Migrant Income and Long-Run Economic Development
We study how international migrant income prospects affect long-run development in origin areas. We leverage the 1997 Asian Financial Crisis exchange rate shocks in a shift-share identification strategy across Philippine provinces. Initial migrant income shocks are magnified six-fold over time, increasing domestic income, education levels, migrant skills, and high-skilled migration. Remarkably, 74.9 percent of long-run income gains come from domestic rather than migrant income. Trade driven impacts of exchange rate shocks are orthogonal to effects via migrant income. A structural model reveals that 19.7 percent of long-run income gains stem from educational investments. International migration fosters broad economic development in origin communities.
That is from a recent AER piece by Gaurav Khanna, Emir Murathanoglu, Caroline Theoharides, and Dean Yang. Here is a good thread on the piece.
Does this have implications for higher ed in particular?
Declining fertility and population loss pose significant challenges for state and federal local governments responsible for providing a range of services to citizens, including education, health care, and infrastructure. Indeed, many areas are already experiencing outright population decline, with roughly half of U.S. counties losing population between 2010 and 2020. This paper examines how shrinking and aging populations affect the operations and fiscal sustainability of state and local governments. Preliminary evidence presented in this paper suggests that scaling down educational services is considerably more difficult than scaling up. The estimated per-enrollee cost increases associated with a 10 percent enrollment decline are four times larger than the cost decreases associated with a 10 percent enrollment increase. Regions with contracting populations will face additional challenges as a smaller working-age population bears the burden of funding pensions and retiree health plans for larger aging cohorts. While lower fertility can create a short run fiscal dividend as local governments serve fewer children, that dividend will only be realized if state and local public officials make efficient retrenchment a priority.
From Jeffrey Clemens, via the excellent Kevin Lewis. As I think JFV mentioned lately, we have not done enough thinking about what a society with low TFR really is going to look like after a while.
Auden on Iceland
If you have no particular intellectual interests or ambitions and are content with the company of your family and friends, then life on Iceland must be very pleasant, because the inhabitants are friendly, tolerant, and sane. They are genuinely proud of their country and its history, but without the least trace of hysterical nationalism. I always found that they welcome criticism. But I had the feeling, also, that for myself it was already too late. We are all too deeply involved Europe to be able, or even to wish to escape. Though I am sure you would enjoy a visit as much as I did, I think that, in the long run, the Scandinavian sanity would be too much for you, as it is for me. The truth is, we are both only really happy living among lunatics.
That is from W.H. Auden and Louis MacNeice, Letters from Iceland, from 1937, which is one of the better travel books, if indeed that is what it is.
Good sentences
This leads us to the next of Freud’s major contributions to neuroscience: his realization that cognition is, at bottom, wishful.
That is from the new and notable Mark Solms, The Only Cure: Freud and the Neuroscience of Mental Healing. This is a good book for people who underrated Freud, or think he is a mere charlatan.
The CA Minimum Wage Increase: Summing Up
Two recent joint-papers Did California’s Fast Food Minimum Wage Reduce Employment? by Clemens, Edwards and Meer and The Effects of California’s $20 Fast Food Minimum Wage on Prices by Clemens, Edwards, Meer and Nguyen give what I think is a plausible and consistent account of California’s $20 fast food minimum wage.
California’s $20 fast food minimum wage raised wages in the sector by roughly 8 percent relative to the rest of the country but employment fell by 2.3 to 3.9 percent (depending on specification, median ~3.2%), translating to about 18,000 lost jobs. Food away from home (FAFH) prices in California’s four CPI-reporting MSAs rose 3.3–3.6 percent relative to 17 control MSAs. Falsification tests on Food at Home and All Items Less Food and Energy show zero differential movement—this is specific to restaurant prices.
What’s interesting is that the papers are independently estimated but the fit is consistent. The price paper uses Andreyeva et al.’s demand elasticity of -0.8 to convert the estimated price increases into an implied quantity declines: about 3.9–4.1 percent in limited-service and 1.7–1.8 percent in full-service. These align well with the employment declines of 3.2 and 2.1 percent estimated in the first paper.
The consistency tells us something about the mechanism. One thing we have learned about the minimum wage in recent years is that the pass-through effect is large and more of the employment decline is driven by pass through than by labor-capital substitution. In other words, prices rose, quantity demanded fell, and that’s what killed the jobs—not robots replacing workers. Not today, anyway.
