The U.S. Department of Labor is proposing to end the overtime exemption of “companions” (home assistants typically employed to assist/watch the infirm elderly) employed by an agency. The exemption would remain for companions employed directly by a private individual. This rule would lead to classic results: 1) Higher labor costs through agencies, no doubt passed onto older people in the form of higher prices, leading to less employment through agencies; 2) A shift to more companions employed directly by individuals.
I’m not sure what the demand elasticity for companions is, but it is unlikely to be small.
What would we do with our time if we suddenly didn’t have to work as much but were just as healthy and had the same income? This question is ages-old, was posed by Keynes in 1930, but is very hard to answer: sudden, permanent drops in work time that change nothing else are very rare. They did occur in Japan in the 1990s and Korea in the 2000s, when their governments induced employers to cut work hours. In a recent paper Jungmin Lee, Daiji Kawaguchi and I use time diaries from before and after the changes to see what happened. In Japan, almost half the free time was devoted to additional TV-watching, while in Korea, much was devoted to increased personal care, particularly grooming. But in neither was there any increase in home production — child care, cooking, gardening, etc. I like to think the same would occur in the U.S. — that we would use permanent cuts in work time to enjoy ourselves and take more care of ourselves. Regrettably in the workaholism champion of the Western world, these cuts don’t seem likely any time soon.
In line at the Star$$ on campus, I got to chatting with Professor C just in front of me. She ordered a latte and bought the last of the delicious Star$$ cake donuts, which I had had my eye on. When I got to the order desk, I asked the barista (actually a male, so I guess a barister!) if he had any more in back. Professor C offered to split the donut with me, and I said OK, but I insisted on giving her $1, my share of its cost. She then said she prefers one-half donut to a whole donut anyway, and so do I. She gave the barister a $1 tip. Everyone was better off—a clear Pareto improvement compared to the situation where she got the donut, and the barister and I got nothing.
I’m nearly certain that a pair of students cheated on my final exam—the probability they had so many identical answers on the multiple-choice exam is infinitesimal. If I pursue them, it takes me time, and there’s no assurance they will be found guilty. If I don’t, I’ll feel badly about giving them an undeserved grade. Even for fairly risk-averse students, cheating seems like a good idea. I doubt that most cheating is caught; and unless the penalty is very severe (expulsion) and/or the students’ costs of contesting the accusation are high, and both are very well-publicized, the incentive to cheat for students with weak consciences seems overpowering. To salve my own conscience I’ll report them, although it’s probably a waste of my time; but I doubt that reporting them will deter their future cheating or deter others very much.
A student was interested in seeing the new Twilight movie, Breaking Dawn Part 1. And her roommate, a “Twi-Hard,” even had an extra ticket for the opening, midnight showing. The student likes seeing the vampires and werewolves occasionally, but cannot stand the continuing screams of the mostly pre-pubescent audience. She views her situation as a game with the following payoff bi-matrix:
My wife is helping with a local drive to get people to register to donate organs. We thought that, as a cancer survivor, she herself would not be allowed to register. Wrong. Anyone under age 85 can register, so long as their cancer is not active and they do not have a systemic infection of any kind.
The doctor who informed us says this increases the potential supply of transplantable organs. If the demand is high enough, and the patients sick enough, the doctors will choose to use a donated organ even if the transplantation risk from the particular organ is substantial. Thus, while fortunately the price system is not used explicitly in the transplantable organ market, the choice to allow more people to register and to compare the demand to the increased supply suggests economics is currently present in this market.
Several students claimed in class that our university will give you straight A grades in the semester in which your roommate dies. I said I doubted this claim for two reasons. First, it creates a moral hazard: you are more likely to engage in behavior that would kill your roommate; you might even kill him/her yourself. Second, it will generate adverse selection — people will be more likely to want to room with the dying or those in bad health.
Given these difficulties (and the absurdity of the story), I am 99.99 percent sure that this is a local urban legend. A similar, equally implausible student urban legend at U.T.-Austin is that you receive free tuition for the rest of your college career if you are injured by a university-owned vehicle. I don’t see any adverse-selection problem here, but it sure creates a moral hazard!
