Again with the 90-day trial

13/06/2014 § 2 Comments

Several years ago, New Zealand law was changed to allow smaller employers a 90-day trial period for new employees (yes, you wag, ‘smaller’ is measured in number of employees not in centimetres). In the trial period, employers could simply let people go, no harm, no foul. This provision was later extended to all employers.

The Council of Trade Unions did not approve in 2010:

The 90-day trials are part of a “low road” approach to employment. In the 1990s this road led employers to rely on low wages and skills, building a distrustful and ultimately unsustainable workplace environment. It corrodes the trust required for those wishing to take the “high road” of long term, respectful employment relationships which strengthen productivity, skills, work satisfaction, and wages.

According to CTU President Helen Kelly, it still does not approve in 2014:

“The infamous 90 day trial period is a flop. There is no evidence that 90 day trial periods have led to the creation of a single job. In fact it shows that tens of thousands of workers are being dismissed under 90 day trials each year. There’s not a shred of evidence that trial periods have created any additional employment”

The Ministry of Business, Innovation and Employment released a report this week out of its old Department of Labour group. The report concludes that:

Trial periods have provided greater opportunities for workers to be hired.

What the report does not do is assess the impact of the trial period on overall employment. It says:

A key question in this evaluation is whether employers are confident to take on new staff as a result of the trial period provisions. Answering this with certainty would require a detailed statistical counterfactual comparison between firms that did and did not use trial periods, isolating the effect of wider economic and other factors and over a sufficiently long period. Such an analysis is not realistically possible due to data constraints and a lack of an identifiable ‘control group’, and has not been attempted in this report.

The CTU has used this lack to claim that the government has no evidence that the trial has created jobs. And they have no evidence. Because they haven’t looked.

This is a bit of a problem. If one starts from the point of view that labour market flexibility is good to the extent that it provides employees with opportunities and employers with risk-management tools, then THE key question is whether the trial periods led to (a) increased employment or at the very least (b) more employment for traditionally disadvantaged job-seekers. If the rule change doesn’t improve employment outcomes, then it just looks like a shift of power from one group to another with no compensating benefit.

So, really, the key question for the Ministry is, did it work? And the Ministry just shrugged its shoulders and said, ‘Dunno, beats me, it’s too hard.’

We have been here before. DoL/MBIE has already released a report on the 90-day trial period that did not actually answer the central question. And it led 6 months ago to the same wailing and gnashing of teeth — which I discussed at the time.

Let’s put this issue to rest, already. Can I get an econometrician in aisle three for a clean-up? People are spilling out their prejudices and it needs to be sorted out.

Mr Economist goes to Washington!

12/06/2014 § 1 Comment

Well, may go to Washington.

The big news from my home state of Virginia (sic semper tyrannis!) is the primary to select the Republic candidate for the 7th congressional district. Eric Cantor, leading Republican, lost the primary to David Brat, economist. Way to go, bro’! Let’s see you stick it to those lawyers up on the Hill.

But then one digs a little deeper, and….

“So should there be a minimum wage in your opinion?” Todd pressed.

“Um, I don’t have a well-crafted response on that one,” Brat said, haltingly.

Sorry, what? An economics professor without an opinion on the minimum wage? Such a beast does not exist. That’s like a baseball fan with no thoughts on the designated hitter rule, a physicist with no opinion on string theory.

But then he goes on to explain himself a bit:

“All I know is that if you take the long-run graph over 200 years of the wage rate, it cannot differ from your nation’s productivity. Right? So you can’t make up wage rates.”

Oh, right, that clears it up. Wages cannot differ from productivity, at least not in the long run. Well, that’s easy enough to look up — the Bureau of Labor Statistics does the work for us:

wageproductivity

from: Updated charts and data associated with the paper “The compensation-productivity gap: a visual essay,” by Susan Fleck, John Glaser, and Shawn Sprague.

Hey, look at that. Productivity has been running faster than wages since the First Oil Shock Recession, especially since the Volcker vs Inflation Recession of the early 1980s. Well, given the good professor’s theory, we should be expecting a regression to the mean anytime.

Soon.

In the medium term.