In terms of welfare, the bulk of employed workers get an 8% wage increase, a small minority get disemployed. The big transfer was from consumers to workers. California has roughly 39 million residents, all of whom face 3.3–3.6% higher FAFH prices. The transfer is likely regressive — lower-income households spend a larger budget share on fast food specifically. So the policy effectively taxes low-income consumers generally to raise wages for a subset of low-income workers, while eliminating jobs for another subset. Your mileage may vary but I don’t see this as a big win for workers. We thought small increases in the minimum wage were absorbed–maybe some were or maybe they were just hard to estimate–but you can’t extrapolate the small increases to big ones–the effect is non-linear. Big increases in the minimum wage start to bite.
As usual, when it comes to fast food there is no such thing as a free lunch.
Addendum: Clemens’s JEP paper continues to be the masterclass in how to think through minimum wage issues.
Sunday assorted links
Emergent Ventures winners, 53rd cohort
Elif Ozdemir, Ankara, align satellites.
Lily Zuckerman, University of Austin (and NYC), painting and general career support.
Benjamin Unger, NYC, AI to measure the performance of New York governments.
Maarten Boudry, Brussels, to write a book on who is really for progress, or not.
Allan Wandia, San Francisco, foundation models that learn directly from raw experimental data.
Richard Ng, London, AI agents.
Jordan Unokesan, London, trust scoring for government contractors.
Alexander Griffiths, London, infrastructure policy and decisions.
Pio Borgelt, 17, Osnabruck, AI.
Vedant Agarwal, 18, Cambridge UK, biosciences.
Chris Lee, Murietta, 18, CA, police recruitment.
Broderick Cotter, Austin, 17, finding the best materials for 3-D printing.
Jehan Azad, San Francisco, radar and UAPs.
Marius Drozdzewski, with collaborators, Berlin, German liberal periodical Aevum.
Ethan Galloway, London, 16, AI algorithms.
Keelan O’Carroll, Florida, happiness podcast.
Economic growth and the rise of large firms
Rich and poor countries differ in the size distribution of business firms. This paper shows that the right tail of the firm size distribution systematically grows thicker with economic development, both within countries over time and across countries. The author develops a simple idea search model with both endogenous growth and an endogenous firm size distribution. The economy features an asymptotic balanced growth path. Along the transition, Gibrat’s law holds at each date, and the right tail of the firm size distribution becomes monotonically thicker. The firm size distribution converges to Zipf’s distribution. The model also implies that policies favouring large firms can improve welfare due to the externality associated with idea search. Finally, the author extends the results obtained in the simple model to a general class of idea search models. Under common functional form assumptions, this model stands out as the only model within that class that is consistent with both Gibrat’s law and a thickening right tail.
That is by Zhang Chen, and a revised version will be appearing in Econometrica.
Saturday assorted links
2. Does it help poets to be religious?
4. U.S. prime age employment rate is near an all-time high. For a different perspective, here is NYT on AI and the job market. And new measures of AI task performance from MIT.
5. China’s AI education experiment.
6. Real retail U.S. electricity prices have fallen since 2010.
8. Is Mandarin being Europeanized?
9. 2000 or so additional pages of Leibniz will be published.
Advice for economics graduate students (and faculty?) vis-a-vis AI
From Isiah Andrews, via Emily Oster and the excellent Samir Varma. A good piece, though I think it needs to more explicitly consider the most likely case, namely that the models are better at all intellectual tasks, including “taste,” or whatever else might be knockin’ around in your noggin…I am still seeing massive copium. But the models still are not able to “operate in the actual world as a being.” Those are the complementarities you need to be looking for, namely how you as a physical entity can enhance the superpowers of your model, or should I express that the other way around? That might include gathering data in the field, persuading a politician, or raising money. I am sure you can think of examples on your own.
How should you change your life decisions if we are being watched by alien drone probes?
I’ve asked a few people that question lately, and get either no answer or very exaggerated answers.
Rep. Burchett recently raised the possibility of being terrified and not sleeping at night if UAPs are aliens. But even if that is your immediate response, you need a more constructive medium-term adjustment to the new situation.
One option would be to pray to the aliens as gods, but I do not recommend that.
Another option is to not change anything, on the grounds that the aliens (probably?) have not been interfering in earthly affairs. Or if they have been interfering, they might be interfering in steady ways which are compatible with you continuing your previous life course.
That is mostly a defensible stance, but it hardly seems a true marginalist should make zero adjustments in light of the new and very radical piece of information. If nothing else, you need to consider that other people will in time respond, and you will in turn want a response to their choices.
