Price discrimination explains adjunct salaries?

Tyler Cowen writes,

My immediate reaction was “Given the crowding in the sector, and that they presumably earn non-pecuniary returns from the enjoyment of teaching, shouldn’t we be taxing them at a higher rate?”

He is referring to the low salaries for adjunct professors. A college that pays different salaries to full-time faculty and adjuncts is engaging in price discrimination (actually, wage discrimination). Just as a price discriminator tries to charge based on willingness to pay, the wage discriminator tries to pay according to willingness to work. Like it or not, low pay for adjuncts is an efficient outcome.

Basic econ: costs of production

I am starting to work on filling in/updating some of these college economics topics. Students land on the site when they want to get help with their college econ courses. But I plan to include some occasional “improvements” to mainstream thinking. I did not much need to amend mainstream thinking in my first topic, costs of production.

Other things equal, when fixed costs are high, there will be only a few firms. When fixed costs are low, there will tend to be many firms. When the Internet reduced the fixed cost of becoming a publisher, because you no longer need a printing press, the number of providers of written content skyrocketed.

Essay backup: Paradox of Profits, Part 1

I’ve decided to back up essays I wrote for Medium here. My thoughts:

1. Medium is very poorly curated, and so what little worthwhile content that is on the site is invisible.

2. As a commenter pointed out a while ago, the Medium site could fail, which might cause my essays there to disappear. My guess is that Medium will survive at least through the 2020 election, but why take chances?

3. Scott Alexander has proven that long essays can work as blog posts.

Note that these essays are not well formatted. That is because I just did a copy-paste from medium and took the results. When I write new essays, as opposed to backups, I will just post them here and the format will be reasonable.

So here we go: Continue reading

Labor market elasticities

John Cochrane writes,

Thus, you can’t simultaneously be for higher minimum wages and for wage subsidies. That is cognitive dissonance. Or, inconsistency. Or wishful thinking. And very common.

He is commenting on a post from Tyler Cowen. My thoughts:

1. Greg Mankiw likes to point out that a higher minimum wage is like a combination of a subsidy to labor supply and a tax on labor demand. A wage subsidy does away with the tax on labor demand, which is why Mankiw prefers it. An occupational licensing fee strikes me as a tax on labor supply.

If labor demand is inelastic, that means that large changes in labor costs are accompanied by small changes in workers employed. If labor demand is elastic, that means that small changes in labor costs prompt large changes in labor demand.

If labor demand is inelastic, then a higher minimum wage will raise labor income. Think of employers just absorbing the cost (although that is only one possible reason for inelastic labor demand). But if labor demand is inelastic, then a wage subsidy will not raise worker income. Think of employers as just pocketing the subsidy (again, assuming that this is the reason by which labor demand is inelastic).

If labor demand is elastic (the more likely case, in my view), then a wage subsidy will work to increase labor income, while a higher minimum wage will fail.

2. Cochrane’s point is that economists sometimes argue for one policy that works with high elasticity of labor demand and another policy that works with low elasticity of labor demand, without apologizing for the inconsistency. An example that I have used is arguing for a higher minimum wage (which works with low elasticity of labor demand) and for more immigration (which will depress wages if there is low elasticity of labor demand). Tyler uses that example as well.

3. Tyler’s point is that if you think that labor demand is inelastic, then occupational licensing requirements, acting as a tax on labor supply, will not affect employment very much. Again, I am inclined to think that labor demand is elastic, so I think that occupational licensing requirements do adversely affect employment.

I think that on the immigration issue and the occupational licensing issue, economists of all stripes prefer to implicitly make the elastic-demand assumption. On the minimum-wage issue, economists on the left prefer to implicitly make the inelastic-demand assumption. On the immigration issue, some conservative economists prefer to implicitly make the inelastic-demand assumption. I think that libertarian economists tend to implicitly make the elastic-demand assumption in all cases. So at least we are consistent.

Tabarrok and the Baumol effect, reconsidered

A bunch of folks got together at Cato for lunch to gang up on Alex Tabarrok. Recall that he and Eric Helland want to claim that the high prices of health care and education are almost entirely due to the Baumol Effect.

I offered as an alternative hypothesis that much of the higher prices can be accounted for by the government subsidizing demand and restricting supply. Here are some notes, based on the discussion.

1. Health care spending has been rising at the same rate in most developed countries. Can government policy be the cause everywhere? On the other hand, in most developed countries the proportion of health care spending paid for out of pocket is low, to perhaps there really are not such significant differences in policy across countries.

2. Veterinary care prices have been rising even faster than human health care prices. Yet there are no government subsidies for pet care.

