Is there an inherent tension between efficiency and equality?
Bertrand: Definitely, and as economists, we’re really focused on efficiency. We have scarce resources, and we are always trying to think about how to allocate those resources to create the most value possible. The issue of distributing the value that’s created comes up typically as a second step.
Epley: Whenever you’ve got two goals you could be pursuing at the same time, it’s very hard, and that produces a general bias in behavior of pursuing one goal at a time, often at the expense of the other. In general, decision makers are myopic, and end up prioritizing one goal over the other.
Bertrand: Economists would argue that the right thing indeed is to focus on efficiency, to make the pie as big as possible, and then it’s for policy makers or voters to decide how they want to redistribute the pie. But economists also have some views as to the efficiency considerations that should go into that second stage.
Hurst: In our models, we say it’s good if countries move toward their comparative advantages—one country specializes in Good X, another one specializes in Good Y, and they trade with each other. But if you think about manufacturing in the United States, the people who used to produce tradable goods that are now being produced abroad got dislocated, and they paid some costs.
In a frictionless labor market, those costs are small. If you get fired on this side of the room, you just move to that side of the room. In real-life transitions, we know that the labor markets aren’t totally frictionless, but how quick the speed of adjustment is from Sector A to Sector B is important. The frictions come along three dimensions. One dimension is: people could move sectors within a given location for the same level of skill. The second is: they can move locations and get jobs in another place, again, for the same level of skill. And the third, which is what we see over long periods of time, is: they could accumulate more skill. The frictions are: How costly is it to move? How costly is it to transfer into another sector? And how costly is it to acquire the skills the labor market is demanding? Thinking about the costs versus the benefits is important. We tend to spend a lot of time thinking about the benefits. We’re not always as focused on costs, or how they might be changing across people or across time.
Bertrand: If we assume perfectly functioning labor markets, and solely focus on efficiency, we may make the wrong calculations. There might not be efficiency gains from a trade policy if there are permanent losses for some displaced workers. Once we look at the real labor markets and the losses that are created, we might find the policy does not increase the pie but makes it smaller.
Epley: There’s a deeper psychological friction here that has to do with individual identity. Think about people losing their jobs in the coal industry in West Virginia. They’re coal miners, but that’s not just a job; it’s their identity. It’s who they are, and what their parents and grandparents were. It’s deep in them. Even if they could go to Walmart and make the same amount of money, many will have a hard time doing that. Switching jobs into something that doesn’t seem as meaningful or as consistent with their identity creates another friction. Models tend to focus on things we can measure easily, which makes it hard to account for factors such as loss of identity. Where do you put that in the equation? What does that even look like?
Why is this issue particularly pertinent now?
Bertrand: We live in a moment where some of these groups that have been on the losing end of many of the shocks that were very good for society overall have been expressing themselves, probably much more than they were 10 or 15 years ago.
Hurst: It’s about technology and automation. We produce certain types of goods with technology more than labor now, particularly low-skilled goods, and that displaces workers with lower levels of skills. That has always happened, and so what’s different? Think about how the introduction of the tractor affected agricultural employment. The booming sector at the time was manufacturing. And the skills of agricultural workers and manufacturing workers were very substitutable. Migration was easier. Now, we’re basically moving lots of low-skilled jobs together.
Bertrand: Machines are certainly a bigger factor than trade, but it’s very clear that people have picked on trade because it’s a much better narrative for politicians who want to harness this energy. It’s hard to get people angry at machines. It’s easier to get them angry at the Chinese, or immigrants. There’s not as much of a backlash against trade in Europe as there is in the US. The reason may be because Europe has a stronger social-safety net, and so when jobs get destroyed, there’s more compensation from the state to partly undo some of the concentrated losses.
Hurst: The US lost a lot of manufacturing jobs in the 1980s, although not as many as in the ’00s, but it didn’t show up in employment rates the same way that it is showing up now. At the same time, we see declines in mobility across space. And it’s not only manufacturing jobs that are disappearing; lots of other low-skill ones are too. We’ve had lots of adjustments to past shocks, and the people who haven’t adjusted yet to those past shocks might be inherently different than the people who were exposed to previous shocks.
Think about education. Traditionally, very few people went to college. Then a shock came along, the return to skill went up, and we went and got educated. This scenario repeats itself. So who’s going to get the education? The people to whom it’s most beneficial. Who is left? Those for whom skill is less beneficial. And over time, the pool becomes skewed increasingly toward the latter group, so that for any given shock, they might be less responsive to these margins of adjustment than in the past. This means that for each successive skill-based shock, the pool that is left becomes less responsive. The unskilled who are left might be harder to move than in the past. In my own work, I’m trying to formalize this and test it. The propensity to get schooling, particularly for men, has flattened pronouncedly over the past 20 years relative to the prior 100 years, even though the return to skill actually grew over that time period.
