The Dim-Post

January 29, 2014

Something that’s bugged me for a while

Filed under: economics,Politics — danylmc @ 8:38 am

Via the Herald

Labour’s $60-a-week child payment scheme may produce less work and more babies, economists say.

The scheme, announced on Monday, may put some average wage-earners off working more hours because they will lose two-thirds of every extra dollar they earn through a combination of reduced child payments, tax, ACC and KiwiSaver payments.

But Canterbury University economist Dr Eric Crampton said it would also raise New Zealand’s fertility rate.

“Some people will be thinking, can we afford to have another kid, and just deciding at the margin, no we can’t,” he said. “This extra bit could be enough to do it.”

Now, I agree with Eric on this second point. That’s why I think all the rhetoric from people like DPF has been counterproductive for National: its a policy that might give middle-class voters the freedom to have another child and they’re ranting about sluts breeding for cash.

But this stuff about ‘average wage earners’ turning down work because of marginal tax rates etc? Models in which workers make rational decisions based on perfect information and work more/less in response to proposed policy is standard economist stuff and gets trotted out all the time – but how many actually existing jobs in the modern 21st century economy pay wages and let workers set their own hours? Economist lecturers certainly don’t get paid like that. They’re on salaries! And lower income workers who do get paid by the hour tend to work on a ‘whenever the boss tells you to’ basis. I mean, I’m sure there are some wage jobs out there for part-time Mums who get to set their own hours and will make a rational decision to work less because of higher marginal tax rates but I’d like to see some actual stats on whether those jobs even constitute, say, 0.1% of the workforce before we start speculating that it will impact on the entire country’s productivity rate.

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15 Comments »

  1. What bugs me is that it’s all described as “at the margins”. Economically correct, but I’m not sure 0.73 of a Mum having 0.12 of a baby is particularly pertinent to real world policy decisions…

    Comment by garygoodguy — January 29, 2014 @ 8:57 am

  2. Models in which workers make rational decisions based on perfect information and work more/less in response to proposed policy is standard economist stuff and gets trotted out all the time – but how many actually existing jobs in the modern 21st century economy pay wages and let workers set their own hours?

    It’s not about an individual worker deciding to work, say, two more hours in a week. It’s about the decisions workers are making en masse and the average outcome arcoss them all that matters – this what the models are trying to understand.

    Comment by Phil — January 29, 2014 @ 9:03 am

  3. It’s not about an individual worker deciding to work, say, two more hours in a week. It’s about the decisions workers are making en masse and the average outcome arcoss them all that matters – this what the models are trying to understand.

    I get that. But the assumptions in the models have to be vaguely related to the real world which, I argue, the workforce filled with self-determining wage earners beloved of many economists does not.

    Comment by danylmc — January 29, 2014 @ 9:08 am

  4. I’d note that this particularly policy (with it being flat until 150k for the first year) wouldn’t affect the margins except for families earning just shy of 150k and being offered another hour or two to push them over 150k. The universality is a GOOD thing, yet this is one of the things DPF et. al. are raving on about. It doesn’t affect margins at all for anyone not in work or not earning very much, thus surely this is encouraging work?

    I agree in principle that there are a lot of insane marginal tax rates from all the various tax relief and benefits on offer, and that these can and do act as a disincentive to working for those currently not working, and are less than equitable for those middle income earners with kids near the top of the ranges – we should be working to reduce that rather than rail against policy that specifically ensurs the marginal tax rate influence is small. Universal benefits is one way to do this – after all, it works fine for the over 65′s, right?

    Comment by lefty — January 29, 2014 @ 9:47 am

  5. Yes its been quite emotional for a lot of people in the one party state over the last few days. It been like the hours before kick off in a liverpool vs manchester soccer game.

    Comment by Simon — January 29, 2014 @ 9:48 am

  6. I’d note that this particularly policy (with it being flat until 150k for the first year) wouldn’t affect the margins except for families earning just shy of 150k and being offered another hour or two to push them over 150k.