3. Incomes for other high-skill professions, such as accountants and lawyers, also have risen sharply. Point (3) sounds like it could support the Baumol-effect story, but on closer examination it is more problematic.

4. A pure Baumol Effect would raise wages in every occupation where productivity growth is slow, including for barbers and waiters. That has not taken place.

5. It is difficult to account for the vast difference in pay between adjunct professors and tenured professors. At one point, I asked “Are adjuncts idiots?” That is, are their skill levels so dramatically lower than those of tenured professors?

6. Another question to ask is, “Are college administrators idiots?” In theory, it would seem that you could create a university with all courses only taught by adjuncts and offer a low-cost degree. That this does not happen shows how difficult it is to compete in higher education.

Overall, I still suspect that the story of “It’s all a Baumol effect” is an intellectual swindle. It is tautologically true that in a two-good world, if the relative price of good X falls, then the relative price of good Y goes up. But it is not necessarily the case that the price of good Y has to rise relative to *the* wage rate. In fact, the opposite seems more likely. But the actual ata seem to show that prices in health care and education have gone up faster than wages. I have a hard time coming up with a two-good, homogeneous-worker general equilibrium model that can exhibit that behavior.

In fact, when it comes to talking about wages, Tabarrok pulls a switch and starts talking about the wages of high-skilled workers, so we are no longer talking about “the” wage rate. Instead, we are talking about a skill premium. So Tabarrok has already added an epicycle, as it were, to the Baumol Effect story. That is, he has grafted on a skill premium.

I can more easily fit the data to a story that includes a skill premium as well as a Baumol effect. But then one can argue that this skill premium depends in part on regulations that protect credentialed workers. It is amplified by demand subsidies for education and health care, which put government in the role of enhancing the skill premium.

An economic idea to promote housing development

Anup Malani writes,

New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.

This sounds like a Coasian problem. Malani’s solution is to charge new residents an above-normal property tax rate and to return the proceeds to affected residents in the form of lower property taxes, while getting rid of the regulations that inhibit new development in order to protect incumbent residents. My thoughts:

1. In theory, this is sound economics. By replacing quantity rationing of new development with price rationing, you reduce deadweight loss.

2. In our area, developers are charged by the local jurisdiction for the costs they impose on infrastructure, so the basic mechanism is in place to include additional taxes. Then these taxes on developers would be passed on to the new residents.

3. In practice, it might prove difficult or impossible to eliminate the regulatory impediments to new development, so that high taxes on new residents (or on developers) would just be an additional deterrent to new construction.

4. In practice, it is likely to be very difficult to target the tax reductions to the most-affected residents. If you spread the tax reductions across many residents, each household only receives a minimal, meaningless amount. If you target only a few residents, then a lot of effort has to go into the process for determining who is most effected by the new development and how much they should receive.

The Tabarrok rejoinder

Alex Tabarrok writes,

The problem with Bryan’s critiques is that they miss what we are trying to explain which is why some prices have risen while others have fallen. Immigration would indeed lower health care prices but it would also lower the price of automobiles leaving the net difference unexplained. Bryan, the armchair economist, has a simple syllogism, regulation increases prices, education is regulated, therefore regulation explains higher education prices. The problem is that most industries are regulated.

Suppose that there are two sectors, apples and string quartets. We observe that over the past 30 years, the relative price of string quartets has risen.

Using basic supply and demand analysis, we know that this could be a combination of four things:

1. A favorable shift in the supply curve for apples.
2. A downward shift in the demand curve for apples.
3. An unfavorable shift in the supply curve for string quartets.
4. An upward shift in the demand curve for string quartets.

The “Baumol effect” story says that it’s almost entirely (1). The main claim that Tabarrok and Helland make in support of this view is that the change in relative prices has been steady, so we need a steadily-changing factor to explain it. Regulatory changes are more herky-jerky. Bryan Caplan objected to this, and Tabarrok comes back with some new arguments.

Here, for example, are two figures which did not make the book. The first shows car prices versus car repair prices. The second shows shoe and clothing prices versus shoe repair, tailors, dry cleaners and hair styling. In both cases, the goods price is way down and the service price is up. The Baumol effect offers a unifying account of trends such as this across many different industries. Other theories tend to be ad hoc, false, or unfalsifiable.

Oh, please. In 1950, imports of shoes and cars were low. In later decades, they shot up. But car repair and shoe repair don’t face import competition.

In fact, it could be that the main reason that the prices are relatively high in health care and education is that they do not face import competition. That also would explain why a lot of us don’t feel richer. If the favorable supply curve shift were all due to domestic productivity gains, our incomes would be a lot higher. But a lot of the favorable supply curve shift comes from foreign supply added to the market. That is not a Baumol effect, It is a traded goods/non-traded goods effect.