'Thousands seek Alberta jobs at St. John's fair'

I don't have time to comment on this, but I wanted to share the most exciting news I've stumbled across in a while.

From the CBC:

Thousands of job seekers packed into a modest St. John's hotel Monday, overwhelming Alberta employers who had come east on a recruiting mission. Prospective employees lined up for hours outside the Capital hotel on Kenmount Road, with cars parked along the nearby Team Gushue Highway. Inside, employers said they were deluged with resumes.

"It's been like a zoo," said Dominic House, a recruiter with oil giant Syncrude, whose
perks included a $20,000 moving bonus to Fort McMurray and two months of free
housing.

"They're lined up all around the building and up on top of the hill. It's absolutely amazing."

Estimates of attendance ran as high as 5,000.

Now that's good news (with no subsidies required, I might add). I'm looking forward to seeing how this evolves.

How to win the lottery

I have a dream. It starts with a job in the service industry, and it ends with a sophisticated drink on a stretch of beach. Apparently a suspicious number of retailers and clerks are winning lotteries in Ontario.

Excerpt from the CBC:

The Fifth Estate reported that retailers in Ontario won large prizes nearly 200 times in the past seven years. There are roughly 60,000 lottery ticket sellers in Ontario.

A University of Toronto statistician, who crunched the numbers for the television show, said the chance of retailers winning that often is "about one chance in a trillion, trillion, trillion, trillion," and estimated the number of wins should be closer to 57.

Ha! How do you like them statistics? As ombudsman André Marin is quoted as saying, perhaps the lottery is not so much a game of luck as it is a game of trust.

Oil profits and the binary equation

Should Alberta emulate Norway?

It's been said that no two OECD regions are as comparable as Alberta and Norway. A week ago, Globe and Mail correspondent Doug Saunders forwarded the idea that Alberta should look to Norway for ideas on what to do with its oil profits (subscription required).

Doug reports that Norway's politicians are in disagreement. They're debating whether to save (so that future generations can enjoy today's oil profits), or whether to invest in infrastructure. Those are the two big choices at the table, says Doug. Currently, Norway's government is saving heavily. Should Alberta emulate Norway?

Norway and Alberta share many attributes, but a couple things strike me about Norway: its investment into R&D and its investment in human capital. I've read three articles on the Norway-Alberta comparison lately, none of which give lip service to R&D or investment into human capital. What's going on?

I was eager to gain Doug's insight, since he's sojourning in Norway right now and knows more about this than I do. Here's his response:

I hope I didn't create the impression that this is a strictly binary equation. This is the impression that Norway's political parties, particularly the far-right Progress Party, are trying to create. But even they are not talking about spending all the oil revenue. Quite the contrary: they'd raise the spend-it-now level from the current average of 4 per cent per year to some higher level -- maybe 15 or 20 per cent. This is fiscally unsound in an economy that has 2.5 per cent unemployment and a very overheated currency, but it's what they want.

On the other hand, the left-wing coalition government isn't just investing it internationally. A lot of it does end up spent on things like R&D. Norway is actually a success story, by Northern European standards, in this area. It has superb research universities, and a high-tech economy that is doing extremely well. I've seen figures that show Norway's R&D investment to be among the highest in Europe. Now, there are areas for improvement: People say that it's very hard to start a small business, and that the benefits tend to flow to larger firms (a Europe-wide problem).

But Alberta certainly could learn from Norway in the area you mention: It could use some of its money to create top-class universities. Norway has the highest rate of university-degree completion in Europe (and probably in the world), and the world's highest educational attainment in general. This certainly helps during economic bust times: People are educated enough to find employment elsewhere or to start companies. It's a model worth emulating.

Surely the public realizes the benefit of returns to R&D and human capital just as well as Doug does, but there's no harm in repeating the fact that Alberta's options extend far beyond any spend-vs-save 'binary equation' would suggest. I wish this notion would arise more in mainstream discussions.

Back next week!

I received some very nice emails since I announced my break from blogging. I don't know where you all came from, but I'm convinced that none of the messages I received are the product of a prank (although, my friends are certainly of the type...) . Thank you kindly.

I thought it was only fair that I post a quick note: I'll be back next week. Please return!
I am not about to pull a Captain Oates.*

* Note to those who don't subscribe to Quote of The Day for whatever bizarre reason: Captain Lawrence Oates' last words were, "I am just going outside and may be some time." Oates never came back.

