Economics and Online Work (a slightly misleading title though - see description)

Economics & Online Work
John Horton
Stern School of Business
NewYork University
Training School onVirtual Work
University of Malta
Sep 19th, 2013
Sunday, September 22, 13

Agenda
• Economists for other social scientists
• Labor Economics - some basic principles

My background
• Did not get a PhD in Economics
• But my advisers were all economists
• Main collaborators have been computer
scientists
• I have also worked with psychologists,
sociologists and legal scholars
• This background has some advantages for this
kind of talk

Goals
• Provide a non-strawman
version of economic thinking
• Explain some quirks of
economics that other social
scientists might ﬁnd
confusing
• Convince you that you
would ﬁnd it useful to
wrestle with---even if you do
not agree with---economic
arguments

Critiques of economics
• Implausible assumptions
• Abundant evidence that humans are not
“rational”
• Too mathematical
• Economists have “physics envy”
• Economic imperialism
• Rational addition?Voluntary unemployment?
Household production functions? Seriously?

Economic schools
• Classical (Smith, Ricardo, Malthus, JS Mill)
• Austrian
• Heterodox (e.g., Marxist, Feminist,
Institutional)
• Neo-Classical (Alfred Marshall, nearly
everyone)
“Mainstream”

Unique characteristics of
mainstream economists
• Methodological individualism
• Focus on formal mathematical modeling using the
“methodology of positive economics”
• All models share common features
• Restrictive views on what’s “evidence”
• Increasingly thinking of itself as an experimental
science
• “Deeds, not words”

Methodological
individualism
• Societal phenomena must be explained by
the behaviors of individuals making choices
and interacting with other individuals
• Does not mean everyone uses their own
method (this is what I thought)
• Surprisingly restrictive - rules out many
of the constructs central to other social
sciences (e.g., class)

Methodology of
positive economics
• The methodology is basically one that gives
modelers license to make “unrealistic”
assumptions if predictions are good
• Judge models by their explanatory
power, not their assumptions

Billiards player
plays as if he
knows physics
and geometry
But he’s not actually calculating
precise angles, considering
coefﬁcient of rolling friction
and so on.

“rational”
• Economic “imperialism”
Seriously?
Response: It’s often useful to assume they are.

Economic models
• Define “agents” - people, firms,
governments
• Give them preferences
• Define their choice sets
• Solve the model
• Generate comparative statics - “if X goes
up, then in equilibrium,Y goes...”

Model complexity
• Simple models are a reaction to---not a
ﬂight from---the complexity of the social
word
• Most would view models as analogous to
frictionless planes in physics
• A idealized starting point for analysis

The Economist’s
“frictionless plane”
• Perfect property rights
• All information is common
knowledge and free
• No search costs & no
transaction costs
• Homogeneous workers &
firms with well-defined
preferences
• Free entry of workers &
firms

Bulk of research is
dealing with “friction”
• Imperfect property rights
• Costly transactions
• Search costs
• Information asymmetries
• Moral Hazard
• Adverse selection
• Bounded rationality

Mathematical economics:
Physics envy?
• In defense of mathematical economics:
• Math forces researchers to be clear about their
assumptions
• Quantiﬁcation helps formulate testable hypotheses; discuss
relative importance of various theoretical possibilities
• Many written theories sound plausible but are logically
inconsistent or are pseudo-theories
• Exercise: Read Wikipedia article on Aristotelian physics &
be amazed at (a) how plausible it all seams and yet (b) how
wrong it is.

“rational”
Seriously?
Response: Simple models are at least transparently wrong.

Economic “imperialism”

Invaded “territories”
• Examples (Gary Becker is best example):
• Economics of crime
• Economics of the family
• Economics of addiction
• Aren’t these better addressed via:
• Criminology
• Social psychology
• Medicine

Why imperialism
“works”
• Economics has some simple ideas that are (a)
powerful, widely applicable and (b) often
overlooked by other disciplines:
• Financial incentives matter
• Opportunity costs matter
• Rational decision-makers think on the margin
• Equilibrium outcomes are not always intuitive
• Economics often has useful focus on causality

“rational”
Seriously?
Response: Agreed. But it seems like an opportunity.

Empiricism

What’s compelling
evidence
• Very little stock put into qualitative evidence
• Narrow views on quantitative evidence:
• Short of randomized experiment, most
economists are highly skeptical of causal
claims
• Less concerned with “representative”
samples than other social sciences

“Deeds, not words”:
Economics and self-reports
• Much of economics deals with situations
where people are unwilling to reveal true
preferences
• Empirical focus is on what they do,
rather than what they say

Homer: Is this car $15,000?
Salesman: [rubs off the $12,000 price tag] It
is now.!

MyView:
This gets taken much too far
• Example: “Moving to Opportunity”
Experiment
• “These people aren’t ﬁsh Jeff; you can just
ask them.”
• Structured interviewing identiﬁed important
mental health effects
• Great arbitrage/collaboration opportunity for
other social scientists

Primacy of revealed preference
rather than stated preference
• “Revealed” as opposed to “stated”
• Example:
• “MTurk worker works for pennies/hour -
tells researcher he hates it.”
• Economist:
• “Pennies/hour is apparently better than his
next best option - good thing MTurk
exists.”