The November unemployment data that came out on Friday has Democrats crowing about the drop in the unemployment rate; yet Republicans are rightly pointing out that much of the drop was due to labor-force withdrawal. Neither party, however, seems to be noticing the most remarkable thing: the continuing, constant and historically high share of unemployment accounted for by the long-term unemployed, around 43 percent. This is bad for society for two reasons:
1. The burden of unemployment—the loss in utility—must increase the longer one is unemployed (and has perhaps exhausted savings and unemployment benefits).
2. With unemployment concentrated so narrowly, fewer people than otherwise experience the pain, so the political pressure to do anything to ameliorate the situation is lessened.
The huge rise in long-term unemployment, and the huge rise in the share of income accruing to the top 1 percent of households, both work to dis-integrate American society.
McDonald’s has reintroduced its McRib sandwich. Consisting of meat that at one point belonged to a pig, it is now on yet another farewell tour, its sixth since 2004. (Actually, the first three were called “Farewell Tour,” the last three have been called “Reintroduction.”) The website the Awl.com points out that the reintroductions of this unusual product have all coincided with downturns in the price of pork.
Seems reasonable to me: Mickey D’s assumes there is some best price for the McRib and compares it to the marginal cost, exactly as in our introductory textbooks. When the marginal cost drops sufficiently (and presumably the price of pork is the most variable item in costs), back comes the McRib. (HT to CVB)
Every year, I have my 500 intro students write vignettes like those in my little book, Economics Is Everywhere. This year, I got one which is the most clever and original of the roughly 2,000 submitted in the past four years. It’s by my student Kourtney Kech, and appears below.
As a small child, I remember quite clearly, a book that my mother read and loved dearly.
The Lorax, by Seuss, a doctor of rhymes, provided us both with some great pre-sleep times.
The idea of scarcity is not that complex and is shown in great detail through Lorax’s text.
I got an invitation to give a keynote address at a conference in southern France next June. A great conference, but I had to decline, since we’ve planned a week with the extended family on the New Jersey Shore (the only week we are all available). The man who invited me said,“… southern France would not have been a bad place to spend this holiday….”
Even though we love the Jersey Shore, he’s right—the relative utility from the French week would be higher; and if the relative price were one, we’d be off to France. However, the prices aren’t equal—it would cost over $1000 extra for each of 12 people to do the French week. Too bad—we’ll stick with the New Jersey week, a sensible and still very enjoyable economic decision in the face of income, price and time-constrained optimization.
(HT to NG)
As a teen Max had a great business mowing lawns. He used his hand-pushed power mower to build up a large clientele in a radius of his family’s house. When his friend and neighbor Charlie entered the business, ending Max’s local monopoly, Max didn’t have to cut his price—Charlie just expanded the radius of the client area.
Max knew he had problems, however, when he saw Charlie drive out of his garage on a riding mower. Charlie could now do four times as many lawns/day as Max. Max started losing customers when Charlie cut prices, as he could afford to (because his average cost/lawn was lower than Max’s and had a minimum with a higher output.) Not wanting to compete on price, and unable to get his parents to buy a riding mower, Max decided his opportunity cost was above his now lower lawn-mowing wage, and he quit the business to open a lemonade stand. (HT to MF)
At Saturday’s concert by the Chamber Orchestra Kremlin, the program offered a menu for the second half: The audience was to vote on whether it wished to hear the Tschaikovsky Serenade, the Dvorák Serenade, or Schubert’s Death and the Maiden Quartet (arranged for small string orchestra). After the intermission, the conductor briefly discussed each composer and described each piece, then asked for a show of hands.
I was worried: What if a plurality favored the Schubert (my choice), but the Dvorák had been a close second, with a majority of people vehemently against hearing the Schubert performed by anything other than four string instruments? I don’t imagine that second-preference voting would have been possible (fancier voting schemes regrettably generate larger transactions costs), so we would have listened to the Schubert even though more people would have been better off with the Dvorák.
Fortunately, a small majority of the audience shared my preference and we achieved the first-best (and heard a wonderful performance)!
