Markets involve substantial fairness

I have been writing recently about how market mechanisms work against taste-based (i.e. objectionable) discrimination on grounds of race and sex.

A while ago, I wrote how, even if we think that people should not be punished with bad lives for being unlucky with their upbringing or talents, we should favour some wealth and income inequality in many situations so as to achieve more overall justice. For example, if some choose to take more leisure instead of income, then it would not be just (on egalitarian grounds) to make sure their monetary income or wealth were equal—leisure is a sort of income. Similarly, it would not be just for people with more pleasant, safe or satisfying jobs to earn as much as those with less pleasant, more risky, or less interesting jobs (on egalitarian grounds).

There is one school of thought that understands and agrees with these caveat to equality. They may even note that teachers, who are respected and admired by society, and whose jobs are largely pleasant, satisfying and risk-free should not justly earn as much as despised unhappy bankers. But in the real world they see examples where people seem to have jobs that are high in pay and low in other benefits—boring or risky or low-status. Are markets failing to compensate people in pecuniary terms for the non-pecuniary costs of their job?

According to a new paper, they are not:

We use data on twins matched to register-based information on earnings to examine the long-standing puzzle of non-existent compensating wage differentials. The use of twin data allows us to remove otherwise unobserved productivity differences that were the prominent reason for estimation bias in the earlier studies. Using twin differences we find evidence for positive compensation of adverse working conditions in the labor market.

The authors look at twins to control for ‘unobservable’ factors about the person—basically their productivity and how employable they are—and find that workers are paid more for doing less desirable jobs. Though it often seems like they aren’t, this is only because some people (mainly people on early steps of the productivity/human capital letter without much in the way of experience or skills) are very unproductive. Of two twins, the one with a less pleasant or more risky job gets paid more.

The unique feature of our data is that we are able to estimate specifications that also control for unobservable time-invariant characteristics at the twin pair level (e.g. place of residence, spouse’s occupation, or family situation) and the common wage growth for the twins. We find evidence for positive compensating wage differentials for both monotonous and physical work using the data on MZs (monozygotic, i.e. identical, twins). Assuming that equal ability assumption holds for MZs, the results imply that both twin difference estimates and Difference-in-Differences (combined twin difference – time difference) estimates are unbiased for MZs.

I am perfectly comfortable with arguments that differences in endowments (basically upbringing and inborn talent) mean that there is a case for redistribution between individuals. But it bears repeating that markets, working properly, automatically produce results that in many ways elegantly fulfil the egalitarian concerns of leftist social justice.

Northern Ireland does something very stupid about prostitution

It’s always a little difficult for an Englishman, even one with an extra Irish citizenship (as your author does), to criticise an Irishman for being stupid. That century or more of their being the butt of bad jokes about imbecility creates a certain sensitivity to such an accusation. But this is still flat out a stupid thing to be doing:

Paying for sex is to be banned in Northern Ireland after members at the Stormont assembly members backed the move in a landmark late-night vote.

The proposal to outlaw purchasing sex is among a number of clauses contained in a bill aimed at amending Northern Ireland’s laws on trafficking and prostitution.

Paid-for consensual sex is currently legal in Northern Ireland though activities such as kerb crawling, brothel keeping and pimping are against the law. The proposed ban is similar to the model operating in Sweden.

The human trafficking and exploitation bill was tabled before the assembly by Democratic Unionist peer Lord Morrow.

Trafficking and exploitation are already illegal: making voluntary transactions between consenting adults illegal will not make their incidence any less. Far from it, driving currently legal activity underground will produce more of those already illegal activities rather than less.

