Are Alternative Work Arrangements a Positive Option?

When I think of my children--now young adults--getting a "job," what I am hoping for is  an arrangement between an employer and an employee that pays a wage or a salary, has a reasonably predictable work schedule, and that often has an implicit or explicit contract for a continuing employment relationship.

In an "alternative" work arrangement, at least some of these conditions don't hold. For example, the work may be paid by the job, or based on revenue earned by the worker, not on a wage or salary basis. The work schedule may be unpredictable. There is no strong expectation on either side that the employment relationship will continue into the future, which then influences decisions made on both sides about issues like whether the employer finds it worthwhile to offer training or benefits, the likelihood of future raises, and so on.

Of course, jobs often don't fall neatly into just two boxes, one "traditional" and one "alternative." But in thinking about these alternative job arrangements, a key question is whether workers choose these jobs, perhaps because they like the flexibility? Or do workers end up in alternative job arrangements when they would have preferred a more traditional ongoing job relationship, but were unable to find one?

 Alexandre Mas and Amanda Pallais dig into these issues in "Alternative Work Arrangements" (December 2019, Princeton University Industrial Relations Section, Working Paper #634). From a different angle, so do Tito Boeri, Giulia Giupponi, Alan B. Krueger, and Stephen Machin in "Solo Self-Employment and Alternative Work Arrangements: A Cross-Country Perspective on the Changing Composition of Jobs" (Winter 2020, Journal of Economic Perspectives, 34: 1, pp. 170-95).

Despite considerable public discussion about alternative jobs and the "gig economy," we don't actually have good evidence on whether the number of alternative jobs is rising. For some background, "Do We Even Know if the Gig Economy is Growing?" (January 29, 2019).

In these more recent essays, Mas and Pallais point out that US data don't show that the prevalence of irregular or flexible scheduling, or working from home, has risen much in the last couple of decades. They write: "The number of electronically-mediated gig jobs has grown substantially, but these jobs remain a very small share of overall employment, and independent contracting and self-employment have grown, at most, modestly. While our broad definition of alternative work arrangements represent a large share of the U.S. labor market, the traditional job is still very much a relevant feature of the labor market, and there is little evidence that it is on a substantial decline." Boeri, Giupponi, Krueger, and Machin look at data from a number of high-income countries to find that rates of self-employment don't seem to be rising; however, they also find that look if you divide up at self-employment into solo self-employed or self-employed with employees, the fraction of solo self-employed is a rising share. "Moreover, solo self-employment is largely associated with underemployment: that is, these workers would like to work more hours, and they earn less on an hourly basis than their counterparts with employees. The solo self-employed are also more liquidity constrained and more vulnerable to idiosyncratic shocks than the self-employed with workers."

In my own mind, the key question about job "flexibility" is who controls it. If I'm the worker, and I have flexibility to telecommute some days or to vary my hours in the context of an ongoing employment relationship, that sounds good to me. But if I'm the worker, and the employer is telling me that my time schedule is shifting on a weekly or even a daily basis, or that I am required to work from home some days, that's much less attractive to me. The issue becomes especially messy because "flexibility" may start off as something where workers feel as if they have the power to vary their hours or to telecommute on some days, but it may then rapidly evolve into something where workers feel as if they are under implicit or explicit pressure to take on jobs at times or on days that would not otherwise be desirable.

In this spirit, Mas and Pallais write that most of the workers who have job "flexibility" experience it as involving less work-life balance:

While flexibility in work schedule and location have often been touted as a means of achieving work-life balance, we do not find evidence that these practices lead to reductions in job stress or family life interruptions. In fact, the opposite is generally true. Workers who report more flexibility tend to also have worse outcomes in these dimensions, as well as higher shares of long work days and late night work. Perhaps surprisingly given the emphasis of the benefits of flexible arrangements on work-life balance, there is no evidence that women are more likely to be in jobs with more scheduling or work location flexibility. The ability to work part-time appears to be one of the primary job characteristics that workers, especially women, use to achieve work-life balance.

There are really two kinds of "flexible" labor market arrangements. One is workers with relatively  high levels of education and skills, who in theory have lots of flexibility, but in practice often feel pressure to be on call for the job 24/7. Another kind of "flexible" applies to low-skill workers whose schedules are being toggled and joggled at what often feels like the whim of an employer. These are often solo self-employed workers who often would prefer more stability in their work lives.

