Efficiency Wages at Costco

In AP Micro, we discussed efficiency wages, where a company pays wages that are above the market wage as a way of reducing turnover and because happy, appreciated workers are more productive. Here is an article that suggests that Costco pays efficiency wages relative to other warehouse stores:

And Sinegal says he's also built a loyal work force. In fact, Costco has the lowest employee turnover rate in retailing. Its turnover is five times lower than its chief rival, Wal-Mart. And Costco pays higher than average wages — $17 an hour — 40 percent more than Sam's Club, the warehouse chain owned by Wal-Mart. And it offers better-than-average benefits, including health care coverage to more than 90 percent of its work force.

Costco doesn't have a P.R. department and it doesn't spend a dime on advertising. There's a real business advantage to treating employees well, Sinegal said. "Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you," he explained.

(Source: Greg Mankiw's Blog)

Beauty in the Eye of the Computer

Beauty is thought to be subjective and ideas of beauty can change over time, but there is some general consensus on what makes someone beautiful. Researchers in Tel Aviv have written a computer program (called the Beauty Function) that scans an image of your face and makes small adjustments to the picture to make you look more beautiful.

Some 250 measurement points were taken into account and once formulated, researchers developed an algorithm that could let them apply some of the desired elements of attractiveness - as mathematical equations - to a fresh image.

The article mentions that one practical application of the software could be for plastic surgeons. Any other commercial applications you can think of?

(Source: Marginal Revolution)

Confirmatory Bias

Last semester, we discussed biases and irrationalities that violate the rationality assumption in economics. Another common bias is confirmatory bias. This describes the tendency of people to look for information that confirms their preconceived notions or a decision they made.

An example used by Tyler Cowen on his blog is how people eagerly read advertisements for a car after they have already bought the car: they do it as a way of confirming that they made the right decision. Another example that is a little different is when people notice or comment on a piece of jewelry or an expensive piece of clothing on a Walker student because they believe that all students from private schools are all rich. In that case, they are looking for information to confirm their preconceived notion.

Any other examples you can think of?

(Source: Marginal Revolution)

Shortcomings of GDP

We recently talked about the shortcomings of GDP as a measure of economic well-being. One of our points was how GDP does not account for environmental effects. Chip suggested this article that discusses that very issue with China. The overall point is that China is growing very fast, but you should decrease that growth rate to account for the effects of its high levels of pollution.

The article discusses the example of the Shanxi province:

These are boom times for Shanxi province in northern China. The province produced 25% of the country's coal in 2005 at a time when coal prices were soaring. Shanxi's economy grew by 12.5% in 2005, well ahead of even the astonishing 10% growth for China's economy as a whole. Or maybe not.

The province is home to Linfen, Yangquan and Datong, the three most polluted cities in China. Life expectancy in Linfen is 10 years below the Chinese national average. Unchecked coal mining -- the province closed 4,800 illegal mines in 2005 -- and the drilling of illegal wells for water have created a chronic water shortage and a steady loss of farmland as it subsides into underground mine shafts and drained aquifers.

If you subtract the costs of air and water pollution from Shanxi's growth rate, local officials have told Deutsche Bank, the province's real economic growth rate is close to zero.

The article also references research that applies that method to the country as a whole and argues that Chinese economic growth should be revised to be closer to 7% or maybe even as low as 0%, as opposed to the current figure of 10%. The author is a little too Malthusian in some of his predictions for my taste, but he still discusses the point that just looking at GDP figures does not give you the whole picture of how well a country is doing.

(Source: Chip B.)

Live Classes & Guest Speakers

Two related questions from Marginal Revolution and Greg Mankiw:

1. Why do people pay exorbitant amounts of money to see a guest speaker at a conference when they could see them on TV or read their book for significantly less?

Similarly, people are willing to pay a lot more to see someone speak live than a videotape of a speech. Tyler Cowen suggests that it is a signalling problem: "The quality of the speaker signals the quality of the event, and most of all the quality of the other attendees. Wealthy people and successful people don't want to go to an event full of losers, why should they? So the organizers seek quality speakers, so as to attract quality participants."

2. You can buy mp3's or CDs of economics lectures by talented economics professors here for a few dollars per lecture. On the other hand, tuition at highly-ranked private universities is about $30,000 a year, which works out to a lot more than a few dollars per lecture. Why is there such a discrepancy? Why not just pay for the lectures and save thousands? (Note: this is not a suggestion, just a question for thought)

What are your thoughts on either of these questions? Why are live performances worth so much more?