    Not quite. There are three margins involved – those just below $150,000 (who would get the $60 pw for one year), those just below $70,000 (or whatever, who would get the $60 pw for 2 years), and those just below $40,000 (who would get it for the full three years). Any household at any of these points that is offered more paid work time (which would push them over the threshold) will face the disincentive effects of losing the payment for a year.

    No idea how many such households there are, nor how realistic their work-choice will be … but I’m sure there’ll be some.

    Comment by Andrew Geddis — January 29, 2014 @ 10:10 am

  7. “…they’re ranting about sluts breeding for cash…”

    To be fair to DPF, everytime they feel they are in trouble National’s great white whale Paula emerges from the stygian depths to bash the benes so he is just being a dutiful little repeater to what the Nats clearly think is the winning tactical approach.

    National’s spinners (and Patrick Gower, whose astonishing behaviour over the last few days has rendered imperatorfish’s satirical parodies redundant) have always beaten the bene-bashing drum at every opportunity.

    Comment by Sanctuary — January 29, 2014 @ 10:19 am

  8. One quick question. Will households be assessed on their last twelves months income? If you’ve got your reasonably typical couple, say him on 65k and her on 45k before she give up work, would they be assessed at 110k for the purposes of this payment? If that is the case, then would your rather better off couple with one earning 85k and the other earning 75k be assessed as earning 160K in the previous twelve months and therefore not qualify for the payment?

    Comment by Sanctuary — January 29, 2014 @ 10:36 am

  9. Of course this has occurred to people before, even economists (see e.g. http://www.nber.org/papers/w1638) but my understanding is that it doesn’t make such a radical difference to the results that it’s worth qualifying every public statement with.

    The effect is relatively small because lots of workers can actually adjust their hours (overtime, etc) but even those who can’t in the short run can do it over time, for example through their choice of job and the contract they’re prepared to accept. Working unpaid overtime to hopefully increase your bonus or chance of promotion is also common and sensitive to monetary incentives. In the real world there is a wide range of hours worked by ‘full time’ workers which is basically what economists would predict I think.

    Comment by Tom — January 29, 2014 @ 10:39 am

  10. One quick question. Will households be assessed on their last twelves months income?

    No. Predicted income for the year(s) in question.

    Comment by Andrew Geddis — January 29, 2014 @ 11:55 am

  11. I read the original article and thought it represented the typical textbook stupidity of economists, as it rather mixes up cause and effect. In the real world, economies are constructed to meet the needs of people, not the other way around. If families have the financial flexibility they need to have the number of children they desire, then that’s a net win for society, not a decrease in productivity that somehow endangers our international competitiveness.

    Comment by Economic Illiteracy Support Group — January 29, 2014 @ 5:28 pm

  12. Look over there someone wants to change the flag http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11193725

    Comment by max — January 29, 2014 @ 8:52 pm

  13. LOL. Nice try, max! :D

    Comment by David in Chch — January 29, 2014 @ 10:33 pm

  14. It’s important when talking about rational actors not to mention that we’re talking about women who have just given birth to children, possibly the most traumatic experience they will ever have in their lives, the one of the most developmentally important for the children. Quite a few will have undergone major surgery, and will have suffered complications too. They are also at the prime moment for post-natal depression. We mustn’t contextualize that and instead should lump them together with all other people and then argue abstractly about the dangers of their economic rationality affecting national production. Only then can we make the rational choice that giving women and their newborns a comparatively small break is far too expensive. Especially when there’s a new flag to design.

    Comment by Ben Wilson — January 30, 2014 @ 10:15 am

  15. With regards to the labour supply stuff, I recently talk about how economists actually investigate labour supply a bit in the document linked here:

    http://www.tvhe.co.nz/2014/02/05/conceptual-introduction-to-tax-benefit-microsimulation/

    We are often estimating a latent job choice, or at least discrete hours choice, based on observed data and a view towards the medium term (so not capturing the transitory impact). There are a bunch of models where we try estimate and describe different elements of the data, but I think that document gives a bit of a high level taste at one type of method we use to interrogate household level data for considering policy trade-offs.

    Comment by Matt Nolan — February 7, 2014 @ 1:12 pm


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