The Future of Unskilled Labor

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The “unskilled” labor market is at a crossroads perhaps unlike any we have seen before. With the ongoing emergence of automation and robotics, many of the old manual labor jobs in factories are quickly becoming obsolete. The loss of manufacturing jobs in the United States is not simply a story of outsourcing as it is sometimes told, but also one of automation that will likely eventually replace even many of the outsourced jobs in China and elsewhere. The future of unskilled labor is a mystery and questions are aplenty. Is demand going to continue to fall to insignificance? Will a new sector emerge to take over the demand as the rise of manufacturing did after agricultural mechanization? And if not, what does it mean for social mobility?

These questions are perhaps some of the most pressing yet overlooked of our time. Exact answers will be impossible to come up with, but the mere possibility of a major decline in the unskilled labor market should be considered in the realm of policy, especially given the strong public ties in what is currently an inflexible education system.

For one, is the current schooling system adequate for what could be a much more specialized and technical labor market? I would guess not. As even entry level positions in many substantial labor markets start to require specialized training, the current high school graduate would almost definitely have to go through further training to get a job for much beyond minimum wage (and increasing it cannot fix the problem).

With some very undesirable unemployment rates for certain majors and trends that suggest things will be getting worse (not to mention the possibility of a college tuition bubble), four-year universities are likely not a blanket solution for this problem. My guess is that a combination of four-year schools, shorter technical programs, community college programs, legitimate online programs as well as newer solutions such as career-training programs or classes that can be taken during high school would be the best response. What exactly is needed is hard to gauge though as we aren’t even sure where the unskilled labor market is headed and if it is in fact going to eventually become obsolete. This is where leaving more education decisions to the market might be a much better option than the current labyrinth of Federal subsidies and regulations that favors certain choices over others.

Aside from education reform, simply acknowledging the potential unskilled labor crisis will likely lead to more diversified thinking and more solutions. Accepting that the government-fueled cultural notion of four year universities being for everyone might be wrong would be another step in the right direction. Questions are a good thing and blanket “solutions” based on mere speculation can be dangerous as we have so often with speculative bubbles. More people should really think about what they want to do, where they can find jobs and with what degrees or programs. This sort of critical thinking would be especially important in the face of a college tuition bubble.

The future of the unskilled labor market is up in the air right now and furthering the discussion is important as it can help prepare us for the worst. I’ve hit on a lot of topics in this post with some that I definitely have a lot more to say about, so you will probably see some posts on some of these topics (e.g. education reform and a potential college tuition bubble) again some time in the future. Please share any ideas of your own below.

Unintended Consequences in Amphetamine Regulation?

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A couple of days ago, the New York Times published a story about the shortage of amphetamine-based Adderall, a popular prescription drug for treatment of ADHD (attention deficit hypersensitivity disorder). The overall supply of the drug, which includes both the brand name and generic forms, has been in widespread shortage as manufacturing quotas have been reduced by the DEA (Drug Enforcement Administration) in response to black market abuse of the drug. Unfortunately, the response has severely limited supplies for even people with legitimate prescriptions and the small supplies that are available are often of the much more expensive name-brand versions and not the generics despite the same companies making both versions of the drugs. The shortage has affected the market for another stimulant, the methylphenidate-based Ritalin, where a similar situation is unfolding.

The issue here is not that the DEA is trying to combat abuse, but that the situation clearly favors the drug companies while hurting legitimate consumers and arguably not impacting black market demand. In allowing the manufacturers to determine the ratio between generics and brand name production, yet restricting the supply, the manufacturers are naturally inclined to change the brand production vs. generic production ratio to what is most profitable. Unfortunately, this has led to an especially large shortage in the much cheaper generic versions of these drugs, leaving the most cash-strapped with fewer options. As the article states, things have gotten to the point where the FDA has even asked the DEA to consider expanding the supply, to which the DEA has answered that supplies are okay due to existing brand name stock.