It may seem obvious that flexible work should be rising: after all, the technology that makes it easier to work from remote locations or that lets a firm coordinate "gig" jobs is getting cheaper and better all the time. But other factors are pushing back against the spread of these alternative jobs.  Mas and Pallais write:

We highlight several factors constraining the growth in gig work, flexible scheduling, and telework. Gig work (including independent contracting and freelancing) as a primary form of employment is likely held back by widely held preferences against irregular schedules and uncertain earnings. The primary benefits of electronically-mediated gig work are its potential to smooth fluctuations in earnings and to enable moonlighting. Regulatory pressure to reclassify independent contractors as regular employees may also limit future growth in these types of alternative arrangements. Temporary staffing has not grown, possibly because it primarily serves to smooth employment around temporary vacancies or meet transitory demand shocks, needs that may not have changed much over time. Flexible work practices may also be constrained by high marginal costs of implementation for two reasons. First, implementing these practices is infeasible in many jobs. Second, team production and coordination may require workers to be in proximity to each other. ... 

Worker preferences for alternative work arrangements may be driven, in part, by how these arrangements impact workers’ careers. Bloom et al. (2015) found that workers randomized to work from home had lower promotion rates conditional on performance. Teleworking employees may have less understanding of office dynamics and so be less prepared for promotions. Alternatively, being away from the office may negatively influence managers’ evaluation of worker performance. In experimental work in psychology, Elsbach et al. (2010) find that “observers interpret passive face time as an indicator of specific traits (e.g., responsibility, dependability, commitment, and dedication), and that the context of passive face time (i.e., whether it occurs during vs outside of normal work hours) is critical to the particular traits that judges assigned to those displaying passive face time.” Kossek and Van Dyne (2008) find possible deleterious effects on careers may be one reason workers do not value flexibility more.

A reasonable takeaway from this literature is that lots of workers would like to have jobs where the hours are more regular, where you know in advance what your hours will be and where you can truly unhook from the job in between those hours. For high-skill workers, the greater flexibility is bought at the price of never being truly off the clock. For lower-skill workers, having an employer pay low wages and then also jack around your hours feels like adding insult to injury.

For high-skill workers, Mas and Pallais point out that this desire for limits on hours is part of what causes more women to end up in part-time jobs. They write: "The literature consistently finds that women take jobs with fewer hours, and lower hour jobs are associated with better work-life balance in all of the dimensions we considered  as well as lower wages.  It appears that women are mostly working shorter hours by choice. In the 2016 CPS, 80 percent  of women in part-time employment report working under 35 hours per week voluntarily." To put this point another way, my suspicion is that many of these women would also be happy with a full-time job that had scheduled hours and hard time limit each week, but they are hesitant about signing up to be perpetually on-cal. 

At the lower skill levels, governments have been experimenting with giving workers more assurance over their hours. As the Boeri et al. team write: "At the federal level in the U.S., there aren’t regulations on time and days of work. However, in many European countries, work is restricted on Sundays, evenings, and during summer months. ... At the state and local level, a number of new laws, starting with San Francisco’s Retail Employee’s Bill of Rights in 2015, provide workers more advanced schedule notice. The rule requires large retailers to post workers’ schedules two weeks in advance and pay additional wages if schedules are changed. Since then, Oregon, New York City, Washington D.C., Chicago, Philadelphia, and Seattle among others have passed similar ordinances which mainly affect large employers in retail, hospitality, and food service."

There is also the question of whether it's possible for alternative, flexible, and gig workers to be eligible for benefits like health insurance, retirement accounts, sick leave, and so on. Results from Boeri et al. suggest that many of these workers would be willing to take lower wages in exchange for such benefits, but setting up such a system isn't trivial.  For example, should such a system be voluntary or mandatory for workers? Should it be run through employers or through outside companies--and if through outside companies, how does it get set up? How would these different choices affect wages. 

Overall, it seems to me that even before the coronavirus pandemic, there was a growing concern over whether the extent of "flexibility" in the labor market was turning out well for workers, and whether there should be some pushback toward encouraging the more traditional model of employer-employee relationships. Many of those who have been able to keep their jobs are getting a major dose of job "flexibility," like it or not. I suspect that among the lasting effects of the pandemic will be some shifts in attitudes in how many people feel about the availability of work-related benefits (health care, sick leave) and how happy they feel about providing flexibility on demand. 

Patents and Competition: Thomas Edison, Xerox, Bell Labs, Medtronic

Patents are a tradeoff: they let an inventor escape direct competition, but only for a limited time and for a specific product, and in this way provide an incentive for innovation and--one hopes--heightened future competition.

