In this episode of the McKinsey Global Institute’s Forward Thinking podcast, cohost Michael Chui talks with Betsey Stevenson and Justin Wolfers, both professors of public policy and economics at the University of Michigan. They cover topics including the following:
- Subjective well-being
- How the labor market has evolved since the pandemic
- A decline in inequality
- The potential impact of AI
- Why write a new economics text book?
Michael Chui (cohost): Janet, do you ever get the feeling when you listen to some economists that they’re talking in a language that just doesn’t make sense to ordinary people?
Janet Bush (cohost): I think most of them actually. I was an economics journalist and my job was to translate economics jargon into something that meant something to people.
Michael Chui: That’s something that today’s guests also think is incredibly important. They’re an economist couple who, in addition to their research, have taken on the task of explaining how economics matters in the lives of real people. And they even have a podcast!
Janet Bush: Well, Michael, a podcast is clearly the best way to reach people, isn’t it?
Michael Chui: I couldn’t agree more. Justin and Betsey, welcome to the podcast.
Betsey Stevenson: It’s great to be here.
Justin Wolfers: You bet.
Michael Chui: Great. Let’s start at the beginning. I’d love to hear from both of you how you got to where you are today. Where’d you grow up, what did you study? Betsey, let’s start with you.
Betsey Stevenson: I grew up in the United States. And that’s obviously a vague answer. But my dad was in the military. So I lived in a lot of different states growing up. I did both my undergraduate and my graduate coursework in Massachusetts, which is why, even to this day, it holds the record as the state I’ve spent the most years in.
It’s funny because you look at who you are when you were younger and what are you trying to be. And I had a history as a policy activist. Back in college, I was big in the environmental movement, which was different and definitely more nascent in the late ’80s, early ’90s. But it was big for me. And big, actually, on international policy as well. What’s going on in Central America with US policy. South Africa policy. Those were things I cared a lot about. And I felt like it was somehow separate from what I did in school, which was study math and economics.
I feel like there’s been a journey to bring the parts of myself that are interested in policy and making the world a better place, and then my interest in economics, together. I feel like that’s where I am today. But it was a journey of intertwining those two parts of me.
Michael Chui: And you are in the academy now. But you’ve spent some time in government service, too.
Betsey Stevenson: Absolutely. It’s part of what makes me love academia even more, is having actually had to go out there and use it and understand how it works in the world. I think the US model, where we bring people from academia into our policy-making process and then send them back, is actually really healthy for both academia and policy making.
I encourage everybody in academia to give it a try. You have expertise. Let’s get out there and use it in a real-world way. It’s really invigorating for your research, it’s invigorating for your scientific community, and it’s invigorating for the policy-making community.
Michael Chui: Justin?
Justin Wolfers: [in an Australian accent] This is an accent, obviously, you recognize from Michigan—the great state of Michigan. But believe it or not, I spent my early years in Australia. I was actually born in Papua New Guinea. So I may be one of the very few Papua New Guinea–Australian–American economists you know.
I did my undergraduate work in Australia. Betsey talked about wanting to make the world a better place. And that’s a theme among teens around the world, including in Australia. And I was blessed by truly great high school econ teachers who taught me that there’s a tool kit of extraordinary power and beauty that can help us do that. That started a journey that I’m still on today, trying to learn more about how the world around us works and what a little bit of economic knowledge can do to help.
Michael Chui: How did you end up in Michigan?
Justin Wolfers: They offered me a job. Betsey and I have spent a great deal of the last few years, in some sense, trying to pay all of that forward. I think we’ve each been immensely lucky, immensely fortunate to have truly great mentors and truly great economists take an interest in us and teach us this bag of tricks.
We’ve recently written an economics textbook that’s being used in introductory economics courses around the world. We released a podcast to teach people who are not in college what we do teach in college. We continue to think every day about how we can communicate this superpower, that we were given by great economists, to a broader group.
