Recent Land Reform in China

The Chinese Communist Party (CCP) collectivized—or assigned ownership to a collective rather than to individuals—all land in 1950s. In a second round of land reforms 30 years ago, the CCP assigned small plots of land to each rural family. Families could use the land as they saw fit and sell the resulting crops but the state maintained ownership of the land itself. Selling the property was therefore out of the question.

Last week, the CCP announced a third round of land reforms, allowing farmers to "subcontract, lease, exchange or swap" their land-use rights. Although farmers cannot sell their land, they can lease their land to other farmers for up to 70 years in exchange for cash. For China, the reform represents another step away from communism and another step toward a market-based economy.

Proponents of the policy hope for four positive effects. First, exchange of land among farmers should lead to a more efficient allocation of resources. Previously, people who wanted to leave the farm for work in the cities left their plots of land in the care of elderly parents. Under the new policy, those people can subcontract their land-use rights to farmers who place a higher value on the rights to use the land.

Second, the reform should allow farmers to enjoy economies of scale—the cost reductions that result from higher levels of output. Before the reform, each rural family had a small plot of land, limiting the use of machinery and technology in farming. As a result, agriculture in China remains labor-intensive. The exchange of land-use rights will allow the development of more commercial-scale, larger farms, where farmers can take advantage of more advanced agricultural technology. As farming yields rise, so will China's total contribution to the world food supply.

Higher yields may contribute to the third potential benefit: higher incomes for families in the Chinese countryside. The incomes of some farmers will rise along with the output per acre. Those who would rather leave the countryside can now cash in their land-use rights and pursue better paying opportunities in the cities. The rising incomes should lower the income gap between rural and urban households, easing a social tension.

Finally, the new policy should provide more property protection to farmers. Before, without the rights to lease state-owned land, land grabs by local authorities left many rural families with little to nil in the way of compensation.

Of course, there is no guarantee that the policy will work as intended. Opponents of the measure worry about the effects of the reforms. They argue that the policy will force some farmers to lease property and join the ranks of cheap labor in the cities, increasing the income gap even more as land-use rights become concentrated in the hands of well-off farmers.

Discussion Questions

1. Do you believe that the new policy would provide adequate property protection for small farmers? Could land grabs still occur? Why or why not? Can you think of other economic or political challenges the reforms will create?

2. What new pressures will the cities face if many farmers lease their land and move to urban areas?

3. The ongoing financial crisis in developed countries overshadows the ongoing food crisis in developing countries. The food crisis refers to rising prices for basic food like rice and wheat. If China's land reforms work as intended, how might they affect the global food crisis?

Beeps per Minute

How do peer preferences affect your own? Recently, this blog examined a paper by economists Michael Kremer and Dan Levy about the peer effects of alcohol use among college students (archived link here). The paper suggests that students who are randomly assigned to frequent-drinking roommates will, on average, earn a lower grade point average (GPA) than students matched with non-drinkers. According to the authors, students exposed to frequent-drinking roommates develop a strong taste for booze--a taste that sticks around and continues to lower their GPAs in the years after the roommate situation changes. More broadly, the paper suggests that peer consumption preferences may exert an eerily strong influence over our own. Economists also refer to this phenomenon as the "demonstration effect."

What about the peer effects of our coworkers? In his latest column, Tim Harford--the Undercover Economist--writes about research by UC Berkeley economists Alexander Mas and Enrico Moretti on the peer effect among supermarket clerks. How do checkout clerks change their behavior when an especially fast clerk joins their shift? Do they slack off as the faster clerk picks up more of the workload? Or does the presence of a faster worker encourage them to boost their effort? Read Harford's latest Slate column to find out more.

Discussion Questions

1. Productivity is the amount of output per unit of labor input. How do Mas and Moretti measure the productivity of supermarket clerks?

2. According to Mas and Moretti, the presence of a quicker clerk encourages the other clerks to work harder. What is the size of the peer effect?

3. Mas and Moretti are convinced that peer effects, not checkout-stand congestion or managerial decisions, explain the changes in productivity. What makes them so sure?

4. A clerk's productivity rises only when a particularly fast colleague is facing (watching) her. If a clerk is looking at the back of a particularly fast colleague, her productivity does not change. What does this say about our motivation to work harder in the presence of an especially productive coworker? Given this evidence, what effect do you think automated checkout stands have on the work habits of supermarket clerks?

5. Suppose you're an analyst for a major supermarket chain. Given the results of Mas and Moretti's research, how would you go about designing shifts of workers with different productivity levels in order to maximize the number of beeps (checked items) per minute?