And raising the minimum wage shouldn’t be a problem for the economy, since the productivity is there and has been for 30 years.

I look forward to him sponsoring that bill.

****

Bonus points: apparently, he is facing off against another professor from the same college, a sociology professor! Disciplinary disputes go prime-time! I’m praying for a cage match.

Bonuser points: as one does, I looked Brat up on Google Scholar, and ran him through Publish or Perish. Professional curiosity. It looks like an h-index of 2? Based on work in the 1990s? Honey, that would get you an R ranking in the PBRF. Not a good look.

How much would carbon policies hurt?

10/06/2014 § 3 Comments

We’ve been talking about carbon policies to address climate change for years — the Kyoto Protocol was agreed in 1997 — but carbon emissions keep increasing. The recent news about the West Antarctic Ice Sheet seems to confirm that climate change and sea level rise are coming, ready or not. Policies are not biting enough to change emissions enough to have an impact.

One thing holding us back is that we don’t want to pay for it. There are interesting discussions about the best way to pay for climate change policies. Do we reduce economic activity now by a little? Or, do we grow faster now and pay more later but out of a larger pot of money? How do we divide our efforts among prevention, mitigation, and adaptation? But these interesting discussions also serve to delay, limiting our ‘prevention’ options and de facto pushing us into adaptation. We will end up paying one way or another.

Also, emissions reductions are not necessarily that expensive, as a new study confirms and earlier research has shown. Car emissions are a good example. I have driven American cars made in the 1970s; they were horribly inefficient compared to modern cars. We have learned how to motor around using a lot less fuel per kilometre, and we are getting better all the time.

I often think about the economic impacts of carbon policy as turning back the clock to some earlier time when we were poorer. That’s not to say I’m taking the Roger Pielke view that energy and the economy have an immutable one-to-one linkage our only two options are either economic growth or ‘technological innovation in energy systems on a predictable schedule‘ — a view ably rejected by Paul Krugman. Less carbon, though, does mean less energy use, which does mean less energy-intensive production, which essentially means less stuff. It might mean prettier stuff, in a baroque/Japanese, let’s-make-it-exquisite sort of way. But, still, probably, not so many physical objects that have been transformed from raw materials into commodities.

So, what are we talking about? Even with more efficient cars, lighting, heating, hot water systems, etc., we might have to put up with less stuff. Can we place it in an era? Well, let me explain with US data, with the caveat that the New Zealand experience has been different. How about the 1980s? Or the 1970s? How awful was it, really, just to have one television set per household instead of three? Or, to have 50 square metres per person instead of 100?

On the other hand — and I think this is important when considering resistance to carbon policies — a lot of people aren’t much richer than they were 20, 30, or even 40 years ago. The recent focus on inequality keeps emphasising that growth has been better for some people than others:

income

There are two ways to look at this. The first is that moving to the same level of consumption as 1975-ish wouldn’t be that painful for a lot of people. They are already there. The consumption basket has changed, sure, but the overall level of consumption has barely moved.

The second way, the one that creates the resistance, is this: lots of people have gained only a little over the last 40 years. Would carbon policies ask them to give up what little they have gained? If so, that’s a big ask.

The question, therefore, isn’t just ‘how much would carbon policies hurt’. It is also, ‘who bears the brunt of the change?’

Becker, Foucault, Lacan

07/05/2014 § Leave a comment

Gary Becker passed on this week, so I did a mini-lecture in class yesterday on his contributions to economics (I managed to use Peaches Geldof as an example of a rational addict). I thought it was important to think about Becker because of the way he pushed economics in new areas. He used marginal analysis and specialisation — standard ideas — in new ways. It shows both the usefulness of a few simple economic ideas and the way late 20th century social sciences developed.

Crooked Timber has had a couple of good posts, one about Becker and Foucault  and one linking to a good post on Becker’s contributions and shortcomings. Reading ‘Becker on Ewald on Foucault on Becker’, I wondered how Lacan would react to it. Foucault, apparently, was taken with the way that Becker thought about people making decisions. Foucault showed how law created crimes and doctors created diseases, by the way they deployed power. But Becker had people making decisions within each of the categories created. So, within the family, clearly a site of power relations, men and women were making strategic decision to maximise utility subject to constraints, balance marginal costs with marginal benefits. So, there was agency.