How should policy makers think differently about equality and efficiency?
Epley: You could perhaps align efficiency and equality if you thought more about maximizing well-being, which social safety nets do. All this raises the question, what should we expect from people? As a society, when we form these policies, what ought we be trying to do? Economic models of efficiency assume that people ought to be maximally responsive to shocks. The working mother whose job is lost should be willing to up and move to another job. The coal miner who loses his job in West Virginia but wants to continue living in this community and be part of this system, should he just be expected to up and leave the community and go to California, where there are jobs?
We may decide that’s not the kind of country we want to live in. Instead, we could try to make people happy where they are. If we thought more about well-being, and incorporated some of these nonmonetary factors into well-being, it might lead to very different kinds of policy, because we wouldn’t assume that people would want to do things or should do things.
Bertrand: There are people, such as [University of Chicago’s] Eric Posner, who are thinking about how we could adapt cost-benefit calculations to account for the permanent impact of job losses. On top of just asking the standard questions—What’s going to happen to prices? What’s going to happen to cost?—you could also incorporate factors such as the number of jobs that would be destroyed and the total dollar value of these job losses, factoring in the loss of skills that people have invested in. This might lead to different choices on specific, concrete policy decisions. Should the Environmental Protection Agency pass this rule versus that rule? Should we open the door to trade? We could try to put a dollar figure on some of the factors Nick is talking about.
Note that some of this is already happening, particularly when it comes to accounting for possible concentrated losses. There’s such a thing as a feasibility analysis, where a government agency might be considering a policy that may pass the cost-benefit test, but it would mean shutting down 80 percent of the plants in a particular county, and that’s something we would deem to be infeasible. It’s about doing two things: first, looking at costs and benefits, and second, determining a threshold of how many job losses you are willing to have in the particular part of the country. Then you have to find a way to balance these considerations.
Hurst: The auto bailout that we had in the US during the Great Recession had the concentration consideration in there for a particular area. We don’t have a lot of policies that are designed to deal with these long-term adjustments. If you think about the big transfer policies, particularly for men in the US, there’s unemployment insurance, but that’s usually for short-term fluctuations—you go into a recession, you want to help somebody for a couple of months, or maybe up to a year or two, to ride out the storm. Then we have disability, which is basically a long-term insurance program, usually for health shocks, to help smooth out those types of events.
We are relatively underdeveloped in terms of policies in response to industry decline, which is not a health issue, and not a temporary measure such as unemployment insurance. We do have some trade-adjustment policies around retraining. But this doesn’t really get to any of the types of stories that Nick said might be around in the background. It doesn’t talk about some of the long-term dynamics that we see. It doesn’t talk about this long-term skill adjustment. When you think about these issues, how do you implement policies that also don’t have large efficiency effects on the background? That’s the trade-off. If you start transferring money to people in certain areas, that might slow down adjustments for the next generation, or the generation after that. So how do you get the right policy?
Now suppose we want to do efficiency-gain-type policies. There are some losers. We want to redistribute the pie. We really don’t have any mechanism for that redistribution for the types of shocks we’ve experienced in recent decades.
Epley: Let’s go back to the concrete example of the coal miners in West Virginia. There are analyses of what really drives well-being. Social connection turns out to be hugely important. It’s much bigger than the effects of income on day-to-day well-being and happiness. A policy could take into account the cost of relocation when a group picks up and moves, because now they’re not around friends and relatives whom they’ve been around
for a long time, which is likely to affect their health.
Coal miners are involved in the energy industry. That’s part of their identity—they’re making power for the planet. You could imagine a policy that tries to keep them there, and tries to subsidize some other social good, such as wind power. Instead of blowing the tops off the mountains, you could put windmills on top of them. Retrain these workers to stay close. It’s probably not the most efficient outcome. That’s probably not the best place for the windmill, and so you’d sacrifice some efficiency. But would there be an overall gain in utility, not just for those people but for society as a whole, of keeping them there, retraining them to do green energy in the state of West Virginia? Would that be better overall for well-being? If you were to add well-being and health into some of these metrics, not just money in terms of efficiency, some of these policies that wouldn’t perhaps make sense on a pure efficiency calculation might start to make more sense.
Hal Weitzman: Economists are sometimes accused of focusing too much on efficiency and not enough on equality. They spend too much time, so the criticism goes, thinking about whether the pie is as big as it could possibly be, and not enough time thinking about how it’s carved up. So should economists and policy makers think more about distribution, and if so, how?