Hiatus

This blog is going on a bit of a hiatus. My schedule has become more hectic and I'm finding it a challenge to throw anything creative or interesting up here. Until that changes, there won't be any new content here. Thanks to everyone who reads this blog.

The economics of blogging

What is the worth of a hobbyists' blog? The benefits derived from such a blog seem to be related mostly to utility. The cost, one might argue, is the productivity that would otherwise be created if the blogger weren't blogging.

First, there are a billion ways that blogging could raise an individual's utility. Ben Casnocha does a fantastic job expressing one such way (h/t Marginal Revolution).

...I recently had a great solo dinner in Rome. I had a terrific companion (newspaper) and good food. About 1/4 of the way through this thought crossed my mind: "This is an awesome meal. I'm going to blog it." I did. I was committed in my mind to making it a positive night overall, and it did end up that way. In sum: when I know I'm going to blog an experience, I'm committed to making it a positive experience, and since intention and reaction mostly define the quality of an experience, it usually turns out positive. True, I could always commit to having positive days each day, but knowing I will blog something introduces a weird form of "public accountability.

For whatever reason, blogging satisfies an individual's demands when no substitutes exist. Blogging raises my utility because it helps me connect my work life with my school life in the least damaging environment. My work requires me to do cursory research on current events, while my studies require me to gain a rigorous understanding of economic principles and theory. In my experience, the two don't often welcome each other. In the blogosphere I can force principle and practice to unite, which gives me the satisfactory feeling that I'm in control of my own learning experience outside of the institutions I belong to.

What are the costs associated with blogging? The nonpecuniary cost of maintaining a blog can be reasonable when the opportunity cost is small. Ninety per cent of the posts on this blog are written during the thirty minutes or so that it takes me to cool off from a morning run. In the time I spend blogging, few things in the world are better companions than my laptop, my coffee and my Shreddies (none of these things will hold my sweat and smell against me). When the opportunity cost is low to reasonable, a blogger needn't necessarily be an unproductive member of society.

Also, the nonpecuniary cost can also be affordable when the effort that it takes to produce a blog is reasonable. The effort extended to maintain this blog is (for the most part) already sunk. Since 80 per cent of the content on this blog involves material that I've researched or learned about for work or school, the marginal cost of producing each post is mostly just the effort that it takes me to reflect on what I have already read, heard, seen or studied.

While the benefits to blogging might not outweigh the costs for everyone, the net result is surely highly dependent on the blogger. This is an interesting area that I wish would be explored more. Questions lurking in my mind: Why do the Japanese have the highest propensity to blog? Further, why do Americans have a higher propensity to blog than Canadians? Is the net cost significant?

A case for income trusts

When BCE joined Telus in its decision to convert to income trusts, people became skeptical, including Marc Lee over at the REP blog. Marc invited his readers come up with reasons why income trusts might have economic benefits. I couldn't resist taking the bait.

In defence of income trusts:

1. Income trusts allow firms to maximize profits because they encourage the convergence of objectives held by management and ownership. In other words, income trusts increase the likelihood that management will act as profit maximizers rather than risk averse agents.

This point hadn't occurred to me until I came across it in The Globe and Mail.

What started as a way for small companies to cut their tax bills has become something else — a tool for shareholders to reclaim some of the discretion that once belonged almost exclusively to CEOs and directors, and at the same time address one of their deepest concerns: a lack of faith in corporate executives to spend their excess cash wisely.
Trust conversions, in other words, may come to represent one of the biggest power shifts between investors and management that Canada has witnessed in a generation.

2. This point is related to the last. As management begins to make profit-maximizing decisions, the nation as a whole should benefit. Productivity and returns should be expected to increase over time.

3. Detractors of income trusts argue that income trusts will erode the tax base. Perhaps this concern is inflated, considering that the majority of provinces are currently running a surplus.

4. Income trusts have offered an attractive payout to investors and also to the securities industry. Canadians investing in income trusts are bringing in a nice profit. Large firms simply are not the only ones profiting.

5. Evidence from The Bank of Canada shows that income trusts may enhance financial market completeness "by providing diversification benefits to investors and a source of financing to firms that might not otherwise have had access to markets.” Although the BoC suggests that income trusts are not without faults (eg. liability and lack of transparency), their report implies that these problems can be corrected.