But of course, there are prominent cases where firms focused on the ability of patents to limit competition. For example, I wrote last fall about "The Return of the Patent Thicket" (November 22, 2019), describing the historical example of how Xerox  back in the 1960s and 1970s had taken out more than 1,000 patents on various aspects of the photocopy machine. By continually adding new patents as older patents expired, Xerox had made it essentially impossible for others to enter the market--until the antitrust authorities intervened,

I was recently reminded of another attempt to use patents to block competition by Jen Maffessanti in a short article about  "Why the Movie Industry Is Fleeing California" (Foundation for Economic Education website, February 13, 2020). The main focus of the article is about why, in 2017, only 10 of Hollywood's top 100 movies were actually made (mostly) in California, and now more movies from Hollywood studios are (mostly) shot in the state of Georgia or in Canada. But along the way, she offers a reminder of when Thomas Edison tried to use his patent on movie technology to lock up monopoly control over the industry. She writes:

Back at the end of the 19th century, motion pictures were a very new technology, and a handful of people held almost all of the patents related to the filming and screening of said films. Chief among them was Thomas Edison. ... 

Films at the tail-end of the 19th and beginning of the 20th century in America were made almost exclusively on the East Coast—New Jersey, mostly. Films were short, silent, and lacked much of the subtlety and nuance that modern moviegoers have come to expect from cinema. At the time, though, they were cutting-edge and incredibly popular. One could make a very good living running a show house or nickelodeon in any big city. Right up until December 1908, that is.

That’s when Edison spearheaded the creation of the Motion Picture Patents Company (MPPC), generally referred to as the Edison Trust. It was comprised of the holders of all the significant patents related to the production and screening of motion pictures, including Biograph, Vitagraph, American Mutoscope, Kodak, and others.

Edison was widely known for having strong opinions about what kinds of movies should be made, how long they should be, who should be credited in them, and what it should cost to show them. With the control of the patents he himself owned combined with the collective clout of the other members, the MPPC ruled the movie-making industry with an iron fist. They sued those who didn’t comply with their dictates for patent infringement, refused to sell them equipment and film, and, occasionally, sent hired hooligans to wreck up movie sets or show houses.

As Matthew Lasar explained some years back in "Thomas Edison’s plot to hijack the movie industry," Edison had previously engaged in lawfare to pressure others to sell patents related to movies to him.

But the old man wanted it all, so he assembled his rivals and proposed that they join his Motion Picture Patents Company. It would function as a holding operation for the participants' collective patents—sixteen all told, covering projectors, cameras, and film stock. MPPC would issue licenses and collect royalties from movie producers, distributors, and exhibitors.

To top it all off, MPPC convinced the Eastman Kodak company to refuse to sell raw film stock to anyone but Patent Company licensees, a move designed to shut French and German footage out of the country.

Antitrust authorities did move to block Edison after a time. But long story short, a primary reason that the US movie industry ended up in Hollywood was that would-be film-makers and theater-owners were getting as far away from Thomas Edison as they could. For an overview of this and later antitrust issues involve movies, a useful starting pint is "Breaking the Studios: Antitrust and the Motion Picture Industry,"  by Alexandra Gil (NYU Journal of Law and Liberty 2008).

The attempts by Thomas Edison and Xerox to use patents as a way of creating broad and lasting monopolies has a broader implication. The ultimate goal of patents is to not to benefits innovators, but to benefit consumers: the benefits to innovators are just a mechanism for encouraging the inventions that will benefit consumers. Indeed, it used to be a fairly standard antitrust practice from the 1940s up through the 1970s to require that firms  be required to offer a "compulsory license" soo that others could use key patents, often with no royalty payments at all, as a way of encouraging competition.

One of the most famous cases involved a 1956 consent decree signed by Bell Labs to put all of its patents in the public domain. A number of Silicon Valley old-timers were quick to say that the start of the semiconductor industry would not have been possible without those patents becoming available. For a recent discussion of this case, see "How Antitrust Enforcement Can Spur Innovation: Bell Labs and the 1956 Consent Decree," by Martin Watzinger, Thomas A. Fackler, Markus Nagler, and Monika Schnitzer, which is forthcoming in the American Economic Journal: Economic Policy.

Medtronic, a leading maker of many kinds of medical equipment, offered another example yesterday. Medtronic makes ventilators, but yesterday it announced that it is making available the complete blueprints for one of its popular ventilator products, so that others can see if they are in a good position to start making ventilators. My suspicion is that it's not just a good public relations move. If one assumes that lots of ventilators are going to be made and sold in the next few months, and Medtronic knows that it doesn't have the capacity to fill the rising demand, it will be to Medtronic's long-term benefit if many of the new ventilators follow Medtronic designs--and can benefit from Medtronic training and maintenance. Nonetheless, it's a nice example in which a company was able to see beyond the role of intellectual property as just a way of blocking immediate competition.

Is It Getting Harder for Research to Boost Productivity?

New technologies are the beating heart of productivity growth and a rising standard of living. But Nicholas Bloom, Charles I. Jones, John Van Reenen, and Michael Webb ask "Are Are Ideas Getting Harder to Find?" (American Economic Review, April 2020, pp. 1104-44, not freely available online). The fact that the are asking you the question tells you that their answer is a pessimistic one. This economics research article will be tough sledding for the uninitiated, but the heart of their case is made with some graphs suitable for anyone to mull over.

