Lies, Damn Lies, and Statistics

I enjoy the repartee I have with IPEZone's Emmanuel. We often disagree, but the back-and-forth is always fun. I must protest, however, to his recent challenge. In an update at the bottom of this post, Emmanuel criticizes me for not being able to use data:

Now Kindred's a good kid, but he is wet behind the ears as he tends to put words in my mouth and gets embarrassed for it. Anyway, I decided to look up the numbers for myself instead of relying on other's charts. Below are the figures for US income for those 25 and up for the years 2000 to 2008 from US Census Bureau tables P-16 and P-18. It doesn't matter whether it's the mean or the median or if you're male or female; real annual income has been falling there since 2000. It doesn't matter either if you're a college graduate or have a higher educational attainment.

I guess the furriner is more familiar with US stats than the American. Also at grad school, you are taught not to compare apples and oranges, but he does so by quoting another data series and naively suggesting differences have something to do with using "mean" and not "median" data.

There's a lot of wrong in just a few sentences there. First things first, I haven't put any words in Emmanuel's mouth; I've quoted him directly. The purpose of his post is to counter the argument that a college education is a wise investment. That's why it is titled "The Knowledge Worker Myth vs Blue Collar Reality", not "A Handful of Skilled Blue Collar Jobs Are Hot Right Now, But College Still a Good Investment Overall". That's why he writes sentences like "So much for the college myth." He is claiming at least one of two things: the college wage premium is collapsing, or the real return to a college education is falling. I am claiming the opposite.

So which of us is right? I am, of course. The data I previously reported shows this quite clearly in a few easy-to-read graphs from BLS data. Emmanuel appears to prefer Census data, but as we will see that doesn't matter. Other than the mean/median distinction, the two sources appear to disagree because the time period Emmanuel selects is misleading. His starting date is the peak of the previous business cycle (2000), while his end date is the trough of the most recent one (2008). Tables P-16 and P-18 go back to 1991, so this must have been a deliberate choice on Emmanuel's part. The series I posted go back at least to 1991 as well. The longer series show an inflation-adjusted increase over the past two decades in the return to college education for both men and women, mean and median. Over the same period, inflation-adjusted median income of high school graduates declined by nearly 10%. (The same figure increased for women... from $16k to $18k.) Male and female college graduates made nearly double what those with only a high school education made across the time series. If you compare peak-to-peak, incomes for college graduates went up from 1999-2007 as well. The spread between the college-educated and those who are not also increased across the series, and those without degrees have seen especially nasty upticks in unemployment in the last two years or so.

I'd produce a nifty graph here but the Census data is a mess, it's late, and I'm tired. Please read the tables for yourself. A quick glance is good enough. Or look at the BLS data, which tells the same story. I'm not the one talking about apples and oranges. Whether you're looking at absolute or relative gains, means or medians, male or female, the pattern is clear: the more educated earn much more than the less educated, that disparity has increased over time, and job security (as well as non-wage benefits and compensation) is also much higher for the well educated. The "Knowledge Worker" is anything but a myth, which is probably why Emmanuel's pet countries like Singapore have emphasized higher educated so much.

The only way Emmanuel can reach any other conclusion is by tweaking starting dates in a pretty egregious way, and changing his argument midstream. As I say: lies, damn lies, and statistics. Whether it's intentional or not is not clear to me, but just as in a previous tangle (see comments), Emmanuel loves to make broad claims and then say "That's not what I meant" when questioned. As before, he meant what he insinuated, and what he insinuated was wrong.

Does Education Pay?

Emmanuel, striving for a "compelling narrative", implies that seeking higher education isn't worth it:

The white collar life was supposed to promise the land of milk and honey.

Certainly, academia has had an interest in propagating this story since it provides fodder for ensuring a steady stream of tuition-paying students in law, commerce, and business. Various American commentators like former Fed Chairman Alan Greenspan have constructed an entire narrative out of "knowledge workers." In recent times, that has meant training to be a software engineer or some other lofty position that makes the most of conceptualizing abstract ideas and similarly high-faluting rhetoric. The truth, though, is much less compelling. Take America (please). Not only are there scores of unemployed college graduates there, but wages of college graduate have been on a downward trend since 2000. So much for the college myth.

As the graph above shows (via David Leonhardt), this is simply not true. (The data presented above contradicts that in the link in Emmanuel's quote, probably because the latter reports a mean while the former reports a median.) The college wage premium has expanded over time, and college graduates now make more than double what high school graduates make. Moreover, as the below chart from the BLS shows, more postgraduate education generates an additional, large, premium along with a pretty significant amount of job security.



The recent unemployment crisis has not changed this trend; it has exacerbated it, as less-educated workers have been hit especially badly:



So when you see breathless articles questioning the wisdom of pursuing higher education, or claiming that you can do nearly as well without it, remember the stats. A compelling narrative is no substitute for a few facts.

More on US/EU Unemployment

Apropos of this post by Alex noting that the unemployment rate in the US is now the same as the average of European OECD countries, consider this passage from John Quiggin:

Advocates of the US system make much of the deterrent to hiring associated with employment protection laws, but they ignore the other side of the coin. When the economy is contract, employment protection laws do in fact protect employment (if they did not, they would have no adverse effect on hiring either).