The bottom line is that Canadian firms are feeling over-taxed and income trusts are the upshot of this. To be honest, I still haven't completely formed an opinion; however, I don't think the benefits I've cited are really so minor. I'm not ready to write off income trusts just yet.

Efficiency vs. Equity: Maine and NB

As reported in The Globe and Mail last week, and addressed by Greg Mankiw earlier, two economists have published a paper that compares the extraordinary employment gap between Maine and New Brunswick.

If you provide very generous unemployment insurance, you may end up with more long-term unemployment. That's what economists Peter Kuhn and Chris Riddell find when they compare the long-term impact of a highly generous unemployment insurance (UI) program in the Canadian province of New Brunswick with the more modest UI program in the neighboring state of Maine. In Maine's northernmost countries, about 6.1 percent of employed men worked fewer than 26 weeks (half a year) in 1990. Across the Saint Croix River in New Brunswick, the comparative figure was more than three times as high, 20.8 percent. The more-generous UI program in New Brunswick accounts for about two-thirds of this difference, the authors estimate.

The central message from this study is difficult to argue with: the design of a UI program has a major affect on disincentives to work. It's easy enough to question whether Riddell and Kuhn held all the right factors constant (political and social institutions, taxing policies, nature of industries etc etc). I won't address these here. Further, for the most part, many such concerns seem to be unimportant to the undeniably strong central message.

I have just two comments.

The first is in response to the comments expressed on Greg Mankiw's blog. Several people forwarded the opinion that there is a trade off between equity and efficiency. This annoys me.

A well-designed UI program that promotes efficiency and productivity is promoting equity. Equity has many definitions, but my favorite is this: “a career of hard and responsible work should earn a higher pension than one of slacking or routine casual work.” Thus, equity, according to my favorite definition, encourages efficiency if we assume that individuals are rational and would prefer to earn a higher wage.

In relation to Riddell and Kuhn's findings, I would argue that even a well-designed UI program is destined to produce a poor efficiency and equity outcome in an economically challenged region like N.B. If we accept Okun's Law, it takes 2.5% points of growth above the trend growth rate (which, in N.B., averages 2.25 per cent in the annual real rate over the past five years up to 2005) to lower unemployment by one per cent. With this in mind, efficiency and equity without the promotion of migration is a high goal to set. I don't see how 35,000 unemployed in a labour force of 385,000 in an inviable province signals otherwise. Can equity be achieved in New Brunswick? Well, not through endless ill-efficient subsidization. In sum, the efficiency-equity tradeoff has little grounds.

My second point is this: to what extent does path dependency have an affect on the figures that Riddell and Kuhn arrive at? To explore path dependency, consider the ways that the unproductiveness of the New Brunswick labour force is self-perpetuating. For example, in the time period that members of the New Brunswick labour force are unemployed, their unproductiveness is increasing. Further, the attractiveness of New Brunswick to businesses seeking to establish themselves is decreasing. What is the effect? If such historic trends matter, it must be the case that the 2.5 percentage points of growth necessary (above a declining trend growth rate to put a damper on unemployment by one percentage) is facing upward pressure. How can this not be the case when employment is drastically subsidized, the labour force is decreasing, and the ratio of unemployed to employed is increasing?

A third and a fourth point have popped into mind, but I'll exercise will power and pursue something more productive. This is such a rich subject that I could rant on it forever (at the full risk of contributing nothing new, I might add).

Random observations

There's a heated debate going on right now at Wikipedia. No one can agree on a definition for “Classical Liberalism.” Further, they can't agree on whether to merge Liberalism with Classical Liberalism. Here's a sample:

I'm leaving Classic Liberalism separate just in case the socialists try and destroy Classical Liberalism like they did the liberalism page. - Gibby

Why those rotten socialists. I know, vandalism of the Wiki is a disgrace to the commons, but this is an interesting episode.

Second random observation:

Everyone in economics circles has by now read half a dozen articles about Edmund Phelps winning the Nobel Prize in Economics. This gives me the excuse to move off the topic of economics and point to a splendid post by Ars Mathematica about the Nobel Prize in Physics.

Canada-Chile FTA: 'Discouraging?'