Welcome to a special edition of The Big Question, the monthly video series from Chicago Booth Review. We’re filming in front of a live audience on the campus of the University of Chicago. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.
Marianne Bertrand is Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth. She’s also the faculty codirector at Booth’s Rustandy Center for Social Sector Innovation and faculty director of the Poverty Lab at the University of Chicago Urban Labs.
Erik Hurst is V. Duane Rath Professor of Economics and John E. Jeuck Faculty Fellow at Chicago Booth. He’s also deputy director of the Becker Friedman Institute at the University of Chicago.
And Nicholas Epley is John T. Keller Professor of Behavioral Science at Chicago Booth and faculty director of the Center for Decision Research. He’s the author of Mindwise: How We Understand What Others Think, Believe, Feel, and Want.
Panel, welcome to The Big Question. Marianne Bertrand, is there an inherent tension between efficiency and equality?
Marianne Bertrand: Yeah, definitely, and as economists, we’re really focused on, you know, efficiency. I think the idea behind it is that we have scarce resources and we are trying to always think about how we are looking at these resources to create the most value possible. That’s really our focus. That’s the pie that you were talking about; but, you know, issues of distribution of this value that’s being created, distribution of these resources come up typically as a second step.
Hal Weitzman: But inherently, there’s tension between the two?
Marianne Bertrand: There will be a tension.
Hal Weitzman: OK, Nick Epley, if we’re trying to kind of, you know, go after two goals that are diametrically opposed, or will trade off in this way, is that always inherently a hard thing to do?
Nicholas Epley: Whenever you have a situation where you’ve got two goals you could be pursuing at the same time, it turns out to be a very hard thing for any individual to do, and that then produces a general bias in behavior, you might think of, in pursuing one goal at a time, often at the expense of others. So if you’re thinking about what might be good for me today, it can be hard at the same time to think about what might be good for me a month or a week or two months from now.
If you want to cut a piece of paper, right, you might choose the thing that only does the one thing that satisfies that goal best instead of choosing a tool that maybe serves many goals, like a Swiss Army knife that could also cut this paper but isn’t only meant for cutting a piece of paper.
So in general, you find that decision makers are myopic, and so when you have tensions like this between one thing we might value on the one side and something else we might value at the same time, generally what happens is you’ll end up prioritizing one over the other.
Marianne Bertrand: But economists would argue that the right thing is indeed to focus on efficiency because then we do indeed have the biggest pie possible, and then there’s a second problem for society, or policy makers, or voters to decide, which is how they want to put in place policies to redistribute this pie among, you know, among people. But then questions emerge because economists also have some views as to, kind of, efficiency considerations that go in that second stage of that process.
Hal Weitzman: And there’s some assumptions built in there, right? Particularly about, Erik Hurst, about labor markets: Isn’t there an assumption that labor markets clear in some sense, that workers transition to other jobs?
Erik Hurst: So now we’re talking about, you know, very specific types of shocks. So usually when we start thinking about: Is trade good for the populace or not? In an efficiency standard, we write down models and we take derivatives and we kind of say: it’s good where countries could, you know, move toward their comparative vantage, and one country specializes in Good X, another one specializes in Good Y, and we trade for each other.
But the people who used to— if you think about, like, manufacturing in the United States— who used to produced tradable goods that are now being produced abroad, they no longer, you know, have the same demand for their employment as they did before, and they get dislocated. And as they get dislocated, they pay some costs.
Now, in a frictionless labor market, those costs are pretty small. You get fired on this side of the room, you just move to that side of the room. Everybody gets a job. Everybody’s fine. We all get the benefits of lower prices from trade. If there’s a little bit of a barrier, though, between moving from this side of the room to this other side of the room, or from Labor Market A to Labor Market B, that provides some sort of costs to those workers, that, you know, when we start thinking about how the cost, the distributional effects of trade, that’s a cost that many of our models that we write down in textbooks don’t have because we assume these frictionless markets in the labor market.
Marianne Bertrand: And just to be clear there, I mean, this could also be—if we assume these perfectly functioning labor markets when we do, say, a series of trades— we may, even if we just solely focus on efficiency, make the wrong calculations, is that on nets, there might not be efficiency gains from the trade policy if you realize that indeed there will be permanent losses for some of the workers that have been displaced by other trade, right?
Erik Hurst: Yeah, exactly.
Marianne Bertrand: And so that’s no longer a distributional question because it might mean that we start with models that assume perfectly functioning labor markets and then once we kind of look at the real labor markets and the losses that will be created in the labor market, in fact, the policy did not increase the pie.