For example, take an overall look at the US economy, considering the number of researchers and productivity growth. You find that the number of researchers grows by multiples, but productivity growth rises and falls by small amounts. The inference is that it's taking a lot more researchers just to keep productivity growth at the same level.

For a specific example, consider Moore's law, the notion that the density of semiconductors on a computer chip will double every two years or so. Moore's law turned 50 a few years ago, and as I noted at the time, it's been getting more and more expensive and difficult to keep doubling the density of chips. As Bloom, Jones, van Reenen and Webb write: "In particular, the number of researchers required to double chip density today is more than 18 times larger than the number required in the early 1970s. At least as far as semiconductors are concerned, ideas are getting harder to find. Research productivity in this case is declining sharply, at a rate of 7 percent per year."

Or how about agricultural crop yields? The green lines show the number of researchers, rising; the blue line shows agricultural productivity growth, falling.

Or how about inventions of new drugs? The authors write:

New molecular entities (NMEs) are novel compounds that form the basis of new drugs. Historically, the number of NMEs approved by the Food and Drug Administration each year shows little or no trend, while the number of dollars spent on pharmaceutical research has grown dramatically ... We reexamine this fact ... The result is that research effort rises by a factor of 9, while research productivity falls by a factor of 11 by 2007 before rising in recent years so that the overall decline by 2014 is a factor of 5.

Or how about reductions in cancer? Yes, death rates for cancer are falling, but research into fighting cancer has been rising quite rapidly. As a result, it seems to be taking more and more research publications about cancer and more and more clinical trials to reduce cancer deaths by an equivalent amount.

Based on these and other examples, the authors write: "[J]ust to sustain constant growth in GDP per person, the United States must double the amount of research effort every 13 years to offset the increased difficulty of finding new ideas."

In the fashion of honest academics, the authors note in a number of places and in a number of ways that examples like these don't prove conclusively that it's becoming more costly to find ideas and harder for research to boost productivity. For example:

• Perhaps the measured growth of GDP doesn't capture many of the gains that are happening, like free or zero-marginal-cost access to so many goods and services over the internet. 
• Perhaps  there are other examples measures of the gains from research would be rising, not falling. 
• Perhaps Moore's law is a bad example, because it involves running into physical  limits, and thus isn't representative of other research efforts. 
• Perhaps we are doing fine at discovering new ideas, but our economy is doing a poor job of turning these ideas into commercial products and at diffusing the ideas and products across a wide spectrum of industries and companies. 
• Perhaps the shift away from "basic research" funded by governments and toward applied research largely funded by companies has reduced the number of big new ideas. 
• Perhaps more firms are using intellectual property as a defensive technique for warding off competition rather than as a method of moving forward with productivity gains. 
• Overall US R&D spending has been pretty flat for several decades at about 2.5% of GDP, and maybe that's the measure of "research" on which we should be focusing.
• Perhaps there is some technology threshold for technologies like artificial intelligence, such that once that threshold is reached, very large productivity gains will then be possible, but we just haven't hit the threshold yet.   

You can probably add some possibilities to this list. But the weight of the argument from Bloom, Jones, van Reenen and Webb is that if we want technology and new ideas to ride to our rescue in a variety of areas--productivity growth, reducing pollution, improving health care and education, and many others--we need to step up our efforts considerably.

CBO: GDP Falls 7%, Unemployment Hits 10% in Second Quarter 2020

Phillip Swagel, Director of the Congressional Budget Office, blogs on "Updating CBO’s Economic Forecast to Account for the Pandemic" (April 2, 2020)

The following are CBO’s very preliminary estimates, which are based on information about the economy that was available through this morning and which include the effects of an economic boost from recently enacted legislation.

Gross domestic product is expected to decline by more than 7 percent during the second quarter. If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however.

The unemployment rate is expected to exceed 10 percent during the second quarter, in part reflecting the 3.3 million new unemployment insurance claims reported on March 26 and the 6.6 million new claims reported this morning. (The number of new claims was about 10 times larger this morning than it had been in any single week during the recession from 2007 to 2009.)

Urbanization: Glaeser's Presidential Address to the Eastern Economic Association

Urban areas have traditionally been engines of prosperity and social mobility. But the technologies driving changes in urban structure and the ways in which government responds to these changes has evolved  over time. Edward L. Glaeser prepared the Presidential Address for the Eastern Economic Association on "Urbanization and Its Discontents" (Eastern Economic Journal, April 2020, 46:191–21). It's also available as NBER Working Paper # 26839. (Both links require a subscription, which most academic libraries will have.)

