Principles of Microeconomics – 73-102
Economics Lessons for Life
James A. Best
April 24th, 2023
Faculty Course Evaluations
• I really appreciate getting the feedback on the course, it is very useful.
• If you can, please complete the FCE by the end of Friday this week
Thank you!
Final Exam
• May 4th 2023, 1300-1600, In Person
• Same format as Practice Final Exam
• Today’s lecture will not be examinable.
• Schedule for all exams: https://www.cmu.edu/hub/docs/finalexams.pdf
Economics Lessons for Life
Career and Income
Returns to education over time
Hourly Wages by Major
Altonji, Joseph G., Erica Blom, and Costas Meghir. "Heterogeneity in human capital investments: High school curriculum,
college major, and careers." Annu. Rev. Econ. 4, no. 1 (2012): 185-223.
Correlation does not Imply Causation
Omitted Variables:
• People tend to select into subjects where they have comparative advantage
• This comparative advantage depends on abilities such as
• People also choose based on preferences:
• These factors all have an impact on wages.
Controlling for Observable Ability
Control for:
• GPA
• Science and Math Credits
• Math Grades
• Weekly hours
• High school area income
• SATs
• High School Percentile
Economics is about half way
between hard and soft
(according to paper) so 0.44
How Do We Interpret These Numbers?
• Conditional on observable ability this is the
effect on wages in log points.
• What does that mean?
• Take the difference between two subjects
and multiply by 100:
• That is approximately the percentage
difference in earnings.
• E.g. Economics vs Architecture and finearts:
0.44 − 0.162 ×100 = 28%
Hamermesh, Daniel S., and Stephen G. Donald. "The effect of college curriculum on earnings: An affinity
identifier for non-ignorable non-response bias." Journal of Econometrics 144, no. 2 (2008): 479-491.
Signaling Value of Education
Caplan, Bryan. The case against education: Why the education system is a waste of time and money.
Princeton University Press, 2018.
Does it matter if it is signaling or not?
• Grades and completion matter a lot.
• Socially it matters:
• it seems like a very expensive way of working out who is excellent or not, but
then why have firms not found a better way of doing it.
But the Skills Do Matter?
Arteaga, Carolina. "The effect of human capital on earnings: Evidence from a
reform at Colombia's top university." Journal of Public Economics 157 (2018):
212-225.
• A natural experiment to look at the effect of economics training:
• An administrative change caused a reduction in the economics
course load by %20.
• The size and composition of the entering class stayed the same.
Arteaga, Carolina. "The effect of human capital on earnings:
Evidence from a reform at Colombia's top university." Journal
of Public Economics 157 (2018): 212-225.
The wages of econ graduates fell by:
14.52 − 14.36 ×100 = 16%
Interpretation:
• Earnings were not being driven purely by selection.
• The education had market value beyond the certificate.
Impact on Your Actions
• What you are learning matters (in economics or elsewhere) for
your income.
• Good grades are very important, but so is the knowledge.
The future is not the same as the past
• Changes in technology, resources, and politics are very important for
the future of work.
• Depletion of oil plus concerns over climate change
• Automation of manual labor (Robots)
• Automation of intellectual labor (AI)
AI and your
Career
• Goldman Sachs Report on AI and Jobs
• https://www.key4biz.it/wpcontent/uploads/2023/03/Global-Economics-Analyst_-ThePotentially-Large-Effects-of-Artificial-Intelligence-onEconomic-Growth-Briggs_Kodnani.pdf
What if my career is highly exposed?
• Will AI increase or decrease your wage? Yes/No/Uncertain
What if my career is highly exposed?
• AI could be a complement or a substitute for your job.
• Within industry AI is likely to be a complement to the rare human skills but a
substitute for the relatively common human skills.
What if my career is not exposed?
• Standard models: AI should positively affect your (absolute) income.
• Caveat: If people in impacted areas become very rich relative to you, this
could affect your ability to buy other limited goods
Career and Doing Good
Doing Good
• Money is not the only thing people care about in their career.
• This of course suggest there may be a trade-off to make:
Money
Doing Good
Economics of Altruism
NHS (UK health care system) has a budget of £125 billion.
• They cannot treat all problems, the opportunity cost of a cancer treatment may
be 10 heart procedures.
• A panel decides based on QALYs (Quality Years of Life)
• Conservatives opposing the ACA referred to such panels as “death panels”
• Currently NHS spends $30 000 to give someone a quality year of life.
• A rough estimate is that the NHS saves 4 million years of life per year.
• Or about 50 000 whole lives (dividing by 80 years life-expectancy).
When we think like an economist though this picture misses something. What?
Opportunity Cost
• That money could be spent on something else.
• Currently the most cost-effective intervention for saving lives is insect repellant
mosquito nets.
• It is estimated that by giving $100 to the Against Malaria foundation we can give
an infant a healthy year of extra life.
• So if we only cared about saving lives and got to choose how to spend that $125 billion how
many years of life does the NHS save net of opportunity cost?
12.5 𝐵𝑖𝑙.
4 𝑀𝑖𝑙. −
= −121 𝑀𝑖𝑙𝑙𝑖𝑜𝑛
100
• This is still missing something though. What?
Thinking at the Margin
• The average spending per year of life by the NHS may be up to 30000.
• But the marginal cost of saving a life is increasing.
• Vaccines are very cheap, but cancer treatment is very expensive.
$$$
Marginal Cost of Saving a Life
Years of Life Saved
How Does This Matter for Me?
• If you want to have a positive impact, you need to think about:
• Opportunity cost.
• Marginal.