Super Bowl Losers' Gear

Have you ever wondered what happens to all of the t-shirts and hats that say "Chicago Bears: 2007 Super Bowl Champs" after they lose the game? They have the hats and t-shirts available right after the game so they have to produce them for both teams without knowing who the eventual winner will be. Here is the answer:

By order of the National Football League, those items are never to appear on television or on eBay. They are never even to be seen on American soil.They will be shipped Monday morning to a warehouse in Sewickley, Pa., near Pittsburgh, where they will become property of World Vision, a relief organization that will package the clothing in wooden boxes and send it to a developing nation, usually in Africa.

This way, the N.F.L. can help one of its charities and avoid traumatizing one of its teams."Where these items go, the people don’t have electricity or running water," said Jeff Fields, a corporate relations officer for World Vision. "They wouldn’t know who won the Super Bowl. They wouldn’t even know about football."

(Source: The Sports Economist)

Non-Scientific Evidence on Minimum Wage Effects

Here is some anecdotal evidence to support what we have discussed as the main effect of a minimum wage increase: New wage boost puts squeeze on teenage workers across Arizona

That's certainly not the case under the state's new minimum-wage law that went into effect last month. Some Valley employers, especially those in the food industry, say payroll budgets have risen so much that they're cutting hours, instituting hiring freezes and laying off employees.

Mark Messner, owner of Pepi's Pizza in south Phoenix, estimates he has employed more than 2,000 high school students since 1990. But he plans to lay off three teenage workers and decrease hours worked by others. Of his 25-person workforce, roughly 75 percent are in high school. "I've had to go to some of my kids and say, 'Look, my payroll just increased 13 percent,' " he said. " 'Sorry, I don't have any hours for you.' "

Tom Kelly, owner of Mary Coyle Ol' Fashion Ice Cream Parlor in Phoenix, voted for the minimum-wage increase. But he said, "The new law has impacted us quite a bit." It added about $2,000 per month in expenses. The store, which employs mostly teen workers, has cut back on hours and has not replaced a couple of workers who quit.

(Source: Division of Labour)

More on the Economics of Crime

At the beginning of this semester, we read a chapter out of David Friedman's Hidden Order that discussed how to keep people from burglarizing your house by posting fake signs, etc. Stephen Dubner has a post on the Freakonomics Blog that continues on that same theme. Here are some of the tips he cites:

1. If you do keep cash in the house, leave a little of it where the burglar can find it, in the hope that he’ll think that’s all there is.
2. Leave visible a list showing that all your valuables are tucked away in a safe-deposit box.
3. If you have kids, consider hiding cash in their rooms: they’re too messy for a burglar to bother with and burglars assume that parents wouldn’t take a chance of hiding money where their kids might find it.

Congestion Pricing

The NY Times has an article up about congestion pricing on roads and highways. Congestion pricing involves charging a toll to motorists to reduce congestion on roads -- in particular, varying the toll based on how much congestion & traffic there is.

The reasoning behind congestion pricing:

congestion pricing holds out the possibility of harnessing people’s innate economic rationality and self-interest in order to promote a series of public goods. Every time a driver turns onto the Henry Hudson Parkway, she slows down the travel speed of all the other drivers, imposing a cost — or, as economists say, a negative externality — on countless fellow citizens. “Everybody wants fewer people to drive, and everybody wants people to use less gas,” said Gregory L. Rosston, deputy director of the Stanford Institute for Economic Policy Research in Palo Alto, Calif.

But so far, high gas prices and concerns about emissions haven’t led Americans to alter their driving patterns significantly. By making people take into account the true cost of driving — beyond gasoline, insurance and lease payments — congestion pricing in theory encourages people to car-pool, or to drive at different times of the day, or to take the train or bus.

The most famous implementation of congestion pricing is in London, where you have to pay a toll to drive in the center of the city. In the United States, most cases of congestion pricing have been implementing a toll to drive in an "express lane."

What do you think of charging tolls in this way? What are the pros and cons?

I particularly like this quote from the article:

“Everyone accepts that if your car is stationary, it’s fine to pay for parking,” said Alexander Tabarrok, professor of economics at George Mason University. “But if you tell people they have to pay to move their car between two points, they think it’s crazy.”

This subject is one that we may also discuss in class because I did some graduate research in this area.

(Source: Greg Mankiw's Blog)

Violence in Sports

Italian soccer has been in the news lately because there were riots at a soccer match in Sicily where a police officer was killed. They cancelled the professional matches in Italy last weekend, and this weekend, they are playing the games, but not letting any fans watch them in the stadiums. European soccer has a reputation for hooliganism and has struggled to limit the violence around matches for decades.