But I’m not convince that either Foucault or Becker had it right. First, if we take Foucauldian analysis seriously, then the power is creating the categories and determining individuals’ positions in the structure. How is it that individuals still have some residual liberty to make their own decisions? That would mean either that the power relations are not fully defined, or that there is some slippage between expectations and actual behaviour.

Becker, similarly, promoted universal explanations. The article I know best is ‘De gustibus non est disputandum‘, and don’t agree with it that tastes and preferences do not vary significantly across people. In fact, my research (and others) in food choices show that people do have different preferences and those preferences do affect spending. This issue is similar to Thomas Piketty’s endnote in Capital in the 21st century, that Becker didn’t let data get in the way of theorising.

Which brings me to Lacan. Lacan provides a motive force for difference and decisions — this is the analysis that Copjec offers in Read my desire. The Foucauldian analysis fails because of the impossibility of ‘saying it all': the law cannot fully establish all the required categories. The act of creating categories creates its own excess; the act of neoliberal analysis creates its own outside-the-analysis. Becker fails because of the impossibility of fully determining preferences and because of the idiosyncratic nature of desire and its impacts on behaviours. Becker seemed to move too quickly from the idea that people pursue that which they think will make them happy, to the idea that we know (he knew) what makes people happy.

Spreadsheeting r>g

01/05/2014 § 3 Comments

Thomas Piketty’s book, Capital in the 21st Century, has been getting press, some favourable, some lukewarm, some critical. There’s even a bluffer’s guide (bonjour paresse!).

I haven’t read it, but that won’t stop me commenting. Specifically, the little shorthand ‘r>g’ making the rounds had me thinking. Unfortunately, my thought is also the first entry in the bluffer’s guide: the thesis isn’t new. This is the tendency for the rate of profit to fall, by some 19th century economist, dressed up a different way. It’s also something my actuary/economist dad pointed out to me years ago — that stock market returns couldn’t keep outpacing economic growth forever. And something that can’t go on forever, won’t.

But it isn’t real until you can put it in a spreadsheet. So, I tried. My first attempt failed because ‘r>g’ isn’t enough by itself.

So, I tried again, this time including a marginal propensity to save, which you need in order to determine how much income gets converted into wealth. It turns out to make for interesting calculations.

Here’s one example. Start with GDP = 100, divided 60/40 into wages and rents. Assume g = 0.02 and r = 0.08. With the amount and rate of rent, you can calculate initial capital (K), which is here 40/0.08 = 500.

GDP Wealth
g= r= MPS_L= MPS_K=
0.02 0.08 0.1 0.8
Year total wages rent savings, L savings, K Final K
1 100 60 40 6 32 532
2 102 59 43 6 34 566
3 104 59 45 6 36 602
4 106 58 48 6 39 641
5 108 57 51 6 41 682

What happens in the second period depends on what happens to rents. If they are entirely consumed by dissolute third-generation scions, then they don’t add to the stock of capital. So period 2 depends on the marginal propensity to save, which here I’ve assumed is 0.8 (80%). Final K is higher than the initial K, and the amount of rents increases. The result over many periods is the following:

wagerent1

The picture, though, is sensitive to the assumptions. Assume g = 0.03, r = 0.08, and MPS_K = 0.4, and here is the 100-year picture:

wagerent2

It turns out that the results depend on initial allocations, relative rates of returns, and savings rates. Crucially, too, I haven’t actually created a stock of K wealth that is owned by the initial L. I created the category in the spreadsheet, but then didn’t use it. If labour starts owning bits of capital, well, either that’s employee-owned companies or control of the means of production by the proletariat — I’ll let you make the call.

It seems that the problem is prying rents out of the hands of capital-owners, rather than the rate of rent itself. One way, of course, is taxes. A 50% estate tax looks like a useful way to get MPS_K from 0.8 to 0.4, for example. And dissolute grandchildren should also be encouraged.

Happy May Day!

