0:33 Intro. [Recording date: January 31, 2020.] Russ Roberts: Today is January, 31 2020, and my guest is economist Ed Leamer of UCLA where he is the Chauncey J. Medberry chair and management. He's also Professor of Economics and Statistics and the director of the UCLA Anderson Forecast. This is Ed's fourth appearance on EconTalk, but he has not been here, I'm sad to say, since May of 2010, when we talked about the state of econometrics. Our topic for today is the role of effort in affecting how we measure inequality, drawing on a recent paper, which we will link to, that he has written with J. Rodrigo Fuentes. I want to thank Plantronics for supplying Ed with the Blackwire 5220 headset. Ed, welcome back to EconTalk. It has been a while. Ed Leamer: It's great to be back. I missed this conversation. I really admire all the stuff you do, and being a participant is really great. Russ Roberts: Thanks, Ed.

1:24 Russ Roberts: Well, let's start with the transformation in manufacturing. There's a lot of concern about that out in the policy space, the political world; and there's some complexity there between output and employment. But it's certainly a sector of the economy that's changed drastically over the last 50, 60 years. Ed Leamer: Well, I would back up and say that we built our democracy in the factory floors of America, because with those are good jobs for middle class Americans and they pay decent wages; and while you have large numbers of people employed there you have a solid democracy. But since around 1950, there's been a decline in the share of jobs in manufacturing. In the 1960s, it was around 35% or something. Now it's down to eight or 9%. A lot of that is said to be a Chinese caused, but in fact the decline began long before the Chinese played a role. They did play a role, but the jobs in manufacturing have been on the decline since the 1960s. If you plot the ratio of jobs in manufacturing compared to total jobs, it's almost a straight line down since 1960. Russ Roberts: My impression is that the Chinese increase in trade with the United States accelerated the reduction in that proportion, but it's certainly not the underlying cause in any way. There's a whole bunch of stuff going on, obviously on the productivity side. We recently had Susan Houseman on the program where she suggested that on the output side, it's actually pretty stagnant except for computing: that a lot of the apparent health of manufacturing on the output side is driven overwhelmingly by the computing sector. So, that the last 30 or 40 years actually haven't been good on the output side other than in computing. But certainly on the employment side, it's a place where fewer and fewer workers, especially workers who have only graduated from college--excuse me--have only graduated from high school, not going to college, found work and [?] have fewer opportunities. Ed Leamer: So, I don't know the work that you're referring to, but my impression is there's been a productivity improvement in manufacturing that has been incessant throughout the whole 20th century, and that allowed fewer workers to get the job done. That therefore, would have called for fewer number of workers throughout the first half of the 20th century, but in fact you had more and more people working in manufacturing. So, how can that be when you're getting a productivity improvement? The answer is, it's product innovation, not process innovation. So, that was an era in which you had all kinds of stuff that had to be built and that was not available in 1990. Washing machines-- Russ Roberts: In 1890? Ed Leamer: Yeah, I'm sorry. I meant 1900s. There's a great book by Bob Gordon about the transition from 1870 until now, and he emphasizes very much that fact: that the product innovation in the second half of the 20th century was quite different than the product innovation that occurred earlier. And that to me is the main driver. We're having a different method, different kind of innovation still occurring. What I found is, iPhone is a huge innovation, but a new iPhone doesn't create new jobs. So, it's a different kind of story. Russ Roberts: Not as many as, say, as many in the car, refrigerators, etc.

5:02 Russ Roberts: So, what has changed for workers of low skill because of that? I shouldn't say low skill: I should say low education, particularly. For workers who have less education versus workers who have more, how has that changed in manufacturing? What's been the impact? Ed Leamer: Well, I think the operative words are 'creative destruction' that are used to describe any kind of innovation. There's creates new things, but it destroys old[?]. And, globalization and technology had really destroyed the high school degree, that asset that was very important for the middle class Americans. Because it used to be you'd get through high school and you'd go out there and get a good paying job. Maybe your father and possibly your mother had that before, and you continue on in a tradition. Now, these kids end up being part-time workers in fast food restaurants or they become drug dealers, or unemployment. Their prospects are very bad for the high school graduates today. That to me, I mean, we all are very concerned about our political situation here in the United States. The reason is, is that we don't have decent jobs for high school graduates anymore. Russ Roberts: Now, of course, more people are going to college than, say, in 1950 or 1960 in America today, but not as many are finishing as go. So, there's different groups of skill and education that you look at in this paper. There are people who don't finish high school. There are people who finish high school but no further. There are people who finish high school, go to college, but don't finish. And then there are people who finish college. And then there are people who went on to graduate school. The underlying, I would say stylized fact that you start with is that when we compare the present--which you in your data will be 2016, because that's the data set you have with the most recent data--if we compare 2016 to, say, 1980, the workers who have a college degree or greater, do dramatically better than they did in 1980 of the same educational level, but the workers who don't have those degrees do worse in absolute terms. Is that correct? Ed Leamer: That's completely correct. Also, you described the push toward more education; and implicitly, kind of that's a policy question, which is: Can we rebuild our middle class using a more effective educational system that pushes people beyond the high school level? Russ Roberts: One of the ways that people try to answer that question--I think it's a mistake, but one way--they say, 'Well, everybody should go to college.' But, of course, not everyone is finds as colleges productive as others, and if we pushed everyone to go or subsidized everyone to go or paid people to go, that doesn't mean they'd become as productive as the people who had gone in the past, or with a different skill level or ability. So, that whole policy challenge, I think is all too hard for the debate. The level of sophistication is not quite up to what's needed there. Ed Leamer: Well, you're getting close to, what we're going to talk soon enough, is the importance of talent, raw natural talent, in today's economy compared to what it was back in 1916, which being able to get a job in manufacturing took a relatively low level of natural talent and you operate equipment, which made you extremely productive. That's really not available for those low-taletn people today. And, education is probably not going to cure that.