Michael Chui: My grandfather actually got a master’s degree at Ann Arbor, as it turns out. But not a PhD. I am curious, though: you mentioned the textbook. You’ve described it as a 21st-century textbook. Your first principle in there, actually, is cost-benefit. Why in the world would you write a textbook? Especially because there are other textbooks, at least one actually has the exact same name, from a friend of yours. Why create a new textbook called Principles of Economics?
Justin Wolfers: There’s never been a more exciting time to be an economist. I think economics has never been more interesting. I think the opportunity for young econ students has never been greater. I think the economy has changed in ways that we’re still trying to understand.
And the economics I was taught and privileged, gifted, insight into—it’s a joyous economics. And it sees economic forces all around us. It’s not your grandfather’s economics, it’s not the widget factory. It’s the decision about how many kids to have, it’s what’s going to determine the next election, it’s whether people are going to turn to crime. It’s issues of social policy, it’s questions of inequality, of racial justice, of healthcare systems, of financial crises, of pandemics.
Our economics, the economics I get to do, my colleagues at the university when I walk down the hallway, this is just the most exciting water-cooler conversation in the world. But it wasn’t in Econ 101.
What I want to do is, I want to invite you to what I think of as being the most fabulous dinner party in the world. And you’re going to have to learn a few manners in order to attend this dinner party. And those manners are things like, what do the words supply and demand mean? What is market structure? What is market power? But I think when you turn up, you’re going to discover the immense joy of that dinner party.
But more than that, it’s also incredibly useful. My students, I invite them not to watch the economy, but to understand themselves as economic actors. And once you understand the reach of economic principles, you understand that this small set of ideas can help you decide whether to rent or buy, whether to study for higher education, what career to choose, whether to take out insurance, what your investment strategy is, whether you should go to the gym.
And when you think about all of that, if I can help you make better decisions on the many six-figure decisions you’ll make during your life, then, I believe, the ROI—return on investment, to those who haven’t taken Econ 101—is absolutely astronomical. And I wanted to bring that power, that joy, to people’s lives.
Betsey Stevenson: One of the things I loved about your question, you said, your first principle is cost-benefit analysis. The thing you hinted at strongly but didn’t say out loud—so I’ll say it out loud—is, how could it possibly have passed a cost-benefit test to write yet another economics textbook?
That’s a great question. Justin outlined a lot of the ways in which we saw why we thought it could pass that cost-benefit test. But I want to add another aspect. And that’s that over the last 30 years, women have dominated men in terms of educational attainment. And not just in the United States but actually around the world.
Girls have actually always done well in school. I learned this from the great economic historian Claudia Goldman, that even, you go back to the ’50s, girls were more likely to be valedictorians. But they didn’t run off and try to claim their spot at Harvard. Now they do.
So we’ve got young girls, they do really well in the classroom. They go on to college at very high rates. And somehow, economics isn’t keeping up. Economics is just underrepresented. If you look at the share of women on campus, if you look at the share of minority students, African-American students, Hispanic students, economics—
Justin Wolfers: First-gen students.
Betsey Stevenson: First-gen students. Economics is just—what’s dismal about this “dismal science” is it’s dismally behind. And I think we have to turn that on ourselves and say, “Well, why? Why are we behind?” And one of the reasons we’re behind is it’s been hard for economists to embrace the idea that our language really matters in terms of how people see themselves, whether they think of themselves as being including or not included.
In fact, one famous economist who has a textbook—not a principles textbook—actually wrote in the preface, “My coauthor wants us to alternate between ‘he’ and ‘she,’ and I think that’s nonsense. It’s clear we’re using the non-gendered form of ‘he.’” And I was like, “What non-gendered form of ‘he’?” But he, the male professor who said this, just really couldn’t understand how writing a textbook where you only use male pronouns might feel less inviting to people who don’t identify with male pronouns.
So then imagine how hard it is for that professor to imagine why not everybody relates to a golf example, or not everybody relates to a baseball example. We need to reframe economics in a way that makes everybody feel included. And that starts with our principles class, which is where we lose a lot of students going on to take further economics.
But more importantly, a lot of students take first-year economics. And I don’t want them to have the experience that so many people have had. I can’t tell you the number of people who’ve come up to me and when I’ve said, “I teach economics,” and they groan. “Oh, yeah, my dad made me take that.” My favorite is they say, “The big X.” And I’m like, “That’s what they remember from economics, the big X.” Not a concept, not an idea.
