Protecting Jobs...

"If a country passes laws that make it difficult for firms to fire workers, why will that generally increase the unemployment rate?" - Louis

That's an excellent question! Consider the problem of the firm. They face uncertainty about the future demand for their output. Suppose demand increases today. The employer may wish to hire additional workers, but must take into account that future demand will also vary. In particular, future demand may fall sufficiently that the firm may wish to lay off the worker that they've just hired.

Suppose the Government passes a law that states that firms cannot lay off workers under any circumstances. Now let's work backwards from this. The employer knows that if he hires a worker today he will need to pay that worker tomorrow, whether he needs the worker tomorrow or not. Because there is a non-trivial chance that he would want to fire the worker tomorrow, he will be more hesitant to hire the worker today.

Legislation the makes it difficult for firms to fire workers therefore result in higher unemployment, as employers in general will be more hesitant to hire workers. But not everyone losses: people in existing jobs are better off (they currently have jobs, and therefore cannot be fired), but people who currently do not have jobs but may wish to enter the labour market in future (like my students) are worse off: employers will be mush more hesitant to hire them.

This suggests another problem resulting from firms being unable to fire workers. Younger people already have the highest unemployment rates (for example, in Hong Kong the unemployment rate for 15-19 year olds is 16.6%; it falls to 4.4% for 20-29 year olds and 2.4% for 30-39 year olds). Also younger people are more likely to be freshly entering the work force. Thus restricting firms' ability to fire workers is likely to exascerbate youth unemployment. This is both socially and economically costly.

Reading more....

"I want to read more about economics news. What do you suggest?" -Zheng

There are many excellent resources on the web. For detailed economic discussion of the business cycle, for example (something that we will cover in class later in the year), Econbrower is excellent- although it does focus almost entirely on the US economy. For more general reading, check the Freakonomics blog or the Undercover Economist. For slightly more eclectic discussion of all things economics, see Marginal Revolution. There's also the Economist website where you can read the latest edition of this excellent publication for free. And if you have any more time to spare after all that, don't tell me, or I'll assign more homework! :-)

If you do come across relevant stories that you think other blog readers would be interested in seeing, please send me the link, and I'll post them here as well.

University Rankings....

Earlier this month, the Times Higher Education Supplment came out with its latest university ranking. And if you live in Hong Kong, you would have had to turn off all news media to have failed to learn that my employer, HKU, ranked 18th worldwide! That's an impressive performance by any means, and the University is rightly trumpeting its performance.

But university rankings are inherently problematic. In this case, the THES takes a series of relevant indicators (peer review, employer review, international staff, international students, staff/student ratio, and citations), combines them with a formula, and comes out with a number that can be compared between universities.

In general, these indicators are proxies for latent variables that cannot be accurately measured, and may be poor proxies at that. For example, I suspect the "international" variables are trying to capture the extent to which the university encourages its students to think outside the box, and take into account other viewpoints and perspectives. But just having international students and international staff is neither necessary nor sufficient for this to occur.

There are likely to be significant measurement issues as well. Who exactly are the peers and employers who are asked about their views of different universities? Is the sample biased towards one country, or one demographic? How do we count international students, and international staff? Are mainland students in HK domestic or international? Are exchange students, who come to HKU for one semester or one year, treated identically to international students who come for their complete degree program? Is "international" determined by passport, or birthplace? In the staff count for the staff-student ratio, who is included? Only permanent, tenured staff? Gardeners and cleaners? I could go on....

There are two reasonable responses to these problems. One would be to dismiss these rankings as noisy indicators of very little. The other is to treat the noise in the ranking as sampling error, and try to increase the sampling size, by considering more university rankings.

Unfortunately there's only one other well-known global university ranking, by Shanghai Jiao Tong University. And where does HKU rank here? Somewhere between 203rd and 304th.

Oops.... I guess we need a lot more rankings than two to get any accurate idea of where HKU really stands!

Hong Kong Tax Cut Harmony....

Continuing yesterday's post, William Pesak of Bloomberg agrees that Hong Kong's tax cut is a bad idea- although he adds some additional reasons to my argument about macroeconomic instability: (1) instead of cutting taxes, the government could have used it's largese to try to reduce inequality, and (2) the government should focus less on competing with Singapore (Hong Kong's closest competitor in the low-tax stakes in Asia), and more on forward planning- figuring out what Hong Kong needs for future growth.

(2) is obvious: planning is good-provided such planning is focused solely on trying to ensure that Hong Kong has all the essential ingredients in place to allow for future growth. Here I'm thinking of physical infrastructure, and ensuring Hong Kong is an attractive location for human capital to locate. On the first one, the CE's announcement included some important news: expansions to the subway trains and highways to improve mobility. On the second one, there was further good news: new green-field sites for international schools (places in which are currently significantly over-subscribed, and are limiting the relocation of expats to Hong Kong). But there's still room for more. In my opinion, the greatest issue in making Hong Kong a more attractive location for human capital is the air quality- which is affecting the quality of life of all Hong Kong residents.