A café in Seattle offers a 3-egg omelet breakfast for $7.99, and a 6-egg omelet breakfast for $9.99. They will let two people split the 6-egg omelet, and even let the two people order one slice of different kinds of toast with the shared omelet. Is this pricing strategy crazy?
Perhaps, but unless each person would order a 3-egg omelet otherwise and pay $15.98, perhaps not. The marginal cost of making the 6-egg omelet is really just the 3 eggs, which cost much less than $2. The good deal on the shared 6-egg omelet induces a couple to split it, and stuff themselves, rather than split a 3-egg omelet, which my wife and I often do. The incentives provided by this pricing decision may actually raise the café’s profits.
(HT to MH)
The University of Texas System regents have chosen to invest $10 million in a start-up company that provides web-based advising services to university students. Perhaps a good idea, although unlike nearly all other investments of the System’s endowment, this one was made by fiat of the Board of Regents with no consultation of its investment advisors. Interestingly, the start-up is run by a man who was on Gov. Rick Perry’s re-election finance committee and by another whose father was a previous chancellor of the System (with the former chancellor being part-owner of the company).
This is one of the best examples I’ve ever seen of successful rent-seeking in the public sector (although laypeople might use a less felicitous term than rent-seeking). This blog needs a contest for the most outrageous example of this behavior, and this is my entry into that contest. So, dear readers, please share your examples in the comments section.
[HT to AC]
In Belarus, the government doesn’t allow trading of its ruble outside a narrow price range, which greatly overvalues the ruble— so there is a price floor on the ruble compared to the euro or dollar. Because of the floor, currency trading had dried up: who would want to sell foreign currencies for grossly overpriced Belarussian rubles??
A friend of one of my students has a website designed to overcome rigidities in this market, sort of a Craigslist for currency. People specify amounts willing to buy or sell, agree to trade at some price and arrange a meeting place (often one of the empty currency-trading booths!). When they meet, trade nominally occurs at the official price floor, making the transaction nominally legal; but the person selling rubles makes side payments to the buyer to lower the price sufficiently so that the trade actually takes place at the equilibrium price.
One more way in which technology helps markets circumvent imperfections and rigidities.
(HT to MK)
The Jewish New Year is announced by blasts on a ram’s horn (shofar). Many people use much larger horns instead (a kudu, for example). This year, as part of the religious service, a woman picked up the ram’s horn to blow a few sounds, and not much came out—a few feeble toots. After squeaking out half the required notes, she switched to the kudu horn—she switched to additional capital. With the larger horn she blasted the entire congregation out of their seats—truly wonderful sounds.
Even in a religious service we can observe that the marginal product of labor is enhanced by additional capital—even in this context labor and capital are complements in production.
(HT to AB)
Last summer, a court ruled in favor of Pfizer’s patent on Viagra, extending its monopoly on the product through 2019. Many jokes were made when Viagra was first marketed, with Jay Leno remarking that it would keep comedians in business for years. With the patent extension, the price of Viagra will remain high for another 8 years.
There are many implications of this, but my question is the narrow one: What related markets will be affected by the absence of a generic equivalent of Viagra and the product’s continuing high price, and how?
I’m getting a 3.6 percent increase in my Social Security retirement benefits on January 1. This reflects the rise in the “cost of living.” I’m happy for the money, but it’s wrong: every economist who has studied the issue knows that the Consumer Price Index (CPI-U) used for this adjustment overstates inflation by failing to account for the fact that people substitute away from goods and services whose prices rise relatively rapidly.
For a decade the U.S. Bureau of Labor Statistics has published a measure that accounts for this substitution, the chained CPI (C-CPI-U). Over the last 10 years it has risen 24.4 percent, while the CPI-U has risen 27.4 percent (and 3.7 instead of 3.9 percent this past 12 months). The C-CPI-U is a better measure of the cost-of-living, and it should be used (although even it overstates inflation because it doesn’t account fully for improvement of products).
