Austrian fanatics ruin it for the rest of us
The Adam Smith Institute has long been associated with the Austrian school of economics. There is a picture of Friedrich Hayek on the wall. Our Director, Dr. Eamonn Butler, has written Austrian Economics: A Primer and books on Hayek and Ludwig von Mises. With respect to myself, I am personally friendly with, and/or heavily influenced by Austrian-leaning economists including George Selgin, Anthony J. Evans, Emily Skarbek, Mark Pennington, Kevin Dowd, David Skarbek, Adam Martin and dozens of others. I own about 15 books by Ludwig von Mises. I went to a Man, Economy & State reading group. I am still technically a moderator on the Ludwig von Mises Institute forums. My very first post for this blog was on the Austrian theory of the business cycle.
Smart Austrian economists have done, and still do, lots of important work. I personally think that Israel Kirzner deserves a Nobel prize for his work on entrepreneurship. I don't think Austrians are deserving of the hit pieces that some less pleasant members of the mainstream level against them. But there is a genre of commentary, particularly seen below the fold in economics blog comment sections, whose contentless, nebulous, impossible-to-completely-eradicate nonsense unfairly tars all Austrian-influenced economists.
A recent example was left on Sam's post on NGDP targeting, and many of those in the genre follow a similar pattern. Here I will focus on one issue: the dismissal of Sam's argument as 'Keynesian', because it includes non-Austrian ideas. This is probably the worst and most annoying flaw internet Austrians display. Not all non-Austrian arguments are Keynesian.
There is nothing a Keynesian or New Keynesian or post-Keynesian would recognise as Keynesian in Sam's post: he doesn't talk about natural interest rates*, he doesn't talk about marginal propensities of consumption, he doesn't talk about multipliers, he doesn't advocate fiscal stimulus, he doesn't mention a paradox of thrift or liquidity trap. He uses the equation of exchange, which is about as non-Keynesian as you can get!
And many if not most (macro)economists through history have been neither Austrian nor Keynesian, including prominent figures such as Irving Fisher, Milton Friedman, Robert Lucas, and Ralph Hawtrey. At least two schools of thought are neither Keynesian nor Austrian: New Classical/freshwater macro, and monetarist/Chicago school macro. And these schools don't just differ from Keynesianism, they actively and vigorously oppose it on a host of important issues.
It just doesn't do to call all non-Austrian economists 'Keynesians'. It's inaccurate and it's irritating and it's idiotic. Economists have worried about demand-side or money-demand-caused recessions before Keynes and they've worried about them since without accepting any or all of his solutions.
What's more, there is no reason why being an Austrian economist should preclude one from interest in any of these approaches—something smart Austrian and Austrian-influenced economists like Hayek and Selgin have not shied away from. Hayek warned of the dangers of a 'secondary depression' caused by monetary contraction after the real shock involved in the Austrian theory. Austrian fanatics ruin it for everyone.
*George Selgin points out in the comments that natural interest rate ideas predate Keynes and are important in Austrian theory.
Bad arguments against selling the government's stake in Eurostar
The same bad arguments crop up again and again in political debates. The government is now looking, as it planned in the 2013 Autumn Statement, to sell off its 40% stake in Eurostar, for about £300m, as part of a general plan to get £20bn from privatising assets. In response, one popular argument is that the government is throwing away an asset, part of the 'family silver' that generates a few million quid each year for the exchequer.
But as I have repeatedly argued, this makes no sense. Instead of holding £300m in railway shares it can pay down debt, earning (approximately) the same risk-adjusted return. Even if they gave it away, they could just tax the returns from the private sector. As I said before:
A firm, in doing business, puts capital to use. It uses a mix of physical and human capital and devotes it toward achieving tasks in order, usually, to turn a profit. From this capital you get a return. Train Operating Company margins average about 4% over the last ten years. The average company got more like 10%. FTSE100 companies seem to enjoy higher returns. Of course, operating profits are not share returns, but they tell more or less the same story. The extra couple dozen billion the government would need to spend on trains could equally be spent on equities or anywhere else for more or less the same risk-adjusted return. The return they got here could be put into trains.
If the government returns that couple dozen billion to the population at large, the government can tax the income that the private citizens make on the wealth, at a glance dealing with the problems of governments holding wealth—principally: they are not very good at picking winners. Or they could pay off debt and reduce their repayment costs—since the risk-adjusted return of gilts is priced in just the same way as other assets.
This is just a general application of the problem of government's holding assets, which I have written about at length:
So maybe the government should hold some wealth, I can see the arguments for and I can imagine some arguments against. But if it holds wealth it ought hold assets as broadly as possible: because it’s not placed to take gambles on particular assets; because doing so may distort markets directly; because holding assets takes them off the market and reduces allocative efficiency; and because holding particular assets may distort the incentives facing policymakers. Thus we should praise Gordon Brown for selling off gold just as we should praise Vince Cable and George Osborne for selling off the Royal Mail.
To be fair, in this case the French & Belgian state stakes are going to stop this 'privatisation' leading to big allocative efficiency gains, but these widely-made arguments are still extremely unconvincing.