So what is that telling you? Well, visually, they remember a big X. But I would rather them come away with some of the joyful things Justin has talked about. If you think about the key ideas, what we refer to as the core principles of economics, what all of economics is really built on, it’s things like considering costs and benefits, which include your opportunity costs.
And it includes making the choices that are going to leave you as well-off as possible. That’s a very optimistic view of life. Economics helps you live your best life possible. It gives you the tools to systematically make decisions that will leave you, whoever you are, with whatever values you have, making the best choices you possibly can.
I don’t have to assume anybody’s rational. I don’t have to imply that you’re a chump if you’re not rational. I can just talk to you about the ways in which we see people making decisions, and why you should evaluate costs and benefits, and how that can then get us something like a downward-sloping demand curve and an upward-sloping supply curve. I want students to see economics in their everyday life. And see it as something that helps them no matter who they are, no matter what they’re going to go on to do, or no matter what kind of background they came from.
Michael Chui: So what is it that—why would someone who thought of economics as it’s all about rational actors and homo economicus and all we’re doing is calculating things, and where’s the joy in that? If a student comes to you and says, “That doesn’t feel like me,” how do you respond?
Justin Wolfers: I was radicalized by a discussion with my sister-in-law, who turned up to her first economics lecture, and she wanted to major in economics, and on the first day of the first lecture, the instructor said, “We will assume rationality.” And she said, “Why? I’ve met people. That seems a bit odd.” And there’s a long defense that an economist could give. But on the first day of the first class, he lost her.
Betsey Stevenson: It’s dispiriting because it’s telling you, “Well, we’re going to study a world that doesn’t exist.” It’s like showing up for your first day of medical school and they say, “We’re going to assume people are immortal.” And you’re like, “Wait, I’m going to medical school to help people. If they’re immortal, what am I doing here?”
Justin Wolfers: The truth is, people are trying the best they can in the circumstances they’re in. That’s not that different than the sort of mathematical equation that you would write down if you were a fully optimizing, fully rational, forward-looking, perfectly informed consumer. But we can meet you where you are. And we can drop the “assume this” and the “assume that” and talk about people and the world that we’re actually in.
Michael Chui: Let’s go into some things that you’ve researched. You’ve done some work on subjective well-being. And there’s some controversy in the field. I’d love to get your reflections. It’s been years that you’ve looked at it. What’s your perspective on subjective well-being? Or some people talk about the economics of happiness. Where do you come out on those things?
Justin Wolfers: You did a nice job in avoiding the term “happiness.” But people are only interested in this because they’re interested in happiness. There are a large number of people who say the measure of a country is not its GDP—it’s the smiles, it’s the hugs, it’s the joy. It’s more than just that. It’s the meaning.
And that’s true. But that doesn’t make economics irrelevant. It just says we should measure those things. Fortunately, a bunch of people have gone out and measured those things. And then we can figure out the sorts of things that appear to be closely related to joy and happiness and laughter and satisfaction.
The first-order question in the field when we entered it was what is the role of the most standard of all economic indicators, which is income? The claim at the time was that income doesn’t make people happier. That claim came about because it’s an actually interesting claim. It suggested that if you looked in a society like the United States at a point in time, 2023, richer people do tend to be happier than poorer people.
But, the claim was made, if you look around the world, richer countries like the United States were not, it was claimed, any happier than poorer countries. Or as countries got richer over time, they didn’t get happier. And so the claim was made that what that must imply is that happiness depends on where you are in the pecking order. Your income relative to other people. That has enormous intuitive appeal.
If you run surveys of Harvard undergraduates, they all say, “I’d rather be higher in the pecking order rather than that I want more money.” It also has enormous implications for policy, because if that’s true, it says policies of economic development which raise countries from grinding poverty, to join the global rich aren’t helpful. Because if you make everyone rich, you made their neighbors rich, no one got relatively richer, it’s not helpful.