Unsurprisingly, groups claiming to represent us greedy geezers are vehemently against even this change, “This so-called ‘chained CPI,’ through compounding, would cut seniors’ benefits by thousands of dollars over their lifetimes ….,” said AARP Executive Vice President Nancy LeaMond.
Of course, nobody’s benefits would be cut. Rather, their future benefits would rise less rapidly and would reflect better the prices of the goods they consume. My advice to other geezers: suck it up—this is the right thing for society and the right thing logically.
A recent headline in The Onion reads, “Boardwalk Con Men Hit Hard By Sharp Decrease in Chumps.” Even though it’s a fake story, we can still have some fun with the economic principles it illustrates. According to the piece, the weak economy has reduced people’s willingness to be swindled— the demand for being swindled has shifted left. It’s gotten tough for swindlers, with one complaining, “In a stagnant economy like this, I can’t get no one interested in the same old grift.”
Not surprisingly, in this competitive industry (presumably entry/exit into/out of swindling is fairly easy), it is likely that some swindlers will leave the industry. The story notes that, unless the economy improves, many will, “…pull up stakes and take it down to Florida, where the chumps are a dime a dozen.”
That exit should restore normal profits for the swindlers who remain on the boardwalk.
A tenured senior professor at another university, one of his department’s top researchers and best teachers, asked his department chairman for a temporary one-course teaching reduction for this Fall. The chairman refused but offered a terminal three-year appointment that included this reduction for all three years, at the same salary as if this professor taught a full load each year.
The professor accepted the deal, as he desperately wanted the teaching reduction this Fall, figuring he could get a teaching job elsewhere after three years. But he tells me he would have been happier teaching a full load over the next two years, and would rather not have to search for a job in two years. He is worse off. The department and university are also worse off, since they lose his courses in each of the next two years, and thereafter will not get the benefit of his teaching and his research/publication luster; and students are worse off too.
Is this really a Pareto deterioration—a new economic phrase denoting a change in which at least one person is worse off, and nobody better off? And is the phrase Pareto deterioration the best name for this unusual phenomenon?
General equilibrium ain’t just peanuts. With the tremendous shortfall in the peanut harvest (a decline of 17%) due to the unusually dry weather in peanut-growing states, people are expecting a rise in the price of this main input of peanut butter to cause supply to shift leftward. Jif peanut butter expects to raise its price by 30% starting in November.
I doubt that its sales will go down much—I think the demand for peanut butter is fairly inelastic. But what about related markets? If everyone likes peanut butter and mayonnaise sandwiches as much as I do—if peanut butter and mayonnaise are complements—then we’ll see a leftward shift in demand for mayonnaise, and its price will decline. Have I held too much of the ceteris paribus, or not enough? Where should one stop?
The Bourbon Outfitter in Lexington, Kentucky sells souvenirs and paraphernalia related to bourbon distilling and drinking. Its only physical retail outlet is a kiosk in a shopping mall; and its selling season is the Christmas shopping period. Its difficulty is that the mall will only rent kiosk space in three-month intervals—the kiosk is a fixed cost to The Outfitter, which has come up with the following solution: It rents the kiosk from November through January, and opens on November 1, sufficient time before Black Friday to make an impression on shoppers. It stays open until New Year’s and then closes down.
The owner tells me that this is a profit-maximizing policy, since the variable cost of remaining open after New Year’s Day far exceeds the trickle of revenue that might flow in.
[HT to BK]
A recent story in the NY Daily News reported that Cryos International, one of the world’s largest sperm banks, is refusing to accept donations from redheaded men.
Apparently, this is a result of a sharp increase in supply that the company needs to reduce before more donations are accepted. Like most temporary surpluses, this one will be removed, in this case probably not by the price system (although one can imagine that potential recipients, hearing of the surplus and being indifferent about their donor’s hair color, might offer Cryos a below-market price).
More likely, Cryos’ refusal to accept any more supply will cause the surplus to disappear, so that redheads’ donations will soon be accepted again.
