Sunday, 28 June 2015

Minimum wage and its cost to workers

I have argued in a previous blog that my hourly subsidy proposals should be much more effective at supporting the least economically fortunate than a generous minimum wage.

There are several reasons to prefer targeted earnings subsidies to the minimum wage as a means to increase the living standards of low earners, such as that high minimum wages will price some people out of the job market, make some products and services untenable, benefit low-wage workers from already wealthy families and that it will damage exports from the area and shift the economy to more service work instead.

I wanted to emphasise another important reason that minimum wages can take from the poor while giving to them. According to economic theory (though backed up by a lot of evidence), minimum wage increases will generally be passed on to consumers.

The important question is who will pay the cost of these price increases. If only the goods and services purchased by the economically fortunate increase in price then it is a highly redistributive policy.

On the other hand, if low earners will have to pay a lot more for the goods they buy then the policy simply takes with one hand while giving with another. This is particularly problematic where the minimum wage is having a lot of other impacts on the economy such as increasing involuntary unemployment for the worst off.

The literature on the subject seems to indicate that the latter is true, and that the minimum wage will increase prices substantially for the low workers. Examples are from the USA MaCurdy, 2015 as summarised in the WSJ; Hungary Harasztosi and Lindner, 2015; and the UK Wadsworth, 2010 (also cited in Aitken Dolton and Wadsworth, 2014).

Are there reasons to be sceptical of this argument that earning subsidies might be more effective than the minimum wage at improving the position of the least well off? Perhaps some will worry that the evidence comes from right-wing or mainstream economists. But is there any evidence to the contrary? I would be interested if anyone has any contrary evidence that they can share. 

Sunday, 21 June 2015

The Quality of Work

In my previous blog I mentioned that the quality of work is an important element of people’s job or career package. It is therefore of distributive interest and I suggested that an economic system which would provide more high-quality work would be preferable, even if this came at the cost of some economic growth.

I used the term “quality of work” in that post but I should say more about it. Some of those who are interested in this issue of the quality of work are interested in a specific objective notion of the quality of work which differs markedly from the subjective approach implied by my blog.

The subjective approach to judging the quality of work is simply to rely on people’s own ideas and preferences about the quality of the work that they do. Some people you talk to might say that they would not leave their job or career even if they could earn a lot more money--it expresses something about them as a person. Indeed, economists measure job satisfaction using Job Satisfaction Surveys. For example, in 2014 year the Office of National Statistics data indicated that Vicars had the highest overall job satisfaction, despite their low hourly pay. 

This complicates my categorisation of jobs by quality as it is very likely that people will differ wildly in their preferences over the features of jobs. Some people will desire jobs that I have referred to as lower quality over those I have branded as higher quality.

For example, some people might not want the attention or responsibility that comes with the high quality roles and would prefer a low-key role in which they are unlikely to make any mistakes and draw attention to themselves. Indeed, some people might see a particular job as their calling, such as being a nurse, paramedic or a teacher, and this makes this job quality.

I should therefore emphasise that my categorisation of quality was based on the average perception of job quality (which makes no reference to remuneration and other factors). Most people would prefer the jobs I labelled as higher quality all else being equal, but some people will not agree with others. Furthermore, some people will accept money over other qualities of a job much more readily than others.

My categorisation may fit with a quite different approach to categorising work. I will refer this to as the objective approach as it does not make reference to what people actually prefer. The idea here is that some activities are more valuable than others as they relate more to our expression of human values and virtues. Basically, some types of work will make it difficult or impossible to reach full flourishing or self-realisation as an individual, while other kinds of work will lead people towards these.

This is an Aristotelian idea, which greatly influenced a lot of left-wing thinkers, and can be found in Marx’s Economic & Philosophic 1844 manuscripts, and continues to influence philosophical work on the subject. Aristotelian ideas also influenced Catholic thinking via Thomas Aquinas.

Marxist thinkers have emphasised that workers can suffer from False Consciousness and this might lead them to prefer things that are not truly in their interests. They would therefore question the usefulness of the subjective approach, since people may not properly value the work that is good for them in this Aristotelian sense.

Objectivist approaches will therefore emphasise a) a notion of human good (usually relating to flourishing or the expression of virtues), and b) a theory about which types of work or jobs lead to this human good and which do not.

I think what I said in my previous blog is compatible with both approaches to answering questions about the quality of work. This is because people’s judgments about quality will often track those picked out by Aristotle. However, people may place a much greater emphasis on other issues than the quality of the work when making their job and career choices. Pay is an obvious one, but also job security will no doubt be a major factor particularly for those who have or hope to have children.

The purpose of this blog has been to show what lies behind the notion of ‘quality’ that I used in my previous blog. If anyone wants to suggest any objective judgments about work that I have missed out then by all means do so.

Saturday, 20 June 2015

Work and Justice: The Quality of Work

This week I attended a very interesting conference at Manchester entitled “Work and Justice” organised by my good friend Liam Shields.

The speakers considered several different issues under this umbrella, such as justice in hiring decisions, the just response to occupational inequalities, gender issues relating to caring and career decisions, and class interests.