Is the The Canada-Chile Free Trade Agreement (CCFTA) a flop? Christina Campbell, a contributor to Canadian Business magazine, says the CCFTA “has some discouraging lessons to offer would-be bilateralists.”

Detractors of the CCFTA have their reasons. Some focus on the fact that exports haven't received a major boost since the agreement was signed. Others say that Chile's collection of bi-lateral agreements makes the CCFTA meaningless, or that Chile simply isn't large of an economy to make an impact on Canada.

Others say the treaty meets its objective. This is a minority view in the CB article (although, for what it's worth, I have a suspicion that a technical glitch is preventing readers from viewing the final portion of the on-line article).

Christina Campbell, Canadian Business magazine:

If there are voices in favour of the CCFTA, they speak toward the guarantees the accord provides to Canada's investments in Chile, particularly in the mining sector. "It eliminates a lot of the uncertainty that would otherwise be there," says Scotiabank's James Callahan, who also heads the Chile-Canada Chamber of Commerce. The turbulence of Chilean politics--starting with the leftist Allende regime of the early 1970s that nationalized many foreign companies, followed by the unsavoury Pinochet military dictatorship--left lasting uncertainties about the country's dependability. Dymond says concerns about Canadian mining investments ($6 billion at last count) were the real motivation behind the CCFTA. "It's not really a trade agreement at all," he says. "It's an investment agreement."

"The success story of FTA is in investment," says Sylvain Fabi. According to him, Canadian investments in Chile have nearly doubled since the CCFTA was introduced. Fabi still holds out hope for Canadian exports. "We believe the agreement is still underused," he says. "We still have work to do in conveying to Canadian business the opportunities in Chile." To help foster this trade, embellishments to the agreement are still taking place. A chapter on government procurement is waiting to be ratified and discussions have started on a financial services agreement.

According to DFAIT's Web site, “investment has increased to a total of $5.69 billion, making Canada the third-largest investor in Chile.” I wonder if this figure speaks for Canada's motives.

Another argument is that the “failure” of the CCFTA in the trade arena could really be a reflection of a strong dollar and other economic conditions.

I'll admit to not knowing a lot about the historic success and failure of Canada's bilateral agreements, but the Chile-Canada example seems to say a couple things. First, the impact of a bilateral agreement isn't simple to isolate. Second, if Chile's lack of demand for Canadian exports is really a disappointment, perhaps our expectations were too high. What did we expect?

Mental 'backward screening algorithms'

I once asked a diligent news editor how he organizes his information. He gestured his hand across a seemingly unkempt office with bountiful stacks of papers and, worse yet, stacked open books (The poor spines! Doesn't he know a book cannot live without one!). “This is how,” he said (unembarrassed, I might add). There must be a better way.

I'm always interested in learning how others organize their information. How does an individual read all of those papers, blog entries, news articles, etc etc, and remember them three months later? The substance is easily left to be forgotten when it holds nothing of great significance to the reader, but then there always arises some piece of knowledge that would fit oh so nicely with that tidbit from three months prior! If only it can be remembered, and then found!

Yuejing shares her method:

...build a "tree structure" of knowledge, i.e. first divide all material into some parts, then further divide each parts into subsections, blablabla, until reach the small enough part to give out the details. This is actually a "multi-split" knowledge tree.

I found that if I could organize my knowledge in such a tree structure, basically I understand the whole material. If the knowledge in my head is still piece by piece, then even if I understand it when I study it, I'll definitely get lost some time after. It is so important to see the link between different pieces of knowledge rather than the details, since you'll never remember every detail but you have to preserve a good knowledge structure in your brain so that whenever you study something new, you can do a "backward screening algorithm" to link this piece of knowledge on your general knowledge tree.

It seems so simple, yet so thoughtful and useful.

Demographic shifts & education

The Toronto Star reports (no link):

More than half of Canadians - and more than 60 per cent of Ontarians - believe immigration is the biggest issue affecting the education system today, a new poll finds.

The poll, conducted in August for The Learning Partnership as part of its demographic study, also found that one in five Canadians believe rural-to-urban migration is also affecting public education.

Random fact of interest: Don Drummond, TD economist, is head of The Learning Partnership steering committee.