8:47 Russ Roberts: Before we get into that, I want to ask you a technical question, which surprised me. So, just to restate that first finding, which is, I think widely believed and found in many other datasets, which is that the gains over the last 35, 40 years have been quite large for people with high levels of education and either zero or negative for people without a college degree. And, one of the issues there, of course, is measuring the price level. And in your numbers--because you have to correct for inflation--in your numbers, you used the--at least, I didn't go to the footnotes for this part of it--you used the CPI [Consumer Price Index] as your measure of the price level. I've argued and others have argued that that's a very flawed measure. Obviously, if you use the CPI for both high education, low education, you haven't biased the comparisons between the two levels at any point in time. But, if you're trying to measure absolutely whether, say, high school graduates have fallen behind or not--and I have to add a footnote here that when we talk about 2016 versus 1980, we're not talking about the same people. We're talking about people with high school degrees in 1980 versus different people with high school degrees in 2016. And your finding is that if you have a high school degree in 2016, you make less than if you had a high school degree in 1980. But that is dependent on the measure of price level you use. I'm curious if you played around with other price level measures, like the PCE [Personal Consumption Expenditures] or others, and whether that issue is something you worry about. Ed Leamer: See, I thought you were hinting at a different price level for the wealthy and for the poor, because [?]there's different consumption baskets[?]-- Russ Roberts: Well, there's that too. Of course, absolutely. Ed Leamer: That's, to me, very important. We looked at the PPI [Producer Price Index]-- Russ Roberts: Producer Price Index-- Ed Leamer: Yeah, the Producer Price Index, which would be relevant for businesses deciding whether people are sufficiently productive. We use the CPI [Consumer Price Index] to refer to individuals' consumption or individuals' welfare. But the Producer Price Index doesn't have the rate of inflation that the CPI does. And so, those lower level education categories actually have rise in real income if you use the PPI. Russ Roberts: Yeah, okay. I think it would be true if he used other consumer measures besides the CPI, which have been criticized for not taking account of quality change. Obviously a big challenge for price indices generally over any long period of time like this.

11:25 Russ Roberts: But, let's put that to the side. Because we're not going to focus on whether the people with a high school degree are absolutely worse off than their parallel folks were in 1980 with a high school degree. We're more interested in the inequality issue: That is, across, at a point in time, across skill levels, what has happened to the level of income, and the ratio of, say, a high-education people's income to lower? One more footnote: The income measure you use is taken from this particular data set, the American Community Survey, if I remember correctly? And it is: Wages, salaries, commissions, cash, bonuses, tips, and other money income received from an employer. Payments in kind or reimbursements for business expenses are not included. But it also doesn't include in-kind benefits, right? Ed Leamer: That's correct. Russ Roberts: Which is much more important in 2016 than 1980, but probably disproportionately important for high-skill workers relative to low-skill workers. Is that--so, if anything is-- Ed Leamer: That's true, but I would add, by the way: This is a survey at the household level-- Russ Roberts: Another problem, yeah-- Ed Leamer: and they have one respondent who answers questions for every worker in that household. And that respondent is provided the description that you just gave, and asked, 'How much did individually A earn last year? and how much did individual B earn last year?' So, this is not administrative data. This is sort of suspect for many reasons. And you bring up one kind of that is a concern, but there's lots of others here. Russ Roberts: Yeah, and you're honest about that. There's a great line in the paper about how, given that they're asking one person about the other folks: It may not be evidence that would hold up in a court of law, but it's what you've got. Ed Leamer: That's right-- Russ Roberts: I like that rare bit of honesty.

13:28 Russ Roberts: So, let's set the conceptual background for this conversation, which is: You're interested in the question of how much effort--and that's a vague term that can mean a number of things, but we'll get into that. How much does effort contribute to the measures of inequality that we gather when we look at the data? Obviously, there's effort in terms of hours of work. There's effort in terms of leisure on the job versus how hard you have to work at any point in time. But, underlying your paper as a conceptual vision of how effort has changed for people who are low-skill versus high-skill, or high-education versus low-education, over time. So, talk about what your hypothesis is there, for what's happened for low education people with respect to effort versus high education people with respect to effort as we've gone over the last 30, 40 years. Ed Leamer: Well, before we get to low- or high-, I want to ask you if you ever helped one of your friends when you were in college or in graduate school? Did you help them move from one apartment to the other and did you have a rental truck to do it? Russ Roberts: Sure. Ed Leamer: So, for me when we did that, as a group, we got all together before that rental truck was rented--we got all together and we work hard to load that truck up and drive it quickly to the new destination and unload it as quickly as possible and return it. Because we were paying for that a lot of money by the hour. So, that's the-- Russ Roberts: For the truck? Ed Leamer: For the truck. So, that's a symptom of your understanding and my understanding that if that higher rental car[?]--it's an expensive piece of equipment--we want to be able to operate it high speed for as few or as many hours as needed to get the job done so as to minimize the rental cost. Now contrast that with a screwdriver or a hammer, which are also pieces of equipment, capital items, and they sit idle most of the time. We don't make a big effort to make sure those are being used all the time. That's because they're cheaper. So, what I'm trying to get across is this idea that workers who are operating expensive capital, whether they own it or not, they[?] have an implicit rental cost that has to be recovered. If they work slowly, and if they work for few hours while that capital was rented, they end up in the hole, meaning their rent is costing more than they earn. So, that says there's an incentive or a necessity to work at high pace. So, when you say 'manufacturing,' I want us to think about this idea and contrast the picking of strawberries with working in an assembly line or working in manufacturing. Picking strawberries doesn't involve any capital. You just go out there and you get paid per carton of strawberries that you pick. So, if you want to, you can pick at slow pace or at high pace, you can do it for many hours a day or for a few hours a day. But, in the case of operating an expensive