On this basis there is nothing surprising in what we are seeing. EU unemployment rates should be higher in expansions and lower in contractions, which is exactly what is required for lower variance.

Which is better?

Short answer: that is a normative judgment. If my primary concern is improving the lot of the most people most of the time, I might think of it this way: if the "normal" state of a capitalist economy is for there to be more years of growth than recession, and I want to maximize the well-being of the most people for most of the time, then I'd go for the system with the higher variance, since a majority of the time people on the margins will be better off. Additionally, more flexible labor markets allow more labor mobility, which increases competition and boosts productivity. This, in turn, leads to additional economic growth as well as improvements that don't show up in GDP, like the improvements in home computers of similar price over time. Technological advances often generate positive social externalities that don't show up in raw GDP figures.

However, if my primary concern is to avoid sudden catastrophic outcomes for even a small minority of people, and I'm willing to trade off subtle gains for the majority to achieve that, then I might prefer the more stable, but less dynamic, European system.

Now, if unemployment increases in the Eurozone as both Alex and I expect it to do, then this might be a moot point. After all, you can't juxtapose dynamism with stability if one system or other has more of both. And it is worth noting that there is more inter-country variance in unemployment rates in Europe than across states in the US. But if there is a choice to be made, then the appropriate decision can only be made on normative grounds.

Bryan Caplan, who has his own normative views, offers up a bet:

The average European unemployment rate for 2009-2018 (i.e., the next decade) will be at least 1% higher than U.S. unemployment rate. The bet will be resolved when Eurostat releases its final numbers for 2018.

I'm happy to bet each of the three authors $100 at even odds. Will they accept?

So far, I don't believe there are any takers.

US Unemployment Rate Higher than Europe's?

It is expected that when the April international unemployment numbers are released, the United States will have a higher jobless rate than Europe. The United States' rate is already on par with European averages, a factoid that would have surprised many just a few months ago. 

For many years, unemployment in the United States was lower than in Western Europe, a fact often cited by people who argued that the flexibility inherent in the American system — it is easier to both hire and fire workers than in many European countries — produced more jobs.

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993.

For men, the unemployment rate in the United States surpassed that of the 15 original European Union countries in December. By March, it was 9.5 percent in the United States, compared with just 7.5 percent for women. The figures for men and women in the 15 European countries, however, are close together, at 8.4 percent and 8.5 percent.

How did that happen during a worldwide recession? First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it.

In the United States, there has been more movement of workers from depressed areas to places where the employment outlook is brighter. But the housing crisis appears to be hampering such movement because some workers own homes that are worth far less than the amount they owe on their mortgages.

Among the 15 European Union countries, the national unemployment rates range from 2.8 percent in the Netherlands to 17.4 percent in Spain. That is a wider spread than the ones among American states, where the rates range from 4.2 percent in North Dakota to 12.6 percent in Michigan.

So I guess I'll add to the speculation. Another reason may be the extent and quality of European re-training programs and their ability to get workers back into the labor force after shorter adjustment periods. A vast chunk of the increase in American unemployment has come from financials, insurance, housing and retail (as well as unemployed graduate students argh!). Europe may simply have been less exposed to the problems in financials and housing. 

The rigidity of European labor markets also play a role; it is harder to lay off workers in Europe, thus causing a higher level of stickiness in labor markets. As the downturn drags on, we can expect larger increases in European unemployment levels. The United States sheds jobs at a quicker pace (because of relatively less sticky labor markets), with most lay-offs concentrated towards the beginning of a recession. Europe may simply be dragging on the labor market adjustment period with their generous social insurance programs and rigid labor markets. 

So the United States' unemployment rate could rise above Europe's in the short-run, but may be surpassed by Europe's as the downturn continues and as the (predicted) expansion begins. We may simply be observing a wider band for American unemployment rates over time, and a smaller band for the average European rate. 

Broader Unemployment Figure

From the Economix blog at the NYTimes: 

The job market is getting ever closer to the depths that it reached in 1982.

Since the start of 2008, the economy has lost jobs at a steeper rate than at any other point in 50 years. That hadn’t been true until today’s report. But the 651,000 job losses in February — together with 161,000 additional job losses in previous months, a result of Labor Department revisions announced today — means that the decline is worse than it was at any point during the deep recessions of the mid-1970s and of the early 1980s.

The economy has now lost 3.2 percent of its jobs since January 2007. It lost 3.1 percent between the summer of 1981 and the end of 1982.

The job market still is not in as bad shape as it was in 1982, because unemployment entering this downturn was somewhat lower than it was in 1981. But it’s getting close.

The government’s broadest measure of unemployment and underemployment was 14.8 percent in February. That includes some of the people who have stopped looking for work because they don’t believe they can find jobs. It also includes part-time workers who want to be working full time.

The Labor Department did not keep such a statistic in the early 1980s. But it likely would have been in the neighborhood of 17 percent then. (Awhile back, I created a similar — though slightly narrower, for reasons of historical consistency — measure, with help from Labor Department economists. It peaked in 1982 at 16.3 percent in December 1982; it was 14.1 percent last month.)

So it’s still too early to call this the worst recession since the Great Depression. But it’s bad, and it’s still getting worse at a rapid rate.