Tuesday, August 29, 2006

More education or condoms?

We congratulate Aco and Anna for their new born baby. Now they have officially contributed to the population growth. As a present to the couple, our entry is about demand for children and education (yes – we can’t avoid talking about education again…).

Economic models generally show that, everything else constant, high population growth is bad for economic growth. For some people, high population growth is a reason why poor countries are poor (“the rich gets richer, the poor gets children”). Let’s say this is true. What makes people in poor countries have many children?

According to the demographers’ view, the answer is unmet needs for contraception. Since they are poor, they can’t afford to buy contraceptives. Hence, the appropriate intervention would be family planning campaign.

Many economists reject this idea. Even in poor countries, condoms cost no more than cigarette or coke (Easterly 2001). So, if they want to reduce the number of children, poor people can in fact afford to do so. This means that high birth rate in poor countries are actually desired. The desired fertility argument (Pritchett 1994) is based on the fact that some markets are missing or imperfect: labor, insurance and even goods market. That makes poor families rely on their children for cheap workers and old-age social security.

Only when the income level is higher, people will demand fewer children. Higher level of national income usually correlates with more availability of formal insurance system. Higher income can also be translated to higher level of parents’ education. This will give more opportunity to enter the labor market, so there will be a trade-off between working and childbearing which then lead to a substitution between quantity and quality of children. We can also say that when people are more educated, the effectiveness of contraceptives will also be increased (smarter people knows better how to put condoms or calculate women’s fertile period, eh?).

In short, development is the best contraceptive, said economists. Or, in a narrower version, education is a good, if not the best, contraceptive.

How true is such premise? I am currently doing a research on that.* Using household data from the Demographic and Health Survey, surprisingly, I found that there is no significant correlation between mother’s (as well as father’s) years of education and number of children.** No such correlation also exists between education and ideal number of children.

The data does not allow me to test the impact of education on the labor market participation. But let’s assume it to be positive. The reason must be that education does not explain contraceptive use. And yes, the data confirms that. I did not find any positive and significant impact of education on the probability of using modern contraceptives such as periodic abstinence or birth pills. There is only a marginally significant impact of education on the probability of condoms.

So does that mean that economists or the pro-education camp lost the intellectual battle?

Can’t say that too fast. The thing is the survey was conducted in 2002/03. Three decades after the family planning campaigns by the Indonesian government (BKKBN) has been considered success. Thanks to the campaign, (poor) people have had the knowledge on and access to contraceptives, regardless of their education level. You don’t need to be that smart to know where to buy condoms or pills and how to use them.

Put it more scientifically, we don’t have the counterfactuals. What would have happened if there was no family planning campaign in the ‘70s-80s? Maybe we can ask our colleague Arya Gaduh to conduct a randomized experience to answer such question.


*) The research paper is currently being written. I will post an update if it is available.

**) For the methodology-oriented people, I have corrected the reverse causality and omitted variable bias by applying 2-stage least square estimation, using quarter of birth as the instruments (see Angrist and Krueger 1992).

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Econ101: Marginal and Relative Analysis

Economists -- at least your Café economists here -- don’t really care about big changes. We are into details. Meaning, we are more interested in small changes. What happens if I blog one more hour? Am I still as good as the last entry? How many minutes do I need to write one more posting? What do I have to sacrifice, in minute-equivalent?

People make decision based on marginal analysis. No? Well, yes, although you might not realize it. Remember when you were eating nasi goreng and chicken nuggets? You took a portion of nasi goreng and some, say four pieces of nugget. Then you were running out of the nasi while you still had one nugget remaining. And you were not full yet. So you decided to add nasi -- just enough to go with the lonely nugget. Then you’re satisfied. Sounds trivial. But congratulations, you just ran a marginal analysis. The “just enough” is the key there.

Still remember our first discussion? Yes, we talked about cost and benefit. We said, people do something when the total benefit of doing it outweigh the total cost. How does that relate to our marginal analysis? Here is the mantra: You do not stop doing whatever you are doing until the “marginal benefit” equals “marginal cost”. (At this point I’m tempted to use graphs and math – much easier; but let’s just talk – more fun).