One important thread between several of the papers was about questions of the quality of work. The reward for any given job can be seen as a bundle of goods encompassing the pay and the quality of the work. It is important to note that pay is not the only indicator of the quality of a job or career – some people would much prefer to do a less-paid job which they found enjoyable or rewarding.

Indeed, some of the speakers and attendees were interested in the way that some jobs help us to realise and develop ourselves through our work. I refer to this here as the quality of work, and I unpack this notion in another blog.

The basic thought is that some jobs are of higher quality because they would encourage us to use our higher powers such as problem solving through complex work and decision-making. Another aspect is whether the job people do reflects their values and affords them self-respect.

On the other hand, many existing jobs actually do the opposite by discouraging active decision making, utilising simple processes and requiring people to perform work which does not reflect their values.

Jobs are packages of benefits and burdens. What most of the attendees agreed on is that work creates issues of distribution that do not necessarily perfectly track economic distribution. It therefore deserves special attention as an issue.

For example, some people with low incomes are not disadvantaged because they have actively chosen less well paid work that is more rewarding in other ways. Meanwhile the overall package for some highly paid people may not be as great as the pay implies—they may have to work long hours at boring and/or stress-inducing work.

Low Quality
High Quality
Low Paid
Repetitive, low skilled work, e.g. manual labourer, cleaner, catering assistant
Low-paid work with degree of self-direction, e.g. self-employed tradesperson
Rewarding work, e.g. charity worker, poet, artisanal craftsperson
Reasonably Well Paid
Jobs not requiring specific qualifications but some skills e.g. lower management, car factory worker
Jobs requiring qualifications and accreditation e.g. school teacher, social worker, nurse
Professional work, e.g. Some medical doctors, academics
High Paid
Difficult work requiring unusual skills or tolerance to difficult situations, e.g. Some forms of finance work, deep sea diver
Professional work, e.g. Some medical doctors, solicitors
Highly Sought work using rare skills, e.g. People at the top of their field (e.g. sports, law, surgeons).
Table: Job quality and pay. Shading indicates how common such work is.

There are many more jobs of the top-left kind and very few jobs of the bottom right kind. Good and bad fortune will have a major role in who gets the few jobs that are higher paid or higher quality (or both). This fortune comes in at least two forms, family endowment and talent endowment.

People with wealthy are parents will have advantages in the early part of their lives that mean that they can have access to the skills and experience required for these. Many highly sought positions effectively require low-paid internships and these are only open to those with family support. People with more talent will be able to out-compete others for these jobs where they are initially available to all. 

In the worst cases people will be excluded from the high quality jobs on the basis of irrelevant factors, for example where their society is institutionally racist, sexist or religiously discriminatory.

Acknowledging these inequalities is easy, while doing something about these inequalities can be very difficult. Interfering in the hiring processes of employers is difficult at best and in some cases can have significant unintended consequences.

The case for interfering in hiring decisions is much stronger where these relate to discriminatory practices than in the distribution of high-quality work. For one thing it is easier to measure and assess inequalities in people from different groups entering particular jobs and careers than it is to change the nature of the work available to people.

Changing the job market

One approach is to look at the micro-level of hiring decisions by employers. However, interfering in these processes on a significant scale could have serious repercussions on employers and encourage all sorts of inefficient responses to the regulations.

I doubt that state agencies would be able to do a very good job of equalising access to the most highly regarded positions, but let us consider what would happen if they did. Where such jobs are the minority it would simply replace one form of luck with another one: the lottery of talent and family support would be replaced with the lottery of state interference in your favour or against you.

Instead of seeing the problem as a micro-level one of hiring-decisions we can see it as a macro-level one of the jobs and work that is available.

As I have mentioned, there are many more low-quality and/or low-paid jobs. I would suggest that a free-market libertarian-style economy is likely to reduce the amount of high-quality work available as people will be less likely to take the risk on investing to obtain high quality work if there is less of a safety-net.

What about economic systems that would change the distribution of high and low-quality work?

Some forms of socialist economy might provide more of the high-quality work but not necessarily. Socialist-type economies generally suffer from inefficiencies which would reduce what people get from the economy—after all people are all consumers as well as producers and some left-wingers place far too much emphasis on the latter.

Advocates of a Universal Basic Income might argue that this would enable many more people to pursue high-quality work. Employers offering low-quality menial work would have to compete with a life of leisure and this should push up the pay for such work. People could also pursue the high-quality work they would enjoy as they would not need to worry if it did not pay very well.

I will not rehearse my concerns about Basic Income proposals, except to say that it is unlikely to be able to provide a generous level of income without producing economically harmful disincentives to work.

There is something to be said for creating a situation in which there are more opportunities to pursue high-quality work. However, it would be necessary to do this in a way that maintains incentives to work; otherwise we place too much emphasis on the nature of work people do  and not enough on the goods and services that are produced by these processes. After all, workers are consumers as well.

I think my CLIPH-rate tax proposals, described in my book Rethinking Taxation, would create a radically better job market while maintaining strong incentives for people to produce goods and services that people want to consume and enjoy. It would not remove the work I refer to as low-quality in cases where this work produced useful or desirable goods and services.