Clearly there are a few problems here and a lot of it centers around the unintended consequences of the DEA’s questionable policy. The virtual elimination of the generic supply of Adderall and Ritalin has left many prescription-holding patients simply going without the drug if they cannot afford it or take it. Meanwhile, manufacturers are making record profits on the drugs, suggesting that the limited supply might be in a sense giving them more pricing power in the market. At the same time, the effect on actual black market use is debatable.

Even at co-pays of ~$200 for brand-name Adderall or Ritalin, the cost per pill is still likely much lower than the per pill cost on the black market. And although I have not seen the numbers, I can say from first-hand observation that there is still rampant amphetamine abuse amongst college students, especially during final exams (including in this past Fall 2011 semester). I can also say from the prices I have heard that the per pill cost in colleges might easily be over the per pill cost of a $200 prescription given an average prescription quantity. It would not be far-fetched that those abusing the system by using their legitimate prescriptions to buy these drugs and subsequently selling them at much higher rates in the black market still buy the brand name drug after the supply restrictions because either way they can still make a profit. It ends up being the people that really need the drug, especially those who both need it and cannot afford brand name prices that get hurt. A lot of speculation on my part, sure, but they are points to consider.

Questions for 2012

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I am not a big fan of forecasting, especially when it comes to economic news as it is borderline impossible in many cases even for the most knowledgeable of experts (and I am far from an expert). Anyway, with that in mind, I will offer a list of questions for the new year instead of predictions:

  • What will happen to the Eurozone? It is probably the biggest question on everyone’s mind heading into the new year. How will the Eurozone get out of the mess it is currently in? Will it get out or is this the year that major structural changes are forced (possibly with a breakup)? Finance ministers and the ECB across the Eurozone seem adamant that everything will be fine, but everything clearly is not. Reactions from the Fed and other central banks in response to whatever happens will also be very interesting. I expect for it to be another future-defining year in Europe. For better or for worse…
  • Who will win the Republican nomination and will how much of a challenge will they pose to President Obama? It will be an intriguing (or is aggravating the word I’m looking for?) few months as the general election comes around and a lot of who is favored will likely depend on the economy. The more important question here though is will anyone actually look to solve the bigger issues with economic incentives in this country? Things like taxes, intellectual property rights, and even political incentives on Capitol Hill? I am not optimistic on that right now, as the only major one that has been discussed of those three is taxes and many of the proposals have been flatout backwards (i.e. saying a flat income tax is an equal tax on everyone).
  • Will the strength of the populist movements continue in the United States and abroad? With the Tea Party and Occupy movements in the United States and plenty of activism around the world from Europe to the Arab Spring, the past few years have had quite a strong dose of populism and activism. Some for the better, others perhaps not. I do not know if the trend will continue in 2012 and for those seeking freedom from oppressive regimes, I hope it does, but as far as the United States goes, I really hope a more intellectual approach can be taken by activists. Anti-intellectualism has been rampant thus far and it is tremendously unfortunate. I won’t hold my breathe for that wish though. Addendum: By a more intellectual approach I did not mean that they did not protest, but that they would take a bit more time and care to learn the facts (or at least be open to other explanations) and in some cases even know what they were protesting for altogether.
  • Will the Fed finally crack on NGDP targeting? The proposal has become quite the snowball and it looks like the momentum might keep going. Will Bernanke consider it? I am not so sure it would be the best idea. I do hope the discussion continues at full swing though as it is still worth considering. Also related, it will be interesting to see if recent Federal Reserve Board nominations Jerome Powell and Jeremy Stein have an impact on any changes in the direction of monetary policy.

Have anything that you think I should have mentioned? Or perhaps a comment (or prediction)? Share below.