piece of equipment, like a taxi, which I'd like to get back to, too, you got to work at high speed for long hours in order to recover the capital costs. The result is that if you're willing to work long hours and at high pace, you're more likely to take the manufacturing job, because that's where the compensation is going to be high. On the other hand, if you prefer the lower pace, opportunity is going to be strawberry picking. So, what I'm trying to say is that I'm trying to paint in your picture, paint in your mind a picture of the conversation as a function of effort, and show how the job changes at low level of effort, which is picking strawberries or maybe working in a fast food restaurant, versus[?] at relatively low wage rates, versus very high wage rates and higher earnings if you're willing to operate that capital at high speed and in onerous working conditions. Russ Roberts: The other idea I got from your paper, which I love, is this team versus on your own. If I'm picking strawberries, it's not just that I have low capital to work with--just the basket. I also can work at my own pace; and I don't hinder or help anyone as a result of that. So, if I'm an artisan or crafts person, and I'm using the screwdriver, the hammer, it's not just that they're cheap: it's that I could use them and I'm not hurting or helping anybody else. But if I'm in a team production, like the moving of a house, I can't say, 'Well, I'll come unload it later.' We've all got to work together. That assembly line, which was the basis of modern manufacturing, obviously--modern meaning, the first 60, 70 years of the 20th century for sure--dominant thing was that assembly line with relatively lots of people all having to work at the same time. Otherwise, you're the bottleneck. And so, people are exhorted to work hard for two reasons. One, they've got an expensive piece of equipment; you don't want to have it sit idle. And secondly is that, if you're not working at a pace that matches the other people, it's essentially sitting idle, because it's a team product. So, it's the transformation--the contrast is not just strawberry picking and assembly line working. It's the contrast you make in the paper between assembly line and sitting at home on my computer writing an essay, which I do now and then. And as a result, I can work at a frenzy for three hours and bang out few thousand words. I can let it sit for a few days and marinate and think about it for a while. My computer is still going to sit idle, but there's no team production. Unless I'm a co author, which I rarely am. If I'm on an assembly line, in old-fashioned work, I've got to work with everybody else. Totally different world. Ed Leamer: Also, you have to be attentive because if you are inattentive and you cause some kind of accident, you shut down not your own workstation but all the other workstations. So, this is a critical difference, definitely, as you pointed out.

19:54 Russ Roberts: The other metaphor you use is you ask the question whether a computer is a forklift or a microphone. What do you mean by that distinction? Ed Leamer: So, the forklift is meant to be a symbol of the innovations in the industrial age. And what that does is it makes you and me equally strong, very strong. With a little bit of training, we can lift enormous weights. It doesn't matter how much stronger you are than I am: we're equally strong driving that forklift. So, it's a force for big improvements in productivity and therefore higher wages. But also, it eliminates the talent--that is to say, strength--that might have given you an advantage before that equipment was available. So, you made a reference to the artisan shops. Those were places where skills were extremely important. It wasn't mechanical activity. It was skilled workmen-- Russ Roberts: Craftsmanship-- Ed Leamer: Craftsmanship. And you had stages where you began as apprentice and you end up as a master craftsman. That's a whole elevation in the skills and quality of workers [inaudible 00:20:59] perform. What manufacturing does is basically it descales--I'm sorry--what the Industrial Revolution does is it descales manufacturing by producing equipment and to some extent products that don't, no longer need the skills that were used in the artisan shops. So, that's a force for, like the forklift, force for a much higher productivity but also equal incomes for everybody. The microphone is totally different. So, before you had the electronics that allow a person to sing into a microphone and have a record and communicate around the globe, every little village had entertainers, had singers, and their audience was limited. I think Abraham Lincoln had, if I recall correctly, 2,000 people--could that have been?--when he gave the Gettysburg Address. That was kind of the limit of the audience. I'm not sure that was the right number, but you have a sense of how that was about as much as a speaker could reach. With the microphone and with recording devices, you can reach the whole globe. So, that's a huge improvement in productivity of a singer. But it makes the quality, the talent as well as hard work absolutely essential because there's going to be enormous competition to be the one singer who takes care of the whole globe's sales, all the customers out there. And then you get a highly unequal income distribution because you have the few people who have the talent, do the hard work, become exceptionally well off and you have other people like waiters in Los Angeles restaurants, who aspire to be entertainers and hope they're going to become entertainers, but in the meantime, they're left behind. So, I like the word, 'It's Detroit versus Hollywood.' Detroit is top down--meaning that you have a workforce that does what their manager tells them to do, top down, more egalitarian community. Hollywood is bottom up--highly unequal society. Bottom up is the last thing you want, is innovative people to do about the bosses say. You want to turn their creativity loose and see what results. So, that's a bottom up. And then because their work can be communicated to such a huge audience and the result is only a few of them are going to have those audiences, the income inequality is very extreme. So, what I have raised is the question: Are we turning most of our labor markets from Detroit-style labor markets into Hollywood-style labor markets because of the computer? Russ Roberts: And just to spend another minute or so on the singing example, because I don't want listeners to be misled. When you said, 'One singer makes all the money,' of course, not one, but it's a handful or a few hundred or a few thousand instead of a few hundred thousand. In the small town, people would go out to hear entertainment or hear people singing and they still do--they still hear a local talent, we still like a live performance. But if we want to hear the best which we can now hear on our phones--used to be our stereos--those local performers are now in competition with the best. The best isn't just in New York City: they're all over the world. They can be accessed 24/7, and that's the so-called winner take all. It's an unfortunate term, because it's not literally winner, take all. It's just that the distribution of income becomes more skewed, less flat and more unequal. And some of those singers who used to make a small amount of money singing for entertainment in those villages now can't make any. Some of them go to the big city hoping