A surprising thing about Google, and the economics lesson it teaches us.

I learned something surprising about Google this week.

Their spam-filtering software lives an amazing double life.

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I’ve known for some time that if you fill in this form (to post a comment on a blog, or whatever), you need only type the number on the right – it will ignore the number in the photograph. That was perplexing.

Then I discovered Google is using us. When you type the number in the photo, that gets sent to Google Maps, where it answers a question being asked by Streetview – ‘what street number is this?’.

This is quite brilliant. They apparently also use this program, called ReCAPTCHA, to decipher words the software can’t untangle when scanning books. So every time you post on a blog, you’re contributing to the quality of streetview, or scanned books.

Ingress by GoogleThe idea is so clever that Google now has software that is entirely designed to trick us into doing work for them.

I am talking about the “game” called Ingress. I downloaded this last week, because it was free and the Google App store told me it was highly regarded.

I opened the app and when it told me I had to “walk” to achieve the missions, I started pinching the screen, tapping, even shaking my mobile device to figure out how to “walk.” Soon it dawned on me. “Walk” meant “walk”. 

The app is designed to collect data on the walking distances, way-finding and walking time between landmarks, especially those which are in pedestrian areas not covered by the Google streetview system. (The game itself is pretty intriguing but also pretty confusing.)

The lesson of all this is the power of a big company – there are amazing things you can do inside a company that you couldn’t do outside.

One of the last century’s most famous economists – Herbert Simon (Nobel Prize in Economics 1978) argued the existence of companies actually showed markets’ weaknesses. (Here’s his great 1991 paper, Organisations and Markets.)

Inside companies, exchanges are based on relationships, not market payments. Unless you get paid piece-work, you are rewarded for being there, not for every article you write, or every ministerial briefing, or every line of code. You do the work because they trust you to do it. You are getting paid, sure, but you trust that working hard now will lead to reward down the line. It’s not specified in the contract.

Every time a company expands, they are saying that they have more faith in using relationships to get the output of the people they just hired, than using the market. The reason is transaction costs. 

Google is a monstrous, monstrous beast. It now has 47,756 employees, and if they are as happy as my friend who works there, they are very happy indeed.

While Google is tricking us into doing work for it via non-market transactions, Amazon is arranging to pay people to do similar work.

They have a “marketplace” called Mechanical Turk, where you can get stuck into the task of diong things computers can’t. Maybe selecting which photo of a landmark is clearest and best, transcribing some audio, or similar.

But it has been controversial. Bloggers complain the pay is too low and the jobs listed are themselves spam, the term digital sweatshop is being thrown about, and the Huffington Post has written about “Amazon’s new underclass.”

But there are many tasks, like completing surveys or any crowd-sourcing task, where low effort from lots of people delivers a better result than lots of effort from a few well-paid people.  Google seems to have this figured out - the market is not always the best solution.

Why Labor should have made equality a key budget figure.

The Budget comes out on 13 May, and when it does, one thing is for sure. Everyone will get in a flap and a lather over the wrong things.

The Budget is a whopping lump of documentation, and many of the people sent to cover it are inexpert in matters fiscal.

So at the end of the day, an inordinate number of stories will be simply about “the deficit.”

It’s one of only a few simple numbers in the whole Budget. Earnings minus Spending, delivering a binary result: Surplus/Deficit. Good vs Bad. It’s quite graspable.

But it is very hard to find experts that care about each year’s budget deficit. (1, 2, 3, 4.)

Forecast deficits are more important, but the actions that need to be taken to get the ship in order long-term are often counter-productive if you want a surplus ASAP.

Stressing over one year’s budget deficit is akin to stressing about the score in a five minute period of a game of football. Sure, the end result is made up of periods just like this one. But experts understand that the game turns over a longer period than just five minutes.

Sometimes you are kicking into the wind, and a deficit score can be okay. Sometimes you run a deficit on purpose, to prop up the economy or grease the wheels of reform.

Raising funds to cover a deficit is easy and cheap at the moment.

Headlines that scream Deficit! and Surplus! – complete with a cartoon of a treasurer either pulling out his pockets to show they are empty, or otherwise evilly grinning and hoarding cash – would be better spent focusing on what matters.

The way to train people’s focus onto certain matters is to measure and report them.