But forward planning is not necessarily a great idea, depending on what it entails. If it includes trying to determine which sectors will be the "winners" in the future evolution of the economy, as in Singapore, then Hong Kong may be better off without it. Think of the unpopular and unprofitable Hong Kong Disneyland and the mis-allocation of resources involved in the Cyberport project as the results of this type of planning. The private sector should be left to make these decisions.

Regarding (1), inequality in Hong Kong may be high by international standards, but is it too high? That's a difficult question to answer.... although from the point of view of contributing to economic stability, a large increase in government spending to increase equality (by spending on public housing, education, and health care, for example) may be just as destabilising as a tax cut! Someone receives that increase in government spending as income, contributing to overheating of the economy. Stability would be greater if the government increased such spending during a recession rather than the current boom.

For more of Pesek's column, see here.

Universities... Iraq Style

War has many consequences, few of them good. Here is a news story about universities in Iraq as a result of the US invasion. Apparently being a university professor is a dangerous occupation, and worthy of being specifically targeted by the insurgents.

But this is not just a story about university professors. Stepping back, universities play a vital role in developing human capital. The long term economic costs of the invasion of Iraq, even IF it ends peacefully, depends most strongly on how much human capital has dissipated in the interim.

The loss of human capital may be far worse than death and injury statistics suggest. Where professionals are forced to stay "... at home almost 24 hours a day, seven days a week," in order to increase their likelihood of survival, their human capital is slowly deteriorating, through disuse. It's an example of hysteresis.

The North Korean Model....

The Hermit Kingdom is an excellent teaching tool, and makes my job easy. Just look at the economic decisions made by deranged despots, and argue for the opposite. Google a few recent news articles on whatever is making headlines in those countries, and you even have some relevent, interesting, real-world illustrations to keep your students awake during lectures.

Consider two recent news stories carried by Bloomberg. Here we learn that North Korea's : "Arirang mass games," ostensibly put on to showcase the worker's paradise to the world, involves twice as many performers as spectators. That's a great example of a profitable business model.... NOT!

Here's another, discussing the lavish palace built to hold all the gifts given to the "President for Eternity" and his son, North Korea's current leader. At the same time as wealth is being allocated to such high priority tasks,

A high percentage of [soldiers] are five feet tall or shorter. In the 1990s, North Korea reduced the minimum height for military service to 148 centimeters (4 foot 9 inches) from 150 centimeters and the minimum weight to 43 kilograms (95 pounds) from 48 kilograms....

in order to be able to recruit soldiers, despite a shrinking population. And why were people shrikning? As a direct result of their "Great Leader's" misguided policies leading to severe malnutrition. Surely you know you've done something wrong when your people are getting shorter from one generation to the next!

Remember the concave production possibility frontier used to teach opportunity cost and diminishing returns? "Guns" lie on one axis (representing military spending) and "Butter" on the other (representing food). Korea demonstrates what happens when you choose a corner solution, and it's the wrong one! (DPRK even looks dark at night from space).

Even if North Korea miraculously find a way to improve, there are other deranged leaders willing and able to fill it's large shoes. Zimbabwe is an excellent example of how NOT to generate economic growth, run monetary policy, support property rights, and so on. I don't expect to run out of teaching material anytime soon....

So You Want to Go to Harvard?

A recent article in the New York Times on students interviewing for Harvard here (thanks to Newmarks Door for the pointer) is food for thought for students wanting to study in top universities. I have had the priviledge of discussing future education plans with many students since coming to HKU 6 years ago; here I'll outline a few thoughts that might help you in your plans.

1) EVERYONE wants to go to Harvard- and nearly everyone who applies fails to get in. So be realistic.... apply by all means, but have a plan B, because you'll probably need it. And just to be safe, have a plan C, D, and E as well. When I talk to students, nothing worries me more than those who have not thought seriously about what they'll do if their plans don't work out. Life is too valuable to waste, waiting and hoping that you might get in if you apply again next year.

2) I DIDN'T go to Harvard. (If you're curious, you can trace my progression through universities here or here). There are many other excellent universities in the world, and going to any good university will open many excellent career opportunities to you. Sure, going to Harvard would give you an advantage, but there are other ways of achieving your career objectives.

Aside from those general principles, a few more that are specific to students contemplating postgraduate studies in Economics:

3) If you are not desperate to do research, than a PhD is not for you. Some top undergraduate students choose to stay on at university simply because it is what they know. Like most things in life that are worth doing, a PhD is difficult and requires persistence. If you start a PhD without complete commitment, you'll probably drop out without finishing, wasting a few years of your life in the process. By the end of your second year of undergrad, you should have some good ideas on where you WANT to be in future. Actively work towards that end.... don't just drift into further studies.

4) As an application of 3), if you can be persuaded NOT to do a PhD, you probably should not do one. (If you come to me for advice, I will first try to persuade you that you should do something else).

5) You MUST take lots of Maths courses. You can bluff your way through most undergrad courses with very limited maths. But economics gets increasingly mathematical the further you study; writing descriptive essays, no matter how polished, will probably not get you a PhD, let alone a job.

6) And finally, a PhD from a bottom-ranked university may give you very few career choices. Don't loose sight of the role of your studies- they're ultimately a means to obtaining the career you want, not an end in themselves.