to be discovered and becoming one of those Hollywood talents or singing talents and then get that lottery ticket and win. But the question is: what's the alternative? What are the alternatives available to the people who can't be the singers anymore, who can't be those manufacturing workers? And I think the key, the other piece of this, which you don't talk about much in the paper because it's not the focus, is that the alternatives to manufacturing are limited. There are things like construction, truck driving, taxi driving, the things that require limited technical ability and mainly require reliability, honesty, intangible skills that you can't really--they have a nice reward, but they're limited when they're being applied to skills that don't use a lot of capital and doesn't make the worker a lot more productive. So, that's part of the revolution you're describing here that's taken place over the last 40 years. Right? There's a set of people--fortunately for me, and you--people like us who have high education, who can use our skills to reach thousands and thousands and thousands of people through the amplification of the microphone called a computer, which is what we're doing right now--literally with a microphone and a computer. At the same time, there's a bunch of people who had a decent living before, if they've lived in a different time but now their talent level is such that they don't even have access much to the forklift. Because the forklift and that assembly line, which used to have lots of workers working in tandem and together as a team, a lot of that's been automated. So, they don't even have that option any more. Ed Leamer: Yeah. So, you didn't quite say it directly, but it's important to understand that there's been a revolution in intellectual services, as well as in the manufacturing area. The manufacturing is slower product innovation and globalization, greatly reduce the availability of jobs there. And you're right that there are some left that are trucking, some that involve substantial equipment like trucking or driving a taxi; but there's many fewer in total that are available. So, in a sense we don't have as many forklifts as we used to have. We have many fewer. And those high school graduates have to find something else to do. But, I want to go to the other end of the spectrum, which is intellectual services. It used to be, if you wave your Bachelor's degree, you're going to get a great job. When I graduated from college, it was a sure thing that you'd get a great job. And, in college, you'd basically learned artificial intelligence, meaning, you carried out the instructions that the faculty member gave you. You memorized the lectures, and you were tested on your memory in the exams. That's what a computer does. It basically memorizes what you tell it to do. But now, with a computer doing all those mundane, repetitive intellectual tasks, if you're expecting to do well in the job market, you have to bring, you have to have real education. Real education means to solve problems that the faculty who teach don't really know how to solve. And that takes talent as well as education. So, my view is we've got to change education from a kind of a big Xerox machine where the lectures are memorized and then tested, into one which is more experienced-based to prepare a workforce for the reality of the 20th century. You've got to recognize that just because you had an experience with, say, issues in accounting, doesn't mean that you have the ability to innovate and take care of customers who have problems that cannot be coded. For example, you're not going to do mundane tax filing anymore because there are computer programs that do that. But you have to have the ability and knowledge, insight, to solve some of the accounting problems that have not occurred. So, what I'm saying is the computer and internet have fundamentally changed the intellectual service activities and put a lot of emphasis on those who have the talent to operate that equipment and do the hard work. Those are the ones who get exceptional pay. So, we're having a new kind of inequality in architecture and law and eventually in college teaching as well, I think.

29:41 Russ Roberts: So, that's really--it's a deep thought. And it's pretty clear to me that education hasn't changed very much. In fact, I'd say [?]that they say[?to the extent?] it has changed, it's gotten worse at the college level. Because, more of our people are going to college trying to get that extra benefit, but the human capital they're acquiring there is still that late 20th century or mid-20th century, spit-back. It's not how to think. There's exceptions obviously, if you're in certain fields like computer science or chemistry, and sometimes even economics. You're taught how to apply the material to new things, things that algorithms and machines can't do. But otherwise, your point is that you haven't really gotten more productive. You do have the credential, but your ability to use that credential productively isn't nearly as valuable as it was 40, 50, 60 years ago, when there weren't computers and you had a skill that was--you had a knowledge base, the equivalent of a database that a computer has. It's just a really interesting thought. The puzzle is, I think there are two puzzles here. And we still haven't gotten to your data yet, but we will, I promise, because it is very interesting. But the puzzle is: Why hasn't the educational system been more responsive? I have some thoughts on that. I'm sure you do, too. And why hasn't the workplace been more responsive? Because, usually what would happen is that if technology, as you've described it, made certain workers less valuable, those workers are now relatively inexpensive and you think people would have an incentive to find ways to use them, increase the demand for them, that would help ease the burden of the fact that they're less productive. That's what creative destruction is: There's a bunch of people now unemployed: they could be unemployed, let's take it back to the 19th century, when, at the turn of the 19th to the 20th, when the blacksmiths and the buggy makers and the stable boys had trouble making a living because the car replaced the horse. New things came along to employ those people and they were cheap. So, people were excited to employ them. They could be employed in all kinds of different ways. So, why isn't that happening now? Is it because technology is such that you can't reorganize them? The production function is such, you can't reorganize them in different ways like you could in the past? Why is the system--it seems a little more sclerotic than it was in the past? Ed Leamer: Well, I think the one we're seeing is there's some very dramatic reduction, fall off, in productivity once you dip very deep, very far into the ability level of the population. I mean, imagine that the only job in the future is going to be writing commercially viable software code. And I don't know if you've ever had students who do some software coding for you, and there's very few who can kind of have the wisdom to make it really work effectively. So, that might be 1% of the population, maybe 5%; and the other 95%, what are they going to do in this new world that we're moving into? I'm not saying it's as dramatic as that. But it's not as easy to redeploy a college graduate who's only learned how memorize into some kind of new job in the new world that we're moving into.