Glaeser offers a brief reminder of past urban patterns:

Urban fortunes are shaped by technological change. During some periods, technological shifts are largely centripetal, meaning that they pull people toward cities. During other eras, technological trends are centrifugal, meaning that they push people away from dense urban cores.

The nineteenth century was predominantly a centripetal century, marked by series of innovations, including steam engines, streetcars and skyscrapers, that abetted urban growth. The first 60 years of the twentieth century was largely a centrifugal era, largely because technological change reduced the tyranny of distance. Cheaper shipping costs, from highways, cheaper railroads and containerization,
allowed far-flung people to participate more fully in the global economy (Glaeser and Kolhase 2004). Radio and television enabled the rural population to enjoy previously entertainment.

These lower costs reduced the need to locate production near the urban ports and railroads that once anchored all of America’s cities. The mass-produced automobile enabled low density mobility and the rise of car-oriented suburbs (Baum-Snow 2007). These centrifugal technologies first slowed the rise of American cities and then enabled a mass exodus from urban America. The air conditioner made America’s warmer places far more appealing than they had been before World War II, and a move to sun accompanied the move to sprawl. Urban social problems, especially weak schools and crime, were exacerbated by suburbanization and then further encouraged the move to the suburbs and to lower density Sunbelt cities.

However, the last four decades or so have seen a resurgence of many urban areas, based in large part on a rise in the economic importance of proximity. Glaeser explains:

The industrial jobs that had once been the backbone of urban economies did not return. Instead, human capital-intensive business services became the new export industries for urban areas. Financial services expanded enormously in urban America from 1980 to 2007. At its height in 2007, finance and insurance generated over forty percent of the total payroll on the island of Manhattan. The urban edge in transferring knowledge is particularly valuable in finance, because a bit of extra information can make millions for a trader in minutes.

Face-to-face contact is often part of the delivery mechanism for urban services. Clients like to meet their accountants, bankers, lawyers and management consultants in person. Face-to-face contact is even more imperative for barbers and manicurists. Urban interactions enable young workers to become more skilled. ... 

Why didn’t improvements in electronic communication make face-to-face contact obsolete? While e-mail is possible almost everywhere, face-to-face interactions generate a richer information flow that includes body language, intonation and facial expression. As the world became more complex, the value of intense communication also increases. Physical immersion in an informationally intense environment, such as trading floor or an academic seminar, generates a rush of information that is hard to duplicate online. Moreover, dense environments facilitate random personal interactions that can create serendipitous flows of knowledge and collaborative creativity. The knowledge-intensive nature of the urban resurgence helps to explain why educated cities have done much better than uneducated cities. ..

While highly educated workers moved into professional and business services, successful cities also generated employment for less skilled workers in other parts of the service economy. Many workers switched from manufacturing to wholesale and retail trade during the 1990s. Hospitality and food services also expanded dramatically after 1980. Employment in these service industries depends on the demand generated by the success of more export-oriented services, like finance. In areas that lack viable export industries, the dominant sector is typically healthcare and social assistance, where demand is maintained by Federal transfers.

Cities also came back as places of consumption as well as places of production (Glaeser et al. 2001), which partially reflects the rise in returns to skill. As Americans became better educated and as educated people came to earn more, they spent more on higher-end urban pleasures, such as fine dining, art galleries and expensive retail. Young people increasingly lived in cities, even as they worked in suburbs. Prices rose dramatically in urban cores and remained flat in the suburbs.

This description also helps to what is being lost by the pandemic-induced recession. Yes, some workers can do many basic parts of their jobs from home, and students can do some work with online courses. But the "richer information flow" of "face-to-face interactions" in both production and consumption is being lost for a time, and while the network of such interactions can certainly be rebuilt, it doesn't flip on and off like a light switch.

The resurgence of many cities has also brought with it a new group of problems, as Glaeser details.

One change is that cities do not seem to be functioning as ladders of opportunity. It may be that the extent of social and ethnic segregation--in terms of who you have significant interactions with on a typical day--can be higher in urban areas. Schools in urban core areas have often not recovered from their declines back in the 1970s. Glaeser writes: "It is a great paradox that cities appear to be forges of human capital for adults, but places where children seem to learn less productive knowledge."

Cities are also places of growing income inequality. Skilled workers in a large city or a downtown typically earn more than workers of similar skill outside those locations, but unskilled workers often do not have a similar pay boost from working in a city or downtown area.

Part of the issue may be government regulation of lower-skilled entrepreneurs. As Glaeser trenchantly notes:

Somewhat oddly, much of America appears to regulate low human capital entrepreneurship much more tightly than it regulates high human capital entrepreneurs. When Mark Zuckerberg started Facebook in his Harvard College dormitory, he faced few regulatory hurdles. If he had been trying to start a bodega that sold milk products three miles away, he would have needed more than ten permits. One question is whether the inequality that persists in America’s system is exacerbated by the legal and regulatory system.

