Tim Harford The Undercover Economist

Articles published in August, 2009

A recession-proof career path? Only for the lucky ones

How long will the economic downturn last? While some claim to see green shoots, others – such as my colleague Martin Wolf – see a slow and painful process ahead. I have little to add to that debate, but I can guarantee that for some of us, the impact of this downturn will last a lifetime.

That is the conclusion I draw from the research of Till Marco von Wachter, an economist at Columbia University, who has been tracing the lasting effects of bad luck in the job market. Having to look for a job at the wrong time can force us into compromises whose repercussions can last years or even decades.

For example, when von Wachter teamed up with two US government economists, Jae Song and Joyce Manchester, to study the experiences of those hurled into unemployment by mass layoffs in the 1982 US recession, they discovered horrendously long-lasting effects. The recession itself – one often compared with today’s downturn – was savage, but it was over in less than two years. Yet von Wachter and his colleagues discovered that those who lost their jobs had incomes about 20 per cent lower than would otherwise be expected, even two decades later.

It is possible that this result is really capturing the effect of being a less productive (and thus expendable) worker, or of being trapped in a declining industry. But that is unlikely. Such mass layoffs are by their nature indiscriminate, and the researchers tried hard to compare like with like. The results remain robust – and they match similar research done in Germany, and earlier studies in the US with smaller data sets.

Why such a big effect? In part, it is a question of luck. Most people who have secured a decent, secure, full-time job have enjoyed a dose of luck in doing so. “It is hard to get lucky twice,” comments von Wachter. The difficulty of retraining is also a factor. Many people have to switch careers when they lose their jobs, meaning long-standing skills fade and new skills must be learnt. Certainly, when people are laid off during a boom, the loss of income is much smaller, presumably because it is easier for them to find a comparable job before their skills start to be lost.

A similar problem lies in wait for those graduating during a recession. “People have to make compromises,” says von Wachter, which often means taking a stopgap job with a less glamorous employer, and trying to switch careers or switch employers later on. The longer this process takes, the longer the impact on the unlucky cohort of graduates.

Relying on a very large data set from Canada, von Wachter, Philip Oreopoulos and Andrew Heisz estimate that the typical student who graduates during a recession can expect to be 10 per cent poorer in the year after graduation, a disadvantage that slowly fades over a decade. Even a couple of years’ work experience is enough to insulate a cohort of young graduates from a recession – but those who graduate into its teeth, especially from less prestigious schools, can suffer all the way through to, well, the next recession.

One striking recent study, by Paul Oyer of Stanford’s Graduate School of Business, showed that the Stanford MBA class of 1988 earned low incomes for many years. Why? Because they were applying for jobs just after the crash of 1987, and the high-paying bank jobs were simply unavailable.

The inspirational message from this research: if you are forced to accept a less attractive job because of temporary hard times, actively look to get back on your dream career path as soon as you can. The less inspirational message: luck matters, and bad luck lasts.

Also published at ft.com.

Should my wife use ‘positive incentives’?

Dear Economist,
Now that we have completed our family, my wife wants me to have a vasectomy, strongly hinting that she will withdraw all sexual favours unless I comply. For a long time now, the amount of sex we have been having (about once a month) has been less than I would like (a couple of times a week). While I am not an economist, I have read that positive incentives are important. Wouldn’t my wife have more chance of persuading me to have the snip if she promised me more frequent sex rather than threatening to withdraw it altogether?
Dave, London

Dear Dave,

In traditional economics there is no important motivational difference between stick and carrot, and so I can hardly accuse your wife of bad economics in that respect.

But, even if your proposal is accepted, you face a serious problem. Your vasectomy is a one-off operation, for which you seek an ongoing future incentive. How can you be sure that your wife will stick to the deal? Economists call this the “hold up problem”.

You are hoping for an extra 90 bouts of intimacy per year. Since I give your marriage five more years, tops, this adds up to an extra 450 sexual encounters in total. But there is no guarantee that, after you have your operation, you will experience any of them.

The obvious answer is a performance bond. Your wife could deposit, say, £45,000 with a lawyer. Whenever the two of you contact the lawyer to confirm that intercourse has occurred, he will release £100 to your wife.

Perhaps that seems unromantic, so I have a better idea – simply secure payment in kind upfront. If the two of you get busy, you should get through 450 lovemaking sessions within a year, perhaps sooner. You might even find you enjoy it so much that this troubled marriage perks up. I suggest you get started at once.

Also published at ft.com.

1st of August, 2009Dear EconomistComments off

How the humble train helps countries get on track

Railways are back in fashion. Globally, the industry has been booming, thanks less to high oil prices than to a growing emphasis on the environmental benefits of trains over planes. The UK now has its first high-speed railway line (a few decades after everyone else), Barack Obama is promising similar links in the US, Japanese-built bullet trains are making a splash in Taiwan, and the French seem never to have lost their love of fast trains. Then, of course, there are the rather slower trains operated by the state-owned Indian Railways, the world’s largest commercial employer, with 1.4 million staff.

But it is the rail system of a bygone India that has attracted my attention recently. Colonial India – which comprised present-day India, Pakistan and Bangladesh – had no railways in 1850 but more than 60,000km of track by 1930. What difference did that expansion make to the country’s economy?

Dave Donaldson is a young economist who now knows more about the details of colonial railways than anyone alive. For his PhD research on the subject at the LSE, Donaldson had to build a massive database based on paper records of the railway building programme, gathered in painstaking detail by colonial officials.

It seems obvious that the railways should have had a large impact – they did not compete with cars or planes, but with bullocks on dirt roads that a train could outpace by a factor of 20. But not everyone was convinced. Romesh Dutt, an Indian historian and politician, argued over a century ago that the railways did not help rural areas, while Mahatma Gandhi saw them as promoters of the bubonic plague and accessories to famine. (If they can ship food in, he reasoned, they can also ship food out.) And it is certainly true that the British had military aims uppermost in their minds when they built the network.

But, according to Donaldson’s research, the sceptics are wrong. The railways profoundly improved the rural economies through which they passed. Thanks to a data-hungry colonial administration, which collected information on local crop prices and rainfall, Donaldson was able to calculate the improvements with some precision.

He discovered that whenever two regions were linked by rail, prices of transportable products converged; local droughts no longer affected food prices, but widespread droughts elsewhere suddenly did; local income became less volatile; and income levels rose by almost 20 per cent, although they fell slightly in areas bypassed by the railways. Donaldson tracks all of these (largely beneficial) effects to the fact that the railways increased trade with other regions of India and the world beyond. It is one of those periodic reminders, which economists need to put out to the rest of the world, that allowing people to trade with those outside their immediate community is not an entirely pernicious act.

Since the alternatives to the train are somewhat better in modern western nations than they were in the India of 1860, I doubt that spiffy high-speed rail links will have quite the same effect. Still, Donaldson’s research is a reminder of the huge importance of quality transport links. It will come as encouragement to the World Bank, an enthusiastic supporter of transport infrastructure projects, which have recently made up one fifth of all new lending.

The Bank has also started to target unnecessary barriers to internal and external trade, from age-old standbys such as tariffs, to corruption and red tape at border crossings. It should be cheaper to deal with them than build a new road or railway, and just as important.

Also published at ft.com.

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