33:09 Russ Roberts: Well, normally what would happen, we'd say, I learned this as there's more than one way to skin a cat. You can use high capital or low capital. Let's use the famous, like the example the garbage truck. You know, a garbage truck in America is a high tech, expensive piece of equipment. It can be driven by one person and no more. It's possible to have a garbage truck that has one piece of capital--I mean, one piece of capital, the truck--and then one unit of labor--a worker. And that worker is able to pick up the cans, empty them into the back of the truck because the truck has all that technology built into it. He just needs a rearview mirror to make sure that he didn't spill it. And now in most neighborhoods in America, there might be two people on the truck, or at most three--the driver and then two people to make the can gets put back nicely to the curb and nothing is spilled. But in poorer countries, the truck is a very primitive piece of equipment, and there's six workers or eight workers doing all the work. The puzzle here is: Yes, there's a really skilled person who can do that coding for you. In the past, you'd say, 'Well, let's do the coding with 10 people. Won't go as fast or won't be as quite as, but it'll be cheaper.' And the problem is, the substitutability just isn't there. You can't get 10 people to do the coding, because you get none. It's not that they'll just do it at a slower pace or not as quite as effectively, but it's cheap, so, you don't mind. It's that: There's no substitution there. Is that kind of what you're saying? Ed Leamer: Yeah, that's exactly. Those were very well put and I'm going to remember those words. Russ Roberts: Thank you. So, I don't know if it's true. You know, I think--historically, in the face of innovation, people found new things to do. I think the fantastic example of, you mentioned in the book of, obviously, the mechanical age, takes strength away as an advantage. If you are a physically strong person, typically a man--right?--all the skill that you brought to the workplace is eliminated. Classic--this is John Henry, the steel driving man--he goes up against the machine. And he can't compete. And he's done. He's not just like, he's going to make a little bit less: There's no job for him. And he has to take his skills somewhere else. And his strength is vastly now less valuable. So, we understood: that technological innovation created the opportunity to apply brains. Brains became suddenly much more valuable. What you're really saying in this paper, to some extent, is that we've reached sort of the end of that where even having some brains is not enough. You really have to have a particular kind of brain with a particular kind of creative, innovative talent; and the rest of the folks are going to struggle. Is it that bleak? Ed Leamer: Well, it does come down to supply and demand. You can imagine in a community that had one barber and 99 software coders, that barber would be very well compensated. But in a community that only had one software coder and 99, barbers, those 99 are not going to do so well. So, it does come down to supply and demand And I agree with you that historically, the Luddites were wrong to try to resist technological improvement. Technological improvement has helped everybody in America in the 20th century looking backward. That's the way it was. I really worry that we're experiencing a totally different kind of technological innovation, that is going to create a kind of bifurcated economy with some winners and losers, nothing like we ever experienced in the 20th century. And beyond economics, it has huge implications for politics.

36:52 Russ Roberts: Yeah, but I want to challenge a piece of this. And I think there are two issues that often get conflated: which is inequality and poverty. So, there is an emotional issue to inequality. Right? It is--I'm aware of it when people come into my house who do work for me. I've talked about it before. I have a cleaning crew that comes and cleans our house once a week. They make surprisingly more than the minimum wage. They are protected through some competition for their services, but they don't make as much as I do. And, I have other folks who come in my house. People put up drywall and painters and we're doing a bunch of repairs on our house lately. And I'm aware of the fact that when they walk into my house, I have a higher standard of living than they do, most of them, maybe almost all of them. I joke that my cleaning lady drives a nicer car than I do, but it's still the fact that I have a higher income. And her kids are going to go to college, which is great and I hope they thrive. But I'm a quote ahead, if you care about such things and I always wonder how much they care. Is it painful to see people make more than they or do they aspire to it and they think my kids will do this someday? I have no idea. But that's one issue. People worry about just the ratio--forget the absolute levels. At the same time, we care about the absolute levels a lot. And I think a world where--I love your example--99 barbers and one computer programmer . Well, the computer programmer might live like a king, or queen, and the barbers might live in a hovel. Another vision is they all live really well, but it's true that the computer programmer lives better And, those are two different worlds to me. Maybe I shouldn't treat them as differently, but I think they are different. And when I look at the data--and maybe I'm wrong--but when I look at the data, I don't think most of the people in the bottom half of the income distribution today would want to go back to 1980. So, I would argue that the quality of life they have in terms of their access to things that they love, things they enjoy, food, health, housing, even--which are things that of course gotten a lot more expensive in certain parts of the country--those, their standard of living is such that even though they're, "way behind," the higher skilled people and the higher education people, they're still better off, I think, even though your data doesn't show it because I think use a bad measure of the price index. I don't think most [?] would want to go back to 1980 that had the more equal distribution of income. If I said to you, 'Okay, you're in this situation now as a high school graduate, and I'm going to show you back to 1980. Do you want to live there?' I wonder how many would say yes. Ed Leamer: Well, another question is: What kind of world do we want to move into? And, how can we control a world that we're going to be living in a decade or two from now? And I think you have a level of respect for the people that you described who are working in your home, and that's an essential part of the solution to poverty, in my opinion, because being poor does not mean being impoverished. Impoverished is a state of mind, and it results in a feeling that your job is meaningless. You don't look forward to going to work, that wealthy people look down upon you: they consider you lower class. So, we need to move into a world in which material success is not what we admire. What we admire is contribution to the communities that we live in. And you can make important contributions at every level of the income distribution. To me, we've got, we inherited from the 20th century, a race toward material superiority. And we need to stop that. Russ Roberts: I think that's built, hardwired, into human nature to some extent, though? Ed Leamer: Well, I think there's a communal need and a communal instinct-- Russ Roberts: I agree with that-- Ed Leamer: that has been learnt through evolution, the importance of us to work together. So, I don't think that needs to be supported by the kind of material- and income-inequality that we're moving into. Russ Roberts: Yeah, it's not obvious how we're going to control it, either culturally--those attitudes that you're talking about--or just on the basic economics and the wages and mix of skills that are available. We may think we can, and certainly politicians are going to talk as if they can. But, I do think there's an important role to play in terms of attitudes and respect that is under-emphasized in today's world, for sure. Ed Leamer: Yeah. A great example is Abraham Lincoln, who was born in poverty, but read books and became a distinguished American, one of the most ever. Russ Roberts: But a lot of people would argue that's what you're hinting at is that's harder to do today than it was: that just by dint of effort isn't enough. Talent matters a lot more. I'm sure he was a talented person. It wasn't just that he tried hard and walked uphill to school both ways in the snow.

