• income redistribution

    The Mystery of Why Grads From 4 Year Colleges Earn More

    Jan 12 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Education • 659 Views

    After studying accounting and finance for three years, Mick Jagger left the London School of Economics. With his childhood friend Keith Richards, he planned to work in a new band. For Jagger, leaving college in 1963 was a good decision.

    The College Wage Premium

    The rest of us, though, need a college diploma to earn more. Graduates of four year colleges have higher earnings than students who never finished, never started or attended a community college. For 2013, the NY Times says grads earned a whopping 98 percent more than individuals without that degree. While other estimates are closer to 10 percent for each year of school, whichever we accept, still, the gap is big.


    Human capital pay boost from 4 year college

    Our mystery is why. Why does that four year degree create a wage premium?

    Better Capital or Better Signaling or Something Else?

    The traditional view is that we learn skills during four years of college. Attending classes, taking exams, reading and doing research, we acquire thinking and writing skills. Correspondingly, our major determines the technical expertise with which we will graduate. Put it all together and you get human capital growth that makes a graduate much more valuable than a freshman.

    Yes? Not according to some economists who are looking at signaling.

    The signaling people say that college graduates’ labor market attractiveness comes from showing they could graduate. Being able to get that diploma means you have many of the skills you will need when you enter the labor force. You have to go to classes on time, pass exams, stick with a goal for 4 or 5 years and display perseverance. Students lacking the qualities they need to finish a four year college are “filtered out.” Consequently, one leading advocate of the signaling model says the split is 20/80. 20% human capital and 80% signaling.

    And then, we also have a third group. In one study, researchers looked at students who were admitted to an elite university but attended a state school. Their earnings equaled what they would have been as “elite” school graduates. Does that mean we also have a group of people–no matter where or if they attend college–whose individual attributes bring them success?

    Like Mick Jagger??

    Our Bottom Line: Human Capital

    Resembling fractal mathematician Benoit Mandelbrot’s observation about the British coastline being infinite when we look closely, causation between a college diploma and higher income involves an incalculable number of variables. Scholars are continuing to debate whether human capital development, the signaling of the diploma, or pre-existing human talent is most responsible for the college wage premium.

    So yes, college is worth it. But the mystery is why.

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  • Everyday economics and labor participation rate

    The Mystery of the Disappearing Workers

    Jan 11 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 625 Views

    Our story starts during the 1970s.

    Forty years ago more women started entering law school, medical school and other professional programs after college. Instead of majoring in education, they became judges, physicians, dentists, architects, veterinarians. They entered professions that required years of their time.

    Asked why, some economists say, “oral contraception.” The birth control revolution that started during the early 1970s helped women time marriage and motherhood.They could complete longer educational programs, decide the duration of employment, and have control over professional goals. Able to plan child birth, women entered the labor force.

    In a slightly different way, the following Bureau of Labor Statistics graph shows the story of the pill. The ascending line from 1972 to 1998 represents a ratio that compares the size of the labor force to its potential size. A higher ratio means more people who could work are working or looking for a job. And that is where the pill enters the picture. Oral contraception enabled women to enter the labor force in larger numbers than ever before.

    Labor force participation rate up and downs

    From: BLS


    The Mystery: Where Has the Labor Force Gone?

    Now though, the proportion of the population that could be in the labor force again are not.

    It makes sense that during the Great Recession people left the labor force. Many were laid off and new labor force entrants did not even try to find a job. People stayed at home, they considered retiring early, they went to school.

    With the recovery, though, wouldn’t you expect the trend to switch? However, look at the line. Historically speaking, we still have a relatively low percent working or looking for a job compared to all of the people who could be. According to the BLS, we are talking about six million or more individuals.

    And… No one knows why.

    There are theories. Maybe people have remained in the underground economy which means they are not reporting their pay. Maybe more baby boomers are retiring. There could be many individuals who stopped trying to find a match for their skills. Others might have been eligible for the Social Security disability payments that create the incentive not to work.

    Our Bottom Line: Participation Rates

    There are two kinds of unemployed people.

    • People in the labor force
    • People who are not in the labor force

    Now at 5.6 percent, the unemployment rate counts the unemployed people in the labor force. However, there are millions of people who are aged 16 or older who potentially could work. If we divide the size of the labor force by the potential labor force (which includes everyone who could be and is in the labor force) and then multiply by 100, we get the participation rate. Our graph above displays the labor force participation rate.

    The problem with a rock bottom participation rate? We are talking about 6 to 8 million people who could be contributing to the GDP and paying taxes.