To view the abstract of Mas and Moretti's research paper, click here.

Innovation and Diffusion in Baseball

Managerial innovation often involves the use of new ideas that allow a firm to produce at a lower cost than rival firms and, in turn, earn higher profits. Yet, as word of profitable innovation diffuses, other firms will mimic the innovator until prices adjust and the innovator's initial cost advantage disappears. The labor market for baseball players at the turn of the 21st century offers an example of managerial innovation and diffusion. The innovator, according to Michael Lewis's Moneyball, was the Oakland Athletics headed by general manager (GM) Billy Beane. Beane was the first GM to make use of an idea that was formerly relegated to the realm of baseball stat geeks: the notion that on-base percentage is a much more important indicator of batting performance than baseball managers realized.

Let's assume that professional baseball teams earn more revenue when they win more games. In this case, profit-maximizing baseball teams will strive to maximize the production of wins while keeping the team payroll as low as possible. Winning requires scoring more runs than the opponent. We can think of batters as the run producers. A batter's value to a team is tied to his ability to produce runs and, by extension, wins.

Like any other productive resource, economic theory suggests batters should be paid according to their marginal productivity: that is, the amount their talents contribute to runs scored by the team. Of course, there is no way to measure this amount precisely. So summary statistics, such as batting average (the player's hits divided by at-bats), slugging percentage (the player's total bases divided by at-bats), and on-base percentage (the number of times a player reaches base divided by plate appearances) must be used. GMs must decide how to value each of the various batting attributes so as to acquire batters capable of scoring runs and winning games.

In a recent journal article, economists Jahn Hakes and Raymond Sauer (founder of The Sports Economist blog) show that, at the turn of the 21st century, player pay did not adequately reflect the contribution of on-base percentage to winning games. That is, in paying batters, GMs paid too little for on-base percentage and probably paid too much for other, somewhat less important attributes. Oakland's managerial innovation--emphasizing on-base percentage in the evaluation of prospective batters--exploited the inefficiencies in baseball's labor market and allowed Oakland to acquire players with high on-base percentages at a relatively low cost. As a result, the A's built a series of playoff contending teams but spent much less on payroll than clubs with a similar number of wins. Read the first few pages and the concluding remarks of the Hakes and Sauer article to find out more about the Oakland innovation and how its diffusion changed the labor market for ball-players.

1. According to pages 3 and 4 of the paper, what do batting average, slugging percentage, and on-base percentage measure? Compared to batting average, what additional information about a hitter's productivity does slugging percentage capture? What about on-base percentage? According to the authors, which measure, on-base percentage or slugging percentage, has a bigger impact on wins?

2. What do the authors conclude about the diffusion of Oakland's managerial innovation? Had the value that GMs placed on on-base percentage changed by the time Lewis's Moneyball was published?

3. Steven Levitt, co-author of Freakonomics, criticized Moneyball for over-emphasizing the role of batting and under-emphasizing the role of pitching in Oakland's recent success. Levitt argued that pitching generated most of the A's success. Remember, winning requires scoring more runs than the opponent. Part of a team's success in out-scoring opponents comes from the ability of its pitchers to keep the other team from scoring runs. During the 2000-2004 period, Oakland found a way to acquire inexpensive but productive offense and managed to assemble a stellar pitching staff. Do you think Oakland's offensive innovation helped free up the resources needed to acquire pitching talent?

4. What can the labor market for baseball players tell us about the labor market for corporate executives? Might boards of large corporations mis-price leadership attributes when they determine executive compensation? That is, do corporate boards overvalue certain characteristics of business leaders and undervalue other, potentially more important indicators of competence?

Real Wages and Productivity

The New York Times reports that real wages, as a percentage of GDP, have fallen to their lowest level in recorded history. The article contains a number of good nuggets that illustrate some basic points in economics.

First, we need to think about what we mean by "wages." A worker's nominal wages are the dollar value of her take-home pay, not including benefits. For example, if a worker earns $20 per hour before taxes, that is her nominal hourly wage. However, a worker's real wages are the wages adjusted for inflation. For example, if a worker's nominal wage rises by 2% and there is 3% inflation, we actually consider her real wages to have dropped by 1%--that is, the value of goods and services she could afford went down by 1%. (In fact, real wages did decrease in 2005: median weekly earnings increased from $631 to $651, an increase of 3.16%, but since inflation was at 3.4%, the $651 in 2005 was actually worth less than the $631 in 2004.)

However, the article doesn't say that real wages have decreased--indeed, with the exception of 2005, real wages have generally increased over the last few years. The article's main point is that as a percentage of GDP, real wages have been steadily declining. In other words, the growth rate of GDP has been steadily greater than the growth rate of wages and salaries.