“If you can’t measure it, you can’t (media) manage it,” as they say.

Labor had the opportunity to remake the focus of the Budget, but lacked the foresight.

They could have put the budget balance in size eight font and tucked it away down the back. Obviously you can’t take away the food bowl and expect the media to sit there wagging their tail. You’d need to give them something else.

When in power, Labor could have chosen any number of other measures to make the focus. Productivity, the need for tax reform to fund the NDIS and Gonski, composition of revenue, efficiency of government service delivery broken down by department, or even equality.

Politically speaking, this last one might have been quite useful.

The Australian economy has been characterised by a fall in the compensation of employees (COE), relative to profits.

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The National Accounts, from where these graphs come, note: “The profits shares recorded since the late 1980s are at a distinctly higher level than those reported at any time since 1959–60.”

I do not suggest that at the moment there is a crisis in equality in Australia, but I suspect many people think Australia could do better. And there is a choice to be made as Australia equips itself with policies for the next decade. Do we want to be Sweden or America?

People realise policies that promote freedom and small government can lead to inequality of outcomes. Mostly they accept that, until the inequality is bad enough to undermine the society expected to enjoy that freedom.

In the US, inequality is so bad that Walmart now is forced to declare as a material risk to its earnings, any changes to  Government welfare cheques that would further impoverish its customers. (from the Wall Street Journal).

It’s hard to have a mass market business if the mass market is so poor. And in America, the focus of inequality is no longer on the 1 per cent but the 0.01 per cent.

The evidence is not finalised but much of it is pointing in one direction – rules that promote equality inside a market economy are correlated with happier people. The Labor party has as its assistant Treasurer a man who authored a lot of the research on inequality in Australia, Andrew Leigh.

The Budget is the best time to try to introduce a new concept or issue into the economic debate, because that is when the greatest number of Australians are paying attention. Using the budget to shape the environment in which economic policy is played is going to yield better long-run outcomes than playing another round of The Deficit/Surplus Game.

Even if the other side gets back in and removes that statistic from the Budget, the public – by then attuned to expect this data – gets the sense the new team is hiding something.

If the Coalition wants to be smart, they can pick a concept (assuredly not inequality, but perhaps labour productivity, days lost to industrial action, rising health spending or a measure of how free Australian markets are) and use that as a central theme.

Market Forces: Should a taxi ride cost even more?

In the rain on Wednesday night, I got a cab home from the city – a $15 fare. Near my house the driver had to turn from a busy road into a side street, across oncoming traffic.

As the windscreen wipers flicked back and forth, the oncoming headlights of a bus distorted into a kaleidoscope of colour in the raindrops. At that exact moment, the driver took his foot off the brake and began to make his turn.

Every muscle in my body tensed and I opened my mouth to shout something, but then he stopped again. The bus had to swerve past the yellow bonnet of the car. Once it was gone the driver proceeded.

And I’d rate this guy as one of the better drivers I’ve had in recent times. At least he didn’t drive on the footpath.

So when the state government announces it is raising the fares on taxis, what do I think? I say thank god. Let’s make driving a taxi rewarding enough that people with a will to live and proper skills want to do it.

The government is proposing to raise flagfall from $3.20 to $5.20 after 5pm and to $6.20 on Friday and Saturday nights.

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A sheltered industry

The market for taxis has long been a mess. A big part of the problem is the lack of actual market forces. The industry has long been regulated to within an inch of its life. The biggest single rule has been a cap on the number of taxis in Melbourne, that drives up the value of a cab.

The licenses (aka plates, aka medallions) that permit you to have a taxi in Melbourne are worth hundreds of thousands of dollars. The owner gets half the money you pay. The value of the medallion exists only because the number of taxis is regulated.

As the medallion owner reaps return on the investment, the cab driver gets screwed. An Age journalist recently trained and worked as a cab driver and made $8 an hour for his troubles.

One of the reforms proposed by the Victorian government’s taxi review was for the split of revenue to change from 50:50 to 55:45. A ten percent increase for the driver is hardly earth-shattering, but it has been opposed by the Victorian Taxi Association. That is the peak body for the industry. Unsurprisingly, it doesn’t effectively represent the users of taxis or the casual drivers. It is backed by the money.