    Continuing our mystery week, we have a new one tomorrow.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Drinking Behavior to Dating Decisions

    Jan 10 • Behavioral Economics, Demand, Supply, and Markets, Economic Humor, Economic Thinkers, Environment, Financial Markets, Gender Issues, Government, Households, Lifestyle, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 605 Views

    Our Posts Roundup

    Everyday economics and beer product differentiationSunday 1.04.15 What beer shows about our taste…more


    everyday economics and buffet marginal utilituMonday 1.05.15 How the price of an all-you-can-eat buffet affects us…more


    market system queen honey beeTuesday 1.06.15 Trying to place a price on the environment…more


    everyday economics and EU dysfunctionWednesday 1.07.15 How EU members disagree with each other…more


    Everyday Economics and how dynamic scoring is controversial because it spotlights growth instead of spending categories.Thursday 1.08.15 A new hot topic for Congress…more


    Everyday Economics and impact of gender equity for gays and lesbiansFriday 1.09.15 How gender ratios change men’s dating behavior …more


    Ideas Roundup/Economists

    • Daniel Kahneman
    • Alfred Marshall
    • Reverend Malthus
    • David Ricardo
    • John Stuart Mill
    • Gary Becker

     Ideas Roundup

    • competitive market structure
    • product differentiation
    • behavioral economics
    • diminishing marginal utility
    • marginal analysis
    • price system
    • supply and demand
    • comparative advantage
    • globalization
    • transaction costs
    • dynamic scoring
    • taxation
    • gender ratios

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  • Human capital and Prop 8

    How Men Act When They Outnumber Women

    Jan 9 • Behavioral Economics, Demand, Supply, and Markets, Financial Markets, Gender Issues, Households, Labor, Lifestyle, Money and Monetary Policy, Thinking Economically • 647 Views

    Thinking of places with more men than women, China first comes to mind. But what about Florida? In Fort Lauderdale, there are 111.8 males for every 100 females.

    in the following map, “Sex Ratio by County: 2010,” shades of blue indicate male gender ratio bias while the reds and rusts represent more women.

    Gender ratios affect economic behavior

    From: U.S. Census Bureau


    How Men React When They Outnumber Women

    University of Minnesota researchers concluded that gender ratios affect financial behavior. In one study, when men were led to believe that they vastly outnumbered the female population, the amount they planned to save declined by 42 percent while their willingness to borrow spiked by 84 percent. Just using photos even seemed to change financial behavior. After looking at photos with more men than women, the men decided to take, for example, $35 tomorrow rather than wait 33 days for $45. Checking further, researchers found more credit card debt in communities with higher numbers of single men. Correspondingly, learning that men outnumbered them, women expected them to exhibit more lavish spending behavior.

    The China correlation is even more interesting.

    One Child

    With more than three decades of China’s one child policy, a male bias has resulted in 120 men for every 100 females. Research has indicated though that Chinese men do not engage in conspicuous consumption to woo females. Quite the opposite. They save more.

    But it is all cultural. In China, with a history of men paying a bride price, saving to get your girl is traditional. Consequently, Chinese men, doing their own version of conspicuous consumption, are not contradicting the University of Minnesota study.

    With China recently announcing that it was easing single child restrictions, the impact on their male gender bias could have monetary repercussions.

    Confirming that dating relates to market behavior, gender ratios affect men's savings.

    From BusinessInsider


    Our Bottom Line: The Market

    Explained by Nobel economics prize winner, Gary Becker (1930-2014), dating behavior is not necessarily about love and marriage. Instead think utility functions. People want to marry because they expect to “raise their utility level above what it would be were they to remain single.” To avoid remaining single, though, men and women need to cope with supply and demand. And that is where gender ratios influence the male quest to find a mate…and what they are willing to spend on an engagement ring.


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  • Everyday Economics and how dynamic scoring is controversial because it spotlights growth instead of spending categories.

    Understanding a New Tax Issue

    Jan 8 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 627 Views

    New Yorker Magazine book review from Malcolm Gladwell starts with a cartoon drawing of two presidential advisors. Showing their clashing views of how to design Obamacare, the graphs they display are unbelievably complex and completely different.

    Yogi Berra would have said, “It’s tough to make predictions, especially about the future.”

    Dynamic Scoring

    The article and Yogi took me to a new tax-related rule from the House. Called dynamic scoring, the rule requires the Congressional Budget Office to further emphasize macroeconomic tools for deciding the impact of new fiscal legislation in addition to its current micro-oriented approach.

    Imagine a new tax on low quality toothbrushes. Using a micro lens, you focus on less tooth decay and fewer visits to the dentist. However, because the macro view traced the impact throughout the economy, we would note higher inflation, less employment and lower economic growth.

    A vast simplification, our toothbrush example does reflect the Democrat/Republican split. Democrats say the current approach is more accurate while the new Republican House majority is “cooking the books.” The Republicans say that the micro method ignores crucial information. The Democrats assume that spending on research, education, infrastructure, healthcare, and entitlements help our economy. Republicans emphasize the economic growth from tax cuts that dynamic scoring could predict.

    This graph only touches the micro and macro impact of the 2007-2009 recession that no one expected.

    Tax legislation and the GDP

    From: CBO


    Our Bottom Line: Redistribution

    Looking at 19th century Great Britain, economist John Stuart Mill (1806-1873) told the classical economists who preceded him that he had to tweak their thinking. Yes, he said we do have the laws of the market system. And yes, supply and demand do shape what we produce and how much we produce. But they do not necessarily dictate who keeps the income. Societies can reshape where the market takes them by using tax legislation to redistribute income. Concerned about incentives, though, Mill supported opposed progressive taxation and liked the inheritance tax.

    Mill returns us to Yogi Berra, the Democrats and the Republicans. Yes, it’s tough to predict the future so maybe our philosophical outlook should be the explicit source of our conclusion. I suspect everyone can manipulate the numbers.


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