42:12 Russ Roberts: But it reminded me of a different thing, which is: I was on a street corner; I pulled up to a light a couple days ago and there was a homeless person with a sign. I give cash to homeless people. Most people think that's immoral. Some people think it's immoral. I give them cash, happily. I don't give them a lot. But I give them a dollar. And I gave this guy $1, but I realized I should talk to him, too. It was a long light. I asked him how he was doing. And we had a nice conversation about where he was going to sleep tonight and the issues with this homeless shelter that he goes to sometimes and what he does when the homeless shelter is closed. And it was---it was a moment of human contact. It wasn't just me giving him a dollar. And I don't want to make a big deal out of giving him $1. It's not a big deal. It's pitiful. But I do think that similarly with how one should treat the people who work in your house, you should treat them with respect. And you should honor the work that they do that when it's done well. But I do think there's a challenge there, which is a lot of us don't interact with those folks other than in a work relationship. And that's a whole other issue. I am kind of opening up a Pandora's box there, but you can comment if you want. Ed Leamer: Well, I admire what you said. I think you're a great human being to talk with the homeless people. That's an essential part of the solution, not to treat them as sort of all abnormal and to be avoided. We've got to recognize these are human beings that have lives as well. In LA [Los Angeles] there's lots of mothers who have children who are homeless, and many of the kids who go to school have homeless situations. So, it's an egregious situation that this country is facing. The solutions are hard--the solutions are hard to put in place to cure everything. But the notion that you're reaching out to a homeless person, I think that's extremely important and I admire it. Russ Roberts: Well, let me push back on that just because I lived in LA in 1987 to 1989. I used to go to synagogue in the morning in West LA, the Pico-Robertson area. And there used to be a homeless person who came through every morning and asking for charity. I would give him--in those days, I probably gave him a quarter. And, he would go from person to person in synagogue for morning services, and he knew that most people there felt moral obligation to give them money. And, sure enough, most of us did. There was another guy in that synagogue who, when that homeless guy came by and put his hand out, he sometimes took that man home for breakfast, and let him use his shower. Now, that's an exceptional human being. And that's somebody who treats a person struggling with the humanity that they deserve. And, he also told me by the way that he would lecture the guy, that it's not a good thing to pick up newspapers off of people's driveways, and then resell them, which is something he had noticed. So, it did come with some ethical strings. But the idea of--not walk--the first thing is, don't walk by that homeless person and say nothing. At a minimum, smile and greet them, realize that they are a human being going through perhaps an unbearable struggle. Ideally, give them some money. Ideally, interact with them and ask them how they're doing or what their day is like or what their plans are. Anything you can do to make them realize that they're alive and they exist, and they're not just a piece of, like, a fire hydrant you're walking by. So, I think that's--I'll get off my soapbox, but I think that is an issue. I don't think that's exactly what the main problem we're dealing with in this conversation, but I'm happy we got on to it. Ed Leamer: Yeah, well, I'm involved in United Way here in Los Angeles. You and I can have a long conversation about this, because United Way is out there in front line trying to help out these folks.

46:20 Russ Roberts: Let's get back, this is fun conversation, but let's get back to the findings of the paper, which are quite interesting and we're now about 40-something minutes into our conversation and have gotten to them yet. What you do in the paper is you try to figure out how much of the gap in income between high and low is due not to the hourly wage, but to how many hours that people are working. And you find that low-skill workers now work less per year; higher-skill workers work more per year; and that's expanded the income differences across skill over time, just because of the effort involved. That higher-skill workers are working harder and lower-skill workers are working less hard. Ed Leamer: Yeah. And, I would say 'harder' is maybe not the right word, because I think I actually enjoy the long hours that I work; and they're not hard. They're a source of pleasure. I kind of think the internet and the computer used by these high tech folks that we're talking about, it's not the same as a manufacturing job, which is really hard work and tedious and you get worn out and can hardly work beyond the age of 55. It's a totally different kind of thing. And, I would also add, which is a question you asked before, these are not the same people when you go from 1980 to 2016. But, the key finding is what you said before, which is that there was decline for high school or declining earnings for high school workers regardless of how many hours they worked. I mean, controlling for hours--at the same number of hours in both years, there would be a decline across the board for regardless of how much effort was put out. But for the highest skilled workers, those with advanced degrees, there was a significant increase in compensation for those who work long hours. Russ Roberts: What do you think is driving that? Why is it that--you know, the technical term in economics, which I find not so helpful, is we talk about income- and substitution-effects. I'm just throwing that out there for the listeners who are trained in economics. But why are, without using those terms, if you can, why would the higher-educated workers work more hours? Why wouldn't