. There's a lot of activity members don't see and many critical relations with those outside the gang that most don't have. In other words, the lowly sailor is a closer substitute to his captain than a lowly drug dealer is to his top boss. While a rebellious sailor might be able to handle captaining competently, a rebellious drug dealer would likely not have the same level of success. This also explains why pirates elected their captain while dealers autocratically promote from below (thus why the higher ups are paid so much: to encourage lower ranks to work harder on the chance they can be promoted).

The Futility of Equality

In Russ Roberts' conversation with William Bernstein about inequality last week, Bernstein argued that largely different salaries harm the less wealthy people. In the pursuit of status, the 2nd, 3rd, 4th, placers stress out about their lives. This stress harms their health and shortens their life span. Thus we should engage in redistribution.

It's a clever argument, but I challenge its conclusions (again...see my previous challenge here). I assume Bernstein searches for something less than full equality (where everyone makes the exact same amount) since that would be prohibitively expensive. The alternative is partial distribution, where a few are poorer and several are wealthier.

Redistributing from the wealthy to the poor still creates that ranking system, only with a smaller variance. Instead of being much wealthier, those "on top" of the status ladder are only slightly wealthier. But according to the status theory, that shouldn't matter. A runner up is still a runner up, whether by a little or a lot. They will be just as stressed out, just as prone to an early death. But society will be less opulent because of the incentive distortions. Bernstein's world is strictly worse.

Coase and Inequality

This week Russ Roberts interviews William Bernstein on inequality. Bernstein argues that income inequality has ill effects on poorer people's health--they have a lower quality of life because they know they are on "low" end, they're more likely to stress out, etc. Thus, he says, we should engage in income redistribution.

I find the big weakness to the inequality argument is its policy recommendation. I can see how a few people making lots of money makes others upset/jealous (we hear about it all the time in politics, suggesting people like to hear about how evil wealthy people are). I can also see that such anger leads to stress and leads to unfortunate health effects. In other words, I can see how one person's increasing wealth can externalize a cost onto another.

Since transaction costs are high, let's set aside the Coase Theorem. Instead, who's the least cost avoider? (Remove the wealth or remove the sadness and either way we have no problem so what's cheaper to remove?) If we ask the rich to make less money, we would lose those the benefits that the person would contribute to society. If we ask the poor to take a breath and let it slide, we likely lose much less for what we get. In other words the conclusion should not be redistribution but people dealing with it on their own terms. Bernstein should be telling people to pick up yoga, not pick pockets.

Why oh Why Can’t We Have a Better Press Corps?

A recent article in the NY Times gave the statistic that the pretax income for the top 1 percent of American households rose 7 percent, to 16; while the income share to the bottom four quintiles fell 7 percent. And then this sentence:

It’s as if every household in that bottom 80 percent is writing a check for $7,000 every year and sending it to the top 1 percent.

That’s not even a remotely true statement. The first problem is the oft quoted “They aren’t the same people.” Those in the bottom quintile in 1979 are not the exact same people there today. I would be willing to bet that the majority of people in the bottom quintile today weren’t even in the labor force in 1979. Furthermore, all quintiles have gotten richer since 1979, but the rate of growth for the quintiles has been different. Just because the top 1 percent has risen faster, doesn’t imply that the bottom 80 percent are sending checks in the mail to them from their helpless exploited state. It could be (there’s really no way of knowing for sure one way or the other) that if the top 1 percent didn’t increase as much the bottom quintiles would have grown slower.

On a somewhat related note, Don Boudreaux directs us to Steve Landsburg.