You are doing two things at the same time.1 You’re assigned to organize a seminar. It is time now to call participants. But as usual, you just activated your yahoo messenger – you are now e-chatting with that cute someone out there. We can look at this from either side: your calling the seminar participants or your chatting with that guy. Believe me, the result will be exactly the same, but let’s just take the latter.

What is the cost of your chatting? This is the time you’re supposed to apply your opportunity cost concept. Yes, the cost of your chatting is the next best alternative use of your time. Since you have to work to earn money, the "cost" here is therefore the number of calls you don’t do. Now let’s do the game. If writing one more sentence to him and making one less call to participants makes you happier, you will rationally delay the call and do the chatting. You will keep doing this until you start “feeling guilty” of not doing your work (calling seminar participants).2 Until you are indifferent between chatting and calling. The additional pleasure of chatting is fully compensated with a guilty feeling of not-calling. Economists call this a situation where “marginal benefit equals marginal cost” (Forgive my abbrev: MB = MC). Since you will keep chatting if the marginal benefit of chatting outweighs the marginal cost of chatting (or: You will keep calling if the marginal benefit of calling exceeds the marginal cost of calling – See? It runs both ways!), this state of “MB = MC” is therefore optimal.3

Now I’d like to add one more thing. We prefer relative- to absolute measures. Everything absolute that stands alone (that is, without benchmark) is useless.4 We are impatient with people talking in absolute tones: “What is the 2005 Indonesian GDP?”,5 “How much is the Manager’s salary?”, “What are we good at?”, or “How many Indonesians are poor?”. Rather, we ask: “What is the growth rate of Indonesian economy?”, “How much raise did the Manager get?”, “What is our comparative advantage against Malaysia?”6, or “What is the poverty rate now?”. Relative analysis allows you to mentally picture what is really going on.

Stay tuned.


1 Of course, in super marginal world, you can’t really do two things at really the same time. Only that guy in StarTrek can do that.

2 This is a term to actually say, your cost is increasing.

3 More on this yet another key concept, later. (Man, I keep promising…Sorry...)

4 Of course, two absolutes qualify for a comparison, which is good enough.

5 GDP stands for gross domestic product. It is also called national output, national expenditure, or national income. Please be patient with this confusion. More on this later.

6 Saying something like “Indonesia has a comparative advantage in palm oil” is meaningless. Compared to whom?

Monday, August 14, 2006

Econ301: Education and labor market signaling

Note: while Aco continues the Econ 101 series, allow me to squeeze in with some more advanced topics. Usually, in our university, the better teachers are assigned in introductory courses. In our cafe, the manager assigned Aco, our best barrister, to serve the younger, funkier customers...

Updated note: a version of this entry was published in The Jakarta Post (15/8/06).

Why do many people hopes to get higher education, university degree in this case?

The most common answer is because having a university degree makes it easier to find job. Actually, this is not the correct answer. Several researches have shown that people with high school diploma or lower have greater chance to be employed or to switch jobs. Especially after the economic crisis, people with higher education are more likely to be employed. The correct answer is: to get a better-paid job. True, university diploma does not make it easier to get job. But certainly it enables one to have higher salary.

Why then higher education gives higher earning? The answer seems to be obvious. Education provides workers extra skill, which enables them to be more productive. Since workers are rewarded in the labor market based on their productivity, it is the higher productivity which brings them higher earning. Hence, the higher one’s educational attainment, the higher his or her wage. This is the Beckerian answer to the problem.

But such view was not too convincing. Labor market, like any other market, is not perfect. Employers can not evaluate the true productivity of potential workers before he or she starts working. But we know that typical job application process, the wage rate is agreed in advance.

So, on what basis will wage rate be determined?

According to Stanford University's Michael Spence, in the world of asymmetric information, employers only assume higher educated workers are more productive. Not that a college graduate in is actually more productive; it is what the employers believe to be. So, to distinguish oneself in a stack of application, a job searcher shows his/her university diploma to signal the prospective employer that he/she is a productive type. In other words, higher wage is a reward for the diploma one gets, not a worker’s true productivity.

He wrote his seminal article in 1973 [1] - and his model was then called "the signaling model." Spence won the 2001 Nobel Prize in economics, together with George Akerloff and Joseph Stiglitz.

What does the model imply?