Minister makes sense on alcohol minimum pricing

27/04/2014 § 6 Comments

Note: Eric Crampton at Offsettingbehaviour is an expert on the economics of alcohol consumption in New Zealand, and has posted on this. I purposely wrote this post first (because I have looked at modelling of minimum pricing), then checked out his comments. This post is especially long — sorry.

The Ministry of Justice released a report calculating the impacts of a mandated minimum price for alcohol. The reporting (in both the Christchurch Press and the Dominion Post) was that the report said minimum pricing would be good, lots of people were in favour of the policy, and the Minister blocked it anyway.

Minister Collins was absolutely correct to stop the policy, but not for the reason stated. The reporting was that

The ministry recommended that a minimum pricing regime should not be considered for five years. It said this would give time for Government to assess the impact of alcohol reforms which passed in late 2012.

And you think, fair enough, let’s see what happens with existing measures before we go adding new ones.

Back up a moment — who were these ‘people’ who favoured the policy? Well, all the same people who have been trying to reduce alcohol consumption for years. Specifically, SHORE can’t just let people drink in peace. They feature prominently in the article. It turns out that they supplied a lot of the data and analysis for the MoJ report, too.

SHORE got wound up a while back because alcohol has become ‘more affordable’. What does this really mean? It means (a) people have become richer, and (b) they have decided to spend some of their new riches on drink. This is clear evidence that people like alcohol. Given their druthers, they would like more of it rather than less. Alcohol is a ‘normal good’. Affordability is generally a good thing — think housing.

Back to the MoJ report — what did the report say, anyway? I’ll give you the high points.

First, a minimum price produces nearly the same reduction in moderate drinking as harmful drinking. The report acknowledges that harmful drinking is less price sensitive, but says that the fact that harmful drinkers consume cheaper alcohol means that the minimum policy has more bite with harmful drinkers. Figure 27 makes the link, showing that those who drink more frequently are more likely to be buying cheaper alcohol. The link is there but fairly weak. For those who drink daily, 25% are buying alcohol in the cheapest 20% of products (with no link, it would be 20% of them). So, 75% of daily drinkers are buying more expensive products.

My main issue with this is the blatant classism: if you work drunk on Bombay gin martinis or ruin your liver with Dom Perignon, that’s all good. The report wants to sort those icky people drinking Chateau Cardboard and growlers. While trying to target the fraction of the fraction of the population who BOTH buy cheap booze AND drink harmfully (roughly, 25% of 11% (Figure 1), or 3% of consumers), they are penalising people who want a moderate drink on a budget.

My second issue is the elasticities that drive the whole analysis. Just to be clear, there are two main elements to the modelling. The elasticities (how price affects consumption) are one main element. One set of elasticities, from SHORE and AC Nielsen, are in table 7 (p. 24). They are, shall we say, inconsistent with the literature. The report even points this out:

It was decided that the significant reductions in consumption estimated using NZ elasticity estimates are not a realistic representation of what is likely to happen in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.

And yet, the analysis still uses these elasticities. The report also uses the Sheffield elasticities, provided in Appendix 3, which have harmful drinkers as more price elastic than moderate drinkers (own price elasticity). So, a key element of the modelling is suspect.

Thirdly, the other main element of the modelling is how drinking links to harm. I spent a little time trying to dig up reliable data, and it isn’t available. The report tells us that it’s a problem:

For all the harm models there is the possibility that the functional form and slope of the relative risk functions are mis-specified (for example, most functions are assumed to be linear). The savings in alcohol-related harm generated are highly sensitive to the form and specification of the relative risk function. (p. 8)

Translation: we don’t really know, and it makes a big difference, but we’re gonna just go with what we’ve assumed.

Finally, the report finds:

A minimum price or excise increase would have some impact on low risk drinkers, but the savings to society significantly outweigh the lost benefits to consumers. (p. 7)

I’m not sure how they’ve made the calculation, but I’ll explain what I’ve seen. Chapter 9 has a big graphic in which the net social effect is the benefits in reduced harm less the ‘Costs of the pricing policy (deadweight loss + lost value of industry assets)’. This figure is after Chapter 8 runs through impacts on consumer surplus, industry revenue and Government revenue. The figures in Chapter 8 are pretty standard, but figure 13, the long-run impact of a price increase, splits the lost consumer surplus into ‘Lost consumer surplus after pricing policy’, which is a deadweight loss triangle, and ‘Transfer of consumer surplus to government or industry’, which is a rectangle showing the rent from the increased price.