Fifteen years ago, on a visit to Peru, I drank many pisco sours and decided I had to buy a duty-free bottle of pisco. It has sat unopened in our liquor cabinet since then. A colleague mentioned he had bought a number of bottles of a South African liqueur, Amarula Cream, that tastes a lot like Baileys Irish Cream, which we love. Chatting, we suggested a trade, since he’s a pisco sour fancier, as is his wife.
The trade is now consummated, and both we and our wives are happier for it. No monetary transaction, but I am convinced that everybody is better off—this is a real Pareto improvement.
(HT to LL)
People in the very upper tail of earnings distribution have seen their incomes rise far more rapidly than even the well-off folks in the top decile. That makes it hard to argue against President Obama’s proposed tax on millionaires, which just restores some progressivity to the tax structure. Nonetheless, we’ve seen arguments against it on grounds that it will reduce job creation (presumably because the rich have a higher marginal propensity to save than others). I’m always amazed at how concerned rich people and their apologists are about job creation (although their concerns are loudest at times when proposals are made to raise their taxes). It reminds me of arguments that got the short-lived tax on yachts in the 1990s repealed.
I don’t believe most macroeconomic arguments; but if one wants to argue on macro grounds, at a time of sluggish demand, if you want to balance budgets surely taxes should be raised on those with high propensities to save (arguably the well-to-do) and reduced on the rest of society, so as to stimulate consumer demand. You can’t have macro arguments both ways!
An example of irrationality? A colleague at another university was offered a buy-out: A full year’s pay if he would resign/retire at the end of the current semester. At the same time his school also offered a phased retirement deal: Two years at half pay, with half a usual teaching load.
This economist chose to take the phased retirement, thus choosing the same pay, but teaching four courses over two years instead of no teaching. I think he’s crazy; but I think you can write down a utility function that is consistent with his behavior and violates none of our assumptions about preferences.
Of course higher unemployment generally raises unemployment among men, women and minorities. But how does it affect the wages of workers who keep their jobs? I believe a new paper that I coauthored with Jeff Biddle is the first to use large amounts of data to address this question about cycles in wage discrimination. Here’s the abstract:
Using CPS data from 1979-2009 we examine how cyclical downturns and industry-specific demand shocks affect wage differentials between white non-Hispanic males and women, Hispanics and African- Americans. Women’s and Hispanics’ relative earnings are harmed by negative shocks, while the earnings disadvantage of African-Americans may drop with negative shocks. Negative shocks also appear to increase the earnings disadvantage of bad-looking workers. A theory of job search suggests two opposite-signed mechanisms that affect these wage differentials. It suggests greater absolute effects among job-movers, which is verified using the longitudinal component of the CPS.
There’s a long line of students snaking around the courtyard near my office. They’re queuing up to get a “free” cheeseburger, courtesy of Dave’s Hot and Juicy Tour of America, a Wendy’s promotion. A student near the current end of the line will spend 15 minutes in the sun to get the burger. A Wendy’s cheeseburger usually costs $2.99. I certainly wouldn’t be out there, even if I liked cheeseburgers.
If the student’s opportunity cost of time exceeds $12/hour, waiting for the freebie is a bad decision. But since there’s some evidence that people value time outside of work at 1/3 their wage, and since it is unlikely that many students’ hourly wage rates exceed $36/hour, standing out there is sensible on narrow economic grounds for nearly all students. But: This doesn’t factor in the likelihood of heat stroke—it’s 101º in the shade!
A puzzle. My nephew has switched to making art glass full-time, and I think his work is gorgeous. His problem, though, is figuring out what price to charge. Among other things, he blows gorgeous candlesticks, which he thought of selling for $70 a pair. I say he should charge $250 a pair. He says no, because he thinks he can sell many more at the lower price.
He assumes it takes one hour of his time to blow a pair after he’s done the first pair, and incurred the fixed cost. So I guess his decision depends on the opportunity cost of his time and the elasticity of demand for his product. Clearly, there is a set of combinations of the cost of his time and the expected change in quantity sold that would make him indifferent between the high and low prices, with a higher opportunity cost requiring a higher demand elasticity if the price is lower.
Given the two prices, what is this set? And what do you think the demand elasticity actually is in this case? (HT to SEH)
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