The signaling model changed the way people looked at how labor market works. The fact that signaling mechanism partly, or mostly, determines the market wage setting has an important implication. University degree helps increasing wage as long as those with university diploma accounts for only a small fraction in the labor market. When the share of university graduate grows, it will no longer be an effective signal. Employers will look for new type of signals to distinguish workers, such as more advance degrees (Master’s, Ph.D.), professional degrees (CPA, CFA), or graduating from 'top' universities (err... UI?).

When the government subsidizes university tuition fees, it makes higher education cheaper and more accessible. It will increase the supply of college educated workers. However, it may not be useful because employers will increase their expectations subsequently. For that reason, subsidizing university tuition does not make a good social investment. It may even have an adverse effect: a large pool of highly educated unemployment.

[1] Spence, A.M.: "Job Market Signaling", Quarterly Journal of Economics Vol. 87, No. 3 (1973), pp. 355-374.

Friday, August 11, 2006

Econ101: A Starter

What is economics? It's all about choice and choosing. Things are scarce. So we make choices. Economics1 is a way to explain why some guy chooses a banana over an orange, given the money in his pocket.2 That's all. Never mind the long and boring definitions in the textbooks. When somebody wakes you up in the middle of the night and ask what economics is, just remember one word: CHOICE.

What is the implication of scarcity and the act of choosing? Tradeoff. When our guy chooses the banana, he gives up the opportunity of having the orange. We say, the opportunity cost of his having the banana is his foregoing the orange.3

How does he choose? By comparing the benefit and cost of the action.4 What does it tell us when we see the guy ends up eating the banana? It tells us that for that guy at that time, the benefits of eating banana exceeds the costs.

When "the guy ends up eating the banana", he is revealing his preference. That is, without telling us anything, we have an information about his preference. This is called revealed preference (RP). Or, it can be that he just tells us that he prefers banana over orange. This is stated preference (SP). We tend to believe RP more than SP. Whenever what you do contradicts what you say, we believe the former.

But why do we rely our analysis on what people do? Because we assume people are rational. That is, people do whatever best for him at any given time. Is the assumption alright? Think about a person playing billiard. Is it alright to assume he is rational? That is, is it safe to assume that what he would do is consistent with the physics dictum that "the angle of incidence equals the angle of reflection"? We think it is safe. But there are crazy people, no? Yes, but there are definitely more non-crazy people out there then the crazy ones. So we're fine.

Should the guy eat the banana? We don't know. What we do know, by way of inference, is the guy prefers banana to orange. And as a rational person, he eats the banana. So, when you offer him to choose between the two, he would take the banana. This is a positive approach to economics, as opposed to normative approach. Positive approach is all about "what is" or "if X then Y". Normative approach is a matter of "what should be". We are more confident in positive approach. In fact, we try not to do normative approach. And we encourage you not to believe economic analysis with too many "should"s in it.

Stay tuned.

1 In this Econ101 series, all economics keywords/phrases will be highlighted like this.
2 From now on, we will be using masculine pronouns. Blame the convention.
3 This is a brutal simplification. The guy can choose to have half banana and half orange. Or the story might as well be: choosing between sweet orange and sour orange, the latter being cheaper for an obvious reason. But don't worry about this complication now. Opportunity cost is central to economics, so we will devote another whole posting for it sometime later.
4 You might say, "Well, no, I don't do that". Trust us, you do -- in one way or another.

Thursday, August 10, 2006

From the Manager

What is it, three, four weeks? Yeah, I haven’t been playing music. But I’m sure you’re all fine with your iTunes or LimeWire. Or even cheap MP3 compilation CDs. What, like I don't know why you bought a 2 giga iPod?

I don’t owe you explanation, yes? But I feel like telling what I’ve been doing, besides pretending to understand economics. I’ve wandering around. To see other people’s cafes. Hanging out at an adorable competitor, Café Hayek, stopping by at a new café, Kedai Kebebasan, and listening people talk on modern politics at TPM Café. Or just to test the brain endurance at the Philosophy Café.