Here are a couple excerpts from the group's recent report, The Changing Face of Canada’s Public Education System :

At the Learning Partnership, we believe that major demographic shifts occurring in our society pose challenges and opportunities for the public education system. Those changes are occurring in the areas of immigration, aboriginal population growth, and rural/urban migration. The ethnic, cultural, linguistic and socio-economic characteristics of our students are changing, in many parts of the country.

Other countries are also experiencing demographic changes, and the results have in some cases torn the fabric of those societies. This spring, we watched cars burn and disenfranchised young people riot in the streets of Paris, in part over proposals to cut back on the social contract France has with its citizens. In Germany and Japan, two developed countries with aging populations and less expansive immigration policies than Canada, there is growing concern that immigrants are marginalized and disenfranchised. Here in Canada, the crisis in the Middle East sparked an outcry over what it means to be a Canadian, as some voices questioned the costs and the responsibility of our government to rescue dual citizens from war-torn Lebanon. In Caledonia, Ontario a community is rupturing along racial lines as residents line up over the issue of land claims and property rights. In more remote communities, far from the headlines, aboriginal young people continue to face an epidemic of poverty with suicide and unemployment rates that dwarf the national average.

* * * *

A 2002 study for Human Resources Development Canada concluded that women, visible minorities, Aboriginals and people with disabilities make up more than 50 percent of Canada’s skilled population. (Close to 80 percent of all immigrants to Canada are visible minorities). But many of these groups face barriers that keep them out of the labour market, or under-utilize their skills. The cost to Canada of those barriers is between $72 billion and $236 billion a year: the equivalent of six to 20 percent of our Gross Domestic Product. A recent University of Toronto Rotman School of Business study states that Canada would have an additional 75 billion dollars a year for important programs if the US/Canada productivity gap could be closed.

The low down

Given the shoddy job that I did on a couple exams last week, these images make me feel at least a tad less depressed, even if they're fake. Poor Peter (h/t Statistical Modeling, Causal Inference and Social Science).

Rubin et al on stocks (Rated 'G')

Jeff Rubin, chief economist at CIBC, has been said to be half entertainer, half economist. What I was personally told is, “He's a walking circus.” Given the partial transcript of The Toronto CFA Society's annual forecasting dinner, I conclude that he at least has color.

The National Post says, “Here is a transcript of the highlights, edited for space and to remove jibes and insults.” No jibes?!! Bullocks, daddio. I did a search for jibes, ludity etc etc, to no avail. The transcript may be clean, but it's still an interesting read.

The speakers quoted below are Ralph Acampora, managing director of Knight Equity Markets in New Jersey; Bruce Campbell, chief executive and chief investment officer of Pyrford International PLC in London; Jeff Rubin, chief economist and strategist at CIBC WM.

Excerpt from The National Post:

Q: On the general direction for the stock market?

Acampora: I think in the next 12 months it's going to be a major rotational theme. I think commodities in general peaked a while ago. I think they're going to be under pressure, money comes out of those sectors of the market and goes into things like large-cap blue-chip stocks: healthcare, technology, telecommunications, stocks like At&T.

Campbell: Down.

Rubin: There's only two issues out there. Is the U.S. housing market going to have contagion effects ... and the second issue is, if the U.S. economy does blow up, is it going to bring down the global economy and by implication commodity prices and I would argue the Fed is going to do whatever it takes to limit the contagion effect and the U.S. economy, unlike the 1990s is no longer driving the global economic bus and sure as hell isn't driving the global economy.

Q: Biggest contrarian call for 12 months' time?

Campbell: Gold at US$999, if not sooner.

Rubin: Oil will set new record highs in
2007.

Acampora: Crude has a very sharp decline that most people are not expecting ... to US$40-US$45.

Q: Speaking of oil?

Rubin: Reality is yes, we are getting new increases in supply but when we're drilling 35,000 feet in the Gulf of Mexico or we're schlepping a tonne of sand to get a barrel of oil the supply curve is a little bit different. I think we're going to see oil prices continue to rise. The only obstacle in the face of higher oil prices is a global recession, and I don't see that on the horizon.

Campbell: Despite having a sneaking regard for what Jeff said, I'm not bullish on the price of oil at all in the next 12 months. A significant U.S. recession might be reasonable odds on. If there's a significant U.S. recession it will take three or four million barrels off the table, but if we don't see a significant U.S. recession we could easily see the price of oil back at US$70.

