Meritocracy and Productivity

A new paper by Bandiera et al. focuses on how matching worker skills to job characteristics affects productivity. They use detailed data for 120,000 workers across 28 countries in an attempt to identify the productivity effects of i) worker skill endowments, ii) technology, and iii) job markets frictions. They formalize meritocracy as as the degree to which worker skills match with the skill requirements of jobs. Miss-allocation, due to, say, inflexible labor laws or nepotism, would imply a reduced the role for meritocracy.

Not surprisingly, they find that most of the difference in income between developed and developing countries is from differences in skills and technology.  However:

... a large share (36 percent) of the gains from adopting frontier endowments and technology are realized through enhanced sorting. Improvements in worker-job matching thus constitute an important amplification channel for economic development ...

Without the ability to hire he right person, technology is less productive. Without the likelihood of using advanced skills on the job, workers forgo acquiring these skills. More generally, meritocracy improves incomes because it increases the return to investing in the technology and skills. This is further documentation of the importance of getting the incentives right.

Why are quarterbacks taken so early in the draft?

 WSJ:

Since 2011, the NFL has had a rookie wage scale, which allocates relatively affordable salaries to each draft pick regardless of position. That means taking a rookie at one of the more valuable positions has the chance to generate enormous surplus value. It’s why, for instance, quarterbacks on rookie deals are so advantageous—teams can get the most from them before they re-sign on contracts that could cost upward of $50 million a year.

In other words, quarterbacks salaries are fixed further below expected value than other positions, so they generate more expected profit for the team.

Note how NFL owners negotiated with current players and came up an agreement that screwed the only people not at the table, future players (college kids).  Nice metaphor for the human condition. 

 Ironically, I am still disappointed by this kind of self-interested behavior. 

HT: Lamar

US v. Google: do complaints have to be internally consistent?

From former DOJ Economist Greg Werden: 

The governments case suggests that its exclusive deals with Apple and Mozilla to be the default search engine on their browsers “allowed Google to maintain its monopoly power [in "general search"] in violation of Section 2 of the Sherman Act.”  

However, the government's brief also suggests that Google's scale is very important, which implies that its scale economies--not its exclusive deals--that maintain Google’s dominant share. 

What does Earth Day teach us about supply?

Around the time of the first Earth Day (1970), Environmentalists were making dire predictions (via Mark Perry): 

• ...world famines of unbelievable proportions.
• some 4 billion people, including 65 million Americans, would perish in the “Great Die-Off.”
• By the year 2000, … there won’t be any more crude oil.
• Lead, zinc, tin, gold, and silver would be gone before 1990.

Why were these predictions so spectacularly wrong? 

ANSWER: If prices increase, producers find more supply or develop alternatives. For example, oil reserves are much bigger now due to technological innovations like directional drilling and shale oil extraction. 

• In 1980, Paul Ehrlich, a Stanford biologist (author of "The Population Bomb,") bet Julian Simon, a Maryland Economist, that prices of five metals (chromium, copper, nickel, tin, and tungsten) would rise due to increased demand from population growth. 
• In 1990, the prices of all five metals had fallen, and Ehrlich lost $1,000.

BOTTOM LINE:  Don't underestimate supply.  

Places like Illinois "are screwed"

The Economist: Declining fertility and declining immigration lead to:

• DEATH SPIRALS: ... the biggest problem is that, once a place starts shrinking, ... there is far more housing available than people to fill it, ... landlords and even homeowners stop maintaining their properties, ... blight spreads .. 
• TAXES PAID BY FEWER PEOPLE: as cities lose population, the cost of providing public services [mostly public pensions] tends to stay about the same. ... the result is that the remaining taxpayers must pay more simply to support the same services. 
• STATE CANNOT PAY ITS PENSIONS: Across Illinois the total burden of unfunded state and local pension liabilities is estimated to be around $210bn, or roughly four times the state’s entire annual budget.
• IL, NJ, WV, have been shrinking for awhile
• In 2021, 14 more states shrank.

McKinsey was wrong: diversity does not improve performance

Econ Journal Watch:

Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that ... they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.

Why growth matters

Making the pie bigger ("the growth agenda") means we are not fighting over a fixed pie ("zero sum fallacy"), and it guides decision making, "does this policy increase the size of the pie?"

MarginalRevolution points to a Jason Furman graph showing that a 0.5% growth rate difference between the US and Argentina over the last 120 years has lead to a per capita income in the US that is over three times as large as Argentina's [note exponential scale]

Online Marketplace Competiton

Amazon had been concerned with Walmart's and Target's growing presence as online marketplaces. Now Sebastian Herrera at the WSJ reports that their focus has shifted to Temu and Shein. So far, Amazon's US market share is larger than the other four combined. But these newcomers (to the US) believe that this could change. Temu's number of active users is approaching Amazon's, but Temu's revenue per user is much lower.

It is interesting how all of these firms are staking out differentiated products strategies. Walmart and Target leverage their brick & mortar stores, Shein focuses on fast fashion, Temu on deep discounts, while Amazon's logistics muscle allows it a delivery speed advantage.