they kind of take it easy? They're making a lot. Why not relax? And the people who are relatively low skilled, who aren't making much per hour, why aren't they working more hours to try to make up for that? Ed Leamer: You just said income effects, but you didn't say substitution effects-- Russ Roberts: No, I did. I did. I said both; you didn't hear it. Ed Leamer: No, I heard you say substitution, but your examples were income effects-- Russ Roberts: Yeah, fair enough-- Ed Leamer: In other words, if you're being paid a whole lot more if you're in the advanced group, you might as well cut back the hours and have more leisure. But, you also have--I hate to use the word--substitution effect. You have an incentive to work more hours because the hourly rate has gone up so much. So, those two things are maybe going to pull you in different directions. But I really don't think that that's the determinant here. It's that these long hours are a huge pleasure. You can call me a workaholic, but I get a heck of a lot of enjoyment and imagination that I'm having an impact on the world around me by the hours that I work. But, on the other hand, I don't feel like I have to work every hour of the day. I go play a round of golf or walk with my buddies or play some tennis. So, to me, I'm one of those, what you might call workaholic but without being sick. I think it's a productive, happy life that I lead working those long hours. Russ Roberts: What about the workers at the other end who are less educated? Why do you think they're working few hours today in 2020 or 2016 relative to 1980? What's changed? Ed Leamer: No, the high school workers are working a little bit more. They're not working in manufacturing, which typically is an high-hour setting. But they're working multiple jobs, I think is the answer. So, you might have a 30-hour work week in one restaurant and you pick up another 20 in another restaurant--that kind of thing has added an opportunity to create more hours and there's an income effect because their wages have fallen so much compared to what they were in 1980. They have to work hard in order to have a decent living for themselves and their family. Russ Roberts: But, I thought the finding was that--so, are you arguing, then, that the increase in high-skilled workers' hours is so much greater? Because I thought the finding of the paper is that the much--not much, that's the wrong word--a significant portion of the rise in inequality between 2016 and 1980 is due to the fact that higher skilled workers work longer hours relative to lower skilled workers. Are you saying that they all work more, but the higher skilled work a lot more than the lower skilled workers? Ed Leamer: Yeah. The high school graduates--I'd have to look at my paper again; I don't have in front of me--but I have this feeling that the 40-hour week is more prominent among high school graduates. So, the shorter hours have kind of disappeared, and then there's been a little bit on the upper tail as well; but on that I'm not sure. Mostly it's losing the lower tail. So, there's been some evidence of more hours among high school workers. Now, I thought there would be a reduction in hours.

51:52 Russ Roberts: Well, let me quote your paper because I took some notes. This is, sorry about the numbers here for the listeners, but we'll go slow and it's sometimes hard to listen to these kind of things but we'll try. So, we're going to look at the ratio of people with advanced degrees to workers who have a high school degree. So, we're talking about law, MBAs [Masters of Business Administration], lawyers, Ph.Ds [Doctors of Philosophy]. We're comparing their income to high school workers. So, that ratio grew. It's large. Advanced education workers, people with advanced degrees, make a lot more than people who only go to high school. That gap grew by 60% from 1980 to 2016. So, it got a lot bigger. A lot bigger. And I'll give you the other numbers here. In 1980, average annual earnings of those with advanced degrees was 1.8 times higher, and by 2016, it was 2.8 times higher. So, it got a lot bigger. That's the 60% increase. So, the ratio of people with advanced degrees to high school graduates got a lot bigger over those years. But part of that difference, your paper shows, is a change in the hours of work. If we only look at full-time workers, that gap only grew 34%. So, roughly, the hours-worked part of it doubled the gap. And I thought you were saying--I think what that means is that there are a lot of non-full-time workers among high school graduates today, who, when we throw them out of the sample to try to control for hours of work and compare apples to apples, the skill differential only increased by 34% compared to 60%, if we just look at the raw numbers without controlling for hours worked. So, that to me says, either, that high school workers, a lot of them work less than 40, or the increase for the advanced degree workers is so much larger that it diminishes the ratio. Does that make sense? Ed Leamer: Yeah. So, we're going to totally lose the audience here, but if you-- Russ Roberts: Yeah, no doubt; but we're way into the podcast. The ones who are, into the episode. The ones who don't have the taste of this, they left long ago, Ed. Trust me. Ed Leamer: Okay, but if you can look on page 18, Figure 14-- Russ Roberts: Oh yeah, now we really are going to lose them. Go ahead. Ed Leamer: But for you, you'll see that there's a figure that shows the fraction of workers who work more than 40 hours a week. Okay?-- Russ Roberts: Yeah-- Ed Leamer: That rose for high school graduates. It rose more for advanced-degree recipients, much more. Russ Roberts: right-- Ed Leamer: And what you were talking about is a ratio of the two. And I was talking about the absolute level. And I'm telling you, I was surprised to see the high school graduates working longer hours, working more than 40 hours a week, because the overtime opportunities in manufacturing were a significant part of the work in 1980, but not any longer in 2016. Russ Roberts: No, that makes sense.