Acampora: I believe equities lead the commodities and I want to challenge anybody to answer why are most drilling stocks reaching monthly lows, multi-lows and large oil companies like Conoco-Phillips breaking down in price? I think it's a harbinger, at least on a short-term basis, at least for six months, there will be pressure on crude.

Q: On metals?

Campbell: Unlike oil, I can't see any reason at all for metal prices in aggregate to rise. There's been far too much leverage and speculation in the metals and it's unwinding.

Rubin: When you look ... China is 160% of world copper consumption ...

Acampora: Jeff everybody knows that.

Rubin: You Americans think it's all about [you] but that's BS because exports to the U.S. from China are the grand total of 8% of its GDP. Last year China produced 6.5 million motor vehicles, not one single motor vehicle was exported to the United States. What we have here is that we are guilty of a very Americentric view of the world. We think that China's rapid growth of 10-12% is all about supplying customers in Little Rock, Arkansas. And that just ain't where it's at. It's not trade-linked to the U.S.; it's exploding domestic demand.

Acampora (deadpan): If it wasn't for the U.S. consumer, the world would stop.

I have to step in and say that Rubin has lost me here. I don't think it's any secret that trade between China and the U.S. is unbalanced. There's nothing “Americentric” about the fact that U.S. consumption is monstrous. Moving on...

Q: If there's so many risks out there, including the U.S. current account deficit and housing, why are stocks going up?

Campbell: Well, they shouldn't be should they? Stocks are actually overvalued.

Rubin: What you talk about as value investing, I regard as fluff. Last year, the energy index was up 61% and if you were overweight energy you beat the market and if you were underweight energy you lost to the market. I wasn't in favour of energy stocks because of the management at Imperial Oil or Canadian oil sands or Suncor. Management is irrelevant. I look at commodities. You get the commodities price right you can have all kinds of management. As far as the long run versus the short run, I think Lord Keynes had the best comment about the long run -- in the long run we're all dead. The long run is a continuum of short runs, you get the short runs right the long runs will look after
themselves.

Q: Worried about hedge funds?

Campbell: It is a concern to us. Our office is in hedge fund alley, Mayfair London, where they open a 100 a week and close a 100 a week. If you ever want cheap furniture you just wander around the streets. There's a lot of stuff going on ... that we can't quantify and there will be some major financial accidents in the next few years ... and it will be tough to bail out the financial system when it happens.

Q: Best money-making idea for the next year?

Acampora: Oracle, AT&T, Qwest, Baxter Healthcare.

Campbell: Boring old large caps. A gold-mining stock in Australia called Newcrest.

Rubin: I believe uranium oxide will be at US$70 per pound and if certain companies would stop hedging the next 200 years of production I might make some money. But I think we are looking at a renaissance of nuclear power around the world. No. 2 would be oil if you can separate natural gas from oil (Suncor, Canadian Oil Sands.) and the financial sector [on expectations of interest rate cuts].

Wages rise fastest in non-oil sectors

Could the energy sector be responsible for an increase in the median wage in Alberta? Maybe not. At least, it's not directly responsible for average wage gains in the province, according to a report by Steve Chan, a TD Bank economist. Nurses, farm hands and hydro workers have benefited more, says Chan.

From The Financial Post (sorry there is no on-line link; I'm subscribed to a database):

TD bank report: Alberta's oilsands the catalyst for a boom in other fields in province, By Jacqueline Thorpe (4 October):

"It's a perfect inverse relationship," said Steve Chan, economist at TD. "Wage gains have been the slowest where employment is growing the fastest and fastest where employment is the slowest."

Alberta's overall labour market has been on fire, with cumulative gains over the 2002-2006 period totalling 17.4%. That compares with just 10% for the rest of Canada.That rise took Alberta's average hourly wage to $20.99 in the second quarter, catapulting it to to first place as the province with the highest wages from third only four years ago.With the boom being driven by the oil, gas and commodities sectors, many would expect wage gains in the so-called "rainmaker" natural resource sector to be outstripping all others. But this is not the case.