Betsey Stevenson: This idea I found so offensive. Because it’s the idea that if you take a village where you’ve got high infant mortality, they don’t have running water or sanitary conditions, and you bring in indoor plumbing and clean water, you bring in more food, infant mortality goes down, but everybody got those things, so nobody was better off.
And in fact, when you describe it that way, most people immediately will be like, “Oh, of course they’re made better off.” And then they just created this random caveat that wasn’t in the data, which was just, at these very low levels of income, if we raise income, then we’ll make people happier. But once we get them to the middle class, we can’t help them anymore.
Justin Wolfers: So we shouldn’t get stuck on what other people said, because what other people said was wrong. This idea that all that mattered was your income relative to others was an idea known as the Easterlin paradox. So we did the simplest possible thing an economist could do, which is we gathered as much data as we could from all around the world. And we confirmed it’s absolutely true that within a country at a point in time, richer people are happier than poorer people.
We, in fact, showed that’s true for over 140 countries. Definitely true. We also showed that if you get data on countries all around the world at different levels of economic development, it’s overwhelmingly the case that countries that are more economically developed, have higher levels of GDP, and have much higher levels of happiness than countries that are poorer.
In fact, the correlation between the two is remarkably strong. For the nerds listening to the podcast, I’m going to say the correlation’s 0.8. For everyone else, I’m just going to say it’s remarkably strong. And so you learn that, in fact, richer countries are much happier than poorer countries. And then if you carefully study what happens to countries over time as they get richer, in fact, they get happier.
All of this leads to this remarkably uninteresting and kind of intuitively obvious insight that, in fact, as we get wealthier, or as we have more opportunities afforded to us by economic growth, we use them in ways that create joy.
Now I’ll tell you, that makes Betsey and me completely uninteresting dinner party guests, because wouldn’t it be nice to not have to worry about the poverty of other countries, which many people in rich countries prefer to do? And wouldn’t it be nice to tell stories about the happiness of the noble savage?
It’s just not true. And so we end up sounding like the most relentlessly boring economists who say that whatever it is that created economic development in the United States, in Canada, in Europe and Scandinavia brought much greater levels of well-being than whatever it is that retarded growth in the countries that have remained less developed.
We don’t know exactly what it is that causes that greater happiness. Is it the income itself? Is it not losing children in childbirth? Is it a sense of security? Is it the support of the welfare state? We don’t know. But we do know the package of things rich countries do seem like they’re enormously helpful for people’s well-being.
Betsey Stevenson: There’s some evidence that what matters is you have more control over how you spend your time and what you do, and you have greater opportunities. And when you have greater opportunities to have higher income, on average, people take some of those opportunities to have higher income.
I think it’s really important that people realize that none of our research suggests that if you are graduating from college with an economics degree, and you are offered a job doing something that looks absolutely fantastic to you for $50,000 and a job that looks like drudgery for $60,000, that you should take the $60,000 job.
In fact, what I would argue is that having graduated from college is giving you these opportunities to choose between two jobs. And you’re not always going to choose the highest-earning, highest-income job. But what we see is, on average, the more education that people have, the more opportunities that people have, some of those people will take it to earn more.
And so we see this correlation between well-being and higher earnings. What’s important is that whatever’s contributing to that ability to earn higher earnings, that ability for the country to be richer, is, in some way, contributing to higher well-being to the population.
And so people who say what they care about is higher well-being do have to be concerned with economic growth. Now, that said, it’s also important to be concerned with distribution. Because if I’m telling you that income matters for well-being, then it matters that some people are getting very little of the gains from economic growth.
And in fact, what we find is that your well-being increases with the log of income, which means that the richer you are, the more money it costs to get a little bit of a boost in well-being or happiness. And in fact, if I take a dollar from a rich person and I give that dollar to a person with low income, what I’ll find is that the person who’s richer does lose something. I think it’s important to acknowledge that. They become less happy, have less well-being. But to a much smaller extent than the gain that the person with the low income just got.
Put together, that transfer makes the world better off. But I think that it’s easier to do that kind of redistribution if we also do acknowledge that there are costs to the people we’re taking it from. It’s just that those costs are smaller than the gains to the people who are lower income.
