Category Archives: Four Forces Watch

Can Men Be Socially Reconstructed?

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Betsey A. Stevenson writes,

Women’s new role clashed with social norms around femininity, but they were able to merge the two. (Remember “I can bring home the bacon, fry it up in the pan?”) By contrast, men are being asked to embrace traditionally feminine roles at work and at home, including helping with the cooking and laundry.

Pointer from Greg Mankiw.

Suppose that in terms of the five-factor personality model, men tend to score lower than women on agreeableness.
When women were moving from the home to the labor force, they moved into office work, where agreeableness was not a drawback. In fact, it is often a plus.

But if you want men to move from a factory to becoming home health care aides, then you are asking them to take on jobs that require a high level of agreeableness. It is not such an easy transition.

The Gentrification Phenomenon

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Derek Hyra writes,

Gentrification, in some places, is associated with political and cultural displacement. Some gentrifying areas once dominated by low-income minorities demonstrate an association between the movement of upper-income people and a loss of minority political representation. Remember, it was presumed upper-income people moving to low-income neighborhoods would bolster civic society, and it appears, in some circumstances, it has. Often, however, newcomers take over political institutions and advocate for amenities and services that fit their definition of community improvement. This process of political displacement can be linked with cultural displacement, a change in the neighborhood norms, preferences, and service amenities.

You don’t think that those poor urban residents appreciate the new bike lanes?

Thanks to Timothy Taylor–I took a small excerpt from his interesting post. Read the whole thing.

As you know, I think of gentrification as driven by the shift toward the New Commanding Heights of health care and higher education. These sectors create jobs for the affluent in urban areas.

Wither Factor-Price Equalization?

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Elisa Giannone writes,

The interaction of SBTC [skill-biased technical change] and agglomeration economies imply that more educated locations have larger skill premium. High and low-skill workers have some degree of complementarity, so, agglomeration effects raise the wages of all the workers. The differential increase in the wages of high-skill workers makes the migration patterns for high and low-skill workers diverge: high-skill workers migrate to educated cities more than do low-skill workers. Migration has a twofold effect. First, the more workers migrate to a location, the marginal productivity of each will decrease, hence, the returns will decrease. Second, when more high-skill workers move to a location, productivity goes up because of agglomeration effects, raising the wages of all the workers, but especially the wages of the high-skill workers.

Pointer from Tyler Cowen.

She points out that within the U.S. since 1980, wages have stopped converging across cities, and this is mostly due to divergence among high-skilled workers. So we are not getting factor-price equalization, and she wants to try to explain why. Her explanation strikes me as quite complex (it includes more than just what is in the quoted paragraph) and a bit just-so-story-ish, but that is what happens when you observe a phenomenon that challenges a core interpretive framework.

If you believe in factor-price equalization, then you predict that workers with similar skills will tend toward the same pay in different locations. The word “similar” often gives me pause. As consumers, we value different amenities. In my prime, I could have earned a higher wage working in Manhattan, but relative to the people who chose to work there, I valued the amenities less. I wonder how much of the apparent divergence can be traced to the interaction of consumer preferences with other factors. I am guessing that assorattive mating fits in somewhere.

Insight, Proof, and Knowledge

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A commenter writes,

So in your opinion intuition is sufficient. As long as we can tell an intuitive story about something, that is as good as proving it?

I think that “proof” is too high a standard to use in economics. If our knowledge is limited to what we can prove, then we do not know anything. I think that we have frameworks of interpretation which give us insights. This is knowledge, even if it is not as definitive or reliable as knowledge in physics or chemistry.

As an example, take factor-price equalization. The insight is that the easier it is to trade across countries, the more that factor prices will tend to converge. I think that this is an important insight. It is one of what I call the Four Forces driving social and economic trends in recent decades. (The other three are assortative mating, the shift away from manufacturing toward health care and education, and the Internet.)

Paul Samuelson proved a “factor-price equalization theorem” for a special case of two factors, two goods and two countries. However, it is very difficult, if not impossible, to extend that theorem to make it realistic, including the fact that not all industries are subject to diminishing returns. In my view, Samuelson’s theorem per se offers no insight, because it is so narrow in scope. The unprovable broader insight is what is useful.

Incidentally, I also think that factor-price equalization is hard to prove statistically. Too many other things are happening at once to be able to say definitively that factor-price equalization is having an effect, say, on unskilled workers’ wages in the U.S. and China. I believe that it is having an effect, and there are studies that support my view, but it is not provable.

In order to prove something mathematically, you have to make narrow assumptions. In physics or engineering, this often works out well. When you roll a ball down an inclined plane, ignoring friction causes only a small error in the calculation.

In economics, the factors that you leave out in order to build a mathematical model tend to be more important. As a result, the requirement to express ideas in the form of mathematical models is harmful in two ways. We waste time proving false theorems and we miss out on useful insights.

The narrow assumptions lead you to prove something which is false in the real world.. For example, the central insight of the “market for lemons” proof is that a used car market cannot work. However, once we expand the assumptions to allow for warranties, dealer reputations, mechanics’ inspections, and so on, the original theorem does not hold.

Meanwhile, there are insights that are missed because they cannot be represented in an elegant mathematical way. A lot of the insights that I offer in Specialization and Trade fall in that category.

Our goal should be to acquire knowledge. The demand for proof hurts rather than helps with that process.

Alex vs. Tyler on Automation

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A ten-minute video. A bit of talking past one another. In short, Alex says that smart machines are making us rich, and Tyler says that only some of us are getting rich.

