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


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This presentation might be better titled "Economics for skeptical non-economist social scientists, plus some basic labor economics at the end." It was part of a longer lecture I gave about economics and online work at the "2013 Training School on Virtual Work" held in Malta.

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

  1. 1. 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
  2. 2. Agenda • Economists for other social scientists • Labor Economics - some basic principles Sunday, September 22, 13
  3. 3. 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 Sunday, September 22, 13
  4. 4. 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 Sunday, September 22, 13
  5. 5. 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? Sunday, September 22, 13
  6. 6. Economic schools • Classical (Smith, Ricardo, Malthus, JS Mill) • Austrian • Heterodox (e.g., Marxist, Feminist, Institutional) • Neo-Classical (Alfred Marshall, nearly everyone) “Mainstream” Sunday, September 22, 13
  7. 7. 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” Sunday, September 22, 13
  8. 8. 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) Sunday, September 22, 13
  9. 9. 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 Sunday, September 22, 13
  10. 10. 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. Sunday, September 22, 13
  11. 11. Critiques of economics • Implausible assumptions • Abundant evidence that humans are not “rational” • Too mathematical • Economists have “physics envy” • Economic “imperialism” • Rational addition?Voluntary unemployment? Seriously? Response: It’s often useful to assume they are. Sunday, September 22, 13
  12. 12. 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...” Sunday, September 22, 13
  13. 13. 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 Sunday, September 22, 13
  14. 14. 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 Sunday, September 22, 13
  15. 15. Bulk of research is dealing with “friction” • Imperfect property rights • Costly transactions • Search costs • Information asymmetries • Moral Hazard • Adverse selection • Bounded rationality Sunday, September 22, 13
  16. 16. 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. Sunday, September 22, 13
  17. 17. Critiques of economics • Implausible assumptions • Abundant evidence that humans are not “rational” • Too mathematical • Economists have “physics envy” • Economic “imperialism” • Rational addition?Voluntary unemployment? Seriously? Response: Simple models are at least transparently wrong. Sunday, September 22, 13
  18. 18. Economic “imperialism” Sunday, September 22, 13
  19. 19. 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 Sunday, September 22, 13
  20. 20. 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 Sunday, September 22, 13
  21. 21. Critiques of economics • Implausible assumptions • Abundant evidence that humans are not “rational” • Too mathematical • Economists have “physics envy” • Economic “imperialism” • Rational addition?Voluntary unemployment? Seriously? Response: Agreed. But it seems like an opportunity. Sunday, September 22, 13
  22. 22. Empiricism Sunday, September 22, 13
  23. 23. 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 Sunday, September 22, 13
  24. 24. Sunday, September 22, 13
  25. 25. “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 Sunday, September 22, 13
  26. 26. Homer: Is this car $15,000? Salesman: [rubs off the $12,000 price tag] It is now.! Sunday, September 22, 13
  27. 27. 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 Sunday, September 22, 13
  28. 28. 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.” Sunday, September 22, 13
  29. 29. Labor Economics Sunday, September 22, 13
  30. 30. 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 Sunday, September 22, 13
  31. 31. 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? Sunday, September 22, 13
  32. 32. 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 Sunday, September 22, 13
  33. 33. 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 Sunday, September 22, 13
  34. 34. 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 Sunday, September 22, 13
  35. 35. 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 Sunday, September 22, 13
  36. 36. Individual labor supply Hours Worked Wage May Bend Backwards Reservation Wage Reservation Wage 2 (for better job) Individual Labor Supply Sunday, September 22, 13
  37. 37. 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. Sunday, September 22, 13
  38. 38. 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 Sunday, September 22, 13
  39. 39. 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) Sunday, September 22, 13
  40. 40. 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 Sunday, September 22, 13
  41. 41. 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 Sunday, September 22, 13
  42. 42. 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 Sunday, September 22, 13
  43. 43. 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 Sunday, September 22, 13
  44. 44. Example from my own work: Starting with the Frictionless Plane Sunday, September 22, 13
  45. 45. “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. Sunday, September 22, 13
  46. 46. 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) Sunday, September 22, 13
  47. 47. 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 Sunday, September 22, 13
  48. 48. John Horton @johnjhorton Sunday, September 22, 13