Michael Chui: How do you make that case?
Justin Wolfers: You don’t think intuition helps? You don’t think telling a story helps? So let’s take $10,000 from Bill Gates. Michael, what is he going to do without?
Michael Chui: I don’t know what Bill spends things on nowadays.
Justin Wolfers: Let’s take $10,000 and give it to a single mom. What does that look like for her daughter?
Michael Chui: It’s a huge difference.
Justin Wolfers: I think people have very, very strong moral intuitions about this. The only novelty of our research is we found that the intuitions people had were exactly true.
Betsey Stevenson: I do think that people like the romantic idea, though, of “your income doesn’t matter.” Just let it be and not worry about it. And I think the advice I give people is, don’t worry about your income, but do worry about the skills that you’re building, the connections, the career, the choices and opportunities that you’re building for yourself.
Because at the end of the day, life is easier with more money. And anybody with more money knows that. And to the extent that they don’t admit it, it’s just because they’re trying to keep it a secret so nobody takes that money and gives it to somebody who needs it more than they do.
Michael Chui: I’m interested, though, the way you framed it, the $60,000 drudgery job versus the $50,000 engaging job. The way you phrased it, almost, it’s, there’s value in the ability to have choice.
Justin Wolfers: Yeah.
Michael Chui: That’s something that someone actually values.
Justin Wolfers: What a great privilege. So you should tell the story of your best friend.
Betsey Stevenson: First of all, I was going to say we actually know people value choice because people who are self-employed tend to make a little bit less than they would make if they were in a wage or salaried job. They’re paying for the control over how they spend their time.
If I take myself and my best friend, we went to college together. She may have even been a slightly better student than me, though we were both pretty good students. And we both went to graduate school. She went to law school. I went to do a PhD. Traditionally, those lawyers will earn more than people getting a PhD. But when she graduated from law school, she decided that the best way she could spend her time was to help low-income domestic violence victims.
She has been in legal practices serving low-income communities her entire career. She earns less than me. I don’t think she’s less happy. I think she made a choice that comes with a lot of meaning, a lot of fulfillment.
And she could have done the other path. She had all the credentials and education to be a corporate lawyer. But when she thought about what life would look like with all that income as a corporate lawyer, or all the meaning of getting up every day and doing things that improve the lives of people who are really struggling, she chose to get paid some of her pay in that feeling of meaning and satisfaction.
That’s very important. And that’s why I never would want anybody to misinterpret our research as suggesting, just pursue the almighty dollar. That’s not what we’re saying. But her ability to pursue that very rewarding career came from the opportunities she got from pursuing a lot of education.
Michael Chui: You framed that point in terms of labor market choices on the part of your friend. I know you’ve actually studied how the labor market has been evolving since the pandemic happened. What have you found?
Betsey Stevenson: Let’s start really big and really broad. If you go back 75 years, roughly half the jobs were in goods and half the jobs were in services. And if you look at where the labor market is today, it’s about 15 percent of the jobs in goods, and the rest are in either government or services. So we don’t need to make as much stuff as we used to make.
Justin Wolfers: We make a lot of stuff.
Betsey Stevenson: That’s true.
Justin Wolfers: But we do it incredibly productively. And we don’t need a lot of people to do it.
Betsey Stevenson: And we also do a lot of our stuff through trade.
Justin Wolfers: I was going to say, unfortunately, we have another workforce.
Betsey Stevenson: What are we doing as we get richer as a country? What we care a lot about is our health. And we care a lot about investing in our skills, so we care a lot about education. And we also care about having fun. We care about leisure.
If you look at the industries that have been growing really rapidly, particularly in the 21st century, it’s education, health services, leisure, and hospitality. Those are really where a lot of the jobs have come from. Those are industries that disproportionately employ women. And it’s one of the reasons why women have continued to grow as a share of the labor force.
Now, during the pandemic, we had something incredibly unusual happen, which is unlike a normal recession. In a normal recession, what happens is people start to think, “Oh I could get laid off. I should probably cut back.” Or “Maybe I’m not getting as many hours as I’m used to getting, so I need to cut back a little bit because I don’t have as much income.”