Stephen Dubner, co-author of Freakonomics, asks why there is so much less violence in American sports than in European soccer, especially since the US has a higher overall rate of violent crime.

He offers the following possible theories:

1. Many soccer matches are more local affairs than U.S. sporting events, thereby attracting a lot of fans for both teams, who are more likely to mix it up than if 95% of the fans are rooting for the same team.
2. We have better security.
3. We drink less; many U.S. stadiums and arenas now cut off the sale of beer, e.g., before the end of the game.
4. Perhaps the audiences at U.S. sporting events don’t include the criminal element — the result, perhaps, of high ticket prices.
5. For years, there has been talk of how American sports, particularly football, are a proxy for war and true violence; maybe this is actually true.

What do you think? Any of these convincing or is there something else? Don't give an answer like "Europeans are just more fanatical about soccer" unless you have an explanation for where that fanaticism comes from.

(Source: Freakonomics Blog)

Sunday Alcohol Sales

There is a current proposal in the Georgia House to repeal the law that bans the sale of alcoholic beverages on Sundays (laws like this are also called "blue laws"). [Technically, it is a law to allow local jurisidictions to decide the issue.] The ban currently covers liquor stores and sales of beer in grocery stores, but does not cover drinks purchased in restaurants. Do you think this will have any economic impact?

(Source: Drew W.)

Setting Your Watch Fast

Tim Harford also has a column in the Financial Times called "Dear Economist," where he answers "Dear Abby"-type questions with an economist's perspective. Here is one recent question:

Dear Economist,
I have the habit of setting my watch five minutes fast. This fools me into avoiding being three minutes late for meetings, or the train – well, more often than not – and instead being two minutes early. But if I am a rational economic agent, how do I succeed in fooling myself so systematically?
Yours (in haste),
Mark, Oxford

I am familiar with this because in past years in my classroom I would set the clock 3-4 minutes slow, which typically prevented students from packing up their books when there was still 5 minutes left in class.

Your first instinct would be that people learn the pattern pretty quickly and adjust their mental clocks to account for the difference. But it still works. Why do you think people succeed in fooling themselves and rational others with this?

Here is Harford's answer.

Here is a clock that assists people in fooling themselves by randomizing how fast the clock actually is (within a range).

Giving Money to a Bum

Many people would like to give money to homeless people on the street, but are hesitant because they are not sure where the money is going or whether the person really needs it. If you could be assured that a panhandler was truly in need and not going to spend the money on drugs or alcohol, many more people would give a few dollars or cents.

Tim Harford (who wrote the article you are reading this week in class) uses this idea to formulate a question: if you could ask 10 bums one common question, and give money to only one of them based on their answer, what would the question be?

One thing to keep in mind is that the bums know what you are doing, and therefore, are tempted to lie.

What would you ask and how would you decide who to give the money to?

Here are some possibilities from the economists who write for Marginal Revolution.

More on the Minimum Wage

On Free Exchange, the blog for The Economist, there is a post that does a good job of summarizing the main issues with the minimum wage. A couple of excerpts:

It is probable that the minimum wage increase will not cost enough jobs to make its effects readily distinguishable from random economic variation...
On the other hand, it also seems probable that much of any benefit that goes to poor families will come out of the pockets of other poor people—very probably even poorer people, such as convicts, who are currently barely hanging onto the fringes of the labour force...
CEO's who support higher minimum wages are not, as the media often casts them, renegade heros speaking truth to power because their inner moral voice bids them be silent no more. They are by and large, like Mr Sinegal, the heads of companies that pay well above the minimum wage. Forcing up the labour costs of their competitors, while simultaneously collecting good PR for "daring" to support a higher minimum, is a terrific business move...

Pennies Are Evil

Right now, there are two US currency problems: (1) The increasing uselessness of the penny, (2) the government currently loses money of producing nickels (the combined losses from making nickels and pennies is estimated to be $40 million). NY Times columnist Austan Goolsbee discusses a solution offered by an economists at the Chicago Fed: eliminate the nickel and make the penny worth 5 cents.

Mr. Velde, in a Chicago Fed Letter issued in February, has come up with a solution that would abolish the penny, solve the excess costs of making nickels, help the poor, keep the Lincoln buffs happy and save hundreds of millions of dollars for taxpayers.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.

What do you think of this option? The most important benefit of the policy to me is that K-Fed would be happy.

Breaking Down GDP Growth

This article in The Economist this week discusses the high GDP growth rates of India and China. They argue that China's growth is more impressive because it is due to greater increases in productivity, while India's GDP growth is due more to increased employment levels without those workers becoming more productive. Therefore, since China's growth is more associated with productivity increases, it is more likley to sustain itself.

