Business Employment Dynamics: 1992:Q3-2011:Q2

Below, Corrections shows Business Employment Dynamics data from 1992:Q3-2011:Q2.  We index to 1992:Q3=1, from data originally in levels.

• Gross job gains are the total people hired in a quarter (not subtracting losses).  U.S. generally has around 7.6 million total gains in a given quarter.  
• Expansions are businesses that reported more jobs than last quarter.  U.S. generally has around 6.1 million firm expansions in a given quarter.
• Openings are businesses that did not exist in the previous quarter.  U.S. generally has around 1.6 million firm openings in a given quarter.
• Gross job losses are the total separations in a quarter (not adding gains).  U.S. generally has around 7.4 million total losses in a given quarter.
• Contractions are businesses that reported fewer jobs than last quarter.  U.S. generally has around 6.0 million firm contractions in a given quarter.
• Closings are businesses that reported last quarter but are no longer active.  U.S. generally has around 1.5 million closings in a given quarter.

We generally think of having both gross job gains and gross job losses high as creative destruction:  while not much is moving, there's a lot of churn in the economy, generally very good.  We generally think of having both gross job gains and gross job losses low as stagnation or sclerosis:  not much is flowing in the economy.

The 1990's and the Great Recession both show prominently in the figure of BED data, depicted graphically below (click to enlarge).

Recession Raises Poverty Rate to a 15-Year High

New York Times article "Recession Raises Poverty Rate to a 15-Year High" (September 16th, 2010) fails to acknowledge the poverty rate's intertemporally unstable nature. It compares poverty rates over time, an improper comparison due to the way poverty rates are calculated.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

One might think that individuals in the U.S. were only as well off as they were in 2004, when chained GDP/capita was approximately the same as it is this quarter. However, Corrections contends that we are actually even better than this. Below, find graphically depicted U.S. GDP over time in chained 2005 dollars (click to enlarge), and U.S. GDP per capita over time in chained 2005 dollars (click to enlarge). Note that chaining dollars is an attempt to introduce new products for comparison (otherwise, comparing cell phone prices from 1960 and today would not be well-defined).

The poverty rate from 1994 is measuring something completely different from the poverty rate in 2009. Poverty thresholds have changed multiple times, under a "sliding scale" approach. For example, in 1964, ~2.6% of U.S. households owned a color television. Circa 1994, 97% of U.S. households owned a color television. Beyond this, these televisions were not only cheaper, but were of better quality, programming, and durability.

Why is this relevant? Because increasing product quality is not properly measured, even with chained GDP. Below, we take minivans as an example.

In 2003, using Barry, Levinson and Pakes's instrumental method for demand estimation (also discussed in a previous post), Amil Petrin, in his phenomenal paper, "Quantifying the Benefits of New Products: The Case of the Minivan" (JPE 2002) estimates the value in dollars to consumers from the advent of the minivan by Chrysler in its first five years (1984-1988) as $2.8 billion in consumer surplus, and $2.9 billion in total surplus.

This surplus comes solely from an improvement in product quality that is largely unreflected in price due to monopolistic competition by competitors (GM and Ford introduced their own minivans in 1985). This sort of change will not be reflected by even chained GDP numbers. Because of increasing product differentiation (Petrin's "new goods" problem) and monopolistic competition (or competition), life is getting better than we're measuring with our best measures of product-chained GDP. Quality of life is higher.

Poverty indicators are not appropriate for "long" time spans because of innovation. Locally, we might think 2008 and 2009 are comparable. But in 1994, the internet had yet to be invented. Since then, as Austan Goolsbee and Peter Klenow estimate in "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet" (AER 2006) (gated) (ungated), the median individual gained $3000/year because of the advent (and widespread use) of the internet. The reason for this large gain is largely due to increased price competition and increased value of time. Since 1994, almost everyone in the United States is vastly better off than they were. (Another example might be how much individuals would have paid for a smart phone in 1994, given the millions that have them now and how "little" they paid for them relative for 1994 willingness-to-pay). This massive increase in consumer surplus generated from an increased value of time is unmeasured by GDP (underestimated) and poverty measures (overestimated). Use of these to compare long-run trends is ill-advised, especially when one has an ideological/Malthusian axe to grind.


Unfortunately, the notion that GDP growth generally underestimates utility gains is almost universally ignored in long-run intertemporal comparisons of utility.

After Bargains of Recession, Air Fares Soar

New York Times article "After Bargains of Recession, Air Fares Soar" (September 4th, 2010) ignores the global phenomenon in air fares to concentrate on the recent.

The increase in fares is the result of a remarkable discipline shown by the airlines, which have generally not added more flights this year even as the economy has improved and demand has picked up. For the airlines, flying fewer and fuller planes has paid off.
Passengers are paying the price. For leisure travelers, domestic fares have increased by more than 20 percent in the second quarter compared with a year earlier, according to data compiled by the travel Web site Orbitz.