So what do they do? Well, they postpone getting a new car. They postpone buying an appliance, like a dishwasher or a refrigerator. They decide not to move house after all. They just stop buying stuff. But they keep going and getting their hair cut and going to the dentist, and those things continued.
In a normal recession, men tend to lose the most jobs because they’re the ones who make the most stuff. And women tend to lose jobs less, because they tend to work in the service sector. What happened in the pandemic was we kept buying stuff, but we actually stopped—we weren’t afraid of our income disappearing as much as we are afraid of our health. And so we stopped doing things where we were interacting with people.
And women tend to hold a lot of the jobs where we interact with people. And those have been the jobs that have been slowest to come back from that pandemic recession. If you look at things like the tech sector—the tech sector hired at incredibly high levels coming out of the pandemic, way exceeded their prepandemic levels of employment.
But leisure and hospitality, still chugging along, trying to recover. Education and health services have gone back to where they were prior to the pandemic, but not the growth path they were on prior to the pandemic. So not where they would’ve been based on preexisting trends.
What we’ve seen is a labor market that’s been really shook up in the last three years with not just job loss, but job loss in unusual sectors. A lot of interest in hiring people in sectors that actually hadn’t grown very much in recent years. The goods-producing sector, particularly the domestic goods-producing sector, started to really grow. So we’ve seen a lot of reallocation of workers.
We also saw a lot of people realizing that control and choice was incredibly important to them. So we saw huge growth in self-employment. And we’re starting to now see people moving away from self-employment and back into more traditional jobs as they’re starting to feel a little bit more comfortable with giving up that control that you get when you are self-employed.
I think we’re in a labor market that’s still evolving. And then we just had AI thrown on top of it. I think it’s nowhere near done evolving. There’s a lot of change that’s left to happen. And I don’t know where that’s going to go.
But I will say that while some people were fearful that because women lost the most jobs in the pandemic, that this would somehow change gender equity in the labor force, it’s actually been women that have come back stronger than men. And if you look at prime-age women, their labor force participation rates well exceed where they were prior to the pandemic. And in particular, it’s Black women who are working more than they’ve worked in this century, basically, in the 21st century. So we’re seeing very high employment rates that come from very high labor force participation rates, and low unemployment for African-American women.
Michael Chui: Until recently we see a lot of gains at the lower quintiles of the income distribution with marginalized populations, as you just talked about. But recently, as the tightening from the Fed has come, those gains have slowed or even reversed. What do you see happening?
Justin Wolfers: I actually think that you’ve hit on one of the truly untold stories of the 2020s, which is inequality has declined. Holy cow. Because throughout my entire lifetime, inequality’s been rising in the US. And it’s been declining for two reasons. At least two.
One is, unemployment is a problem, particularly for disadvantaged groups. When there are people who are going to miss out on work, it usually turns out to be those with less education, or racial minorities, or ethnic minorities. Basically, an employer, when they face a long queue at the factory gate, can afford to discriminate.
But once the economy goes hot, all of a sudden we’re bringing all sorts of people back to work. And not just minorities, but also people with disabilities, people with criminal records. And these are people who otherwise would have an incredibly difficult time getting by. So let me just cheer every day of that with all of my heart.
And then it’s not just that. We’ve actually seen wages at the low end rise quite dramatically. I don’t think I’ve ever said that before in my professional life. It was always that low-end wages were stagnant, for decades. We’re seeing workers in the bottom quintile catching up towards those at the median. I’m not yet sure any of that’s reversed. And so it looks to me like at a minimum, the rise in inequality is over. And perhaps there’s a little boom and a decline in inequality.
And there’s a really big question—Betsey hinted at it before—what is AI going to do to all this? And one could imagine it decreases inequality even further.
Betsey Stevenson: Research has shown really pretty big wage compression. Wages at the top just have not risen as much as wages at the bottom. And that’s that decline in inequality that Justin’s talking about. I think that’s happening simultaneously with people being frustrated by record-high corporate profits and non-wage income inequality that still seems to be accelerating.
