March 28, 2024

Economic View: Supply, Demand and Marriage

Under the dowry system in India, for example, parents of older brides would typically pay more to prospective grooms. Men with better jobs would receive larger payments, too.

In short, there really is a marriage market in many countries around the world, and economic principles apply to it. In markets with a preponderance of women seeking partners, the terms of trade shift in favor of men. If more men are seeking partners, the reverse is true. Two cases in point are the baby-boom generation in the United States and the current youth cohort in China.

In the United States, the end of World War II and the return of millions of troops set off the baby boom. In the second half of the 1940s, the population swelled by almost 14 percent, versus growth of less than half of 1 percent during the first half of the decade. By the mid-1960s, many of those babies were reaching the traditional marriage age.

At the time, it was American custom for women to marry men several years older than themselves. In a typical wedding in 1969, for example, the bride might have been born in 1947 and the groom in 1943. Because of that custom, women at the leading edge of the baby boom confronted a significant shortfall of potential marriage partners.

Economics teaches us that when there is excess demand for a good, its price rises. According to this model, excess demand for grooms should have caused the terms of courtship to shift in favor of men.

Before the 1960s, cultural norms encouraged celibacy before marriage. The breakdown of those norms has been widely attributed to the introduction of oral contraception, which gave women an unintrusive way to protect themselves against an unwanted pregnancy. The pill no doubt played a role — perhaps a very big one — but skeptics object that effective alternative forms of contraception had long since been available.

The supply-and-demand model bolsters the skeptics’ concerns. Biologists describe a fundamental asymmetry in the sexual strategies favored by males and females in vertebrate species. Males, whose sex cells are cheap to produce, tend to favor more transient sexual relationships, whereas females, for whom pregnancy and birth are far more costly, tend to favor greater commitment. The sexual revolution, which bent cultural norms toward male preferences, may thus be partly explained by the excess demand for grooms in the 1960s.

An imbalance in the opposite direction characterizes the contemporary marriage market in China. The Chinese government’s one-child policy, combined with a cultural preference for sons and technologies that permit selective abortion, have helped to create a large sex-ratio imbalance among young Chinese. For every 100 women in that group, there are now more than 120 men.

According to market models, the terms of trade in the Chinese marriage market should have shifted sharply in favor of women. And evidence suggests that young Chinese women and their families have in fact become much more selective in recent years.

They appear, for example, to focus more critically on the earnings potential of prospective mates. Because house size is often assumed to be a reliable signal of wealth, a family can enhance its son’s marriage prospects by spending a larger fraction of its income on housing. (Other families can follow the same strategy, of course, but when all families do so, the resulting homes are still reliable indicators of relative wealth.) Such a shift appears to have occurred.

For example, when Shang-Jin Wei, an economist at Columbia University, and Xiaobo Zhang of the International Food Policy Research Institute examined the size distribution of Chinese homes, they found that families with sons built houses that were significantly larger than those built by families with daughters, even after controlling for family income and other factors. They also generally found that the higher a city’s male-to-female ratio, the bigger the average house size of families that have sons.

Mr. Wei reports that many families with sons have begun to add a phantom third story to their homes, one that looks normal from the outside but whose interior space remains completely unfinished.

“Marriage brokers are familiar with the tactic,” he reports, “yet many refuse to schedule meetings with a family’s son unless the family house has three stories.”

Risk-taking among men is another marker of the terms of trade in marriage markets. Biologists have long argued that men’s relative willingness to engage in risk is an evolutionary legacy of polygynous mating systems, those in which males with the most resources took more than one mate. That means males with the least resources were left with none — the worst thing that could happen in Darwinian terms.

Fast-forward to humans today, and we can see why men may view financial risk-taking as a compelling strategy. Let’s say a man who is single has a chance to invest his last $10,000 in a very risky business venture. If it succeeds, he gets $1 million and is much more successful socially in finding mates.

So even if the odds of success are small, it would be rational — in Darwinian terms — for him to make the investment, because he would fail for sure if he doesn’t.

How is this showing up in China? Mr. Wei and Mr. Zhang find evidence that men are more likely to make risky financial investments in cities with higher male-to-female ratios. Their specific finding was that significantly more local businesses are started in such cities. This doesn’t appear attributable to other factors, since cities’ sex ratios seem to have no effect on the number of businesses started by foreigners.