Steven Berry and Panle Jia examine the changes in air fare demand between 1999 and 2006, finding in their recent article "Tracing the Woes: An Empirical Analysis of the Airline Industry" in American Economic Journal: Microeconomics (ungated working paper) (gated published), that, quoting their abstract:

Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction.

This analysis (identified with BLP assumptions) occurred on a span of time before the recession pushed down further prices. As its its wont as the flagship of the left, the New York Times then turns around as soon as prices rise after declining for a dozen years and uses weasel words to describe Airline executives: "Airline executives have since been preaching the need to reduce the number of seats they offer."

It rather seems a joke, considering airline companies costs have gone down, low-cost carriers have become more prevalent, tickets have become competitive due to the internet, nonstop tickets are more common. When efficiency rises, marginal costs go down, quantity rises, and profits fall, it's difficult for consumers not to be massively better off (consumers that aren't New York Times consumers should be neutral when it comes to competitive profits--the reason they're relevant here is because when efficiency rises, overall surplus increases--if profits haven't risen, we know consumers have received all of the increased surplus).

Below, Corrections graphs out a way to indicate three stylized facts from Berry and Jia: prices fall, elasticity of demand increases, supply increases, and quantity supplied increases (click to enlarge). This is not the only way to depict these facts, and these are not the only facts from the paper, but they are suggestive enough that a first pass analysis seems to completely identify the direction of consumer surplus (coloring from blue to red, it unambiguously increases).

Enabling prostitution

Philadelphia Inquirer editorial "Enabling Prostitution" (09/03/2010) discusses prostitution in a misinformed manner. It further does not appropriately analyze counterfactual scenarios.

Some misguided observers of this debate actually believe there's nothing wrong with adults offering sex for money online. They ignore the fact that prostitution often involves other dangerous crimes, including robbery and assault. And sometimes these ads facilitate the illegal sex trafficking of women or girls who are being held against their will.

It is the case that forced prostitution is present in the United States. However, it is by no means clear that either a significant portion of prostitution is forced, nor that the level of forced prostitution would decrease when the difficulty of prostitution increases.

On the first point, we can take a recent empirical study on prostitution that requests no citation (citation will be given when the paper is published). What it indicates, however, is that there is a 63% increase in the number of tricks done on the 4th of July weekend. Forty-three percent of that apparently comes from full-time prostitutes. The other 20% comes from 4th-of-July-only prostitutes, part-time prostitutes that only come in because of the $11 average price increase. To Corrections, this sort of short-term supply elasticity, a vast reservoir that enters the market for one weekend only indicates voluntary prostitution.

If we assume that the 4th of July comes solely from a demand shock, that the fundamentals of supply remain the same, and approximating with linearity then we can identify the supply change (this is the source of the supply increase identification).

Below, we depict the pure data:

Here, we take the same data and add supply and demand lines, based on the idea that the 4th of July represents a demand shock:


On the second point, if we think that forced prostitutes are an inferior input into the production of prostitution, then enabling prostitution, causing an increase in the quantity supplied, will reduce their use in prostitution. The same concept might be applied to manual labor in manufacturing computers. It is likely that an increase from one computer demanded a year to several thousand would cause manual labor to all but disappear. So too with forced prostitution--cheapening the cost of supplying prostitution is likely to compete forced prostitution out of business.

The gulf tragedy doesn't negate the fact that oil is a green fuel

Los Angeles Times editorial "The gulf tragedy doesn't negate the fact that oil is a green fuel" (June 15th, 2010) suggests that ethanol production causes more expensive food. Whether or not this is true isn't immediately clear to Corrections.

Ethanol production steals precious land to produce inefficient fuel inefficiently (making food more scarce and expensive for the poor).

An increase in the demand for ethanol likely an increase in the demand for, example, corn. Normally, one might associate an increase in demand for corn with an increase in the price for corn. However, if the supply of corn is perfectly elastic, we should expect that price will not rise. This situation is depicted graphically below (click to enlarge).



The idea of the above diagram is as follows: corn is supplied and sold to the highest bidder. If we are to have corn going to both corn feed and to ethanol production, then the prices must be the same--otherwise a corn producer would sell it to the higher bidder--law of one price holds. Therefore, price is set by combined demands and corn supply--price is projected back to individual demands and determines quantity.

This assumption as a long-term assumption is not necessarily absurd. We might add that productivity growth is endogenous and inputs into agricultural production have not risen over the last 60 years, while output has risen 150% (it is 250% of what it was in 1948, for the same inputs). We imagine that not only might land use be easy to scale, so might productivity. Data from the USDA on output, productivity, and inputs are displayed in the figure below (click to enlarge).