It also opposed the big reform proposed by the taxi industry review, increasing the number of cabs in Melbourne. Despite its arduous work in representing the interests of the medallion holders, that reform has driven down the price of a taxi license. (In 2012, licenses were changing hands for as much as $500,000.)

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The government has agreed to a clever approach – leasing 12 month taxi licenses at $22,000 a year. This price is indexed at below the rate of inflation. The eventual effect is that the price of a taxi license approaches zero, and the market is no longer held hostage by the medallion holders.

The other big change that is being stealthily introduced is deregulation of fares. Part of the problem is that a taxi is just a taxi. There’s no easy way to get a good one. No way to offer a better service and charge a higher price.

Quality lottery

Another yellow ball bouncing round the barrel of the quality lottery

But in country areas, the government is introducing a rule that allows taxis to set their own fares. I see a link with today’s announcement. Might higher fares in the city build a consensus that really, deregulated fares are the desirable outcome?

Hopefully by that point, the taxi industry as we know it will cease to exist anyway. The hire car and limousine market has also been given freer rein under these reforms. Hire cars differ from taxis because they cannot pick up fares on the street –  they have to be booked. Pre-smartphone, this was an impediment. Now booking your ride is only an app away.

The biggest player in this space is Uber.  It started as a a way for towncar and limo drivers in the US to make money in their downtime, and is now available worldwide. The little car-hailing company that could is now worth an estimated $3.5 billion. According to their website, riding from my house to the city could cost as little as $10 and you might end up riding in a Prius or a Mercedes.

If they put our yellow cabs out of business, I won’t shed a tear.

Unemployment is down! We Think!

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Unemployment numbers are out and they look like good news. Unemployment fell 0.2 per cent to 5.8 per cent. This matters to everyday life in the following four ways.

1. Lower unemployment should mean bigger pay rises, and more options if you lose your job.

2. Lower unemployment increases the chance the Reserve Bank will hike interest rates, which will get you a better return on the money you have stashed in the bank.

3. Lower unemployment tends to force up the Australian dollar, creating cheaper holidays and cheaper imports. (It jumped over US94c this morning for the first time since last November.)

4. Lower unemployment increases the chance of the incumbent government doing well in the polls. “It’s the economy, stupid.”

But…

There’s not total absence of doubt.

If you look at the numbers more closely, there’s a few little things that might make you worried.Image

For starters, while the latest data, seasonally adjusted, shows the unemployment rate falling sharply, the trend data (calculated over a longer period) actually has unemployment rising.

There are things doubters can always say about the monthly data, that are not especially helpful.

“It’s just one month!”

“The standard error of the unemployment rate estimate for this survey is 0.2 per cent!”

“Seasonal adjustment is not perfect!”

The top two complaints are true and can only be resolved by waiting for more data (which will, itself, be subject to the same issues…).

But the ABS manages seasonal adjustment pretty well. They even account for the fact that Easter was in March last year and in April this year

March is a big month for falling unemployment.

Red line represent falls in March

Red lines represent March

On average, unemployment has fallen in 19 of the last 20 Marches, by an average of 44,000. Why? perhaps it’s only now that businesses are getting over the summer lull.

The ABS takes that effect out systematically. The red lines are the last 20 Marches, almost all of which show falling unemployment. But the average of the blue lines is just about zero:

Red dots are original data, blue lines are seasonally adjusted.

Red dots are original data, blue lines are seasonally adjusted. (data for last 20 Marches.)

We can trust this data for now. But it will be very interesting to see if April results in the effect being magnified or reversed.

Ethical economics: the externalities of eating meat.

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Australians get through a lot of meat. The ABS released its meat and livestock series this week, and it caught my eye. Every month we kill and eat (or export) this many of the following animals:

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I’m an ex-vegetarian.

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A pork belly sandwich with which I crossed paths recently…

So this is not a diatribe or an attempt to persuade you to stop eating meat. It’s an attempt to persuade you that economics provides ways of thinking about issues beyond what you may expect.

Meat-eating can be considered as an economic issue. There are externalities to take into account.

CO2 emissions is one (agriculture is omitted from our carbon tax). But another is the ethical issue of killing. That might not seem like an externality – it’s central to the process – but it is external to the market. There is no price mechanism that accounts for the slaughter of the animal.

If we model that as an externality, there are important differences in the number of kills per mouthful of meat.