At the grander level this is horribly illiberal: the touchstone of any possible liberal society being that consenting adults, when their activities do not harm any non-consenting people, animals or things, get to do what they want. A society that decides to regulate adult sexual activity is not and cannot be described as liberal. It can be anything from Puritan to authoritarian but liberal it cannot be. And we’ve made hugely welcome strides in the direction of that liberality over the decades: for example, from the illegality of homosexual activity to the widespread acceptance societally of same sex civil partnerships. Plus, of course, the more general idea that what people do in their sex lives is up to them. Quite why anyone thinks that the intercession of a £50 note into the proceedings makes any difference is extremely difficult to fathom. It’s still the entirely voluntary playing out of the Tab A and Slot B scenario that we all agree consenting adults are entirely at liberty to perform as they wish.

At the more detailed public policy level there will obviously now be calls that England should follow suit. To which the correct answer is, as above, no it shouldn’t. But even if you don’t find a defence of adults being allowed to be adults convincing there is another. Which is that we really should take advantage of this devolved administration stuff to wait and see what happens. It’ll take a few years for this change in the law to filter through to human behaviour. Time which could usefully be spent actually looking at what happens. Only after we’ve done that will we know what does actually happen: and only once we do know what happens that’s the first time that we can or could usefully discuss whether it’s a good idea or not.

It’s definitional that of course consenting adults should be allowed to consent. But even if you don’t believe that let’s wait and see what actually happens here, eh?

Yes, we do have a large Legal Aid bill; and so we should

It’s entirely true that we have a large Legal Aid bill in this country. But it’s also true that we should have a large Legal Aid bill as a result of both the way in which our legal system works and also the way that we count the bill itself. The truth being that our legal system works on a rather different basis than that or most other European countries.

Britain’s spending on legal aid dwarfs that of every other country in Europe, a report revealed yesterday.

At £2billion a year, it is 20 times the European average and more than seven times the amount spent by France or Germany.

The Government is pushing through controversial reforms to cut the bloated legal aid budget but the report, by the Council of Europe, warns that this could breach criminals’ human rights.

We do not suggest that there isn’t a gravy train for the lawyers in there. Any and every system of public subsidy is subject to the usual capture by the insiders. However, just shouting that Johnny Foreigner pays less so therefore we should too doesn’t quite work.

For our legal system is an adversarial one: the State, in criminal trials, uses all the resources it can muster to prove the case against the citizen. It is up to the citizen to produce their defence and it does seem fair enough that the Staten itself (or rather, us other taxpayers) should help those without the resources to mount a defence.

Most other criminal justice systems work on a rather different basis. The court is, rather than being so nakedly adversarial, more the instrument of investigation. So called “investigating magistrates” do not limit themselves to deciding upon the evidence that they are presented with: they actively go and seek out as much information about the case that they can. And they have substantial budgets to do this too.

It is this that leads to our having that, and justly and rightly having that, higher Legal Aid bill. It’s not so much that defence in a criminal trial costs more in our system: it’s that those costs are differently apportioned. Far more of them, in our system, turn up on the specific citizen’s account for his defence rather than in the general running costs of the courts as a whole.

Our outsized Legal Aid bill is thus, at least in part, simply a product of our system of justice. And as we rather like that adversarial system, where it is up to the State to prove, beyond reasonable doubt, its claims, then that Legal Aid bill is something that we’ll just have to suck up.

As above there’s still room for featherbedding and gravy trains but there really is a structural reason why our bill looks so high in comparison with the court and judicial systems of other countries.

The smoke and mirrors of prohibition

On Tuesday, a review of 2 decades of research into the effects of cannabis was released and pounced on by the media, who then broadcast the fact that smoking weed is ‘as hard to give up as heroin’, doubles the risk of psychosis and schizophrenia, and acts as a gateway drug into stronger substances. As part of this reefer madness I took part in Sky News debate on whether the UK is too soft on cannabis.

Usually, evidence a that prohibited item or action is harmful or more dangerous than previously thought would justify its prohibition. But this isn’t the case when it comes to cannabis, or the ‘war on drugs’ more generally. This is because many of the costs associated with the use and supply of illegal drugs are exacerbated—and sometimes even caused by—the act of prohibition.