Hal Weitzman: So that might upset the first-order, second-order prioritization we talked about earlier.
Marianne Bertrand: Yes, this is exactly right, so I think that this is a problem beyond, kind of, the one I just described. The problem I described first, OK, so it seems reasonable to try to make the pie as big as possible and then focus on distribution after, but sometimes, in the models that we use to define some policies, may also not increase the size of the pie because they build on assumptions that are not realistic.
Nicholas Epley: So can you say more specifically what these frictions actually are that economists—
Erik Hurst: Let me give you an example first, and then we could talk about specifics of what these frictions might be. The example might be that historically, 120 years ago, 140 years ago, most of us were farmers. OK, and then some technology comes along, a robot. We called the robot a “tractor” at that point, and then it created tremendous amounts of efficiency gains in the farming industry in a way that dislocated workers. The tractor substituted for labor, and then over that 120 years, most of us in the population migrated from farming to other types of sectors.
So when you think about these transitions, there’s an inherently, you know . . . we always know that labor markets aren’t perfectly frictionless, but how quick the speed of adjustment is from Sector A to Sector B is important. So with Marianne’s example early on, with a trade shock, might not raise the pie in the short run when we take into account these distributional effects. If enough adjustments occur in the long run, then maybe the pie gets bigger.
So what are these frictions that we usually think about in the labor market? Those frictions come along in, I’d say, kind of three dimensions. One dimension is people could move sectors within a given location for a same level of skill. The second thing is they could move locations and get jobs in another place, again, for the same level of skill. And a third thing, which is what we see over long periods of time, is they could accumulate more skill. They go to school, get training, etc. In those types of models, we tend to move up the skill distribution.
So the frictions are: How costly is it for people to move places? How costly is it for somebody to move to another sector within a place? And then third, how costly is it for them to go and acquire skills to then have the labor, you know, endowments that the market is demanding at a time?
So if there’s frictions in any one of those or if those frictions are getting more pronounced today relative to the future, which I believe they are—relative to the past—I believe they are, then that could make these issues more salient.
Marianne Bertrand: And we do have some estimates. I think in the labor literature, there’s lots of work on trying to estimate how long-lasting the effects are of job losses or, you know, mass layoff, and suggest that you go 20 years later, and people that are being laid off in such a way have certainly not returned to the earnings they had before. I think the kind of magnitudes that exist, like someone that loses a job via mass layoff loses $100,000 in the present value of lifetime earnings.
Erik Hurst: The question then is: Can the young come in and adjust? Is it the short run in the sense that it might be long for the individual but short run for society as a whole because the young come in and adjust?
And I do believe—we can talk about it later— that frictions are more pronounced today for different reasons than they were in the past.
Hal Weitzman: OK, well, let’s come to that question.
Erik Hurst: Let’s move to it now. That’s great (laughs).
Hal Weitzman: I wanted to ask you, Marianne Bertrand, if this tension has always been with us, what is particularly acute now? Is it to do with globalization, or populism, or why do we care about it particularly today?
Marianne Bertrand: I don’t know. I mean, looking back to the reaction that we had in class that triggered this event.
Hal Weitzman: And just to explain, so this conversation was talking—
Marianne Bertrand: This conversation was about job losses in West Virginia. So this was very locally a conversation about job loss in West Virginia. So I think the current political environment very much triggered those questions and those reactions. I think that we now live in a moment where some of these groups that have been on the receiving sides of, kind of, many of the shocks that may have been very good for society overall have been expressing themselves probably much more than they were doing, you know, 10, 15 years ago.
Hal Weitzman: OK, Erik Hurst, is it partly due to globalization affecting the labor market more than in the past?
Erik Hurst: No, I mean, I think globalization is a salient factor, and that might have started some of the changes that were occurring, particularly in the industrial Midwest around manufacturing and energy, but I think it’s more technology now than it was, and automation, in a sense, and that we just produce certain types of goods with technology now more than labor, particularly low-skilled goods, and as a result, that displaces workers with lower levels of skills. Now, why is that different than in the past? That has always happened. Think about the tractor example.
But back when we had the tractor, the booming economy at the time, or the booming sector, was manufacturing. And if you take an agricultural worker and the skill set they had and the manufacturing worker, the skill set they had, they were very substitutable with each other. So again, the friction was smaller because the migration was easier. Now, we’re basically moving lots of low-skilled jobs together and then—
Marianne Bertrand: So I very much agree with what you said. I think all the evidence would point that skill drives part of the change. Machines are a bigger factor than trade, but I think it is very clear, when we think about the narrative of what’s going on right now, trade is the one thing that people have picked up on because, I think, there’s a much better narrative to be written by politicians that want to kind of take this energy, which is that it’s hard to get people angry at machines. It’s easier to get people angry at the Chinese or at immigrants.