Here’s the monthly tonnage the industry produces.

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The result of that is that every meal represents a different amount of the externality in question.

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This is important information. If we aim for a buddhist ideal of minimising killing, perhaps we ought to eat only very large animals?

But deaths are not equal. Even fervent vegans would place more ethical and emotional weight on the death of an elephant than a fly (I think).

What happens if we weight these creatures by their brain size?

Cow 450g
Pig 180g
Sheep 140g
Chicken 4g
(Humans, for reference, have brains weight around 1.4kg.)

In this case, the chicken races up the league table to be a relatively ethical choice. The sheep, with a modest body size for its biggish brain, becomes the least ethical choice.

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Of course brain size is not the only measure of intelligence. (And intelligence remains a highly disputable way to measure the possible ethical externalities of killing animals.)

If you are interested in reading a bit more about animal intelligence, I found this article particularly amazing.

Do you really get a job by looking at job ads?

How exactly do people get jobs?

A few people I know are currently looking for work. I began to wonder if combing through advertised jobs is enough, and thought a little sample of my own experience might help answer that question.

1996. My first ever job was selling ice-creams at a festival in Melbourne called Moomba. I got the job through a friend’s dad. Pay and conditions were great.
Ad: 0%. Luck: 0%. Inside running: 100%.

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Back when I wore a watch

1998 After I finished school I got a job as a busboy at a cafe in a shopping centre. It wasn’t advertised but I handed my resume out to 20 businesses near my house and this one had an employee quit the next day. $8.50 an hour in cash seemed pretty good to me.
Ad: 0%. Luck: 100%. Inside running: 0%.

2000 I became a waiter at Pancake Parlour. Pay was a whopping $7.27 an hour. It was an advertised job for which I went through a quite involved interview process.
Ad: 100%. Luck: 0%. Inside running: 0%.

2001 Waiter at italian restaurant. Through a friend. I lasted about three weeks.
Ad: 0%. Luck: 0%. Inside running: 100%.

2002. Market research interviewer. A friend who worked there told me the place was hiring. Great pay and conditions so I joined the union. Ended up doing market research for big tobacco, but I didn’t mind because smokers loved to chat about smoking. It beat asking people about banks.
Ad: 80%. Luck: 0%. Inside running: 20%.

Teaching english2003 I applied to an ad for an English teacher in the small town of Qinhuangdao, China, where I found I could go months without seeing another foreigner.
Ad: 100%. Luck: 0%. Inside running: 0%.

2004. I parlayed my meagre teaching experience into a job as a tutor in the first-year economics subjects, which was among the best and most convenient jobs for a student ever.
Ad: 100%. Luck: 0%. Inside running: 0%

2005. My first full time job. I became a graduate Treasury policy analyst, living in Canberra.Treasury shot tidied up Ad: 100%. Luck: 0%. Inside running: 0%

2005. Ski instructing at Perisher Blue. A week-long “hiring clinic” for which you have to pay hundreds of dollars serves as both interview process and training.
Ad: 100%. Luck: 0%. Inside running: 0%

2008. Nauru budget adviser. I happened to have just finished my tutoring contract when I was asked by someone I knew in the federal government to come to an interview. I don’t think they interviewed anyone else.

nauru office Ad: 0%. Luck: 20%. Inside running: 80%

2009 Victorian government policy officer. Through a recruitment company.
Ad: 0%. Luck: 0%. Inside running: 0% (I’d say it was 100 per cent luck but luck should be good and this job wasn’t.)

2010. Journalist at the Financial Review – I applied at a timely moment when a bunch of people had quit. But there was no job advertised and I had someone on the inside put in a good word for me.
Ad: 0%. Luck: 30%. Inside running: 70%

2013 – Freelance writing. I sell things mostly to people I know from my other jobs, but also via some cold calling.
Ad: 0%. Luck: 20%. Inside running: 80%

After having had 17 jobs, just six came from simply seeing an ad and applying. My crude averaging of the numbers (including some jobs I didn’t go into above) says ads explain 46 per cent of my jobs, inside running 32 per cent, and luck 22 per cent.

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(I should note luck played a pretty big part in being born to a family that cared a lot about education and invested in my future. It also doesn’t hurt to be in a bunch of categories that are unfamiliar with the sting of discrimination. Is my experience strongly shaped by these privileges?)