My favorite line was Tyler’s, talking about the challenges of adapting to technological change. He pointed out that even though the transition from agriculture to manufacturing was largely completed more than 50 years ago, to this days we still have lots of farm subsidies. I would add that by contemporary standards, the agriculture-to-manufacturing transition was gradual. We might expect even more dislocation from the transition to the New Commanding Heights.

Thete Watch

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Mark Aguiar, Mark Bils, Kerwin Charles, and Erik Hurst write,

we explore the decline in work hours for young men since 2000. Using standard parameterizations, we show that the decline in hours for LEYM (both in absolutely and relative to all prime-age men) is inconsistent with a stable labor supply curve. We propose a new methodology that exploits detailed micro data on how individuals allocate their time away from work to infer how changes in leisure technology have altered labor supply. We find that changes in leisure technology for computer goods broadly, and video games in particular, shifted in the labor supply curve for LEYM by an amount between 10 and 25 percent of the observed decline in market work hours for prime age men and between 20 and 45 percent of the decline in market work hours for LEYM.

LEYM is less educated young men. Pointer from Tyler Cowen.

An Abundance of Workers?

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I received an advance electronic copy of Ryan Avent’s forthcoming The Wealth of Humans. I have not read very far, but he seems to say that a major social problem these days is an over-abundance of workers. However, consider this WSJ blog post.

traits that are hard to define, but ever-present among good employees: professionalism, determination and adaptability and the ability to communicate, work together and take criticism. Or even just show up on time and follow a dress code.

The claim as that these soft skills are in short supply.

I am going to be old-school and say that whenever you see a “shortage” or an “over-abundance” you should ask what is wrong with the price mechanism. If you are having trouble finding workers with the traits that you want, then you are not paying enough for those traits.

Back to Avent. If there appears to be an over-abundance of workers, then what is going wrong? Maybe those individuals have, in Tyler Cowen’s evocative phrase, Zero Marginal Product. Also, it could be that the required marginal product is high because of minimum wages and labor market regulation. Or it could be that labor supply is reduced because of government programs that subsidize non-work and tax work.

Avent wants to assign a large causal role to capital equipment, especially smarter capital equipment. I think that is only one of the four forces, the others being: a shift toward the New Commanding Heights (education and health care) where soft skills matter more; factor-price equalization, meaning that foreign workers now compete more with domestic workers; and assortive mating, which breeds greater inequality.

When journalists and academics warn of a future with a job shortage, the cynic in me is inclined to say, “You mean a shortage of jobs that journalists and academics think of as appropriate for themselves.” Keep in mind that many colleges attempt to indoctrinate students that business is unfulfilling and profit is evil. But profit-seeking businesses are motivated to find uses for otherwise-idle productive resources. The fate of the next generation of Ryan Avents is not to be unemployable. Rather, some of them may end up in business jobs that journalists and academics might have trouble picturing themselves doing.

Cities that Attract College Graduates

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Rebecca Diamond writes,

the additional benefits college graduates gained from having access to a variety of desirable local amenities actually outweighs the negative effects of high housing costs. The 50 percent increase in the wage gap between high school and college graduates from 1980 to 2000 actually understates the true increases in economic inequality due to changes in wages, housing costs, and local amenities by at least 30%.

Pointer from Mark Thoma.

I think that the story she tells is pretty close to my model of gentrification.

1. Some high-skill enterprises locate in a downtown area. Think of the New Commanding Heights industries of health care and education.

2. This attracts well-educated professionals.

3. This attracts amenities that well-educated professionals enjoy. Bicycle lanes. Sushi restaurants. Opportunities to meet other well-educated professionals.

4. Rents and house prices go up.

5. Former residents are driven away by declines in low-skill jobs, higher housing costs, and lower propensity to enjoy bike lanes, sushi, and opportunities to meet well-educated professionals.

Where to Expect Automation

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Folks at McKinsey write,

Manufacturing, for all its technical potential, is only the second most readily automatable sector in the US economy. A service sector occupies the top spot: accommodations and food service, where almost half of all labor time involves predictable physical activities and the operation of machinery—including preparing, cooking, or serving food; cleaning food-preparation areas; preparing hot and cold beverages; and collecting dirty dishes. According to our analysis, 73 percent of the activities workers perform in food service and accommodations have the potential for automation, based on technical considerations.

Pointer from Timothy Taylor.

I can’t wait to see the results of higher minimum wages.

The White House on Prime-Age Males

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This report created a splash, although the findings are hardly news.

The prime-age male labor force participation rate has been falling in the United States for more than half a century. This long-term trend is worrisome, since it indicates that American men between the ages of 25 and 54 are increasingly disconnected from the labor market, lowering potential gains in productivity and economic growth. Although many higher-income economies have also experienced long-term declines in prime-age male labor force participation, the decline in the United States has been noticeably steeper, leaving our labor market—a crucial engine of growth—operating below its potential. Absent policy changes, this long-standing decline could continue, as more Baby Boomers move into retirement, and as younger cohorts enter the labor force at lower rates.

No single factor can fully explain this decline, but analysis suggests that a reduction in the demand for less skilled labor has been a key cause of declining participation rates as well as lower wages for less skilled workers.

Yes, if quantity goes down and price goes down, then you should interpret it as a demand shift.

Long-time readers of this blog know that I focus on what I call the four forces: New Commanding Heights (away from manufacturing and toward education and health care; factor-price equalization (easier for foreign workers to compete with U.S. workers; technology; and assortative mating. All of these play a role in reducing demand for the prototypical low-skilled male. And none is reversible.