Erik Hurst: But the counterfactual—and I think that’s one thing we should really hear Nick’s thoughts on this—but the one thing counterfactual is if we start putting up trade barriers . . . manufacturing jobs are about 6 million jobs less in 2017 than they were in 2000. OK, so trade might have been some impetus, but technology has contributed to that, right? Because manufacturing output is actually up despite manufacturing employment being down.
And at least from my perspective, putting trade barriers back on the market that look like 2000—suppose we get rid of China completely—manufacturing employment in the US will look nothing like it did in 2000 just because the automation was so severe. So even though that’s a focal point in the discourse, it is misguided in terms of the underlying forces that are going on. And I think that just means we keep that in mind when we talk about policy.
Nicholas Epley: Yeah, there seems to be a deeper, psychological friction here, and I’m just curious how economists think about this, and that has to do with individual identity. So if we go back to the example of losing jobs in the coal industry in West Virginia, these guys who are losing their jobs are coal miners. That’s not just a job they have. It’s their identity. It’s who they are. It’s what their parents and grandparents, their fathers and grandfathers were. It’s deep in them.
So you could imagine that they could go to Walmart and make the same amount of money, but that’s not gonna be the kind of thing they’re gonna want to do. So switching jobs across sectors or into something that doesn’t seem as meaningful or as consistent with their identity creates another friction.
Marianne Bertrand: That only kind of reinforces the point I think we were trying to make in the beginning. That is, you know, kind of, the efficiency calculations that we do without taking into account, you know—not only do they put no weight on these job losses because they assume people will move back to another job. You’re only reinforcing the fact that these job losses are really costly and increasing the pie that we get via trade or via policy smaller than our calculations, or these calculations that economics would suggest.
Nicholas Epley: That’s actually costly, though, in other ways that don’t just have to do with the job loss. That is just with the financial part. That is the loss of—
Marianne Bertrand: That’s what I’m saying.
Erik Hurst: It’s in utility, utility.
Marianne Bertrand: And we’d like to value that.
Erik Hurst: The key thing, to Nick’s point, though, and I agree 100 percent, that is a part of the friction in the labor market, this cost of adjustment not only in dollar space but in utility space. But we’ve been doing that for centuries as an economy.
Now the question is: How long does this period of lack of adjustment last? Some farmers who got displaced by the tractor suffered. It just so happened that it was right around the Great Depression, so people might not have been able to tease out the effect on well-being of the structural forces of agriculture with the big period of the Great Depression, but the agricultural areas of the US suffered immensely during the Great Depression. Some of it was weather related, but some of it was the structural change.
But adjustments happen. Now the question is: How quick that adjustment happens and is there something different about this type of adjustment than other types of shocks we got that were large in the past?
Nicholas Epley: Well, I think the question is: What kind of adjustment was required in the past, perhaps compared to the present? So in the past, if you lost your job as a farmer, there was probably another manual-labor job you could take on, where you were building something or creating something, which is likely more consistent with your identity as a farmer. The coal miners are being asked to go back to school to work in a call center, and these are not comparable identities.
Marianne Bertrand: Here’s what I believe has been missing, and going back to the way I started thinking about it, which is step No. 1: we make the pie as big as possible. Step No. 2: we think about the location of the pie. I mean, I think it is very clear that the US does not spend much time on optimizing step No. 2, in particular an environment where we’ve made the pie bigger by shrinking the size of the pie for some groups, right?
So maybe this is not . . . One view I have is that there’s not as much of a backlash against trade, for example, in Europe as there is in the US; yet trade has been also destroying a lot of jobs in Europe, you know, as it has in the US. I would hypothesize that the reason why you don’t hear—and there are other forms of populism in Europe, and we can talk about that—but you don’t hear as much backlash against trades in Europe because Europe has a stronger safety-net model and a stronger social-protection system in place, so that whenever these jobs get destroyed, even if people lost sense of identity and things like that, there’s more of a compensation that will come from the state to partly at least undo some of the concentrated losses that are incurred through trade.
And I think the US has been kind of lagging behind on thinking more about redistribution. I mean we spend—I mean on the fraction—a very small amount of the budget is spent on trade-adjustment programs. We don’t have a good sense. My sense is they’re not very effective. These are all afterthoughts.