And of course, the extremely high cost of housing in a number of economically strong urban areas makes it very hard for the middle-class, let alone those with lower skill levels, to pay the rent. Glaeser says:

For much of the post-war period, many urbanites could find housing that cost substantially less than construction costs even in successful cities (Glaeser and Gyourko 2005a). Housing depreciates, like cars and clothing, and so poorer urbanites could find older apartments in less fashionable neighborhoods that cost less. Filtering models predict that neighborhoods go through transitions, and that the rich would live in a newer, nicer areas but the poor occupy older, more dilapidated areas. The rich vacate areas as they depreciate and then move to a new area that had been built with higher-quality housing. Apparently, this model appears to have broken down after 1970, probably because of regulation and increased neighborhood opposition to redevelopment.

There is a persistent theme in American culture of moving to the big city, finding a low-level job, and working your way up. But US cities have become places where it's more costly to move in because the rent looks unthinkably high, and harder to find that low-skilled job, and then harder to move up unless you develop a high skill level. Add traffic congestion, and concerns about poor schools and crime, and moving to the big city doesn't look so attractive.

Glaeser argues that today's urban problems often reflect poor performance by local governments, who when it comes to housing markets, labor issues, schools, and other areas, have in recent decades often focused on blocking change or supporting insider groups. He writes:

Why has urban success been accompanied by so much discontent? The most natural explanation is that the success of private enterprise in cities has not been accompanied by sufficient development of public capacity. The public sector has often focused on limiting urban change, rather than working to improve the urban experience. In many cases, this focus reflects the political priorities of empowered insiders. ... There are many good things about citizen empowerment, but the most empowered citizens tend to be longer-term residents with more resources. Those citizens do not internalize the interests of people who live elsewhere and would want to come to the city. Consequently, their political actions are more likely to exclude than to embrace.

Aging, the Demographic Transition, and the Necessary Adjustments

David E. Bloom has been thinking a lot about aging. Last fall he edited Live Long and Prosper? The
Economics of Ageing Populations, a free ebook with 20 short essays summarizing a range of research on the topic (October 2019, VoxEU.org, registration required). Then Bloom contributed the lead article, "Population 2020: Demographics can be a potent driver of the pace and process of economic development," in the most recent issue of Finance & Development (March 2020, pp. 4-9).  At the moment, of course, a primary concern is that older people may be more vulnerable to the spread of COVID-19. But more broadly, a shift in the distribution of ages across society will have broad consequences for social institutions and government policies.

Here's a figure from Andrew Scott, in his F&D essay "The Long, Good Life," which gives as sense of the shift. The horizontal axis of the figure shows the expansion of population over time. The vertical axis shows the shift in aging. Thus, the shaded area for 1950 is narrower (fewer people) and more pointed near the top (fewer older people). The time periods that follow get wider (more people) and also develop "shoulders," representing a population where more people stay older for longer.



Bloom explains the underlying patterns, including the "demographic transition" and the graying population, in his F&D essay:

In many developing economies, population growth has been associated with a phenomenon known as the “demographic transition”—the movement from high to low death rates followed by a corresponding movement in birth rates.

For most of human history, the average person lived about 30 years. But between 1950 and 2020, life expectancy increased from 46 to 73 years, and it is projected to increase by another four years by 2050. Moreover, by 2050, life expectancy is projected to exceed 80 years in at least 91 countries and territories that will then be home to 39 percent of the world's population. ... Cross-country convergence in life expectancy continues to be strong. For example, the life expectancy gap between Africa and North America was 32 years in 1950 and 24 years in 2000; it is 16 years today. ...

In the 1950s and 1960s, the average woman had roughly five children over the course of her childbearing years. Today, the average woman has somewhat fewer than 2.5 children. This presumably reflects the growing cost of child-rearing (including opportunity cost, as reflected mainly in women’s wages), increased access to effective contraception, and perhaps also growing income insecurity. ... Between 1970 and 2020, the fertility rate declined in every country in the world. ... 

If the population’s age structure is sufficiently weighted toward those in prime childbearing years, even a fertility rate of 2.1 can translate into positive population growth in the short and medium term, because low fertility per woman is more than offset by the number of women having children. This feature of population dynamics is known as population momentum and helps explain (along with migration) why the populations of 69 countries and territories are currently growing even though their fertility rates are below 2.1.

The result of this demographic transition is a population with a rising number and share of elderly. Bloom writes:

Population aging is the dominant demographic trend of the twenty-first century—a reflection of increasing longevity, declining fertility, and the progression of large cohorts to older ages. Never before have such large numbers of people reached ages 65+ (the conventional old-age threshold). We expect to add 1 billion older individuals in the next three to four decades, atop the more than 700 million older people we have today. Among the older population, the group aged 85+ is growing especially fast and is projected to surpass half a billion in the next 80 years. This trend is significant because the needs and capacities of the 85+ crowd tend to differ significantly from those of 65-to-84-year-olds.