A third option is to write more about the aliens, so that when their presence is (partially?) revealed, you will rise in status and influence.
Should you buy more insurance? But against what exactly?
Hold more defense stocks in your portfolio, if you anticipate more defense spending as the pending human reaction to the revelations?
Consume more? Maybe.
The most plausible decision however is to slightly lower your level of ambition. Consider a few of the core scenarios.
If the aliens go rogue on us and end it all, the efforts you might be making now will have been for naught.
If the aliens are here to cap the level of human achievement, for instance to keep us on Earth and prevent us from exploring the galaxy, yet without harm, you also can scale back your ambition a bit. You do not need to invest so much capital in supporting the space program. Most of your more local ambitions however should remain untouched. You might even become more ambitious in keeping the Earth a safe place, since escape hatches are now less likely. Alternatively, you might think the aliens are our “saviors of last resort,” but that too probably makes you less ambitious.
A more general Bayesian update is simply that human efforts, in the broader scheme of things, have lower relative marginal products than you might have thought. The aliens apparently have lots of powers, at least if they managed to get here. That too militates in favor of lowering your ambitions. Conversely, if you start believing we are the only intelligent, agentic beings in the galaxy, arguably you should increase your ambitions. There will be fewer outside forces to stop, limit, or reverse your efforts.
To be clear, in this Bayesian update large numbers of people still should increase their ambitions, since they were not optimizing in the first place. But they should increase those ambitions slightly less than one used to think. And in some areas, perhaps they should not increase their ambitions at all.
Finally, you should not decrease your ambitions a lot. For one thing, you may need an ongoing high level of energy and ambition to deal with the changes that aliens — or even the perceptions of alien presence — will bring to earthly civilization. Furthermore, since any alien-induced uncertainty about the future is very hard to model, most people will do best by simply continuing on their current tracks. It makes no sense to start waving around a sword to scare off the alien drone probes.
Nonetheless, some of your more extreme ambitions should be carved back just a wee bit. Sorry about that.
I guess it is a good thing nobody is watching then.
Addendum: For this post I am indebted to a useful lunch conversation with Robin Hanson, Bryan Caplan, and Alex T.
NSF update
The White House seeks to slash the NSF budget by nearly 55%, to $4 billion. The proposal also cuts all funding for the NSF division that funds research on the social sciences and economics. At an internal all-hands meeting on Friday, NSF leaders announced that they would dissolve the agency’s Social, Behavioral and Economic Sciences directorate based on the budget request, according to two NSF staff members who shared information anonymously in order to speak freely.
Here is the full story.
My email on NBA anti-tanking rules
I fear that bad management is a recurring problem with those teams. So perhaps no system of incentives can fix that.
I am not sure that bidding and superstar teams are so unpopular with the fans, especially as the NBA has become more international. Maybe ten superstars sell the league in any case, and you want them to be on very good teams.
…The incentives system also has to be palatable and explicable to the very casual fan, which I think rules out some of the more complex options. If the fans are asking “is my team trying to win or to lose now?” the system is maybe already broken.
Friday assorted links
1. Ben Yeoh on Measure for Measure.
2. How much is a badly damaged Gentileschi worth?
3. Sabine Hossenfelder on UAP evidence. And a bit more.
4. New record as Indian painting auctions for $17.9 million.
6. South Africa banned TV until 1976.
8. How do AI models respond to direct authoritarian requests?
9. Lynne Kiesling on which parts of economics will be repriced, as a result of AI.
10. How replaceable am I? An agent takes on that question. And another Karpathy idea.
The President(s) Fought the Law and the Law Won
In our textbook, Modern Principles, Tyler and I emphasize that Congress and the President are subject to a higher law, the law of supply and demand. In an excellent column, Jason Furman gives a clear example of how difficult it is to fight the law of inelastic demand:
…Today a given number of autoworkers can make, according to my calculations, three times as many cars in a year as they could 50 years ago.
The problem is that consumers do not want three times as many cars. Even as people get richer, they increase their spending on manufactured goods only modestly, preferring instead to spend more on services like travel, health care and dining out. There are only so many cars a family can own, but that’s not the case for expensive vacations or fancy meals. As a result we have fewer people working in auto factories and more people working in luxury resorts and the like.
These forces — rising productivity but steady demand — explain why the United States was losing manufacturing job share as far back as the 1950s and 1960s, long before trade became a major factor.