The choice of a marriage partner is one of the most important decisions in life. It’s clearly very different from choosing a car. Yet in many ways, it appears to obey a strikingly similar market logic.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.

Article source: http://www.nytimes.com/2011/08/07/business/economy/marriage-and-the-law-of-supply-and-demand.html?partner=rss&emc=rss

Economix: The Human-Capital Approach to Occupational Choice

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

My previous post, on the shortage of primary-care doctors, brought forth a set of illuminating comments. As many readers pointed out correctly, the issue has many facets, not only an economic one.

Although economists are fully aware of the complexity of career choices, in their Op-Ed piece on the subject that inspired my initial post, Drs. Peter Bach and Robert Kocher used what economists call the human-capital approach to occupational choice.

That approach styles a career choice as an ordinary investment project, focused mainly on alternative cash flows or, in their more sophisticated forms, monetary equivalents of costs and benefits. Drs. Bach and Kocher focus purely on cash flows.

To recap their proposal, they would make attending medical school free of tuition for all students and pay that substantial cost by eliminating the salaries currently paid to residents not in a primary-care residency.

Making tuition free will not increase the overall number of medical school graduates –- because their number is constrained by the limited supply of medical-school places in the United States.

There is already huge excess demand for medical education in the United States, which denies access to thousands of qualified American college graduates every year, then covers the resulting physician shortage by importing large numbers of medical graduates from abroad.

Drs. Bach and Kocher believe that eliminating the salaries of residents in the specialties will drive many among an artificially limited supply of medical school graduates into primary care. Frankly, I doubt it.

To follow my reasoning, let us build the human-capital model that economists would use in the classroom to this end.

The Baseline Human-Capital Model
To illustrate the human-capital approach, I begin with what I shall call the baseline case, using numbers from Drs. Bach and Kocher. Currently, residents in both primary care and in a non-primary-care specialty (hereafter just “specialty”) are paid salaries starting at $50,000 and assumed here to be rising at an annual rate of 3 percent.

We imagine a 26-year-old medical-school graduate who is choosing between a career in primary care and a higher-paying medical specialty that does, however, require two added years of residency. We assume that primary-care physicians serve a three-year residency and residents in the non-primary specialty serve a five-year residency.

Upon completion of their residencies, we assume that primary-care physicians will start practice at a pretax income of $190,000 and specialty physicians will earn 70 percent more in every year of their career, as suggested by Drs. Bach and Kocher. Thus, we assume that specialists start at an annual income of $323,000. Our assumption, as noted, is that specialists start practice two years later than primary-care physicians.

Finally, we assume that the incomes of both categories of physicians grow at 5 percent a year until age 55 and a bit more slowly thereafter. That rate may be higher than current growth rates in annual physician incomes; the higher rate reflects an impending overall shortage of physicians in the United States, as is now widely anticipated by the experts. In fact, a rate of 5 percent may turn out to be low.

Many physicians may not recognize their own experience in this hypothetical example, because there is considerable variance among physician incomes. I merely seek to be illustrative here with reasonably realistic central tendencies.

The chart below illustrates the alternative future cash flows that our hypothetical baseline case implies over the physicians’ careers, starting with their first year of residency. For ease of calculation, we make the assumption that all salaries and incomes are received by the physician at the end of the year in one lump sum.

The red line in the chart represents our hypothetical primary-care physicians and the blue line the specialist.

Let us now look at the purely financial investment implied by a medical-school graduate’s decision to train for a specialty rather than pursue a primary-care career, other things being equal.

Basically, the investment here is the primary-care income that the specialists forgo during the extra two years of residency, minus the residency salary they will earn in those two years. The return on that investment is the much higher income the specialist earns thereafter.

The next chart depicts the differential cash flow implied by this investment decision. From a monetary perspective, training for a specialty tends to bring a large payoff on a relatively small investment outlay, certainly for the higher-paying specialties.

The two most widely used metrics in the classroom and in modern business practice to evaluate future cash flows from investments are the net present value of the cash flow, known as N.P.V., and the internal rate of return on the decision, known as I.R.R.

(This is not the place to explain these two economic concepts in detail. For readers who would like to know a bit more about them, see the lecture notes from my freshman economics course.)