Some forward-thinking countries across the globe have experimented with policies of decriminalization and partial legalization. From the legalization of cannabis in Uruguay to the decriminalisation of drugs for personal use in Portugal, each is an example of viable, harm-reducing alternatives to prohibition. Unfortunately, there remains little political will to see such changes in the UK, where the narrative remains  that evidence of harm equals justification for prohibition.

Most advocates of drug control cite health problems caused by drugs and their impact in the wider community as their biggest concern. This explains why Tuesday’s report (with stats like ’1 in 6 teenagers who regularly smoke cannabis become dependent on it’) made such good news fodder. Certainly we have to tackle health problems caused with drug use, but pushing supply underground and criminalizing users has got to be one of the worst ways of doing it.

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Markets like women too

Last week I wrote about how markets militate against racism. It’s a basic and over-worn point, but it seems to be forgotten regularly anyway. Here I shall make the same point, but with respect to women. It’s a common view that women are paid less than men on average, even after you account for hours, experience, qualifications, industry, risks, pleasantness of job and so on (though they do account for a very large fraction of the gap).

But there are a few other factors that studies have only started looking into recently. One of those is exit. Women often exit the labour force earlier than men, trade down to more flexible or part-time jobs that don’t pay as well. It might well be said that this is the product of socially constructed expectations about what different genders are expected to do and how they are expected to structure their lives—with one gender still doing more work outside the house and one still doing more inside.

But even if this is true, it is important to stress that this ‘discrimination’, which certainly doesn’t seem to result in lower happiness for women, happens at the level of upbringing, schooling, and so on rather than at the level of employment. Firms are not to blame and indeed, recent research suggests firms are actually pretty pro-women.

For example, “Gender Differences in Executive Compensation and Job Mobility”, published in the Journal of Labour Economics in 2012 (up-to-date abstract here, full working paper pdf here) finds that if you control for background (i.e. skills and talent) and exit (i.e. women staying in the workforce) women earn more than men and get more aggressively promoted than men.

Fewer women than men become executive managers. They earn less over their careers, hold more junior positions, and exit the occupation at a faster rate. We compiled a large panel data set on executives and formed a career hierarchy to analyze mobility and compensation rates. We find that, controlling for executive rank and background, women earn higher compensation than men, experience more income uncertainty, and are promoted more quickly. Amongst survivors, being female increases the chance of becoming CEO. Hence, the unconditional gender pay gap and job-rank differences are primarily attributable to female executives exiting at higher rates than men in an occupation where survival is rewarded with promotion and higher compensation.

Another paper, from July this year, finds that reservation wages (the lowest amount a person will take to do the job rather than remaining unemployed and taking nothing) explain the entirety of the gender wage gap that remains after you control for personal and job characteristics. This suggests, again, that the discrimination that is happening (if it is happening) is not coming from markets.

The economic literature typically finds a persistent wage gap between men and women. In this paper, based on a sample of newly unemployed persons seeking work in Germany, we find that the gender wage gap disappears once we control for reservation wages in a wage decomposition exercise. Despite a concern with reservation wages being potentially endogenous, we believe that the exploratory results in our paper can help one better understand what the driving forces are behind the gender wage gap. As the gender gap in actual wages appears to mirror the gender gap in reservation wages, there is a clear need to better understand why there are gender differences in the way reservation wages are set in the first place. Whereas a gender gap in actual wages could reflect either productivity differences or discrimination, a gender gap in reservation wages essentially reflects either productivity differences or differing expectations.

This just adds to a burgeoning literature finding that the reason men and women have different outcomes in labour markets is that they differ systematically in job-relevant ways. For example, men in the Netherlands systematically choose more competitive academic tracks. Even very narrow estimates of the risk-tolerance gap between men and women estimates it at about one standard deviation (implying the male and female distributions overlap 80%).

Again, this does not imply there is no discrimination in society—it just shows that it’s not corporations, firms, companies, businesses, start-ups, market organisations who are doing it.