The main mechanisms within my proposals that would shift the job market towards higher quality work are the guaranteed work programme and the negative-hourly-tax-rate for low earners.

A guaranteed work programme would give the low-skilled a better bargaining position for what I have referred to as “low quality” work (as the Basic Income would). This would provide employers with an incentive to make productivity improvements which would reduce the amount of this work required for their processes, and to provide higher pay in the cases where this work is necessary.

The negative-hourly-income-tax-rate would enable some people to perform high quality work that they would not in a free market environment. For example, people could set themselves up as self-employed and as long as they earned a sufficient income from the work it would be topped-up by their hour-credits. Employers which produce goods or services which workers prefer to produce will also be more viable than they would be under other capitalist systems. This is because they can attract subsidies for low-paid workers who are happy to work in high quality work for a reasonable wage.

These employers and workers would have to find buyers for their products (unlike the Basic Income Proposal), but these firms would be much more able to compete than they would be without the hour-credit system and its subsidies.

Essentially, it would shift the numbers of jobs provided to the right of the table, with fewer low-quality.

Remembering the table from my previous blog, the CLIPH-rate tax would:
1.      Enable people to pursue high-quality work by setting up their own companies with earning subsidies for their activities.
2.      Provide more support to employers which people want to work for.
3.      Encourage employers to pay more for low-quality work, or to alter their processes to make this work less onerous on its staff. This applies to the high-paid-low-quality work as well as low-paid.

As well as improving the quality of work in society, the CLIPH-rate tax would also reduce the pay differentials that flow to people towards the bottom right of the table, for the following reasons:

1.      Greatly reduce the income differentials between many people, meaning that gross income differentials this will be a less serious cause of inequality.
2.      Family luck will play a much smaller role in the distribution of the highly-sought jobs as transfers between generations would be taxed and people would have a strong incentive to seek work to obtain hour credits.

In conclusion, the CLIPH-rate tax would vastly reduce the inequalities in the job packages available, both in terms of pay and quality. Furthermore, it can do so without interfering in the productive processes in ways that would be highly costly to consumers (who are themselves workers). 

Sunday, 14 June 2015

Universal Credit and Hour Credits

The move in the UK to combine multiple forms of benefit payments into one Universal Credit is a very sensible idea in theory. Delivering it has proven difficult, however, and I suggest that my hour credit proposal would resolve a lot of these problems.

The problem with having lots of independent forms of benefit is that they can interact in undesirable ways that discourage people from working. The worst situation is that in which people are actually better off if they work fewer hours. But even having high effective marginal benefit withdrawal rates is undesirable.

High marginal rates mean that working an extra hour will not bring nearly as much in net income as it does in gross income. Add the fact that people’s time off work (to do work in their home, caring for others or simply for leisure) is also valuable and people may not take up additional work even if it is available to them.

A recent report by the Resolution Foundation has highlighted that the aim of making work pay is not currently going to be achieved in all cases. Single parents, second earners with children and the disabled in particular are picked out as being provided with insufficient incentives to take up work and increase their hours.

I wanted to highlight the advantages of calculating support in a way that takes account of the amount of hours worked, as my proposed hourly averaging tax system does. The basic idea is that people are given an hour credit for every hour they work for a recognised employer and this is used to calculate their lifetime tax rate. Each person’s tax rate is based on their lifetime average income per hour worked – calculated by dividing lifetime income by lifetime hour credits.

Those who work long hours at a low wage will receive a more generous tax rate than those who earn the same amount of income while working fewer hours. The incentive to work full-time is therefore built into the system.

What has a tax proposal got to do with the Universal Credit benefit system reform? Put simply – you can use the hourly tax system simultaneously for benefits and taxes. Hour credits can be seen to work in one of two ways—that they bring down your tax rate or alternatively that each one brings you additional income at the rate of your hourly net income.

The hour credit system can provide people with additional hour credits instead of the cash benefits they would receive at present. So someone might get five hour credits a week instead of child benefit, 4 hour credits a week as a result of their disability and so on. These hour credits will bring additional income as a result.

The hour credit system therefore puts all benefits into the same currency—additional hour credits. The value of the hour credits relate to the person’s lifetime income statistics, but will be worth at minimum the effective net hourly minimum wage.

We can be sure that additional hour credits will not produce a disincentive to work because people who receive these can still work and get hour credits for this. Working more hours will always generate more income, irrespective of the additional hour credits that each person receives (up to the maximum weekly or monthly limit for work-based hour credits).

The additional-hour-credit system that replaces existing benefits would sit alongside the regular-hour-credit tax system and the two together will encourage people to work while providing generous benefits to those who qualify according to the relevant criteria.

Hourly averaging works by providing earning subsidies to those with a low lifetime hourly average income. We could alternatively call this a negative hourly tax-rate for low earners. People who are economically unfortunate will get their income topped up. However, working will make them better off as they will be able to qualify for more hour credits as well as receiving the income from these.

The aim of a generous benefit system that retains strong incentives to work is very difficult to achieve unless you build incentives to work longer hours into the entire system. Hourly averaging does just this.