Naked Economics by Charles Wheelan

41 Pages·2012·0.71 MB·English

Naked Economics
by Charles Wheelan

Chapter 6
Productivity and Human Capital

 Bill Gates’ house

 Why do some people have trampolines in
their house and have private jets, while
others have to sleep in bathrooms at the bus
station?

 13% of Americans are poor

 1/5 children (35% black children) live in
poverty

 3 billion people are desperately poor in the
world

 About 7 percent of the population was living under or near the
absolute poverty line in 2010, the Ministry of Health and Welfare
said Monday. The figure is a slight increase from 6.7 percent in 2006

More than two-thirds of them were jobless, and many lived on their
own or suffered from chronic illnesses with expensive medical fees,
the ministry said.

The report showed that 3.2 percent, or 1.5 million people, were
living under the poverty line ― set at 1.4 million won ($1,217) a
month for a family of four. Such families qualify for governmental
aid.

Another 1.8 million people lived barely above that line, making less
than 120 percent of the poverty wage, but were excluded from the
benefits.

 Korea Herald, April 6, 2012

 At least 80% of humanity lives on less than $10 a day.

 More than 80 percent of the world’s population lives in
countries where income differentials are widening.

 The poorest 40 percent of the world’s population accounts
for 5 percent of global income. The richest 20 percent
accounts for three-quarters of world income.

 According to UNICEF, 22,000 children die each day due to
poverty.

http://www.globalissues.org/article/26/poverty-facts-and-stats

Poverty Rate in World

 Economists study poverty and income inequality

 They ask why?

 One answer is the theory of human capital.

 Human capital: the sum total of skills in an
individual: education, intelligence, charisma,
creativity, work experience, entrepreneurial vigor,
physical skills

 Stripped of wealth and possessions, what is left?
How would Bill Gates do? Tiger Woods? Bubba
who dropped out of 10th grade and struggling with
a crystal meth addiction? How about the sultan of
Brunei?

 Labor market like any other: some skills
are in greater demand than others

 More unique the skill, the better
compensated

 A-Rod makes $275m over 10 years

 He can hit a ball, win games, fill stadiums,
sell merchandise, and earn television
revenues

A-Rod

 Price of certain skill not related to social value, but to its
scarcity

 Robert Solow (1987 Nobel Prize in Economics) earned less
money for the Nobel Prize than Roger Clemens earns in one
season: “There are a lot of good economists, but there’s only
one Roger Clemens.”

 The wealthy more often than not have specialized training;
this requires investment

 A college education earns a 10% return

 Education/human capital is an economic passport; in some
countries the right to immigrate depends on skills and
education

 Mr. Abouali’s thoughts on his son’s education; no leisure time,
no breaks; gain the skills now to better insure the future

 Few skills required for a fast-food worker; 150 million
people in the USA capable of serving a value meal

 A high unemployment rate is not necessarily because
there are no jobs; there is not the right human capital

 Poverty is having little human capital

 High school dropout poverty rate 12 times more than
college grads

 Why is India one of the poorest countries? - 35%
illiterate

 Or some suffer from conditions that render their
human capital useless: in the US, many homeless
suffer from substance abuse, disability, and mental
illness

 A healthy economy helps: a rising tide lifts all
boats

 A booming economy doesn’t help parking lot
attendants to become professors; they need to
invest in human capital

 Macroeconomic factors control the tides; human
capital determine the quality of the boat

 Imagine: 100,000 high school dropouts left in the
middle of Chicago

 Imagine: 100,000 graduates from the best
universities left in the middle of Chicago

 Consider the case of the Naval Air Warfare
Center; produced advanced electronics, and
was shut down due to military downsizing

 Usually a plant closing in a city is disastrous,
but the quality of human capital, with
scientists, engineers, and technicians,
allowed the plant to be sold to a private buyer

 On Friday, the employees left work as
recently laid-off government employees, then
on Monday, 98% of the workers returned as
Hughes Electronics employees

 Different from the stories of the closing of
a mill, mine, or factory; lower quality
human capital

 Economists estimate a 25% earning
capacity lost when a factory closes

 The Lump of Labor Fallacy: the belief that
there is a fixed amount of work to be done
in the economy, and every new job must
come at an expense of a job lost elsewhere

 But, jobs are created anytime a new
service is offered, or a new and better way
to make an old one is discovered

 Over the past 3 decades, tens of millions of jobs
were created; the internet and high-tech industry

 Since the 1950s, millions of women entered the
labor force, yet unemployment remained low

 Immigrants have come, without increased
unemployment

 Some jobs are lost, but many more are created.
Every worker will have money to buy more goods,
more demand; a virtuous cycle