On Neuroeconomics

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The ongoing emergence of neuroeconomics as a field is extremely exciting as it has the potential to drastically change economics forever. Admittedly I am probably a bit biased due to my undergraduate major, but it is undeniable that neuroeconomics presents a side to economics that has not really existed before: a link to hard science and scientific experiments that can be repeated rigorously and empirically. This really has the potential to completely change economic theory. Through the use of emerging technologies at the center of modern neurophysiological and neuroscience studies (such as fMRI, MEG, etc.), neuroeconomics can finally start to come up with scientifically rigorous conclusions on behavior. This is in stark contrast to many assumptions at the center of modern theories which are based on observation and earlier assumptions that might be wrong (and likely are as we have already begun to realize through behavioral economics studies).

The emergence of neuroeconomics has the potential to benefit and feedback into research of various other fields from microeconomics to psychology and behavioral economics. The feedback will likely run both ways and neuroeconomics becomes yet another weapon (a particularly potent one in my opinion) in understanding rationality and markets. The eventual (unstated) goal of neuroeconomics, in my opinion, will be to come up with a more precise model on what the real person does as opposed to what the “rational” person would do according to modern theories. This in turn would have major effects on many current microeconomic theories and eventually have their affect on more complex macroeconomic models as well. Given the events of the past few years, I think it is undeniable that certain areas of macro can certainly use this (monetary theory anyone?). The link from neuroscience to macroeconomics will naturally take longer than that to microeconomics, but eventually it should be possible.

There is still so much research that can easily be thought of and done and have ground-breaking ramifications that it really is amazing. The purely biological areas of neuroscience and neurophysiology are still somewhat in their adolescence as well as technologies such as the fMRI, MEG, etc. were not always around and even today are still costly, limiting what has been done in the past. Thankfully, as the technology continues to get cheaper and more readily available, neuroeconomics and neuroscience in general should continue to grow and evolve.

I believe that we are currently in the midst of something of a golden age in neuroscience and that it will eventually happen with neuroeconomics as well. My biased prediction is that neuroeconomics will spearhead a new golden era of economics. It might take a while for it to really have its impact on mainstream theory (especially macro) due to the complexity associated with such theories, but that does not mean it is worth the wait. Because it absolutely is.

For more on neuroeconomics, check out this video of Drazen Prelec of MIT:

Euro Governance has Nudged Banks to Shoulder the Eurozone

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It is no secret that the ECB has held strong on how far it will directly finance the particularly needy Eurozone nations. The central bank, with Germany at its side, has stood by calls for fiscal responsibility and further austerity. It has also referred to its price stability mandate as a reason for its actions. Even with Italy’s slide down a couple weeks ago, the central bank stood rigid- well at least when it came to directly helping Italy, Greece, or the others. While the ECB rejected further loans to sovereign governments, it had announced a program to increase loans to banks, citing liquidity concerns as the reason.

Wednesday, the ECB went ahead with that plan as it offered its first 3-year collateralized loans to banks. The demand was tremendous at almost 500 billion Euros from over 500 banks. So what will these loans be used for? Some, giving the ECB the benefit of the doubt, have suggested that the loans are solely to increase liquidity and to help capitalize banks. Others have claimed that this is the ECB’s way of helping out the sovereign states without defying its legal mandate and position. Frankly, the reason probably does not matter.

What we know is that in either case, the increased capital likely means that banks will consider and buy sovereign debt (especially since it can be used as collateral on the loans), especially as governments look to them to buy it (potentially to the point where they change policy to influence or even force banks to buy their debt). Unfortunately, the erroneous, “risk-free” nature of a lot of this debt still stands, which makes the situation a bit unsettling. Needless to say, banks buying up a tremendous amount of risky sovereign debt might not end well. In fact, it might make things worse because it could result in a major banking crisis on top of the current fiscal crises (which are still small in comparison). Greece and Italy have often been incorrectly labeled the Lehmans of the Eurozone, but it is this ECB policy that might actually make the analogy somewhat correct. And that is not a good thing for anyone.