Labor Economics

Why a “labor” economics?
• Labor markets are funny in many ways
• Both workers and vacancies are often idiosyncratic
• Matches take time to form and evolve
• Labor is the only “input” that cares about its “price”
• Labor has to decide about developing its own human capital
• Labor markets obviously do not instantly clear
• Wages are “sticky”
• Search is very costly
• Much of public policy directly related to questions about
functioning of labor markets

Some classic questions
in labor economics
• What are the determinants of labor supply and
demand?
• What explains wages?
• How does X affect wages? (X = education,
gender, race, age, tenure etc.)
• Why is there unemployment?
• What can public policy do to improve labor
markets?

Why employees?
• Why not just atomic single-person “ﬁrms” trading in a
market?
• Markets have transaction costs
• Avoids “hold-up” problems
• There are advantages to employees
• Coase identiﬁed technology as key driver, but
theoretically ambiguous
• Makes internal control easier; also makes spot
market easier

Economists and labor
• First approximation (full information, market competition):
• Wages “set” by supply and demand - both sides “price
takers”
• Market wages reﬂect compensating differentials
• Workers “pay” for amenities; must be paid for
disamenities (e.g., unpleasant work conditions)
• Elaborations:
• Efﬁciency wages (productivity and wages related)
• Bargaining power

Basic S&D framework
Hours Worked
Wage
Supply
Demand
Labor's Surplus
Firm's Surplus
Firm Surplus: Firm gets hours of work at a price below what they would have paid.
Labor Surplus: Worker gets a wage above what they would have had to have been paid.
Dem
and
2

Micro-foundations
• Labor supply curve
• Aggregates up the choices of all workers
• Trade-off between work and next best
alternative (catch-all “leisure”)
• Labor demand curve
• Aggregates up demand of all identical ﬁrms
• Trade-off between hiring worker and not hiring
the marginal worker

Individual labor supply
Hours Worked
Wage
May Bend Backwards
Reservation Wage
Reservation Wage 2 (for better job)
Individual Labor Supply

Indifference curves & LS
Hours Worked
HoursofLeisure
(MU Income) * Wage = MU Leisure
-(MU Hours) * Wage = MU Leisure
Wages are high.
Wages are low.
The income from an hour of work is worth very little leisure.
The income from an hour of work is worth a great deal of foregone leisure.

Comments on labor
supply
• Given relatively little ﬂexibility to set own
hours, reservation wage is often key
parameter
• Social policies are often indexed to labor
supply, which can be problematic

Labor demand
Employees Added
$'sofWidgetsProduced
L L + 1
Worker's marginal product (MP)
Firm: Is MP > MC?
Worker's marginal cost (MC)
Yes - Add more workers
No - Don't hire anyone else
Wage
Key Assumption: Firms are price-takers.
Concave: Decreasing returns to labor (and all factors)

Comments on labor demand
• This argument explains why economists care
so much about labor productivity
• Directly related to wages & wealth of society
• Note that firms pays a worker marginal
product, but gets to keep average product
(which is higher).
• A competitive market will reduce firm’s
profits to zero

Monopsony & minimum wages
Hours Worked
Wage
Supply
Demand
Deadweight Loss
Transferred to the worker with MW
Transferred to the monopsonist ﬁrm
Minium Wage
Monopsonist Wage
Up for grabs
Firms's Surplus
Worker's Surplus

Efﬁciency wages
Wage
Productivity
Assumption in the simple models - no relationship
More motivated
Less turn-over
Less need to monitor
Healthier
High turn-over
Stealing
Low motivation
"Efficiency wage" models

Technological change & LD
Employees within Firm
$ofGoodssoldbyFirm
Technological change can have ambiguous effects on demand for labor
Old Technology
New Technology 1
New Technology 2
E.g., Agriculture, Manufacturing
E.g., computer programmers

Example from my own
work: Starting with the
Frictionless Plane

“Labor Economics of
Paid Crowdsourcing”
• Joint with Lydia Chilton
• Theory: Workers work until marginal beneﬁt
equals marginal cost.
• Experiment: Give workers piece-rate task, then
lower payment until they quit---learn their
reservation wage.
• Why we care: Reservation wage is a key
parameter in labor markets. Also, way to test
model of labor supply.

23578101112131516171819202122232526272829
0 20 40 60
Worker Output
count
Divisible
by 5?
FALSE
TRUE
Results
• Workers work more when
wages are high, less when
low (+1 for economics)
• Reservation wage
calculation not crazy:
$1.40/hour
• Workers exhibit strong
preference for earning
amounts evenly divisibly by
5 (-1 for economics)

Behavioral economics?
• Uses same tools as economics but:
• Much more interested in how people actually behave as
measured by controlled experimentation
• People violate homo economicus assumptions in predictable
ways
• Research program seems to take behavioral insights and
incorporate them into models
• My own view:
• Very situation dependent - at oDesk, I’ve found a price
theory approach more useful - “mistakes” get disciplined out

John Horton
john.joseph.horton@gmail.com
www.john-joseph-horton.com
@johnjhorton

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