The problem arises because it isn’t immediately clear how that rent rectangle is being treated. According to the Chapter 9 definition, it isn’t a social cost, because it isn’t a deadweight loss and therefore isn’t a cost. Now, this is technically true. If the rent can be captured by government or industry, then it is not a loss to society; it is a transfer from consumers (who may then gain by, for example, more government spending).

However, it is still a loss to consumers. They still, as consumers, have to pay more, and are losing that consumer surplus. Therefore, if you want to draw a conclusion like ‘the savings to society significantly outweigh the lost benefits to consumers’, you need to include that transfer in the ‘lost benefits to consumers’. It is not clear that the analysis does this.

So, a summary. This report is suspect. I haven’t read the whole thing and investigated every calculation, but what I’ve seen suggests that all the assumptions are spelled out and all the details are included, so that if you work at it you can begin to understand how parameters and assumptions were transformed into a crusading conclusion that alcohol must cost more! But it should not be the reader’s job to sort through those details. It is incumbent on the Ministry to provide accurate and impartial analysis. I do not believe, in this case, that they have done so.

Perversity of preferences

10/04/2014 § 2 Comments

I’ve been watching the roll-out of the Affordable Care Act (ACA) in the US. I understand why the Rube Goldberg apparatus was set up the way it was. Doesn’t make me happy about it, but it does mean that more people are better insured.

The Supreme Court ruling that cleared the final roadblock was exactly the sort of split-the-baby decision we should have expected. As sometimes happens with rulings, the implications weren’t immediately clear. In particular, the provision that states could opt out of the Medicare expansion turned out to be more important than was first thought. The implications were recently discussed in an interview with Prof Jonathan Gruber, MIT, Director of the health care program at NBER:

[T]he single thing we probably need to keep the most focus on is the tragedy of the lack of Medicaid expansions. I know you’ve written about this. … I think we cannot talk enough about the absolute tragedy that’s taken place. Really, a life-costing tragedy has taken place in America as a result of that Supreme Court decision. You know, half the states in America are denying their poorest citizens health insurance paid for by the federal government.

(N.B.: ‘half the states’ does not mean half the people — the states in question are less populous than the ones that expanded Medicare.)

Why do I point this out? Because the economist Gruber was surprised by the politics:

if you’d told me, when the Supreme Court decision came down, I said, “It’s not a big deal. What state would turn down free money from the federal government to cover their poorest citizens?” The fact that half the states are is such a massive rejection of any sensible model of political economy, it’s sort of offensive to me as an academic. And I think it’s nothing short of political malpractice that we are seeing in these states and we’ve got to emphasize that.

‘What state’ is an incorrect way to think about the issue. It wasn’t ‘states’ that decided. It was people, specifically politicians and the voters who support them. What politicians-and-the-voters-who-support-them would turn down free money? People who believe — who prefer, let us say — that poor people should not be helped. That poverty is just desserts. That poverty is just the flip side of positive incentives for hard work and sober decisions. These people prefer a certain set of incentives aligned with a specific view of how the world works (Weltanschauung, if you don’t mind me saying).

This ACA situation is the Ultimatum Game writ large. We just played the game in class. When the offer was 50:50 or 60:40, it was accepted. When it was 90:10, it was rejected. Person A turned down free money because Person B else wasn’t ‘playing fair’, wasn’t acting according to Person A’s preferences.

Politics is a way for people to express their preferences and try to foist them on other people. It is also a bloodsport, as Dr Thompson would remind his readers. That’s my way of saying, of course these people rejected Medicare for the poor, even at a cost to themselves. They are using the issue to Make A Statement about how the world should be, and if people get hurt, well, omelettes and eggs.

It’s an important lesson for economists working in policy. People’s preferences are wild and woolly, and when expressed through political process can lead to seemingly perverse results.

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