George Borjas and the national approach

It has taken me too long to introduce the hero of this story. Borjas has had a series of papers, books and editorials since the mid-80’s that have each challenged the consensus economist’s view on immigration in support of the popular view. His work in the late 80’s uncovered the pattern of a secular decline in the quality of immigrants (in terms of educational attainment, work experience and unobserved skills) since WWII, a trend that is common sense today. He also introduced the idea of self-selection of immigrants and gave conditions for when we’d expect immigrants to be higher or lower quality. In the nineties, while setting the ground work for the work I’ll describe below, he started the conversation on the costs and benefits of immigration, sitting on a panel of the National Academy of Sciences evaluating the economic impact of immigration. He wrote papers encouraging researchers and policy makers to balance the fiscal costs of immigrants (welfare, schooling, etc) against any potential production gains.

In his 2003 paper called “The labor demand curve is downward sloping,” Borjas challenged the consensus that immigration has a zero effect on native employment outcomes. He worried that studies comparing regions did not properly account for spillover effects from trade, capital movements and labor mobility. The problem with goods, capital and labor movements is that they all tend to equalize wages across regions. This means that when you compare regions that have had more or less immigration, you won’t be able to find a difference in wages even as everyone’s wages have gone down.

He suggested, instead, to compare groups that do not admit mobility. Specifically, he looked at the effect of immigration across skill groups where skill is defined by a combination of education and years of work experience. Intranational trade in goods doesn’t operate in this context. Add to that the fact that international trade is probably not important here and the trade channel for spillovers is shut down. Also, workers can only increase work experience one year at a time (thus they can’t decrease it or move to a level of experience more than one year ahead of their own), so its extremely hard for them to change it to respond to incentives and, in the short run, workers can’t change their education. These things suggest the labor mobility channel is shut down, too. Finally, if you assume, as Borjas does, that capital is not skill specific (or at least to the degree it is, it has a small spillover effect) then there’s no role for capital movement to cause spillover effects.

Below I reproduce his suggestion. On the x-axis is the change in the proportion of immigrants from 1990 to 2000 and the y-axis is the change in native wages. Each dot is a education-experience group ((Actually, I cheated and used age instead of work experience which gives the same results but is much easier to calculate.)).
The slope here is negative (-0.35) and quarter standard deviation more negative than the mean found by Longhi, Nijkamp and Poot. This result, which controls for spillover effects, confirms what Borjas says: “immigration lowers the wage of competing workers”.

There are three ways to critique these findings. First, attack the premise. If spillover effects are creating the zero correlation at the local level, we should be able to detect them. We should see native workers fleeing areas of high immigration or we should see industries in high immigration areas reshuffle to take advantage of the skills of immigrants, as trade theory would predict. David Card took up both of these challenges. In 2001, he wrote a paper finding no native flight and in 2007 he wrote a paper finding that least one type of trade spillover doesn’t seem to be emperically important ((That said, there is an opportunity for us to look for other ways trade affects native workers. For example, perhaps immigrants produce new varieties of goods. Much attention in trade theory these days — someone got a Noble for his work on this — is on the trade effects of new varieties. This wouldn’t be a spillover channel, I don’t think there’s factor price equalization in New Trade models, as much as a possible explanation for native/immigrant complementarity, which I haven’t talked about yet. I’m no trade theorist but perhaps the production based models used by Ottaviano and Peri, e.g., are isomorphic to the love of variety trade models. So where those authors see complementarity in production, trade models would see love of new immigrant produced varieties. We’d need micro evidence on immigrant entrepreneurship to differentiate to see which of these models best explains the evidence.)). If spillovers are a problem, they don’t appear to work through the trade and labor mobility channels.

Second, attack the assumption that capital isn’t skill specific or that international trade doesn’t matter. To be honest, I haven’t found any work that does either of these things…

So moving right along. Third, point out that there are much more important indirect effects of immigration than spillover effects. This will be the focus of my next post.

For those of us that believe immigration has a net positive benefit on society, Borjas is the perfect enemy ((He’s also a model academic. Besides his volumes of academic papers, he’s written a well-used textbook, several popular books on immigration and dozens of editorials on the subject)). He has applied honest, fair and constant pressure on our sure beliefs about immigration. His challenges have inspired reams of rebuttals; reams that could not otherwise have been used in support of immigration.

Walk out?