55:08 Russ Roberts: So, one of the things I just want to add, because I think this is important: you know, so, many of these conversations about inequality are about household income. And of course, you are looking at households to some extent. It's important to remember that--I mean, it's just a crazy, crazy number. And Mark Perry writes about this in his blog, Carpe Diem, pretty much annually because the numbers are so striking. Basically, if you look at the top 20% compared to the bottom 20%, the top 20%, average income before taxes, is about 17 times. So, think about how crazy that is. The average person in the top--and of course means are distorted by the far right-hand tail, but the--fine, we're looking at means. The highest 20%, the average household income in 2018--I think it's 2018--the average salary was $198,000. In the bottom 20%, it's $11,000. So, it's a 17-fold increase. But, what Mark Perry likes to point out--it's interesting and important--is that the top 20%, the number of workers in the household, the average number is more than two, because it's usually a husband and wife married in that household, and sometimes they have a teenage kid that's working. So, it's greater than two. The number of workers in the bottom 20% is 0.5. Ed Leamer: Wow. Russ Roberts: A lot of those households have, either, one person working or zero. They're retired or they're not earning anything. So, there's a four-fold difference. And so, if you look at average earnings per person, the gap is only--excuse me, average income per earner--the gap is only threefold. Not 17. So, there's just so many things going on in these data you have to be careful about. And, I don't want to underestimate the nature of the social challenge here. And I think you're very clear about that in the paper. This is--you can debate how big the absolute number is. You're more worried about the phenomenon, and especially as a phenomenon, as it rolls forward. Ed Leamer: Well, I think there's another thing we could get into, which is the willingness of Americans in power, to, when there's money sitting on a table in front of them and other workers are on the other side, they more and more are willing to scoop it up and take it for themselves. And, when I talk about that, I would say college professors are in that same category. Because-- Russ Roberts: Examples?-- Ed Leamer: Well, I won't name names, but my understanding is there's an economics professor who is paid a million dollars a year at MIT [Massachusetts Institute of Technology], or something equivalent to that. He had an offer of a million dollars at Chicago. Russ Roberts: That's more than I make. But, do you think that's wrong? He should turn it down? She shouldn't take it? Ed Leamer: Well, who's paying for that is the concern. And the tuition has gone up enormously. We're putting a huge burden on the next generation of Americans in the form of student loans. And that's been created by, I think, really three phenomena. I joke about it and people think it's seriously, that there was a meeting of faculty members from all over the country in 1960 to discuss how to increase their wages. And economists said, 'Well, you need to do three things. You have to have entry barriers, you have to price discriminate, and you have to have inelastic demand.' So, and they split into three groups and the entry barrier group came back quickly and says, 'We'll be researchers. From now on anybody can be a teacher, but we'll be researchers.' The price discrimination group came back pretty quick, too, and said, 'We're kind of doing this already with scholarships. We'll pretend we're helping people out, but we'll do it more aggressively and we'll raise the price discriminating.'-- Russ Roberts: 'We'll raise the list price and only knock off the discount for the right people that we think wouldn't come otherwise.' Ed Leamer: Exactly. And then the hardest thing is inelastic demand and the group came back and they said, 'Boy, we're so proud. This is hard to figure out. From now on we'll give loans, because by the time they figure out how expensive this is, it'll be too late.' And those three things have created a huge increase in compensation for administrators and faculty around the country. It's really appalling when you think about the burden that we, collectively--I mean you're worried about the homeless. I'm worried about the students at UCLA who have these incredible debt burdens. And I can't quite relieve it for all them but I try to contribute to their learning so they'll learn more going forward. But it's a huge problem. And that's true of CEOs [Chief Executive Officers] around the country, as well. Russ Roberts: Well, you left off the fourth group in that, which I assume is a mythical meeting. It's a metaphorical meeting that you're talking about in 1960. The fourth thing is, we got a group of people that says, 'Oh, the other thing we need to do is we need to lobby the government to subsidize education more and more and more, so that more and more people go.' And the key, as Arnold Kling likes to point out, is that a lot of what government does is it reduces the supply and then it increases demand. So, we have barriers to entry--which are often credentials or licensing or other things, exams of various kinds, various requirements. And then we subsidize demand through various ways. Subsidies being, just, literal subsidies being the way we do that: We might give people interest-free loans; or we might have state universities; or we might have community colleges. And all that does push up the demand. And if the supply hasn't changed very much, the compensation is going to go higher and higher for those of us who can work in those industries. So, that is a--and by the way, the part that's real about this, for sure, which I'm ashamed of, and don't like--it's that economists over and over again, talk about what a great public good education is. As if it deserves a subsidy: 'We should over and over make the case that the benefits go way out beyond to the people who just do the work, who go to school. It goes to the whole society, and that justifies those subsidies.' I think that's a mistake. And we've been the beneficiaries. We have a conflict of interest in that. Ed Leamer: I totally agree with you, Russ, because you and I are in complete agreement, which is these plans from the Democrats to have free college are just a scheme for raising faculty and administrator salaries. And if you want to have an impact, just like you said, you got to work on the supply side not the demand side. Which means you have to have, I think, high quality, internet-based education-- Russ Roberts: Yep, that'll do it-- Ed Leamer: that competes against the college professors. Russ Roberts: Yeah. People are trying that. They haven't done very well, yet. Now the question is why; and it's a tough one. It's a little bit tricky, but obviously I'm in favor that, if it can be done. Ed Leamer: Internet-based is good for the Xerox style of teaching where you have the students memorize exams. But, real creativity is very time consuming to teach. It's almost like a one-on-one kind of exercise. I had one of those this summer, by the way, [?]. We have these Chinese students who visit UCLA in the summer. They're assigned to faculty members around the campus and they assigned me want to be a mentor. And I told her I wanted her by the end of the summer to be able to answer the question: 'What impact have imports by the United States from China done on U.S. manufacturing jobs?' Which is an impossible task, really, to answer. But, I said 'Go to this book and it tells you some theory about this stuff and come back in a week; we'll talk about it.' Next week, 'Go to this website; it has a lot of data. Find out what you can find out about China.' So, it was a sequence of hours, 10 hours it had at the end, and it was incredible how much she learned. And that, to me, is the way we have to move, which is an experience-based education in which the faculty member is not the teacher, but the coach, and facilitates and points and suggests. And it's a student who is actually doing the work. And then the crowning jewel from this experience is, after that event ended, she went to Santa Monica, and she wrote me an email the next day saying that, to her great surprise, she and her friends were at the Santa Monica Pier, and she noticed a father and son fishing; and it was the son who was holding the fishing pole. And, all of her life, metaphorically speaking, in an intellectual way, she had watched her father hold the fishing pole, and she stood beside him, and never really figured out how to fish. And this summer was the first time she actually did the fishing herself, and she's so much enjoyed research in economics as a consequence of that. Russ Roberts: I guess the greatest email a teacher could ever possibly receive. I've got goosebumps from that. Ed Leamer: It's better than a Nobel Prize. Russ Roberts: Yeah, that's unbelievable. Ed Leamer: It's incredible. I'll send you a copy of it. It's very well written and just highly emotional.