The common trope is that 70 per cent of all jobs are not advertised.

Economic theory suggests a great benefit and a great cost. If firms are able to fill jobs quickly and minimise their search costs, that could be an advantage. But if it means they miss out on the best human resources, they suffer.

Despite the risks of hiring through word-of-mouth, the approach is not about to go away. This paper finds that firms that hire through referrals may be more profitable.

This expert recommends job hunters should spend: “20% of the time responding to job postings … another 20% ensuring your resume and LinkedIn profile are easy to find and worth reading, and the remaining 60% networking to find jobs in the hidden market.”

If my experience holds for everyone, its going to be advantageous to keep working in the same city, or at least the same country, where you have a bunch of connections. It also doesn’t hurt to be on LinkedIn.

But I want to know if the same is true for you. Have you got your jobs by responding to ads and going through rigorous processes? Have you been lucky? Made your own luck? Deliberately developed and used your networks? Please share your experience in the comments! (Look for the words “Leave A Reply” below)

When the first-day-back-from-holidays blues can be fatal

We all know the feeling. You take your annual leave and go on a terrific holiday. Perhaps some cultural time in the capitals of Europe. Perhaps a noodle and beer-intensive tour of South East Asia.

Then you return to work. The swivel chair sits forlornly awaiting your return. Hundreds or thousands of emails demand your attention.

You dive into work with a mixture of novelty and regret – this used to be very familiar, you think, and now it is not. At least until around midday, when it will seem as though your holiday never happened at all.

But it turns out there is clear evidence of the holiday. It can be measured in your performance. A recent working paper released by the US National Bureau of Economic Research finds that rather than refreshing your batteries, the holiday makes your performance worse.

And here’s the really bad news:

The study was done on surgeons.

Fatality risk increased for every day the surgeons took off between procedures.

In the study the mean mortality rate the first day after surgery was 0.62 per cent. Mortality rose by .05 percentage points for every extra day it had been since the surgeon held a scalpel. That is a 7.4 per cent rise in the risk of dying.

The study (Hockenberry and Helmchen) covered 56,000 patients and 188 surgeons and focused on a procedure called coronary artery bypass grafts. 

Hospitals prefer doctors who do a lot of surgeries, because they are more effective. Surgeons who did more than 100 of the procedure per year had lower one-day mortality outcomes (0.52 per cent), but for them, time off was even worse. For every day of rest, the morbidity rate of their next surgery rose by .09 percentage points.

The doctors did not perform worse on absolutely every measure. When they were back from a break, they apparently sped through the surgery, using less resources. Each day off correlated with a fall in the cost of surgery of 0.6 per cent.

But the saving was well below the value of life lost. In other words, society would prefer the doctors to spend more time and money. The researchers theorise that the cost effect and the morbidity effect are related – relaxed surgeons with their brain still on the golf course are failing to notice important complications and therefore closing up when they should be doing more work.

“After temporal breaks, surgeons may fail to identify and treat life-threatening complications.”

The effect was stronger for surgeons if they had had a lot of time off from surgery in general, rather than if it had been a long time since they undertook the specific procedure being studied.

The effect requires more study before we can determine a policy response.

If the depreciation of skill happens exponentially the longer doctors are on break, we could encourage them to take several two-to-three day breaks a year, rather than one four-week holiday. 

But if the depreciation of skill has a linear or decreasing relation to time away, doctors could be encouraged to take all their leave in a lump. General learning theory suggests most forgetting happens straight away, suggesting the latter solution would be preferred, but this study did not attempt to answer the question.

The research is part of a field of study that looks at human capital and how it erodes. It is well-established that the amount of time that elapses between repetitions of a task decreases the quality of outcomes.

This raises questions about a lot of training courses the modern office worker is encouraged to attend. Is the day off worth the meagre benefit if it also makes the worker less productive on their return?

The link between time off and productivity may also have negative implications for going part-time, buying extra leave, and taking career breaks. These issues are ever more relevant in the modern economy where parental leave is all the more common, where people change jobs often, and where jobs may encompass a wide range of tasks undertaken infrequently, rather than repetition of a few tasks.

There is room for a lot more research on this question, but for now, there is one clear lesson: Don’t choose a surgeon with a suntan.