I don’t think I’ll be participating in the planned walk out Thursday at UC campuses. I’m not clear what the goals of the walk out are to be. Are they to protest a short-term budget shortfall? To dispute the priorities in budget balancing? To lament the lack of voice in the process?

I’m not sure how walking off the job on Thursday will change the short-run budget issues. Short of printing their own money, neither the State nor the University can do much about the deficit. Of course, they could have done things in the past to have mitigated some of these problems (e.g. the University could be less dependent on State funds and the State could have institutions that make it less of a fiscal mess). But a protest today can’t change past actions. The best that can be said on this front for the walk out is that it could provide a modest encouragement towards making structural changes in the way the State and University do business; a very modest encouragement.

Also, the president doesn’t act as dictator nor the Regents an oligarchy. Shared governance means the University is also run by the faculty and they’ve weighed in on the issue. According to them, faculty and research quality should have precedence over access and affordability. “Our view about affordability is simple: if the state of California once again adopts the view that access and affordability are public goods worth supporting, they will be readily achievable.” To them, getting poor folks into the University is a public good and thus, it should be provided by the public, not from cuts in their paychecks.

Now voice: maybe there’s a point in protesting because we didn’t have a say in the process. But we do have a say. Students, mostly new students, can vote with their feet. There are plenty of private universities in the State and plenty of competition of all stripes outside the State. If fellow grad students don’t like the product they’re buying, then they should stop buying it.

Do elite Universities cause poorly performing K-12?

Steve Sailer thinks so:

America’s most storied universities publicly espouse leftist egalitarianism. But that’s just a politically correct smokescreen to distract from their status as the winners in a brutal competition with other colleges for the highest IQ students and professors…
… The prestige of Harvard and the other apex predators at the lofty pinnacle of the American educational pyramid means that the vast K-12 bottom has been infected with Harvard’s values (such as abstraction and abstruseness) and rhetoric (equality uber alles)…but not, alas, Harvard’s brains. Most of the K-12 educators, much less their students, aren’t smart enough to get the joke. They don’t understand that the IQ elitists of America are pulling the wool over their eyes when they rattle on about their purported liberal beliefs about how everybody should go to college.

They don’t understand it’s all a big pyramid scheme. The Harvard professors’ graduate students become the UCLA professors whose graduate students become the Cal State LA professors whose students become the schoolteachers who browbeat their more gullible pupils into believing that everybody should go to college, no matter how obvious a waste of money and time it will turn out to be…

(h/t Fey Accompli)

Does College make you smarter?

That which shall not be named has been decreasing among college students graduates over time.

This might be due to decreasing quality of college. Assuming college is productive, as Prof. Clark says ((i.e. it changes TWSNBN, i.e. it makes people smarter)), decreasing efficiency of educational productivity would produce graduates with less smarts. Or it may also be due to people with lower I… a lowering quality of the supply of college students. Garbage in, garbage out.

On a completely unrelated note… I totally love my students at UC Davis!!!11!!

Americans are dumb…

… until they spend 10 years on the job market (pdf). Improvement in literacy (in the broad sense of the term) is most pronounced between 25-35 year olds and 35-45 year olds. This is to say the jump (or lack there of) in literacy between the college-graduate-aged cohort (25-35 year olds) and the high-school-graduate-aged cohort (16-25 year olds) is much less than the improvement later on in people’s careers ((I saw a seminar yesterday in which it was suggested this isn’t a so-called cohort effect, i.e. the older folks didn’t get better educations.)). Doesn’t say much for the impact of college, does it.

Also, American adults actually catch up to adults in other countries in literacy scores. Here’s the US ranking (out of 19 countries) in the three types of literacy test by age groups ((see page 16 in Sum/Kirsch/Taggart 2002, linked above)):

Given Americans go to college at much higher rates than those in other countries (at least this was true when these literacy tests where administered), this is even more evidence for the signaling theory of higher education or it at least takes the wind out of the sails of the idea that colleges are good at creating human capital.

The catch-up effect suggests Americans are learning things on the job they should have learned in high school. Because we end up high in the rankings, though, this is more than just catch up. It seems there’s something about the American labor market that makes it especially good at producing human capital.

Its the consumption stupid!

A couple weeks ago I made the point that it is strange to look at changes in income inequality and make calls for redistribution. First, its not clear that changes in inequality should matter for someone that cares about social justice. Even if changes in inequality rather than just the existence of it mattered for some reason, I made the argument that tracking changes in the differences between income percentiles confuses the subject.