In a nutshell, the net present value of an investment is the algebraic sum of the future periodic cash flows it yields, with each future year’s cash flow converted to present-value terms. In this case “present” means the beginning of the first year of residency.

The idea is that if one can earn, say, 6 percent on $1,000 invested for one year, one would end up with $1,060 at the end of the year. The $1,000 is thus the present value of the $1,060 receivable one year hence. By the same reasoning, at an interest rate (also called discount rate) of 6 percent, a $350,000 receivable, say, 12 years hence would have a present value of only $173,939 = $350,000/(1.06)12.

Practically, we can think of the N.P.V. as the amount by which the investor’s (here the specialist’s) wealth is expected to increase, as of the moment when the investment decision is made, by choosing the investment rather than forgoing it. Think of it as instant wealth creation, but wealth measured in N.P.V. terms.

The I.R.R. is a more difficult concept. It can be thought of as the rate of return the investment project yields, in any given year, on the amount invested in the project and not yet returned by past cash inflows as of the beginning of that year.

In their textbooks on corporate finance, economists regularly warn against relying on the I.R.R. to evaluate investment decisions, because that metric can be quite treacherous. Ironically, when applying the human-capital model to occupational choice in their theoretical or empirical work, economists have focused mainly on the I.R.R.

In what follows, I shall focus mainly on the N.P.V. criterion.

For our baseline case — in the absence of the Bach-Kocher proposal — where both types of physicians are paid salaries during their residencies, the net present value of an investment in becoming a specialist rather than a primary-care physician, calculated at an annual discount rate of 6 percent, is $2.1 million. (If we had looked just as the algebraic, undiscounted sum of the differential cash flow in the second chart it would be $9.3 million, but because $1 received 40 years hence is not the same as $1 received one year from now, the algebraic sum of long-term future cash flows has no useful meaning).

I note in passing that the corresponding I.R.R. to this investment is 39.22 percent. That rate of return may strike readers as very high, but even higher rates have been found in the empirical literature (see, for example, Pages 4-8 in this paper by Sean Nicholson, now of Cornell University, and Slide 18 in another of his papers).

The Bach-Kocher Proposal
Under this proposal, no medical student would pay tuition. Therefore we can disregard tuition altogether, because there is no difference between the two types of physicians.

In fact, the only small difference between this proposal and the current baseline is that specialty residents would not be paid a salary during their five years of residency. The algebraic sum of the foregone salaries is a mere $265,457. Its present value is $222,872, not even as much as the specialist’s first-year income. It represents a decline of about 3.3 percent in the $6.8 million N.P.V. of the specialist’s lifetime cash flow.

Put another way, the Bach-Kocher proposal would shrink the difference between the N.P.V.’s of the two physicians’ lifetime earnings to about $1.88 million, from $2.1 million.

If I were the medical school graduate and had to choose between a specialty career or a primary-care career, these small declines in the N.P.V. of my expected lifetime earnings certainly would not drive me into primary care.

An Alternative Proposal
An alternative proposal would be not to force specialists to forgo their residency salaries. Instead, we would alter the baseline case simply by raising the primary-care physician’s income by X percent in each year of practice, leaving the cash flow of specialists unchanged. In that case, one would not make medical school tuition-free, sparing the taxpayer the need to bear that cost.

For starters, let us ask how large X would have to be to achieve the same result as the Bach-Kocher proposal, in terms of a decline of the N.P.V. of the specialist’s cash flow relative to the primary-care physician’s.

The answer is that a 2.21 percent increase in every year of the primary-care physician’s income would have the same overall effect as withholding the salaries of the specialists during residency. That may seem a small increase, but it would, of course, be applied every year, and that will add up.

While the Bach-Kocher proposal is imaginary and novel, I conclude that is too timid to move the mountain.

If there really is a shortage of primary-care physicians in America — and one could have a debate on that issue — then more powerful policy tools must come into play, going beyond mere financial return, which is but one of many factors driving specialty choice.

Part of a better policy solution would be to inquire more deeply how medical graduates responds to income differentials in practice. Do they use the concepts taught in economics? Or do they just observe prevailing income differentials among the various specialties and base their choices on that information?”

Article source: http://feeds.nytimes.com/click.phdo?i=958a2f59ad666b34724d9ae965beb524