Wages for oilsands workers and miners have skyrocketed by a massive 42% or $6.80 an hour since the boom -- vastly outpacing the rainmaker industry average -- but wages in the natural resource sector overall, where employment has risen 39.4%, have gone up only 4.7%.Wages in industries that are direct beneficiaries of the rainmakers -- construction, manufacturing, building and professional services, etc., -- meanwhile, have risen 16.3%. Jobs growth here has been a more modest 12.9%.Wages for indirect beneficiaries such as agriculture, utilities, educational services, health care and social assistance where employment has expanded only 10.2%, have risen the most, experiencing a 20.1% gain over the period.

Mr. Chan said it was a classic case of demand outstripping supply. Rainmakers already offer the most competitive of all wages -- on average $25.50 per hour in the second quarter -- so workers gravitate there.Other sectors have to fight for a diminished pool of workers, so they have to raise pay more substantially. In addition, with money flowing into provincial coffers, the government has had the wherewithal to increase wages for public sector workers.

"With respect to wages, the strength in Alberta's resource sector has been a tide that lifts all boats," Mr. Chan added.

Sectorial relations and labour productivity

In previous posts (here and here) I've contemplated whether sectorial industry shifts have been more favourable to the median wage in Canada than in the U.S. Perhaps this idea is worth considering further. In fact, it seems like sectorial shifts are often ignored as a possible reason for the difference in the median wage between the two countries.

Case in point: a paper recently released by StatsCan (h/t Brian Ferguson in the comments section of this blog; link via the excellent Worthwhile Canadian Initiative) has isolated the manufacturing sector in an attempt to determine the contributions to labour productivity in Canada in the 1990's. The authors of Competition, Firm Turnover and Productivity Growth conclude: “the competitive process that shifts market share towards more productive firms accounted for about two thirds of aggregate labour productivity growth in Canadian manufacturing from 1989 to 1999.”

Here is my comment (this is a slightly edited version of what I wrote in the comments section of this blog, but I'll repost it here in the hopes of gaining some feedback from others):

One thing that I'm caught up on is how the StatsCan authors isolated the manufacturing sector.

Their argument seems straightforward: increased competition between firms in the manufacturing sector led to reorganization by more efficient means and labour productivity increased. At the same time, incumbant firms were forced to reorganize themselves to attract increased market shares - this is considered another source or increased labour productivity caused by between-firm competition.

However, the authors also briefly address sector-to-sector shifts:

About 45% of firms that were in operation in 1999 are new firms that entered the manufacturing sector during the period 1989 to 1999. These entering firms account for 34% of output and 39% of employment. Most firms that enter the manufacturing sector are greenfield entrants, accounting for 37% of the firms. But their shares in total output and employment are smaller than the shares of merger entrants as greenfield entrants are much smaller than merger entrants.

The authors imply that merger entrants coming from outside the manufacturing sector accounted for a source of labour productivity growth. If so, I can't help but wonder to what degree vertical integration between sectors is a contribution to labour productivity growth through increased profit shares. Yet the authors ignore this possibility in their decomposition. How do they justify this?

In our decomposition, we assume that greenfield entrants replace close-down exits and merger entrants replace divestiture exits.

I wonder if the decomposition in this paper over-emphasizes the impact of turnover by ignoring the change in profit shares earned from emerging sector-to-sector relations (such as vertical integration).

Spontaneous order, self interest and Adam Smith

In my last post I wrote about spontaneous order and the role that nature plays in creating spontaneous order. I'd like to revisit this because I overlooked an interesting insight.

I previously cited a comparison of the Japanese psyche and the American psyche from a study conducted by a sociologist. From my last post:

...the vast sample of Japanese who participated in her research over a period of years appeared to have lost their childhood memories at an earlier age than the Americans in her study. The reason, speculated the sociologist, could be that Japanese adults were brought up less self-absorbed and less introspective.

The sociologist's use of the term “self-absorption” is not only not as crude as it might seem, but it runs parallel to a theory that Adam Smith developed on the subject of human nature and free markets. Of course, Smith used the term “self-interest.” “Self-interest” should be distinguished from “selfishness,” but is perhaps close cousin to “self-absorbed.” Smith said it was a necessary (but not sufficient) condition for a successful free market system.

From The Wealth of Nations:

Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

After citing the example of the Japanese-American psyche, I asked in my last post how a cause and effect relationship can be defined in this context. Perhaps I can answer my own question now. The cause is self-interest (which is found in nature), and the effects include the predomination and relative success of capitalism in America, and (perhaps) the recollection of childhood! Perhaps memories and capitalism can both be considered the product of “spontaneous order”!