Income levels vary drastically over a family’s lifetime ((BTW, the statistics on incomes are usually measured by the household or the family. This can be confusing if you try to compare these statistics to your own paycheck… something to keep in mind.)). Young families are smaller (maybe one or two people), the income earners are less experienced and therefore less skilled and often a big chunk of the family’s time is spent building human capital (an economist’s phrase for what normal people call “going to school”). All of these factors mean that younger families have less income.

As the family’s income earners get older they have more and more experience and they spend most of their time in the work force. Also, more people are married at this stage in their lives and most couples have children so family size is much larger. The family’s income go up, but they don’t consume all that extra income; they build their nest egg instead.

Later in life, the kids leave home and the income earners start retiring from the work force. The family shrinks and its income shrinks. It lives off its savings instead.

This is why income data show an inverted U shape over lifetimes. Young and old families have low incomes and middle aged families have high incomes. Also, this life-cycle story tells us where to look for explanations of changing inequality. Inequality could be increasing as a result of demographic changes (more middle aged families relative to young and old). I suspect the ageing of the baby boomers plays an important part in the story.

But the demographic story doesn’t explain this picture:

If demographics were the main driver of inequality, the inverted U wouldn’t be getting more dramatic over time.

Increasing inequality also could be a result of changes in the way the economy rewards different kinds of human capital. There were two types of human capital in the above story: the kind that you get at school and the kind you get with experience on the job. First, if skills learned in college ((Or if college let you demonstrate you have certain skills. I’ve suggested before that college is more about signaling quality rather than actually building quality.)) are more and more important for today’s jobs then people will have the incentives to get more education. Young people spending more time in college lowers their incomes and exasperates income inequality.

Second, if on the job knowledge is more important these days, then experienced folks will be paid more. By definition only older workers can be more experienced so this can be driving what we see in the above diagram.

The point of this post’s title, though, is that its not incomes that families care about for the most part. Its consumption. You can’t eat, drive or live in your paycheck. Consumption, as it turns out, varies much less over the life-cycle than income ((It varies about 10%, relative to about 50% variation in incomes, and is hump shaped like income (Gourinchas and Parker). This is an unsolved mystery in economics because standard theory says it shouldn’t vary at all.)) and this NYT opinion piece by two Fed economist argues consumption, surprisingly, doesn’t vary much between rich and poor.

UPDATE: Mark Thoma has more on consumption vs. income inequality. That post, Krugman’s reply to Cox and Alm and the general discussion is so damned muddied. People slip so easily between a descriptive “this is how it is” discussion to a normative “this is how it ought to be” discussion. For example, the Fed piece Thoma excerpts starts off by talking about the best measure of the poverty line (income or consumption) and then quickly gets side-tracked into a discussion of which measures are easiest to construct. Thoma himself uses the Fed’s measurement discussion as a spring board for a short discussion about what he thinks poverty really is (short Thoma, “its not about material stuff, except it is”). What that has to do with data issues, I don’t know. He then jumps from his quick and dirty definition of poverty to a sermon on the “decent and right” thing to do.

Often times, popular discussions of this topic have an air of back filling and data mining. People have some policy they want to implement and then they go squeeze data until it supports their policy. Call me naive, but I think policy should be guided by the science not the other way around.

One of the reasons I’m so attracted to this topic, though, is this level of muddiness. I’d like to think there would be some premium in it for the guy that can try to make sense out of it all. Economic inequality is an extremely complex topic. I believe we need to take a deep breath and try to understand the issue as level headed as possible. This means we need to measure it, understand inequality’s stylized facts and have clean theories that can be explicitly tested.

Things about school that I learned in school today

Things about school that I learned in school today ((BTW, class was held at my desk at home in my PJ’s today due to inclement weather and the insistence of the UCD facilities bureaucrats that classes of one don’t deserve their own lecture hall on campus.)):

  • Earnings increases about 12% per extra year of schooling ((Angrist and Krueger 1991, Ashenfelter and Krueger 1994 and Psacharopoulos 1994))
  • Quality of education, measured by class size and teacher salaries, is much less important for earnings than the number of years of schooling ((Card and Krueger 1996))
  • The social returns to schooling are not much greater than the private returns to education ((Daron Acemoglu and Angrist 2001 and Krueger and Lindahl 2001))