• Implication: neglected problems likely to have high marginal impact
because most things have increasing marginal cost.
• Find neglected areas.
Example: Doctor vs Altruistic Banker
Suppose you are choosing between two (altruistic) career options:
• Doctor working in the US at 200K
• Investment banker earning 2.2 mill and giving the excess 2 mil to Against Malaria Foundation.
• The average positive impact of doctors is very big.
• What about the marginal effect?
• The average positive impact of investment bankers might be small.
• But, if you give 2mil of your money to AMF you save 20 000 years of lives PA
• What about the banker who would take the job if you didn’t?
• If you had these two options the opportunity cost of becoming a doctor is that of
being the banker and giving the excess money to the best possible charity.
Expected Impact
• We should think about the expected marginal effect
• Our investment banker option was saving 20 000 years of life PA.
• Suppose instead that you could instead work in policy trying to prevent nuclear
war.
•
•
•
•
Suppose career only reduces probability by 1 in a million per year.
All out nuclear war could easily kill 4 billion
Save 4000 lives in expectation per year (or 320 000 years of life)
In which case the policy work might be more valuable than the banker route.
(These numbers are very rough, illustrative only.)
• We are still missing something though. What?
Think About the Future
• The future is long – sun explodes in about 5 billion years.
• That means there are potentially 5 billion years of human life.
• Suppose we stabilize population at 15 billion on earth.
• How many years of human life is that?
75 000 000 000 000 000 000
Guardians of the Future
Implication:
A tiny impact on any of the following could have huge expected effect.
• Extinction risks
• Emergence of persistent totalitarian regimes or unjust societies
Are these neglected? Yes / No
…
Things to Think About for High
(Positive) Impact Careers
1. Research in neglected areas, e.g.,
• Mitigating risks from emerging technologies such as biotech or AI
• Research trying to discover neglected areas (meta-option)
2. Government Policy
• With an aim to push policy action towards neglected areas
3. Working at Effective Non Profits
4. Do you have an unusual skill that is not being applied in an
important area?
5. Earning to give.
Warning: Don’t Be this guy!
Sam Bankman-Fried
• Claimed that he was earning to give.
• Set up crypto company FTX
• Company collapsed
• Now he is on trial for fraud.
Want to Learn More?
The ideas of economics have been applied pretty well
to thinking about how to have a positive impact with
your career by an organization called 80 000 hours.
Here is their website: https://80000hours.org/
The Key-Ideas is a good place to start:
https://80000hours.org/key-ideas/
The excellent 80000 hours podcast has interviews with
economists, philosophers, psychologists.
• Episodes are long, I tend to listen at x1.5 speed.
Career and Happiness
High Paying Jobs May Be Less Fun
Why do occupations that require the same innate abilities end up getting
paid differently? One reason:
• Wage premiums to attract workers into unattractive occupations:
• Truck drivers earn high wages for level of skill ( 70K PA) – spend long time away from
family.
• Musicians earn low wages for amount of training required – get status, social
desirability.
• Alaskan crab fishers ( 15K PM) – highest death rate of any US industry.
Extra Trade-offs
• How much fun is the job?
• How does the job affect your health?
• How does the job affect your relationships?
Economics can’t tell you exactly how to value these aspects against
money and doing good, but we can get some useful information.
Income and Happiness
Does money make people happy? Yes / No
Kahneman, Daniel, and Angus Deaton. "High income improves evaluation of life but not emotional wellbeing." Proceedings of the national academy of sciences 107, no. 38 (2010): 16489-16493.
Survey with 450 000 responses
from US Citizens.
Positive Affect: How happy was
the respondent yesterday?
Ladder: People asked to rank how
satisfied with their life overall.
Above $75K the impact on Positive
Affect, Not Blue, and Stress Free
However, life satisfaction
continues to increase about $75K,
Income & Happiness
However, the marginal effect of income on life satisfaction is
diminishing.
It might look pretty linear but notice that this is a log scale.
A one percent increase in income has a similar effect on
reported life-satisfaction no matter how much you earn.
But Someone who earns a $100k that implies a $1000 increase
in annual income for you has the same impact as an $7.50
increase for someone on $750 PA
• About 10% of the world population (750 million people) make
$750PA.
• It is much cheaper to buy life-satisfaction for them than it is Stevenson, Betsey, and Justin Wolfers. "Subjective wellbeing and income: Is there any evidence of
for me.
satiation?." American Economic Review 103, no. 3 (2013):
598-604.
Doing Good and Happiness
Mongrain, Myriam, Jacqueline M. Chin, and Leah B. Shapira. "Practicing compassion increases
happiness and self-esteem." Journal of Happiness Studies 12, no. 6 (2011): 963-981.
• Showed sustained gains in happiness and self-esteem over 6 months,
• Anxiously attached individuals in the compassionate action condition reported greater decreases in
depressive symptoms.
• Suggest practicing compassion can provide lasting improvements in happiness, self-esteem, and
may be beneficial for anxious individuals in the short run.
A Virtuous Circle
Aknin, Lara B., Elizabeth W. Dunn, and Michael I. Norton. "Happiness runs in a circular motion:
Evidence for a positive feedback loop between prosocial spending and happiness." Journal of
Happiness Studies 13, no. 2 (2012): 347-355.
More to Life Than Work
• Two excellent videos on happiness:
• https://www.youtube.com/watch?v=b1Y2Z1BGwno
• https://www.youtube.com/watch?v=8KkKuTCFvzI
• Lots of evidence that a key determinant of happiness
is the quality of your relationships.
• Marriage, children and friendship are very important.
Farewell