I worry about that in the sense that AI is only going to make that worse in the big returns to capital when your capital can do a lot. I worry about that. Justin mentioned a tight labor market has made it very easy to bring workers in who are traditionally more disadvantaged.
If you think back to the end of the expanded unemployment insurance due to the pandemic, there was all this arguing around whether this was contributing to the tight labor market. We had an incredibly tight labor market for several months, with lots of employers saying, “I can’t find anybody. I’m advertising. I can’t find anybody.” I talked to some big employers. And one of the things they realized is, they use algorithms to sort through applications. And many of them had turned on in their algorithm an automatic kicking out of applicants, of people who had been unemployed for six months or more.
That’s the kind of discrimination against the long-term unemployed that exists and has existed. We struggled with this in the 2008 recession. And we talked to employers about, you’ve got to be willing to hire these people that have been unemployed for six months or longer. And it was very hard to get them to do anything about it coming out of the 2008 recession.
But coming out of the pandemic recession, there were just a lot of people who didn’t work for six months because, well, it was the pandemic. And they were at home. And then employers were like, “Oh, we can’t find anybody because we are literally throwing out all of the applications.” A lot of employers had to retool their algorithm to stop kicking people out. And I hope that sticks forever, because it was stupid. And it really hurt a lot of people.
It is a reminder that when employers say the labor market’s tight, it’s that they can’t find people in the way they’re used to looking for people. And we have to ask them questions like, “Who are you considering? How are you getting applicants? What do you have in your ad?” Because we also see employers who will often advertise for more credentials than they need. And then we see that there are gender differences in who will apply for those jobs. Women are much more reluctant to apply for a job if they don’t have all the credentials in the ad. Men are less so.
So if you add a lot of credentials to your ad, you’re going to get a lot of white male applicants. You might get fewer of other people. So there are lots of things that employers can do. And I think the extremely tight labor market of the last few years forced them to investigate those and make those changes so they could widen their pool. The goal is for that to be a lesson that sticks, because it does create a fairer, more diverse labor market.
Michael Chui: I think some people have noted that labor shortages go away if you raise wages, amongst other things.
Justin Wolfers: Yes.
Michael Chui: I’d love to talk more about AI. We’ll publish something by the time this podcast is released on the impact of generative AI. One of the interesting things in terms of skill-biased technological change—it’s almost exactly the reverse if you use skills viewed by educational attainment. It’s actually the PhDs that have the most exposure. I think the question there might be, does that decrease inequality because they’re more exposed? Or do they get to use that superpower of being augmented by these machines to gain even more?
Justin Wolfers: Let me take a stab at that. It’s funny, if I think about my talent as an economist, it’s not that I know the most complicated math. It’s that I can read widely and synthesize economic commentary, insight and, then simplify and say it back in English. That’s what ChatGPT does. So I’m scared.
And I ought to be scared. So I realize, as I think about that—I was talking to a journalist friend today, described his skill set, remarkably similar. So I realized, this is probably what it felt like to be a blue-collar manufacturing worker right before the US opened up to China. It’s given me a great deal more empathy.
I imagine some of the blue-collar unions are looking at this and feeling something. So the advice that I give to my students is, it looks like this is going to take a lot of white-collar jobs. And then middle through upper-middle-class white-collar jobs.
That’s the sense in which this will reduce inequality. The sense in which it will increase inequality is, only so many people hold stock in Microsoft or Google or whoever holds the technology. And so whoever that is, is going to get supercharged rich.
But I think the differences between the working, middle, and upper-middle class are going to compress. The advice I give my students is it’s easy, too easy, for white-collar workers to find themselves as substitutable for generative AI. The thing you want to be looking at for the next 30 years of your career is how can you be a complement?
So literally what I’m doing is, I’m studying this like crazy, because I want to be the economist who uses generative AI to do what I do better. And that may leave those who don’t without a job. But that’s the advice. And so while you get asked often as an economics educator, “Oh here’s a problem,” all of the homework we set our econ students, ChatGPT can answer it. And say, “Why on earth would that be the question you ask them? Why on earth is the thing you’re teaching them the first thing that a computer can do instead of a human?”