Of course I went shopping, too. I just bought a set of Acoustic Wave for the Café. Love the sound it delivers. And some books to keep you staying: Umberto Eco, Milan Kundera, Astrid Lindgren, and J.D. Salinger (they’re used books – since some of you are kleptos; hey, who took my thesaurus? I'm trying to show off, here, please!). I’ll put them on a new bookcase next to the old gamelan. No, I’m not gonna install a flat screen – you can borrow my Hicthcock collection, but go see movies somewhere else. As for games, I have bought three sets of scrabble. No chess or checkers – too trivial and boring.

Sounds like we’re gonna have more fun. Come, come. (No, we don’t have skin tax like them!)

Did I mention music?

Now I’m thinking Enya. Oh, she’s so relaxing. I’m carried away by her mystical soft mantras. It feels good. Especially after an aggression from a lesbian guy across the street.

Update: Shoot! I've linked too much to Wikipedia. Apparently, it ain't good.

Monday, August 07, 2006

Language grows, not imposed

This news tickles me (NOTE: I have just updated the link, thanks to Patrick Hall at Infundibulum -- here's Patrick's take . The Jakarta Post has moved the original article.). It's about some Indonesian "top linguists" complaining about the Indonesian government's deal with those of Malaysia and Brunei to use Malay as the official language in the countries.

What a nonsense from both sides. The governments, do they really think they can force the people to only use Malay language? The linguists, do they really think they can force Indonesians to stay with Indonesian language? Just because "Indonesian is much more developed than Malay"? Or because it is "studied in many countries"? Give me a break.

Call me a non-nationalist, but I don't buy all this crap about "national language". Look. I love Indonesian language (it's the simplest, no?) and I hate Malay ("perogolan", "berseronoklah" -- Man, I hate how they sound). But I will understand if Malaysians don't like Indonesian sound of "canggih", or the mental image of "rumah sakit".1

People communicate, regardless of what language they are using. As long as you understand what I mean and I understand what you mean, we're fine. Misunderstandings might arise, but that's how language develop in the first place.

That is to say, language is like market. It is supposed to be free. Non-imposed, non-enforced. It grows as people need it. Let people choose how they communicate. There were times when people thought they could impose some new words. And they failed. Umberto Eco told us a story about it. The Italian fascists tried to force people to say "mescita" instead of "bar". They failed.

Anyone still remember the words "sangkil" and "mangkus"? 2

1 "Perogolan": rape (the noun), "berseronoklah": have fun, "canggih":sophisticated, "rumah sakit": hospital.

2 "Sangkil": "efisien": efficient, "mangkus": "efektif": effective. Or, is it the other way around?

Friday, August 04, 2006

On Reason to Blog

Why do economists spend their time blogging?
The Economist, I mean the magazine, has some of the answers:
#1. “It's a place in the intellectual influence game,” Mr DeLong replies; and “It's a natural extension of my day job—to engage in intellectual discourse about economics,” Mr Mankiw says.
#2. Although there is no evidence of a direct link between blogging and publishing productivity, a new study by E. Han Kim and Adair Morse, of the University of Michigan, and Luigi Zingales, of the University of Chicago, shows that the internet's ability to spread knowledge beyond university classrooms has diminished the competitive edge that elite schools once held. (my word: to screw up the university's ivory tower)
#3. Blogs have enabled economists to turn their microphones into megaphones. In this model, the value of influence is priceless.
Now, assume (economists love to assume, some said) we, the hosts, are economists (we're economists, aren't we?) : What do you think our motives to deliver something that our Manager often despises as non-sensical in this cafe are?

I don't know about other hosts. But come to think of it, for me, none of abovementioned causes seem applicable. I do blogging for fun. OK, more precisely for showing you that economics can be, and is indeed, fun (and it's fun to read the comments, too). And trust me, the money from the Manager is a shame.

You don't buy it and raise your eyebrows? Fine. Allow me to spill a small secret. For Aco, AP and even Ujang (I don't know about Sjamsu), they blog to woo women.

OK, Rizal, too (I see them throwing cups at me)

Wednesday, August 02, 2006

Selling the Road

So you’ve been dispatched to investigate illegal payment on the road made by truck drivers in an attempt to measure cost of transporting goods. The best way to do this, of course, by taking a ride with them and directly observing how much and how frequent such payment occurs along the trip.