Although every country in the world will experience population aging, differences in the progression of this phenomenon will be considerable. Japan is currently the world leader, with 28 percent of its population 65 and over, triple the world average. By 2050, 29 countries and territories will have larger elder shares than Japan has today. In fact, the Republic of Korea’s elder share will eventually overtake Japan’s, reaching the historically unprecedented level of 38.1 percent. Japan’s median age (48.4) is also currently the highest of any country and more than twice that of Africa (19.7). But by 2050, Korea (median age 56.5 in 2050) is also expected to overtake Japan on that metric (54.7).

Three decades ago,the world was populated by more than three times as many adolescents and young adults (15- to 24-year-olds) as older people. Three decades from now, those age groups will be roughly on par.

I won't try here to summarize all the discussions in the F&D and the ebook. Instead, I'll just list the tables of contents below. But here are a few thoughts: 

• Consider your mental picture of an extended family gathering. Maybe it's a holiday with grandparents, parents, and children. Maybe it's a family reunion with a larger group of aunts, uncles, and cousins. Now in thinking about that family reunion, think about it  being much more common to including five generations: that is, from great-great-grandparents down to children. In addition, think about there being fewer people in each generation, as a result of fewer children. The "family tree" is going to look taller and skinnier.  
• As we shift from (in Bloom's calculation) a world where there are three times as many young people as elderly to a world where those populations are equal, public institutions will also shift to meet the needs of the elderly. The design of parks, libraries, public transit, city streets, shopping malls, and much more will evolve to reflect more emphasis on the needs and desires of the elderly. On the other side, schools and education will be a shrinking part of what government does. 
• Caring for the elderly who need a range of support from an occasional in-home visit to living in a full-care institution is going to be a growth industry, needing both additional workers and technological innovations. This will be especially true as the number of extremely elderly people rises--often defined now as those over 85, but in the future perhaps defined as those over 100. In addition, the elderly will have had fewer children, and thus are less likely to have access to within-family support. 
• It will be important for the workplace to shift in ways that provide jobs with the flexibility and interest to appeal to at least the "young elderly," who might otherwise just choose to retire completely.  
• Government spending on programs to support the elderly, including pensions and health care, are going to rise dramatically in size.
• All over the world, including the US, it's time to start phasing back the age of retirement at which people become eligible for pension plans. Exactly how that is done, and what kind of flexibility is available for retiring earlier or later, is open for discussion. But an expectation that retirement ages will in general be later is a fundamental step in making government-provided social security or pensions sustainable in the long run.
• Older people tend to save less, as they draw down their retirement accounts, but also to look for less risky and volatile investments (more bonds, less stock market).
• Keeping older people healthy and functioning later in life will be an urgent need, both for the people themselves and also to reduce the need for outside support. 

Following Bloom's lead-off essay, other essays on this topic in the March 2020 F&D include: 

• Andrew Scott, "The Long, Good Life: Longer, more productive lives will mean big changes to the old rules of aging: 
• Poh Lin Tan, "Reversing Demographic Decline: Singapore’s experience in trying to raise its fertility rate offers lessons for other countries "
• Lawrence H. Summers, "Accepting the reality of secular stagnation: New approaches are needed to deal with sluggish growth"
• Gee Hee Hong and Todd Schneider, "Japan's Shrinkonomics: Japan is the world’s policy laboratory for dealing with an aging, shrinking population"
• Maria Petrakis, "Eastern Europe’s Exodus: In Europe’s newest states, emigration compounds the problem of aging populations" 
• Giovanni Peri,: Immigrant Swan Song: Immigration can solve the demographic dilemma— but not without the right policies"" 
• David Amaglobeli, Era Dabla-Norris, and Vitor Gaspar, "Getting Older but Not Poorer: As societies age worldwide, pensions and public policies must adapt"

In the e-book, the Table of Contents is:

1) "The what, so what, and now what of population ageing," by David E. Bloom

Part I: Implications of Population Ageing: The 'So What'

2) "Who will care for all the old people?" by Finn Kydland and Nick Pretnar
3) "Employment and the health burden on informal caregivers of the elderly," by Jan M. Bauer and Alfonso Sousa-Poza
4) "Ageing in global perspective," by Laurence J. Kotlikoff
5) "What do older workers want?" by Nicole Maestas and Michael Jetsupphasuk
6) "The flip side of "live long and prosper": Noncommunicable diseases in the OECD and their macroeconomic impact," by David E. Bloom, Simiao Chen, Michael Kuhn and Klaus Prettner
7) "Macroeconomic effects of ageing and healthcare policy in the United States," by Juan Carlos Conesa, Timothy J. Kehoe, Vegard M. Nygaard and Gajendran Raveendranathan
8) "Global demographic changes and international capital flows," by Weifeng Liu and Warwick J. McKibbin
9) "Ageing into risk aversion? Implications of population ageing for the willingness to take risks," by Margaret A. McConnell and Uwe Sunde
10) "Life cycle origins of pre-retirement financial status: Insights from birth cohort data," by
Mark McGovern
11) "A longevity dividend versus an ageing society," by Andrew Scott

