A Blog About Nothing » Jobs

Globalization and Trade

The Homo Economicus — Mon, 07 Dec 2009 01:31:29 +0000

I’m not opposed to trade between countries and globalization in general. Not only because I think the world could only benefit from it in the long run, but also because it is a inevitable process.

However, I understand that in the short run, the dynamics of the world can generate losers in this process. Classical trade theory recognizes this. Firms in countries that open themselves to free trade may lose competitiveness in the goods they produce if production costs are higher than in other country from which the same good could be imported. This could generate unemployment and many firms going out of business and moving into new industries.

Enough said. This video explains all this boring theory in a very entertaining way, enjoy it!

Stages of Development: The Labor Market

The Homo Economicus — Thu, 25 Jun 2009 15:52:42 +0000

Already in India for more than two weeks I began to see some similarities with Venezuela of the 1980’s. The similarities are in terms of the labor market. I don’t know if I’m going crazy, or I’m home sick, but I will share those with you.

These are some of the kinds of Jobs that I’ve seen in the streets, VERY commonly:

- Lift Attendants: In offices buildings every elevator has a lift attendant, with their little key with which they are able to control the elevator. Sometimes it is actually quite cool – if you just saw the elevator closing its doors, you can call (with a loud voice) to the lift attendant so that he will come up one floor to take you down with that cohort… and you also have to take the risk of a power cut during your elevator journey. I remember having lift attendants in the elevators in a Beach Club I used to go in Caracas, a long time ago, but this is something I’ve never seen in a developed country. This hints that these kinds of jobs are very innefficient – everybody can push the botton by itself, and new elevators have algorithms that can handle when the elevator must go up or go down, and when to stop.

- Ticket Sellers in the Bus: So each bus has two employees – the driver and th eticket seller. The driver does that – only drives. The ticket seller has to make sure everyone inside of the bus paid and have this whistle with which he communicates with the driver when to stop, and when to start driving after each stop. In other developed countries this two tasks were given to the driver: people get into the bus only through the front door, and they have to pay their ride when they go in.

- Receipt Stampers: In most of the stores I’ve been to there is one person attending me, another person who is the cashier – who after receiving the money he stamps the receipt – and then he hands the same receipt to a third person sitting next to him/her that also stamps the receipt making sure – I guess – that I’ve taken my own stuff and no of anybody else’s.

These kinds of jobs were common in Caracas – my hometown – but you don’t see them anymore, and my guess is that it is part of the stages of development.

India has very strong labor enforcement rules, in which it is very difficult to fire workers. This sounds like a very nice thing to protect the right of workers, but in fact, this make firms and investors think twice if they should employ more people during a boom because they won’t be able to fire them afterward.

The Government is running now a very controversial program called the Rural Employement Guarantee Act, which is meant to alleviate poverty. The law, passed in 2005, guarantees 100 days of work for unemployed people at minimum wage, which means that only poor people will take it. The kind of jobs that they would do is very basic manual labor: filling potholes, digging up landfills, etc. There is a harsh critique to this program that costs around 2 percent of India’s GDP, and up to 10% of the annual budget. Aside from guaranteeing income for 100 days for very poor unemployed individuals, it doesn’t have any investment that comes along with these jobs, neither the participants get trained or receive any kind of skill that will help them in the future. In the long run, it will do very little to alleviate poverty. A client of the savings product that we are implementing in rural Thanjavur – which appears to be very wealthy among her neighbors – told us that since the program is running she had to employ less people since the wages went up for low skill people because of the program.

One thing is clear – the program is not “attacking” the main problem here. The big question is, why are these people unemployed? Why aren’t there enough places in the job market for them? If it is because they are unskilled, so why is it that they didn’t go to school? It is like in your house you have a low ceiling, and everyday you hit yourself in your head with it… you can put ice on you to alleviate the pain, but the real problem is the low ceiling! This program – in this context, is like the ice.

I think that Prime Minister Singh has a huge challenge in his new government – which is not longer contrained by the approval of the Communist Party – to reform the labor market laws, that in my opinion have becomed a binding constraint in the development of India.

GUEST BLOGGER: Unemployed but Happy

mkransdorff — Wed, 17 Jun 2009 05:01:50 +0000

I think I may have just stumbled upon the holy grail of macro-economics. I think I have found qualitative evidence in support of the seemingly ridiculous intuition of the Real Business Cycle (RBC). RBC theories try to explain why there are booms or recessions which deviate the economy from their growing trend.

RBC created a revolution in economic understanding but in recent years has experienced significant backlash. Theoretically RBC models, given a few simplifying assumptions, seem extremely sound. They are derived from the almost now canonical micro foundation of utility maximizing individuals and profit maximizing firms. The problem however is their seemly nonsensical conclusion. Basically they imply that unemployment during recessions, even those as horrible as the current one, is optimal. The idea is that as real wages go down because of the recession, the relative value of leisure goes up and some people, even many people, choice to go on an extended holiday until the good times return. So then we would expect the unemployed in a recession to be happy. Sounds crazy right?