What we ought to be doing is teaching them the stuff computers can’t do. And so that’s a slower, longer-run pivot. To the white-collar workers who are scared, I feel you. And to those who aren’t, wake up.
Betsey Stevenson: I was just going to say that on an optimistic note, I think Justin’s more creative than ChatGPT. I think that what you have to pivot to is what makes you essentially human. And what makes you essentially human is being able to make connections that aren’t obvious. It’s that creativity.
Hopefully, AI is going to help us spend more time studying art and creativity and thinking about how to be more innovative in a way that can allow us to be more productive and have more free time. But we have to worry a lot about the transitions.
What I worry about in terms of inequality is that the older folks—let’s take Justin and I, well, we already sort of have our positions of authority. And then we can take the AI and use it to keep going. And we’re in a position to harness that AI, hopefully, in a way that will help make us better teachers and better at our job.
No one’s going to let us go. But maybe that means we need to hire fewer people at the entry level, because we can become more productive. I think that’s really happening at law firms. If you’ve got partners at law firms, they used to have to rely on a whole bunch of paralegals and junior associates to do all the scut work. Now you’ve got partners who don’t need humans because they’ve got AI to help them do some of the things that those humans used to do.
The result might be that there are fewer entry-level jobs. The people who are existing in the jobs are doing great, but there’s fewer entry-level jobs. Then it becomes hard to get this path to a good job. There could be generational inequality that comes out of this as part of the transition. And I think that’s going to be something we have to really look out for.
Michael Chui: Well, there’s both optimism in there as well as caution. Do you have a couple minutes to do a quick lightning round? What’s your favorite source of information about the economy? Betsey.
Justin Wolfers: Yeah, that’s my answer. Betsey. What’s yours, Betsey?
Betsey Stevenson: Justin.
Justin Wolfers: Done.
Michael Chui: What’s one topic in economics that most excites you? Justin?
Justin Wolfers: I am deeply excited right now by the reinvention of work. And I also think there’s incredible work to be done on mental health.
Michael Chui: Betsey?
Betsey Stevenson: Justin and I have very overlapping research interests. I think that’s my answer as well, what’s happening with work. I believe we’re finally going to get Keynes’s vision for his grandchildren.
Michael Chui: Ooh. Get your PTO [paid time off] ready, folks. If you could decree one economic policy decision, what would it be? Justin?
Justin Wolfers: A four-day workweek.
Michael Chui: Betsey?
Betsey Stevenson: Free childcare for all.
Michael Chui: What would you recommend someone graduating from secondary school study?
Justin Wolfers: I have to say economics. But I’m going to tell you that I’m going to recommend to my daughter she study psychology. We have enough economists in our household.
Betsey Stevenson: I’m going to say data science.
Michael Chui: What would you be doing today if you weren’t doing what you’re doing? Betsey? I don’t mean today.
Betsey Stevenson: I was like, “Working out. Can’t you tell?” What would I be doing today? Boy, I don’t know. That’s not how I view the world. I’m on the path I’m on. You stymied me because my response is everything, everywhere, all at once.
Justin Wolfers: I’d be floundering in middle management.
Michael Chui: And finally, what’s one piece of advice you have for our listeners? Justin?
Justin Wolfers: Let’s go to that point about AI. Your career is about to change in ways that you’re utterly unaware of even if you’ve been thinking about it. So make you a complement to generative AI. You might say, “What does that mean?” And Betsey gave a sense of that, which is, what is it that’s distinctively human about you and your skills? Because that’s what you can do and computers can’t.
Betsey Stevenson: Use the tools of economics to make the very best decisions you can, given the information you know at the time. And don’t feel bad if the information you learn later makes you think, “Oh, I should’ve done something else.” You made the best decision you could at the time. Move forward. Regret isn’t something that’s going to help you.
Michael Chui: Betsey Stevenson, Justin Wolfers, thanks for joining us.
Justin Wolfers: A pleasure.
Betsey Stevenson: Thank you.