Backing down on climate change

The LA Times recently ran an editorial called "Backing down on climate change" (February 5th, 2010) that claimed

No one really knows what would happen if average temperatures hit 5 C higher than 1850 -- a level we could easily reach within a century under a business-as-usual scenario -- but changes to the physical geography of the planet become probable: land masses would vanish; ecosystems would collapse. Human civilization would change, and not for the better.

Corrections would urge the author to credit the human race with some modicum of intelligence. It is unclear that a global climate change would harm civilization, as a whole. Afterall, the flood urged Noah to build the world's largest boat. Rational human beings will begin to invest increasingly in technology that will prevent serious climate change as soon a such change becomes worrisome. In fact, many have done so already. Assuming people discount the future, they may be willing, for some time, to put off trying to solve the global warming problem in favor of leisure activities or other types of invention. When demand for a solution becomes large enough, individuals will certainly shift their production toward climate innovation. Just because we currently see no social investment in the problem of global warming (beyond shopping in a special "organic" aisle at the grocery store), does not imply that such investment will not take place. Warning readers that "human civilization will change, and not for the better" is contingent on the same, ageless refrain "if current trends continue..."

What goes into chicken

Los Angeles Times editorial "What goes into chicken" (January 4th, 2010) succumbs to a knee-jerk anti-market reaction in analyzing the practice of injecting salt water and other broth-like substances into chicken going to market. The Times's scorn is evident:

According to Kenneth McMillin, a professor of meat science at Louisiana State University, plumping of some kind or another has been around a long time, but has gained popularity in the last three or four years. When growers bred chickens for higher meat production -- more muscle, less fat -- they also brought a dry, less tasty bird into the market. Overcooked, it could be nearly inedible. Besides, chicken that's nearly a fifth water is much cheaper to produce. That's how we've ended up buying chicken with enhanced breasts (and everything else).

The selling of processed chicken to supermarkets is a competitive industry. We do not expect a deliberate lowering of quality. Any customer-harming "tricks" that the LA Times alludes to are to quickly be competed out of practice, both within the chicken-producing industry, which provides substitutes, as well as the meat and food-product industry, broader substitute goods.

Indeed, Corrections conjectures that we can, using only data on change in supply and change in price, help interpret what has happened in the chicken market.  We first display the four possibilities of price and quantity movement in the market (click to enlarge). It is important to note that all quantities and prices are in real chicken terms.  Therefore, the could be read as "1 lb. of real chicken", e.g. the total real chicken an individual buys for a real price, which could be read as "dollars to buy 1 lb. of real chicken".  This will be addressed below.

This, in turn, gives us four possible graphs (really eight, as the diagram explains).  We draw four without loss of generality when taken concurrently with the subsequent table (click to enlarge).

We interpret each of these four possibilities economically using partial identification of linear demand curves in the table below (click to enlarge).  Note that a delta followed by a letter should be read "percent change in."  So, for example, delta Q would be "percent change in quantity demanded."

The last table may be somewhat opaque for non-economists, and the interpretations of Corrections for the above table's four possible outcomes is displayed in the table below (click to enlarge):

Corrections conjectures that rather than casting acrimonious aspersions on business, the Los Angeles Times would do better by at least giving a cursory glance at the facts.  Corrections recognizes that arguments based on  time series alone are flawed.  A more careful analysis would include the prices and quantities of substitutes, as well as GDP (income) growth.  Nonetheless, a time-series alone can also inform:

According to the Consumer Price Index, since November 1999 to November 2009, unadjusted, processed poultry prices have increased by 18%.  Inflation has been about 30% over the same time period.  This means real poultry prices have declined.  Similar numbers can be obtained for 2007, (12% and 29%, respectively).  Furthermore, from the USDA Food Availability Data shows nominal per capita chicken consumption to have grown by 31% from 1997 to 2007, the most recent data.

It is left to understand these numbers in real terms.  We are interested in the change in plumping, not in the fact that plumping occurs.  Assuming that plumping is around 18% (as the article suggests),  and that the majority of this plumping has been enacted only recently, then we conclude that we have observed real prices decreasing and real quantity demanded increasing.  More explicitly, real chicken per chicken has fallen by up to 22% (ie: plumping has increased by as much as 18%), but the number of chickens bought has increased by more than that (by 31%), and price has decreased.  If plumping has increased by even less than 18% over the period 1997-2007 (which seems quite likely), we conclude that per capita chicken consumption has increased, while real prices have decreased.

From the above table (decrease in real price, increase in real quantity) we can conclude that we see an ambiguous quality change, while making chicken cheaper to make.  Noting, beyond the above table, that real prices have not fallen a great deal, while quantity has risen significantly, we could conclude that plumping has likely caused an increase in demand for real chicken, while certainly making chicken cheaper to make (prices move a small amount downward, while quantity moves more dramatically).  The claim of the L.A. Times that quality has been reduced remains without evidence at best, and contradicted by cursory analysis at worst.  The claim that chicken is cheaper to make is confirmed.