Part II: Solutions and Policies: The 'Now What'

12) "Understanding 'value for money' in healthy ageing," by Karen Eggleston
13) "Healthy population ageing depends on investment in early childhood learning and development," by Elizabeth Geelhoed, Phoebe George, Kim Clark and Kenneth Strahan
14) "Financing health services for the Indian elderly: Aayushman Bharat and beyond," by Ajay Mahal and Sanjay K. Mohanty
15) "Cutting Medicare beneficiaries in on savings from managed healthcare in Medicare," by Thomas G. McGuire
16) "Macroeconomics and policies in ageing societies,"by Andrew Mason, Sang-Hyop Lee, Ronald Lee and Gretchen Donehower
17) "Population ageing and tax system efficiency," by John Laitner and Dan Silverman
18) "Means-tested public pensions: Designs and impact for an ageing demographic," by George Kudrna and John Piggott
19) "Pension reform in Europe," by Axel Börsch-Supan
20) "Happiness at old ages: How to promote health and reduce the societal costs of ageing," by Maddalena Ferranna

An Economist's First Tryst with Benefit-Cost Analysis

Célestin Monga has had an eminent career as a research economist at the World Bank, as Managing Director of the UN Industrial Development Organization, as Chief Economist and vice-president at the the African Development Bank, and now as a Senior Economic Adviser at the World Bank. Here, he tells of that intimate special moment in the life of any economist--that first encounter with cost-benefit analysis. 

(I'm quoting here from Monga's "Comment" (pp. 77-94) in response to an essay by Amartya Sen from The State of Economics, The State of the World, published in 2019 by MIT Press.)  

I still remember vividly the strange mix of excitement and bewilderment that overwhelmed me in my high school years when our professor of accounting taught us the fundamentals of benefit-cost analysis. I immediately went to my dormitory and spent most of the evening trying to apply this powerful technique, not to assess whether the advantages of a hypothetical investment project were likely to outweigh its drawbacks, but to evaluate my own life prospects. Benefit-cost analysis seemed like a rigorous and revealing tool to examine whether my minuscule and uncertain existence was a "profitable" venture, or at least a worthwhile escapade that deserved to be continued. Of course, the few friends to whom I confided this found it a ludicrous idea. ... They were right: ... But so what? I kept running the numbers. ... 

I also had to decide how to imagine and estimate the prospective benefits and costs of my entire life to come. Using my own personal value scale, I calculated the costs as the amount of compensation required to exactly offset negative consequences of being alive for 50 or so years of life expectancy ahead. The compensation was the monetary amount required that would leave me just as well off as before engaging in this exercise. Benefits were measured by my willingness  to stay alive and enjoy all the things and emotions that I could reasonably expect for the decades ahead. Knowing that, in the end, life always results in death, typically following either an abrupt and tragic event like a car or airplane crash, or a long and painful illness, I could not find many benefits show present and expected value could match and compensate for the pains and disappointments of the costs. The results of my benefit-cost analysis were not very promising: Taking into consideration all current and expected streams of good and bad news, life did not appear to be a "profitable" investment. 

Shocked by the outcomes, I quick did some sensitivity analysis to check the robustness of my findings: No  matter what discount rates I chose, the calculations still yielded disappointing numbers to the question of whether life was a worthwhile venture. This was all the more puzzling because I actually loved many aspects of my life. Not knowing what to do with the analyses, I concluded one should either doubt the validity of certain measurement instruments or our ability to use them "objectively," or radically give more weight to whatever we define as "positive" outcomes for our actions or inactions, or accept the very probable hypothesis that happiness may be an illusion but those who choose to live should learn to ignore its downsides. I could only forget the outcomes of my own study by learning to radically change whatever assumptions I used in carrying it out. "Live is impossible without the ability to forget," philosopher Emil Cioran once said. But some memories are just to long-lasting to ever be erased. 

Monga's reminisce serves as a reminder of teenage feelings about the world. It also illustrates that although benefit-cost analysis has a useful place in comparing certain limited sets of choices, the method does not contain solutions to the mysteries of life. However, if you are a young person who finds yourself tempted to carry out a benefit-cost analysis of your own life, you may wish to consider seriously a career as an economist.