Matt Nolan

Minimum wage and the “deserving poor”

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Via Marginal Revolution I see that there is a paper common confirming the intuition that the minimum wage is a wage of targeting a given view of the “deserving poor”.  Essentially, those with a strong taste for leisure are assumed to be the ones that lose their jobs first in the case of a minimum wage (efficient rationing) and as a result the minimum wage gives a way to “target” our income transfers to those we think are most deserving.

I have so far only skimmed the paper, and the Saez 2012 paper that justifies efficient rationing – so take my comments with a grain of salt.  However, I have two issues with this:

  1. The efficient rationing argument does not appear compelling – the wage will be in excess of the market wage for both types of workers, so the efficient rationing argument seems to rely on a situation where lower labour demand is primarily working through the intensive margin and the “high leisure” individuals are either generally unemployed or loosely tied to the labour market to start with.  I need to think on this point more – but it is the crux of the issue.
  2. I generally find the “deserving poor” argument weak.  I don’t like the normative assumption that we should favour people with one set of preferences over another – the general policies I’d favour don’t follow this type of assumption.  Now, society may hold this view, and then society should make policies along this line – that is fine.  But I don’t have to like it 😉

I want to read these papers in more detail and write about this business.  The new minimum wage and optimal tax literature is formalising a lot of topics that we’ve previously used “intuition” on, and that is pretty exciting!  Why – well formalisation helps to make assumptions transparent, which is what we really want to do before going around and trying to figure out policy.  However, it is going to be a while until I get to this, as I get very busy through the middle of the year – and this year is busier than usual!

If anyone knows the literature, and would like to do a guest post, I would really like it – compensation would involve a beer and a discussion about economics in a Wellington bar 😉

Matt Nolan

Normative vs positive analysis of policy

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“Normative” and “positive” economics are old terms, that get abused constantly, used out of context (largely by me), and make philosophers dislike economists.  This is cool and all – but I think the is-ought distinction still provides a useful perspective on considering policy.  So I thought I’d quickly flesh that out.

A positive economic analysis is about comparing outcomes – describing what occurs and why, given shared definitions of what the key elements are, but not of how they are valued.  A normative economic analysis is about choosing from a set of outcomes – it requires valuing these elements of our analysis. Read more

Matt Nolan

Some beautiful links

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I am not around.  Over the next three weeks, there are a series of really rubbish auto-posts are coming up about “factor shares” – I normally write posts in advance, but it is unlikely I am going to add anything or move posts around to include new ones.  During that time I’ll be reading and reviewing Capital and writing a summary document on income inequality measurement (both things I promise to share) – these are both sizable tasks I want to do, hence why I won’t be around too much.

However, this also means I can’t post on things I find cool.  So I’ll just give you some links 😉

  1. Greg Mankiw mentions the harm principle and economics.  “First do no harm” is a good principle for us to hold when considering policy, I agree.
  2. Details do matter though, via Mark Thoma and also a piece by John Aziz. My view of this in general would be that the “harm” comes from a “change” in policy from an “initial position” – how do we define this initial position such that something counts as change?  If we define it solely as “now” then we are simply conservative, if we define it as some “ideal type” that we believe is “natural for the social system”, we are trading in ideologies.  Applying the harm principle starts to get tricky! [Note:  In the comments to the recent Hand posts (here, here) there has been further discussion of this]
  3. Tim Harford, Chris Dillow, and Noah Smith all discuss behavioural economics – plenty of interesting points in there if people want to think about choice, its relation to trade-offs, and its relation to policy.
  4. From Mark Thoma again, the misuse of theoretical models.  Given my interest in methodology I’m certainly interested in reading this (what they establish as the ‘should’ how they find what ‘is’ in modeling) – I’m sure you all feel the same way 🙂
  5. And because I have to put up something about inequality here is Lane Kenworthy.  The US example is an interesting one, but I would almost think that lower growth in the low and middle parts of the income distribution is itself defined as higher inequality – it is almost tautological to say one caused the other.  The magnitude of the gap over there tells us that it is an issue worth looking into though!
Matt Nolan

Taxing: Choice and policy consistency

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Offsetting recently posted about a tweet by Gareth Morgan on eating and control, including a reply I popped up.  Essentially, Gareth’s tweet implied that the way individuals make choices indicates we have no choice over how much they eat.  I disagreed talking about precommitment – he stated I assumed perfect information, which is both a touch untrue and (surprisingly to many) irrelevant.

It did get me thinking though.  The two of us actually have almost exactly the same model of choice in our heads for this issue, and as a result any differences of view of on the appropriateness of policy that we might have are not due to differences in the underlying model. Read more

Infometrics

Dynamic comparative advantage: Costs and benefits, the case of Cuba

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Political and economic systems are often fraught with emotional comparisons.  Few create more of an uproar than Cuba – with those on the far left seeing it as an ideal to aspire to, while libertarians view it as a fundamentally broken and immoral state.  However, no matter how we feel it is always useful to ask what the trade-offs are, and what “theories” these ideas are indicative of.  This is what Mieke Welvaert did on her recent post about Cuba trading doctors (Infometrics link here).

Cuba provides an interesting case study in how government policies can help individuals coordinate in their choice of job and educational attainment.  However, it also shows some of the costs of trying to generate a “dynamic comparative advantage”: the misallocation of human capital as people are pushed into specific areas, the restrictions to freedom required to solve the time inconsistency issue between government and the service providers, and ultimately the risk of being exposed to an industry ‘picked’ by a government.

In truth is does appear that one of the key issues, when looking at how the system works, is the freedom of choice of the individuals involved – understandably, people’s beliefs and judgement around this in ethical terms should drive their view on what is appropriate.

 

 

 

Matt Nolan

On GDP and policy

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Excellent article over at Aeon (we linked to earlier in the week, but it deserves its own post), I’d suggest you head over and give it a read.  To quote one passage:

Kuznets lost the argument about measuring social welfare over economic activity back in the 1930s. Now it’s time to put these two concepts in the balance again, not least because so many critics of GDP fault it for not measuring well-being. It was never meant to. Yet while we have always known this, economists have routinely used GDP growth as shorthand for well-being. And while this has a sound rationale, there are good reasons for thinking that the gap between social welfare and economic activity, as measured by GDP, is widening.

The article also mentions the usefulness, and shortcomings, of social indicators – such as the one Statistics New Zealand has put together (related discussion from Donal, Shamubeel, and me).  I think the article puts into perspective how careful we have to be with measurable goals, and why we need to be a little clearer on the limits of our knowledge and what this means for policy – both about trade-offs and how these translate into welfare.

I would recommend the entire article, there is really too much in it for me to fairly summarise anything 🙂

Update:  This piece on Partha Dasgupta at MR University is also relevant.