Quarter 4 2003/Quarter 1 2004
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The Federal Reserve Bank of Boston Vol. 14 No. 1 Q4-Q1, 2003/4 this issue this month, the Regional Review takes on a wide array of interesting and important topics. The long-term prospects of lower-skilled American workers continue to be a major source of public con- cern. In Too Many Cooks?, Urban Institute researchers Julia Lane and Harold Salzman and University of Massachusetts Lowell professors Philip Moss and Chris Tilly consider whether consolidation and out- sourcing in the food preparation industry have led to a disappearance of traditional training opportu- nities and job ladders. They find that these trends may in fact generate better jobs with more extensive job ladders, but the typical entry-level worker lacks the needed qualifica- tions to make the most of these opportunities. Issues in Economics 2 In Objects of Desire, Carrie Conaway examines the By Jeffrey Fuhrer and Geoffrey M.B. Tootell motivations of collectors. She finds that most collec- A steady decline in the core rate of inflation tors—both individuals and institutions such as muse- over the past few years has prompted the ques- tion: What are the economic consequences ums and libraries—hope to make an imprint on the when the inflation rate drops below zero? world and preserve a legacy for future generations. But while individuals typically want to acquire every exam- Focus on High-Tech 6 By Pingkang David Yu The Boston metro area ple of an item no matter how small the variation, institu- fares well when assessing a region’s high-tech tions favor acquisitions that have universal appeal and capacity by its share of scientific and technical represent elements of a larger story. occupations. Finally, as inflation fell to its lowest levels in 40 years, Objects of Desire 12 many people began to wonder about the consequences By Carrie Conaway Although their motivations if the inflation rate became negative and overall prices might appear different, both individual collectors and museum curators seek to define began to fall. Boston Fed economists Jeffrey Fuhrer and themselves and leave their mark on the world Geoffrey M.B. Tootell discuss the costs of deflation in through the things that they acquire. Issues in Economics. They argue that while the proba- Too Many Cooks? 20 bility of deflation in the near future is low, there are By Julia Lane, Philip Moss, Harold Salzman, serious costs in both the short run and the long run. and Chris Tilly Consolidation and outsourcing in the food industry have created higher-paying food prep jobs, but also have erected barriers for lower-skilled workers trying to move up the ladder. Letter from Storrs, Connecticut 28 cathy e. minehan By Owen Canfield president, federal reserve bank of boston cover by gail anderson DO IT YOURSELF turers has driven down the unit Improved self-checkout purchase price. It now takes technology means only 15 months for a device to retailers can now offer pay for itself through labor cost more choice for cus- savings, down from 30 months tomers in how they pay. in 1991. But perhaps the biggest fac- tor is a heightened attention to design. Unlike the earlier one-size-fits-all machines, today’s modular terminals can accommodate both a large conveyor-belt device for a home fur- nishing warehouse and a small kiosk-like de- vice for a convenience store. At least one man- ufacturer, NCR, also helps stores design their checkout area based on layout and staff con- figuration. These innovations have allowed observations retailers to rethink how they use the machines. Now, instead of replacing staffed aisles with kathleen dooher kathleen self-checkout lanes to cut costs, as originally conceived, retailers add them as a way to in- Self-checkout checking in? crease customer satisfaction by offering more choice in how to check out. from stop & shop to Home Depot, sea- Kroger supermarkets. Why did it take over a There are still some snags: items without soned shoppers have begun to forego typical decade before the technology spread? bar codes often do not ring up correctly, ma- checkout lanes with a human cashier in favor One possibility is that today’s technology- chines are not always user-friendly, some sys- of the do-it-yourself machinery of automated savvy consumers are more comfortable with tems did not initially accept the new $20 bills, checkouts. However, although self-checkouts robotic sophistication, although the Kroger and, according to a study by IHL Consult- have become more popular, a Food Market- executives who evaluated the 1980s experi- ing Group, they can actually be slower than a ing Institute survey found that just 30 percent ment were surprised at how quickly shoppers fully staffed checkout in certain circum- of retailers are testing them took to their system. A more stances. But more flexibility