Spontaneous order in economics

I've been thinking lately about the organization, structure and evolution of economic systems, so I was excited to see the excellent conversation that came to life on the HES (History of Economics Societies) mailing list. Diana Weinert, a PhD student, has put forth an invitation for examples of "vast spontaneous order." She cites Leonard Read's essay I, Pencil, and Adam Smith's example of a woolen coat.

Spontaneous order is an engaging subject, but how can one tackle it when the definition of dis-organization is so flexible? Further, why do we care to make the distinction between spontaneous order and centralization?

Humberto Barreto, in his response to Weinert, does an excellent job articulating why decentralized systems are of interest to us. He also points out that patterns shouldn't be confused with centralization.

Here's part of his reply:

I think we do have a predisposition to be more impressed by decentralized systems than hierarchical ones. A marching band that spells out the school's name is not that interesting since we know the individuals have practiced and practiced under the direct control of the band director. A flock of geese flying in a V is much more interesting than the marching band because there's no head goose. The spontaneous order, the pattern that is the V, is, as Smith said, "an end which was no part of his intention." You have to admit that figuring out why there is a pattern without top-down control is a mighty appealing question. Plus, add to that the fact that many people will deny that a decentralized system could work at all, while others will confuse any decentralized system as automatically generating a pattern and you've got grist for the mill for pretty much 'til the end of time.

Another example, which Michael Perelman posits, is an orchestra that plays without a conductor. I won't quote his amusing comment on this blog, but it's worth reading.

Perhaps it's trivial of me, but I can't help but wonder if Weinert could add clarity to her project if she focussed on nature, including human nature. Nature, I would argue, is an aggregation of spontaneous order. Through this aggregation, organized systems are formed. In an attempt to make my reasoning clearer, here's an example using human nature:

A few years ago I heard a sociologist share some interesting insights about the psychology of a Japanese individual versus that of an American. Not only do I forget her name, but I forget the exact details of the study. Ironically enough, her research was on the subject of memories. Anyway, the vast sample of Japanese individuals who participated in her research over a period of years appeared to have lost their childhood memories at an earlier age than the Americans in her study. American teens and adults could recall events which happened to them at an earlier age than the Japanese. The reason, speculated the sociologist, could be that Japanese adults were brought up less self-absorbed and less introspective.

What is the cause and what is the effect? Are the Japanese by nature different than Americans? If so, has human nature been responsible for the differences in the heuristic methods between each country? I might do well to put an end to my uneducated speculating here and instead invite the opinion of one of the most engaging profs I've ever had: a professor of environmental philosophy.

Anyway, this is an interesting area. I truly hope Weinhert keeps HES informed with the results of her project!

Back to the productivity puzzle!

I've just noticed that Tyler Cowan quoted me on Marginal Revolution, one of my favorite blogs! Thanks Prof Ferguson and happyjuggler0 for the kudos over there!

Previously, on this blog and on Mark Thoma's blog, I expressed the idea that the wage/productivity discrepancy between Canada and the U.S. could have something to do with the different make-up of the industries in each country. Here was my response to Mark Thoma's post, which Tyler chose to quote:

Positive net employment change in Canada is most concentrated in the high-paying
energy sector in Alberta. A great proportion of the jobs being created demand high-skilled workers. I wonder how much of the discrepancy in median incomes between Canada and the US can be explained by the increase in job creation in Canada's energy sector relative to the type of job creation occurring in the US. Entry-level workers in BC and Alberta are getting paid big bucks.

Tyler adds:

Might the United States have experienced sectoral shifts which are unfavorable for median wages but favorable for wages at the upper ends of the distribution? Another factor is that rising health care costs in the U.S. are absorbed into benefit costs but in Canada these costs are socialized to greater degree. In any case economists have yet to get to the bottom of this mystery...

Tyler is the first not to dismiss my idea! But, I'll admit, the more I think about it, the more I feel that rising health care costs are the greatest culprit. Anyway, it was interesting to see that Tyler entertained my idea.

This is an aside, but once every week or two I decide to quit blogging (I wasn't entirely saddened when my blog completely vanished this weekend); however, it always picks me up when I discover feedback, good or bad, from others. Thanks to those who email me and post to this blog!