Wage differentials, illustrated

NBER working paper (link): Do labor market changes help explain the decline in interstate migration in the US?

Interstate migration has decreased steadily since the 1980s. We show that this trend is not primarily related to demographic and socioeconomic factors, but instead appears to be connected to a concurrent secular decline in labor market transitions. We explore a number of reasons for the declines in geographic and labor market transitions, and find the strongest support for explanations related to a decrease in the net benefit to changing employers. Our preferred interpretation is that the distribution of relevant outside offers has shifted in a way that has made labor market transitions, and thus geographic transitions, less desirable to workers.

Competition and prices, illustrated

NBER working paper (link): What does a randomized setup say about the link between competition and prices? (Apparently it's a first!)

This paper provides the first experimental evidence on the effect of increased competition on the prices and quality of goods. We rely on an intervention that randomized the entry of 61 retail firms (grocery stores) into 72 local markets in the context of a conditional cash transfer program that serves the poor in the Dominican Republic. Six months after the intervention, product prices in the treated districts had decreased by about 6%, while product quality and service quality had not changed. Using a theoretical model, we arrive at the conclusion that the poor segments of the population in these markets care the most about prices and much less about quality. Our results are also informative to the design of social policies. They suggest that policymakers should pay attention to supply conditions even when the policies in question will only affect the demand side of the market.

Incentive compatibility, illustrated

Matthew Gentzkow: 2014 John Bates Clark Medalist

Economist Matthew Gentzkow has just won the 2014 John Bates Clark Medal, awarded annually by the American Economic Association to the best American economist under age 40. (Citation here.)

Graduation speech, econ style

In 2007 Nobel laureate Thomas Sargent delivered a graduation speech at UC Berkeley all in under 2 minutes (full text below). Rather erudite, but talk about economy of words!

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words. 

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches. 

1. Many things that are desirable are not feasible. 

2. Individuals and communities face trade-offs. 

3. Other people have more information about their abilities, their efforts, and their preferences than you do. 

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended. 

5. There are tradeoffs between equality and efficiency. 

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse. 

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation. 

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made. 

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore). 

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation. 

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves). 

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

P.S. (4/21/14) Chris Dillows alternative 12 principles of economics.

I particularly liked principle #4: "Luck matters. The R-squareds in Mincer equations are generally low." He elaborates: "Where you were born. I'm rich because I was born in England, not Ethiopia. Herbert Simon estimated that at least 90% (pdf) of the incomes of western individuals are due to this fortune of birth." So true, yet I feel this is understudied.

4Ps and Yolanda

Prepared by colleagues at the Bank:

The importance of survey comparability

The US Census Bureau is reportedly overhauling the questionnaire and methodology of its annual survey on health insurance, possibly making old and new data incomparable. Moreover, the changes might make it virtually impossible to assess the impact of the Obama administration's new Affordable Care Act (link):

With the new questions, “it is likely that the Census Bureau will decide that there is a break in series for the health insurance estimates,” says another agency document describing the changes. This “break in trend” will complicate efforts to trace the impact of the Affordable Care Act, it said.

Survey comparability is incidentally an issue that beleaguers our own statistical system, especially where poverty and unemployment data are concerned. While survey updates are usually justified as an effort to adhere to international standards and best practices, there is a case for conducting the same survey using old methods if only to retain the comparability of data over time, especially for purposes of policy analysis and reforms.

Economics for high school: are we missing the mark?

Prof. Noel de Dios makes a case for revamping economics education at the high school level (link):

In lieu of computing elasticities and slopes of curves, an age-appropriate program for economic and financial literacy ought to deal with more existential questions such as: what young people can expect to earn from careers based on their life-goals, skills, and achievements; why prudent budgeting and prioritization of expenses matters and what it entails; the crucial importance of planning a financial future and the role of saving; the responsible use of borrowing and credit; rules for wise financial investment (including how to avoid getting ripped off); and the various uses and options for insurance (medical, life and accident, retirement).