Nicholas Epley: What if the effort was . . . I’m wondering if you could perhaps align these goals a bit of efficiency and equality. If you thought more about maximizing another attribute, not money but rather well-being, which is something that other countries perhaps attend to a little more by creating social-safety nets and so on, and so this would do things like consider, OK, if we’re . . . let’s take a particular region of the country that’s being transformed by technology. Are we maximizing meaningful jobs—not just money going into an area, but actual meaningful work or well-being in some way in a community? Because that then— money is part of that. Money is part of that calculation, but it’s only one part of that calculation, and it may not actually be that big of a part of that calculation.
Erik Hurst: When we think about these policies coming through, or this issue coming through, there are margins of adjustments that are taking place. So let’s think about the auto industry in Detroit. So people don’t like to move. We know that. But they do eventually. Detroit has moved from one of the top 10 largest cities, now well down in the distribution. Because people have migrated out.
So these adjustments do take place. In the industry structure that Detroit had at the time, manufacturing in particular kind of fell out of favor. Other types of industries grew in other parts of the country, and people migrated to that. And that does have some efficiency gains to it. People are moving to where the comparative advantage is.
So when you start thinking about these policies, there is, right back to the beginning, an equity/efficiency trade-off even in the policies we’re talking about now. And so when I like to think about it, it’s like kind of saying: What are the costs, which we know these people are suffering? What are the benefits? Maybe doing some margin of adjustment. Whether it be moving to a different place or going to school or, you know, getting some training for another type of sector, or maybe changing social norms, or whatever that is, take time and have cost, they come with a benefit.
And so thinking about the cost versus benefits is important. We tend to spend a lot of time about the benefits. We’re not always as focused on potentially these costs—or how they might be changing across people or across time, and I think that’s an important component.
Nicholas Epley: But isn’t it the case that usually, when you’re talking about costs and benefits, you mean money.
Erik Hurst: No, people . . . maximize utility.
Nicholas Epley: (laughs) Yeah, some people . . . we’ve had experience with psychologists in utility.
Marianne Bertrand: And then we put a double figure on it.
Erik Hurst: We trade it into a “compensating their money.”
Nicholas Epley: You convert it to money.
Erik Hurst: We convert it to money, but it’s in utility terms.
Nicholas Epley: (laughs) Problem solved.
Erik Hurst: When Nick and I have had these conversations, all of behavior economics is economics, it’s just a different utility function.
Nicholas Epley: (laughs)
Erik Hurst: (laughing) And so I’m OK with that.
Nicholas Epley: But there are certain aspects of utility that are harder to calculate than others. Money’s easy. Money’s easy, and I think . . . so to get back to the original question about thinking about efficiency versus equality, some of these costs are just hard to calculate, like cost of well-being, cost of health, cost of civil society, and all of those. Those are hard costs to calculate.
Hal Weitzman: And presumably people themselves find it hard to say how much their own well-being is worth as well.
Nicholas Epley: Oh yeah. People think terribly about money. No, yeah. I mean the psychology of all of this is very complicated. People often don’t know what necessarily is good for them, what will make them happy down the road. They think more money will make them happy. It often doesn’t. No. There’s lots of complexity, but we can find out what induces utility or well-being at the moment.
But I think, getting back to your original question about efficiency versus equality, in general, our models and the way we think about behavior are prioritized to focus on the things we can measure pretty easily. And that just makes it hard to account for these other factors, like loss of identity. Where do you put that in the equation? What does that even look like? Right? A coal miner’s not gonna go and work at Walmart. They’re just not.
Marianne Bertrand: But there are ways that you can do the efficiency calculations, I think, that would bring a bit more realism to, how far away from the fully functioning labor markets that are assumed we are. I think the problem is that you have this slippery-slope argument because then every model, every policy that we study has some general equilibrium effects, and then we try to put those in the model, it has a slippery-slope feeling. So we do this kind of efficiency calculation in a simple way. It gives us discipline, and I think there’s some benefits to that.
Hal Weitzman: Erik Hurst, you talked earlier about this slowdown in the adjustment in labor markets, why is that happening?
Erik Hurst: So, you know, I’ve been puzzled by this and I have some conjectures. So I’ll tell you the puzzlement, which is, so, we lost lots of manufacturing jobs in the ’80s as well, not as much as we did in the 2000s, and it didn’t show up in employment rates the same way that it is showing up now. And margins of adjustments were occurring, and we could use our statistical methods that, you know, we as a profession use—I use a lot in particular—as comparing locations that get a shock. See what happens to the people in those locations and see how they are after the shock a decade or so later.
And for a given-size manufacturing shock in some measured sense, you could look at employment rates of the people who were exposed to that shock in the ’80s versus today, and it’s very different today than it was in the past.