Well not in Sunny South Africa. I just returned from a short visit home to find many of my friends are now unemployed and to my surprise absolutely loving life. Golf 3 mornings a week, hours at the gym and of course long leisurely lunches. Funnily enough their status as victims of the global recession is also helping their sex life. In addition to the benefits of the extra gym and sun, they have more time to actively pursue girls. And their sad sob story about being retrenched really seems to work.

Now despite what you may think these people are no bums. Most are professionals with tough undergraduate degrees and at least 3 years work experience. Granted most of them have hated the working world and only studied what they did to appease their parents but their expected future earning potential is very high. They also very importantly have no significant credit constraints. You see most still live at home and have access to their generally well off parent’s credit cards. So why shouldn’t they be taking full advantage of their fortuitous situation.

I asked sarcastically if their lifestyles had been hurt in anyway. The only possible consequence they could think of was that maybe the regular oversees December holiday would be a bit extravagant this year. Sadly renting a house for 2 weeks overlooking the sea in Cape Town is all that they will be able to afford.

How can this be the case you ask? Every good economist knows that people should smooth their consumption over their lifetimes. If they were rational they would follow Milton Friedman’s life cycle hypothesis and go on that big holiday to Brazil or Thailand. The problem is that here they run into a credit constraint. This is where their parents draw the line. They can understand their children loafing around the house while the recruitment agent searches in vain for a suitable job. An important key to this whole story is the need to keep the bankroller (in this case the parents) sure that this is just a temporary phenomenon. They need to believe that the expected future earning of their darlings is still high and one day, very soon, they will be back on their feet.

Now you might be forgiven for thinking my friends are spoiled brats. Perhaps you may even be a bit jealous. But if you put aside your personal feelings for a moment and think like an economist you will understand that they are in every sense rational utility maximizing individuals and we shouldn’t expect or want them to behave in any other way. Viva la recesión!!!

The Marginal Productivity of an Additional Line in your Resume

The Homo Economicus — Mon, 11 May 2009 05:37:34 +0000

One of the assumptions that economists use very often is the “diminishing returns to scale” assumption, which means that each additional worker in your factory (keeping constant the number of machines) helps to increase your output but in a smaller amount that the worker that joined before him. For instance, if you have a guitar factory with 1 machine, your first worker will be able to produce 10 guitars. When you hire an additional worker, you will be able to produce in total 18 guitars, and when you hire a 3rd one, in total you’ll be able to produce 25 guitars. this means that each worker contributes to the total output, but the contribution gets smaller and smaller (the first worker contributed with 10 guitars, the second with 8 and the third with 7). This is, labor has diminishing returns to scale.

The fact is that many other things in life behave like this. For example, your curriculum vitae (CV). We all agree that your resume is a signaling device. You send your resume to many places when you are searching for a job, to convince the people to call you and to invite you to an interview. Clearly, they cannot get to know you through your CV, but if you are able to draw their attention such that they will call you for an interview, the signal accomplished its goal. Why is it a signal? Well, you generally know better than your prospective employer what kind of worker are you: if you are a bit lazy, or if you are really hard-worker. In any case, the way that you reveal them your “type” or personality is through signals, which is your CV: the education you acquired, the awards you received, previous experience, and so on. In addition, you also don’t know what is the exact kind of worker that the employer is looking for, so you want to give the appropriate signals.

The big question is, what to write? So, the first thing you should understand is that you are constrained in space. You cannot hand in a CV that has every little thing you did in your life, but you must choose the best signals to fit one page, maximum!

So let’s assume that you are applying for a position which you believe diversity is welcomed – which means that they want to see your education, some work experience, some awards maybe, some publications, some voluntary activities… in other words: everything is valuable you think! How do you put all that in one page?

Here it were the diminishing marginal productivity story comes. Let’s say you were very successful in your previous job, and you want to emphasize at least 10 different projects you were managing in a leadership position. On the other hand, you want to write on your education all the courses you took on math, because you believe they are relevant to the position. If you do that, then you are already above the one page constraint. So your formula to solve this problem is the following:

The marginal productivity of an additional line of one section (say education) must be equal to the opportunity cost of not adding another line in another section (say, work experience). This means that you keep adding lines in education, until you realize that the “cost” of not using that same line on another category of your life is higher than the marginal contribution of the additional education line. This will always happen at some point, because the marginal contribution of each line is decreasing within each section. You don’t have to write all your math classes, but you will write the most relevant one, or the top 3, because each additional course is not saying something very different about you, and you would prefer to use that line to signal about another skill which is not math.

It would be a shame if the employer doesn’t know about your leadership skills because you wanted to write 10 math courses, instead of the most important one. If you leave your leadership experiences aside, so then your prospective employers won’t know anything about your leadership skills and your ability to teamwork which are far more important for the employer than your 5th or 6th math course in the list.The bottom line is that, once you write down your top three courses of math, the employer will understand that you are good at it. Don’t waste an additional line on that, when you can use that very same space to accentuate another skill that will make your curriculum more attractive.

Employers usually don’t have time to read all the CVs, so one should be very strategic on signaling correctly, and not to use two lines for signaling the same skill. The opportunity cost of that line is higher than the marginal contribution of repeating a skill.