The article also discusses how the growth in each country has been in different sectors:

According to conventional wisdom, Chinese workers have shifted largely from farming to factories, whereas India's growth has been driven largely by services, from call centres to writing software. In fact, jobs in services have expanded more strongly in China than in India. Since 1993 the rate of increase of China's service-sector jobs has been four times that in industrial jobs and has exceeded that in India. China's real output of services has not only grown almost as fast as its industrial output, but also faster than India's services. Indeed, a larger proportion of workers is employed in services in China than in India. However, the share of services in GDP is much smaller in China (33%, against India's 50%), because Chinese industry is so much more productive.

This article provides a deeper look at increases in GDP and a little background on the rapid growth of India and China.

"Meatlifting"

According to this article, the item that is most often shoplifted from grocery stores is meat.

Meatlifting is a grave problem for food retailers: According to the Food Marketing Institute, meat was the most shoplifted item in America's grocery stores in 2005. (It barely edged out analgesics and was a few percentage points ahead of razor blades and baby formula.) Meat's dubious triumph is due in part to a law enforcement crackdown on methamphetamine use. Meat used to be the shoplifting runner-up to health-and-beauty-care items, a category that includes cough medicines containing pseudoephedrine, a key ingredient in home-cooked meth.

Why do you think this is? Especially given that meat seems like a messy item to steal. The most straightforward answer is that meat is one of the more expensive items in many grocery stores. Are there any other reasons?

(Source: Free Exchange)

Hire a Protester

A German company offers young Germans that you can hire to protest for your cause:

Young, good-looking, and available for around 150 euros (£100), more than 300 would-be protesters are marketing themselves on a German rental website. They feature next to cars, DVDs, office furniture and holiday homes.

Next time you want me to postpone a test, just hire some Germans to protest outside my apartment...

(Source: Marginal Revolution)

Your Personality & Lifestyle as a Tradable Asset

An Australian guy is selling his current life on eBay:

This auction is for a New Life in the coastal town of Wollongong, Australia of a 24 year old male. It includes the following:

Winning bidder will take ownership of my:
-Name
- Phone number
- All my possessions
- I will teach you my skills
- Will introduce to all my friends & potential lovers (around 8 which I have been flirting with)
- I have around 15 close friends and around 170 other friends
- I have 2 nemeses.
- Lifestyle is very social. It includes a lot of going out.

NB: Friends will treat you exactly as they have treated me. This includes friends who take me surfing, running, climbing and cook for me. All of these features will be transferred over to the winning applicant.

Life also includes the following features
- Will have access to a cruisy job in march delivering fruit.
- You will write a satirical horiscope in the University of Wollongong Magazine.
- You will have new parents to have Christmas with & birthday presents from friends.
- A birthday party will also be organised for you.

This auction also includes the following
- A 4 week training course by the former me which includes the following:
- Many anecdotes and stories from a very interesting and intriguing past 24 years of my life
- 6 Jokes
- Training in becoming me (fashion, food, lifestyle, style of seduction, interests)
- Haircut like mine
- Piercings to the value of $180.
- Lessons in my personal history (The good stuff and the bad stuff)

NB: After the 4 week training winning bidder will also receive 2 months of on-call support.

There are a few more interesting details at the site. He seems to be doing this to film a documentary about it. The current bid is over $60,000 Australian dollars (about $47,000).

Another example of a creative way of finding something of value that you can sell as an asset.

(Source: Marginal Revolution)

Economics of Trying New Things

A post at Free Exchange discusses a small purchase he made that brought him a lot of joy. The key part of his post is this:

While I was at AEA, I had lunch with Dick Thaler, the famous behavioural economist from the University of Chicago. He lauded my (much derided) penchant for experimental purchases of small items at supermarkets and drugstores, pointing out that at my age, the net present value of future utility from a "find" is huge, while the costs (pecuniary and utilitarian) are negligible.

The idea is that young people should try a lot of new things because if they find something you like, you have much of your life left to enjoy it. Even if you try 10 new foods and only like 1 of them, you have given up relatively little and gained a lot of future enjoyment.

What do you think about this idea? Is it a good reason to try new things? Or is there a better reason to stay with what you like? What else could this apply to other than trying new foods?

An personal addendum to this rule that I used when travelling in Japan is that I am willing to try any food, provided I am not told what it is or what is in it until after I have tried it. It helps me keep an open mind.

(Source: Free Exchange)