And at the same time, we see declines in mobility across space. We see correlation in the sense that not only are manufacturing jobs going down now, but also lots of other low-skill jobs—backroom office, things of that nature—are moving in the same direction. And this is something that I’ve been thinking about, in the back of my mind, which is: we’ve had lots of adjustments in the past to past shocks, and the people who haven’t adjusted yet to those past shocks might be inherently different than the people who were exposed to those shocks in the past.
So think about it in just going to schooling. So back in the day, very few of us ever got a college education. And then a shock comes along, the return to skill goes up, and we go and get some skill. Who’s gonna go get the skill? The people who’s the benefit of that skill is the most beneficial. And you start seeing that. And who is left? The people for whom skill is less beneficial. And as, over time, that pool becomes more and more toward the latter group, which just means for a given size shock, that group might just be less responsive to these margins of adjustment than in the past. And that means, as societies grow and you have skill-based shocks where it’s harder to adjust and the skill could be skill-times-identity type shocks, the pool that is left are just less responsive.
And we’re moving in a way where many of us get skill, and so those of us who are left might be just harder to move than in the past. And I’m trying to formalize that and test that going forward. But it is something that we need to be in the back of our mind for when we’re, you know, as an economy ages through time.
Marianne Bertrand: That’s very interesting, but how much of that could also be simply the number of options for unskilled people today are not . . . are much fewer than they were in the 1980s?
Erik Hurst: Yeah, so the question then is: Do they go get skill? So the shock and skill price might be bigger than it is today. That just pushes people toward getting more skill. And we’re actually seeing less. So I don’t know if . . . Marianne knows that the propensity to go get schooling, particularly for men, has flattened pronouncedly over the last 20 years relative to the prior 100 years, even though the return to skill, the price of skill is actually growing during this time period.
Marianne Bertrand: We’ve tapped out the limit of the male brain.
Erik Hurst: Just so you guys know—I don’t think you can see it from back there—she looked directly in my eyes when she said that.
- Nicholas Epley: She was looking at me too!
Erik Hurst: It wasn’t really at you, Nick. (laughs)
Nicholas Epley: Good work, Marianne. (Fist bumps Bertrand.)
Erik Hurst: They put me in the middle for a reason. (laughs)
Hal Weitzman: I think you’re gonna be OK.
Erik Hurst: OK, we’ll see. We’ll see.
Nicholas Epley: It raises, I think, an interesting question, though, which . . . all of this also kind of flits around morality and ethics, too, about what we ought to expect from people and, as a society, when we’re forming these policies, what ought we be trying to do?
And so I think one thing that’s maybe just worth highlighting here is that economic models of efficiency assume that people ought to be responsive to shocks, that is, maximally responsive. So the working mother whose job is lost should, now, because this job is no longer available, should just be willing to up and move to another job. The coal miner who loses his job in West Virginia but wants to continue living in this community and be part of this system should just be willing to up and leave the community and go to California where there are jobs.
And I don’t know that there’s a clear answer to that, but I think that’s just an important assumption that’s in the economic models. And we may decide that that’s not, kind of, the country that we want to live in, where we have lots of money. And you can imagine that we could make people happy where they are, and I think if you thought . . . I think maybe if we thought more about well-being, actually incorporated some of these other, nonmonetary factors into well-being, that might lead to very different kinds of policy, because we wouldn’t assume that people would want to do things or should do things.
Hal Weitzman: Do you think psychologically we underestimate the impact of loss? You talked about that loss of identity.
Nicholas Epley: I think that people probably do in the sense that if they were to actually change jobs, they would pick up a different identity and probably be OK in the long run. That doesn’t mean, though, that people are gonna necessarily, in the current moment, choose some outcome that’s gonna achieve that ultimate goal. People act on loss aversion. That’s not always a sensible thing to do in terms of future happiness, but it’s what drives choice, and that’s what these models have to be sensitive to.
Hal Weitzman: OK, so let’s talk about what the model might look like. You talked about how we could look more at these second-order considerations. How would that affect the first-order considerations? How would that affect the whole economist model?
Marianne Bertrand: Well, it’s like I said . . . I mean, going back to the efficiency calculation, I think there are ways, and some people have been working on this—I think Eric Posner is one person here at the Law School—that have been thinking about how we could do these kind of cost-benefit calculations and incorporate whatever numbers we have gleaned from working labor economics as to what are the permanent impact of these job losses.