But that's only part of the story, because wages are just part of workers' overall compensation packages. Health insurance is the other big component. Due to a historical anomaly, employers tend to pay for health insurance for their workers, rather than workers buying it on their own. Therefore, total compensation to workers can be thought of has having two components: wages, which the workers are free to spend as they wish, and a certain amount of money with which they are forced to buy health insurance. In recent years, the price of health insurance has grown at double-digit rates, far outpacing inflation, while wages, as a fraction of the overall compensation package, have been falling.

Note that the increase in health care spending might very well have had the same effect if workers received all of their compensation in cash, and then paid for health insurance out of their own pockets. Since health care is widely viewed as a necessity rather than a luxury, demand for it is relatively inelastic; therefore, as its price goes up, people might very well decrease their expenditures on other goods and services. In other words, the effect of an increase in the price of healthcare means a decrease in consumers' real income, and the fact that wages and salaries don't include benefits serves to highlight this effect.

However, even if we take into account both wages and benefits, overall compensation has still been falling in recent years as a fraction of GDP, while corporate profits have been increasing. Why? Workers have been more productive--that is, creating more output per hour of labor--which has meant higher revenues for firms. Those revenues accrue to different factors of production: wages to workers, rent to capital, and profits to shareholders. The article's main point is that the gains in worker productivity have not accrued to workers, but instead have gone largely to shareholders.

Describing how wages, benefits, and profits have changed over past years is the province of positive analysis. The article raises an important normative question as well: is it fair that wages have not kept pace with productivity? Or that the top 1% of earners received over 11% of all wage income, up from 6% three decades ago? These are important questions as well, but economic analysis is less helpful in answering them.

1. Suppose the U.S. government provided national health insurance for everyone. Do you think wages and salaries would still be falling? What about after-tax wages?

2. The divvying up of the economic pie appears to be a zero-sum game: there is a certain amount of economic surplus out there to be divided between profits and wages, and more of it has been going to profits. Jared Bernstein, a senior economist at the Economic Policy Institute, lays the blame for lower real wages on workers' lack of bargaining power. Would a greater rate of unionization help to achieve greater equity? Would it do so at the expense of efficiency? What about using government taxes and transfers to achieve greater redistribution of income from rich to poor households? Would economic policies aimed at a more equitable division of the economic pie mean a decrease in the size of the pie?

3. If labor markets were perfectly competitive, wages would increase directly with productivity. (For a simulation of how this works, see this demonstration of an interactive experiment based on the classical theory of the labor market.) What about the real labor market is a departure from this model?

Update: This has been a hot topic on the blogosphere. Greg Mankiw, Russell Roberts, and David Altig have posted comments on the article (and others' comments on it). More to follow, I'm sure, and we'll keep you updated.

The Productivity Gap Between Europe and the United States

A nation's GDP is determined by its labor force, its capital stock, and its technological knowledge. An increase in the amount of capital per worker increases a nation's GDP. An improvement in technology allows a nation to get more GDP out of its existing capital stock. Technology refers to the way an economy organizes its labor and capital to produce goods and services. If two nations have the same number of workers and capital but one nation uses better technology to get more out of its labor and capital, it will generate more GDP. The nation with better technology has higher productivity--it gets more output per hour of labor input.

A recent Hal Varian commentary in the New York Times focused on the role of technological knowledge in explaining the different productivity experiences of Europe and the United States. Compared to Europe, the United States experienced much stronger growth in output per labor hour over the past decade. Why? The evidence suggests that American firms integrate information technology more quickly than their European counterparts. Follow the link to find out more:

Productivity

1. What happened to the rate of productivity growth in the United States over the past three decades? What industries have been fueling productivity growth in the United States?

2. A computer, like an electric motor, is simply capital--a physical resource. Technology refers to the way that we organize our resources to produce goods and services. An improvement in technology occurs when we have a bright idea that allows us to produce more of the things we want from the same (or fewer) resources.

What technological improvement created a productivity boom by putting the electric motor to a novel use?

3. Given that American and European firms have access to the same information technology capital, why are American firms more productive?

4. What are the differences between British firms and American firms located in Britain when it comes to information technology capital per worker?

5. Consider two made-up firms: Initech and Initrode. Initech emphasizes experience- based promotions, a system that benefits older workers who have worked there for a long time. Initrode emphasizes merit-based pay, a system that allows the brightest young workers to move up quickly. In which firm would you expect managerial comfort with information technology to be highest?

Topics: Productivity, Technology