Not All Drugs Are the Same After All

New York Times article "Not All Drugs Are the Same After All" (December 18th, 2009) offers no economic scrutiny to the complex issue of pharmaceuticals.

Let me start by saying I’m a fan of generic drugs. They save Americans billions of dollars each year and give us access to wonderful drugs at affordable prices. I’ve recommended generics in this column many times and use them myself when possible.

The author goes on to speak on the nature of generics and how they may be inferior to the real thing. What the article does not note is two interesting ways in which generics, chemically-equivalent entities, and brand-name drugs interact.

Monopolies are inefficient, and create deadweight loss. Society grants monopolies to pharmaceutical companies to induce them to research and create new products, which create social benefit, both when the monopoly exists and when the patent runs out; competition from generics runs profit down to zero on a drug and society alone gets the full benefit of the new drug. Traditionally, there is a tradeoff between protracting the life of a patent, which encourages research and development, and shortening the life of a patent, which increases social gain for the drugs that are created. Society balances the positive externalities of research with negative externalities of monopoly.

Therefore, as it is unclear whether or not we are at an efficient patent life of twenty years, it is further unclear whether or not generics are "saving" consumers money off drugs that never exist--harming their welfare. However, elasticity of supply increases as time lengthens--after a matter of years, possibly before the patent ends, a drug can face competition from chemically-equivalent compounds. Compounds that are similar, and free-ride off a drug's preexistent research and development, but are different enough that they do not fall under a patent.

If this is the case, then a pharmaceutical firm might see monopoly profits for a matter of years, let's say seven, at which point chemically-equivalent companies compete and drive down profits for the next thirteen, at which time profits are driven down to zero. It may be the case that shortening a patent life increases profits. Were a patent life ten years, then it is possible chemically-equivalent companies would not find their thirteen years of limited competition to be profitable enough to enter an industry, and a pharmaceutical company would gain ten years of monopoly profit, rather than seven, at which point its profits would go to zero.  This scenario is depicted graphically below (click to enlarge).

Additionally, we note that generics may not save certain Americans money. Let us say that, as the article notes, generic drugs are inferior to their brand-name counterparts. Then it may be possible competition for generics makes prices increase, rather than decrease. The reason this is possible is if there exists a heterogeneous population, for which there are inelastic demanders and elastic demanders. Before generic competition elastic demanders are setting the price of a drug, and their quantity is worth a price tradeoff for the firm. When generics are introduced, elastic demanders shift to generics, while inelastic demanders are now the marginal consumers, at which point it is profit maximizing for a pharmaceutical company to raise the price of a good. It is apropos to note that profits will unambiguously decrease for the firm, as quantity will be reduced more than price is increased (otherwise a profit-maximizing monopoly would have reduced price earlier.)  This is depicted graphically below (click to enlarge).

Germany shows government role is key to thriving solar industry

Los Angeles Times article "Germany shows government role is key to thriving solar industry" (December 12th, 2009) is offensively inept in its treatment of profitability. Showing that some solar panel companies are profitable with government subsidies, the article suggests that the solar industry would thrive in the US with a little bit of government help:

What you do need, energy experts say, is a national government willing to foster the development of renewable energy. Leaving it purely to market forces -- or piecemeal local incentives, as in the U.S. -- doesn't work as well.

Nowhere does the article note that solar panels could ever be profitable without government subsidies. Indeed, the article notes that the mere suggestion that preferential rates for solar power could be dropped (rates that cost $5 per household in higher electricity bills), sent solar-power provider stock shares plummeting.

It is worth noting that companies that dig dirt holes and then fill them the next day could be profitable with high enough government subsidies. It doesn't mean supporting them is a good idea.

EU moves toward common patent system

BBC's article, titled "EU moves toward common patent system," (December 4th, 2009) cites some benefits of making patents cheaper for companies to obtain, but fails to discuss one important way in which patents can stifle, rather than encourage innovation.  Though patents give companies opportunities to profit from innovation, the current web of patents through which new inventors have to pass (a costly venture) discourages innovation.

Sweden's Trade Minister Ewa Bjoerling said the EU patent would "make it much easier and cheaper to protect innovations in the EU".

"This will give European industry better opportunities to compete on the global market," she added.

As Michael Heller stresses in his book, The Gridlock Economy, it is important to realize that when product creation necessitates the bundling of numerous existing patents (as is the case with virtually any technological innovation), an entrepreneur with a new idea may decide not to bring a product to market for fear of thousands of potential patent infringement suits, or due to the cost of hiring the legal help necessary to clear patent hurdles [for more information, click here].  It may be true that the patents cost all producers (including the ones who would have entered markets if not for the web of patents) more than they are worth and in net, patents may suppress innovation.