And so, I think you could do your standard, you know, “what’s gonna happen to prices and what’s gonna happen to costs” and also kind of really incorporate “this is the number of jobs that I expect will be destroyed” and “this is what I think will be in total, the dollar value of these job losses” because skills that people have invested in have disappeared, and this may lead to different choices. I mean, the other approach I think—
Hal Weitzman: That’s . . . but you’re suggesting that something’s happening. If it’s technology, that’s just a natural approach—
Marianne Bertrand: Well, that’s surely different. I mean, so here I’m talking just about the things where we are looking at policy decisions that are being made based on these calculations. So should the EPA, you know, pass this rule versus that rule? Should we open the door to trades? They are concrete ways. They will try to proxy for what you are talking about. Let’s try to proxy for putting a dollar figure on this identity factor and what kind of loss you get from losing your identity.
But we could certainly try to move in this direction. I mean, I think the other thing, I believe that that’s already happening is also maybe paying more attention to whenever we decide to pass a policy or not, looking at concentrated losses. I think there’s such a thing as visibility analysis that someone should come and engage in, where a certain policy may pass the cost-benefit test but would really mean shutting down 80 percent of the plants in a particular county, and that’s something we deem to be infeasible.
Hal Weitzman: You’re saying that—
Marianne Bertrand: What’s different there is looking at two things: looking at your cost-benefits and then determining, there’s gonna be a threshold as to how many job losses you are willing to have in a particular part of the country and then you find a way to balance these two considerations. I don’t know how.
Hal Weitzman: You’re saying that’s already happening?
Marianne Bertrand: I’m saying, yes, there are some parts of government that do these feasibility analyses, at least as I understand it.
Erik Hurst: I think they would, at least during the Great Recession. There was the auto bailout had the concentration in there for a particular area.
We don’t have a lot of policies that are designed to deal with these long-run adjustments. So if you think about the big transfer policies, particularly for men that are in the United States, there’s unemployment insurance, and those are usually for short-term fluctuations. You go into a recession. You want to help somebody for a couple of months or maybe for up to a year or two, kind of ride out the storm. And then we have disability, which is basically a long-term insurance program, usually for health shocks, to kind of smooth out those types of shocks.
The policies we have for industry decline and such, which are not health and they’re not temporary, like unemployment insurance, are relatively underdeveloped. We have a little bit around trade-adjustment-type policies. If you’re exposed to trade, you could get a little bit of help on the margins, usually around retraining. And that’s about it.
So it doesn’t really get to any of the types of stories that Nick might have said would be around in the background, doesn’t talk about some of the long-run dynamics that we’d see, doesn’t talk really about this long-run skill adjustment.
And so, when you think about those, then how do you implement those policies that also don’t have large efficiency effects on the background?
Marianne Bertrand: That’s right.
Erik Hurst: And so that’s the kind of the trade-off because if you start transferring money to people in certain areas, that might slow down adjustments for the next generation or the generation after that. So how do you get the right policy to kind of manage these? Suppose we want to do these efficiency-gain types of policies, there are some losers. We want to redistribute the pie. We really don’t have any mechanism right now for that redistribution for the types of shocks we might be experiencing in recent decades.
Hal Weitzman: Nick Epley, what would be, you talked about kind of general well-being. What would a policy that, specifically a policy that had that in mind look like?
Nicholas Epley: Well, so I would think it would take into account a few things, and obviously, you would sacrifice a bit on efficiencies here. But let’s go back to the concrete example of the coal miners in West Virginia. So there are analyses of what really drives well-being. Social connection turns out to be hugely important on a day-to-day basis for sure, much bigger than effects of income, on day-to-day well-being— at least happiness—and so it would take into account things like the cost of relocation when somebody picks up and moves and now they’re not around friends and relatives that they’ve been around a long time, which is likely to affect their health.
So it might do something like, let’s take these coal miners. They’re involved in the energy industry. That’s part of their identity. They’re making power for the planet. You can imagine a policy that tries to keep them there, tries to subsidize some other social good like wind power instead of blowing the tops off of mountains, you could put windmills on top of them, retrain these workers to stay close. It’s probably not the most efficient outcome.
It’s probably not the best place for the windmill so you’d sacrifice on that a little bit but the question would be: Would the overall gain in utility, not just for those people, but for society as a whole of keeping them there, retraining them to do green energy in the state of West Virginia, would that be better overall for well-being?
And I think if you were to add well-being and health into some of these metrics, not just money, in terms of efficiency, I think some of these policies that wouldn’t perhaps make sense on a pure efficiency, a monetary-efficiency calculation, might start to make more sense, might seem better for overall welfare.
Hal Weitzman: OK. Well, on that very practical note, unfortunately our time is up. My thanks to our panel, Marianne Bertrand, Erik Hurst, and Nick Epley. For more research, analysis, and commentary, visit us online at review.chicagobooth.edu, and join us again next time for another The Big Question. Goodbye.
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