Flying over Troubled Red Sea Shipping Lanes

 

Since November 2023, there have been 133 reported incidents of shipping attacks by Houthi militia in Yemen, including 14 vessels struck by missiles or drones and 18 vessels hijacked by Somali pirates. This has caused some ships to bypass the Suez Canal in favor of the Cape of Good Hope. But Paul Berger at the WSJ reports on another alternative for some shippers. Some cargo has been diverted to air freight leading to huge increases in rates.

On lanes linking the Middle East and South Asia to Europe, average spot rates rose 46% from February to March to $2.82 per kilogram, a 71% increase from last year. The average global spot rate to ship cargo by air in March rose 7% from a month earlier to $2.43 per kilogram, according to Xeneta. 

Diverse MBA teams perform worse

From "Diversity and Performance in Entrepreneurial Teams" (SSRN): 

• Among the randomly-assigned teams [of MBA students], greater diversity along the intersection of gender and race/ethnicity significantly reduced performance. 
• However, the negative effect of this diversity is alleviated ... [when teams can choose their teammates]
• ...teams with more female members perform substantially better when their faculty section leader was also female. 

Pricing the Atlantic

A WSJ article by Alexandra Bruell reports that three years ago the Atlantic magazine ran a $20 million deficit which led to layoffs. A new boss, Nick Thompson, was tasked with turning this around. Along with editorial changes toward longer investigative pieces rather than breaking news, the Atlantic raised subscription prices 50%. How did he know to do this?

Thompson’s team ran experiments to determine the best way to charge more without alienating new readers. It is offering fewer stories free and no longer discounting subscriptions. Last year, it raised prices for annual subscriptions to $80 from $60 for digital and to $90 from $70 for both print and digital.

Revenue was up 10% last year to close to $100 million and the magazine is now profitable.

What makes people happy?

Economist: Four main factors, explain happiness: 

• Age: Things go downhill from youth to middle age until they reach a nadir commonly known as the mid-life crisis. ... . [Then as people lose] ... vitality, mental sharpness and looks, they also gain what people spend their lives pursuing: happiness.
• Gender: Women, by and large, are slightly happier than men. But they are also more susceptible to depression: a fifth to a quarter of women experience depression at some point in their lives, compared with around a tenth of men. 
• Personality: Neurotic people—those who are prone to guilt, anger and anxiety—tend to be unhappy. ... Whereas neuroticism tends to make for gloomy types, extroversion does the opposite.
• Circumstances: Married, employed, childless, and richer people are happier

Spotify's Complements?

 

Anne Steele at the WSJ reports that Spotify is the leading audio-streaming platform with 600 million users and a 30% market share. Even so, it seems to be struggling. After a couple of rounds of layoffs, some false starts from expansion into podcasting, concert promotion, and audio books, it earned its first quarterly profits since 2022 in the last quarter of 2023. Competition with tech giants Apple, Amazon, and Google have kept margins low - for every dollar it earns on music streaming, it pays $0.70 in royalties.

But its tech giant competitors do not have to earn profits on streaming music. Their other services can be complementary to audio-streaming. For example, Apple would be happy if Apple Music operated at a loss so long as it helped to sell more high-margin iPhones. This is exactly what Netscape complained about in the late 1990s when Microsoft gave the Internet Explorer away for free. Netscape's revenue model was based on the sales of the browser. Microsoft's was based on sales of operating systems. So long as a free browser sold more computers with Windows already preinstalled, Microsoft was happy. How could Netscape compete with free? How can Spotify compete with subsidized competitors?

Steele hints at this problem by suggesting that Spotify could be a takeover target for companies like Microsoft, Netflix, or Tencent. These companies all have services that could be complements for music streaming. They might be willing to subsidize Spotify if doing so sells more operating systems, movies, or video games.

Keeping you from Cutting your Finger Off

The Consumer Product Safety Commission (CPSC) is considering mandating SawStop technology on future table saws. Ben Blatt at The Age does a good job of laying out the issues and providing some numbers. The technology to drop the blade out of harm's way within a few milliseconds is amazing (see video). My table saw is the scariest piece of equipment in this woodworker's shop. 

Let's see if this mandate might be worth it. The article in The Age reports that table saws cause 4,300 amputations every year, more than thousands of other products combined. Almost all of these will be fingers. Maximum workers compensation values for a lost finger range from 20 weeks of pay (a pinky) to 45 weeks (an index finger). The average carpenter's compensation is $63,149 per year or $1,214 per week. This means that if all amputations were prevented a maximum value of the savings would be $24,288-$54,648 per accident, or about $104-$234 million in aggregate. 

The Age also reports that 675,000 table saws are purchased in the US and that the CPSC estimates that the technology would add $338 to $1,210 in costs per table saw. This implies total cost increases of $228-$817 million. So the costs of the mandate are two to three times the maximum benefit.

But it is worse than this. A mandate eliminates choice. SawStop is already available on the market but only has a 2% market share. Those who value this technology can purchase it. Those who place a lower value on it can choose not to. The mandate implies that the government knows better than the 98% of practicing woodworkers and carpenters who have opted out. This little back-of-the-envelope calculation confirms my own decision not to purchase a SawStop. This may be a case for more information disclosure rather than a product mandate.