And since you are in this country, you may, understandably, assume that they would pay large sum and frequent bribes on the road.

Equipped with this knowledge, thick questionnaire, GPS gadget, and two packs of cigarette, off I went to the one leg of Trans Sumatra East Route in North Sumatra.

You know what, it was fun. And I was surprised that in that 9 hours trip, 298 km long, the truck that I rode did not pay any single payment. Not a single one. Not to policemen, DLLAJR (Road Traffic Authority Office), or preman (thugs) –the common culprits for such crime-. I knew that the other trucks paid some money in three weighing stations along the way, but since my truck did not violate weight limit, they let us go freely.

Is that good news? Scroll down.

But then I learned from my conversation with my truck driver buddies that each of them has to pay monthly payment to three organizations associated with the military and police in return to security protection in that particular route. And in this case they deliver the services –-no additional payment apart to them--

This is indeed in accordance to Shleifer and Vishny (1993), who wrote that the most efficient market of corruption is when it is very fragmented --numerous agents charging the fee are in fierce competition, so that the utility and cost of bribe met at the lowest possible price of bribe.

The worst case is when it is only partially fragmented. There are numerous agents, in less competition, uncoordinated, and can cancel each other’s service. It is like, A doesn’t give a damn whether you have already paid to B. Because B can not imposed their role against, or control, A. And vice versa. This kind of noisy harasshment happened in another route surveyed in Sulawesi, as my colleague reported.

The second best, or worst, you may say, case is when organized agents who can impose the rule –security protection here-- against the potential suppliers monopolize the market of bribe. And this is what I experienced. Those agents take the money, but at the same time deliver the services.

You may then ask: Would the illegal fee –approximately 350K IDR per month—too high? I don’t think so. They know that they have to keep their subjects –the truck drivers—alive, so they won’t rip them off excessively.

In this setting, you need powerful agents to monopoly the market. What are the sources of power? Well, ability to enforce violence and money. And this is why those organizations are not only associated with military, but also capital owners, who happens, coincidentally, to be Chinese ethnic, the tauke.

Is that good news? You tell me.

A cake solution for our leaders

You’re a mom with two naughty kids. Whenever you bake a cake for them two, you would end up with a headache. They always fight over the size (“Mom, why do I get the smaller piece?), no matter how even and accurate you think you have divided the cake with your expensive knife. What’s the solution? Economics offer you one: let them choose. Try this: toss a coin. If it is “Garuda” the first kid will move first. If it is “500”, the second kid moves first. Suppose it is “Garuda”. The first kid would have to slice the cake. Then the second one would choose which part he or she wants. The first kid would have the remaining part.

Did the story ring a bell? Maybe it did for you who happened to share an apartment with another tenant. Say, you two are to decide who would take which room. Alas, the two rooms are unequal in size. What to do? Try this: toss a coin to decide “who moves first”. Supposed it’s you. Now, you assign a "price" to each room. By "price" I mean, the share in the total monthly rent: bigger room has a bigger share; whoever happens to get it he or she should pay more than the other. Alright, have you assigned the "price"? OK, your job’s done. Now your friend would have to choose which room he or she would take.

Sounds simple. What about if there are three kids? Four? Three, four tenants? Well, we can do it, too. It’s just slightly more complicated. Therefore we have game theory1 courses.

But forget about school. Let’s apply this to something the media (and the so-called "communication experts") really likes to rant about. It’s the “race” between the two CEOs of the country, SBY and JK.2 The President and the Vice President seem to always try to outdo one another in delivering official statements (and even official actions). So far, JK scores higher: he’s very quick in taking decision (good or bad) and acting accordingly (or not accordingly, I should say), while SBY is very careful (too careful, he seems depressed).

We love our leaders. So how about suggesting a fun solution (at least to shut the media up)? Yes, the "cake solution"! Try this. Let the House, DPR, toss a coin. Suppose SBY gets to move first. Then he will list all statements and actions to do this month. Then divide it in two blocks. Next, let JK choose which block he likes to execute…

I know, who says running a country is easy?

1 Game theory is an amalgam of math and econ. Math teaches you the logical steps in playing chess. Econ explains to you why you would want to play those steps.
2 Susilo Bambang Yudhoyono and Jusuf Kalla

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