in how and where today. Of course, any new Check this out likely factor is cost. Improve- self-checkouts are set up will ultimately make technology needs some time ments in the machines’ ease the scanners more cost-efficient and popular 12,000 total to get going, right? units of use, scanning accuracy, with consumers, possibly enough to become installed Yet, self-checkouts aren’t 8,000 and database technology (for commonplace in mainstream stores and thrive new. The first automated keeping track of items) have in niche markets. While they may not com- 4,000 checkout system, manufac- all worked to reduce operat- pletely replace human cashiers anytime soon, tured by a company called 0 ing expenses. At the same as the kinks are worked out, self-checkouts CheckRobot, appeared more ’98 ’99 ’00 ’01 ’02 ’03 time, increased competition may well check in for good. source: IDC, 2003 than 15 years ago in Atlanta’s among checkout manufac- —Brad Hershbein Local restocking When it comes to picking stocks, investors may not have to look that far from home. According to University of Illinois finance professors Zoran Ivkovich and Scott Weisbenner, annual returns on local investments—nationally traded companies located within 250 miles of the particular investor holding them— outperform non-local stocks in the local investor’s portfolio by 3.2 percent; among smaller, non-S&P 500 stocks, the local premium is even greater, at 6.2 percent. And this risk-adjusted premium has not diminished over time. Why is there such a difference between the performance of investors’ local and non-local investments, and why does it persist? Ivkovich and Weisbenner posit that investors can employ local knowledge to make better distinctions among local firms than among firms located farther away. >>next page michael kupperman REGIONAL REVIEW Q4-Q1 2003/4 1 Observations continued from previous page << But, in theory, the higher returns should issues in economics boost investor demand for stocks with relatively large local ownership—espe- cially if the stocks are of small compa- nies—driving up their price and elimi- nating the return premium. History sug- What is the cost of deflation? gests at least one possible solution to this conundrum: Most investors may not he prospect of deflation—a yet know how to use this information to their benefit. falling overall price level—received Some analysts believe such was the a fair amount of attention during case with the “January effect,” first dis- late 2002 and 2003. Prompted by cussed in the late 1970s. Researchers found that investors would sell losing a steady decline in the core rate of stocks at the end of the year in order to inflation to levels not reached since offset capital gains taxes and then buy the early 1960s, many people began them back in January, driving up that month’s returns. Knowledgeable to wonder about the economic con- investors could buy in December and sequences when the inflation rate sell in January, making an easy profit. drops below zero. Although the on- With core inflation According to more recent research, how- running at its lowest ever, the January effect has diminished going economic recovery suggests levels since the early somewhat as individual investors have that there is a low probability of de- 1960s, many have learned the game and better information flation in the near future, questions wondered about the technology has made it easier and faster economic impact for them to manage their own trades. about the impact of falling prices are when inflation drops Will the local premium found by worth considering. below zero. Ivkovich and Weisbenner follow a similar At first glance, falling prices path? Currently, personal investors typi- cally invest in only a couple of local pub- might seem like a good thing. licly held firms, and few rigorously com- Who wouldn’t want the prices of pute their gains and losses, so the bene- the things he or she buys to be fits from local stock ownership may not be that obvious. Additionally, the infor- cheaper? But in a period of defla- mation necessary to identify the best tion, overall prices drop—includ- local stocks is harder to get. It is difficult ing the price of labor (wages), for investors to know who the smart locals are, and other effects such as houses and other assets, and most state taxes and trading regulations may goods and services. In the simplest complicate the process. example of deflation, all prices and Still, as Internet communications and online databases become more sophisti- wages fall at the same rate. In this cated, it may become easier for investors instance, the purchasing power of to perform the calculations. Also, firms incomes and the relationship be- may start to advertise the percentage of local residents who own shares of their company if they think it will encourage other investors to buy their stock.