This is a very strange argument against foreign aid
And it's coming from a very strange place, too, the Jubilee Debt Campaign. These are the people who tell us that we should just write off the debts of the poor of the world, both countries and people. At times and in places they've certainly got a point but this is still a very strange argument:
A sharp rise in lending to the world’s poorest countries will leave them with crippling debt payments over the next decade, a few years after many had loans written off, a report has warned.The Jubilee Debt Campaign said as many as two-thirds of the 43 developing countries it analysed could suffer large increases in the share of government income spent on debt payments over the next decade.
Coinciding with the World Bank’s annual meeting in Washington, the anti-poverty campaigners accuse the international lender and other public bodies of “leading the lending boom” to poor countries without checking how repaying debts will divert resources from cutting poverty.
What they think they're saying is that we shouldn't be lending these people this money, we should just be giving it to them in the form of grants. What they're actually saying is that the money shouldn't be going there at all. For look at what they do say: money is going to these poor countries, yes, but the returns from it going there aren't enough to pay the interest bill on that money.
Now, we can play all Teenage Trot and shout that so what? But we should perhaps be adult and remind ourselves that prices are information. These loans are already at concessionary interest rates meaning that risk is pretty much disregarded. All that is included in the rate is the time value of money. And if investment in these countries cannot even cover that time value of money then this sort of spending is a really bad thing to be doing. It's value destruction upon a global scale.
Converting it all to grants doesn't change this: investing money in something that cannot even cover the cost of simple interest (not even risk adjusted interest!) is still that value destruction, whether we charge the interest or not.
No, this does not mean that we here think that the poor should be left to fester in their squalor. The above though does mean that simply shipping off money isn't the right way to be going about things: for as we can see no value is being added. The correct answer is that emergency aid should still exist: doesn't really matter where you get your moral precepts from feeding the starving is still worthwhile. However, that developmental aid, that aid that is being wasted simply because it cannot even pay back its own value, should perhaps cease. To be replaced by the one thing that has lifted hundreds of millions, if not billions, up out of poverty in recent decades. We should be buying the things made by poor people in poor countries. And the best thing we could do for those poor is to tear down the barriers we still impose upon ourselves stopping us from doing ever yet more of that.
Amazingly, fossil fuel reserves are different from fossil fuel resources
Bloomberg has shocking news for us. When fossil fuel companies report their reserves they give us different numbers from when they report their resources. They why seems to have escaped the news organisation:
Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators. Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.
That why being that reserves and resources are different things. This being the way that language tends to work: when we want to describe something that is different we use a different word to do so. Thus helps us distinguish between those different things we're talking about. In general for minerals and fossil fuels a reserve is something that we've proven is there, we've proven that we can extract it, in the volume we say we can, using current technology and also we can make a profit doing so at current prices. Resource is a looser concept: we've good evidence that there's what we say is there there, that we can extract it, using current technology, at current prices, and make that profit. But there's only good to reasonable evidence, we've not spent the money to prove this as yet. There's also a gradation: proven reserves, probable reserves, inferred resources and so on but that's the general structure. So why do companies talk about the different numbers? Because different people are interested in different things. The SEC (and other regulators, the LSE is pretty similar) wants investors to have access to the best hard numbers there are. Great, so, report reserves according to the rules they insist upon. But investors are also interested in what might happen, what could happen and what's likely to happen. After all, if we've two companies, one with 1 billion barrels of reserves and no resources and one with one billion of reserves and 2 billion of resources then that second is logically worth more than that first. So, that's why the use of the different numbers. Because they're referring to different concepts, each useful in a different manner. And that, of course, is why we use different words to describe them, so that we can distinguish between those different concepts. Seriously, it's not that difficult to understand, this is only geology, it's not rocket science or anything.
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.
HMRC, you had one job
It can be frustrating to state the obvious. But, typical to its nature, HMRC has forced me to do just that. In 2013, the average Briton had to work 150 days into the year to pay their total tax bill. Not until May 30th did UK residents stop working for the Chancellor and started earning for themselves
It’s simple, really. Brits earn the money, and HMRC arranges to have it taken away through a variety of different taxes—VAT, National Insurance, and of course, income tax.
It's a tough job the HMRC has—to tax and tax some more—but it’s probably safe to say the average earner has the harder job – to supply both the government with the funds it needs to run the country, and the funds she (and potentially her family) need to live on.
So it should be expected, at the very least, that the taxation process be as smooth and simple for the earner as possible; that those 150 days worth of earnings be transferred without fuss…
If only. From The Telegraph:
“Four months ago, HM Revenue & Customs admitted it had collected the wrong amount of tax from more than five million people in the 12 months to April 2014.
Since then, the taxman has sent those affected notification letters explaining how it would claw back or issue refunds for on average £300.
In an email leaked to The Telegraph, a select group of senior HMRC staff and accountants were told "thousands" of mistakes were made.
The recipients were advised to tell taxpayers who questioned their bills "not to repay any underpayment" of tax.
It said anyone who had overpaid tax should not cash any cheques they had received. Anyone who has already cashed a cheque will see the money potentially clawed back if a mistake has been made.”
Mistakes happen, sure. But such levels of incompetence, without any offer of compensation, can only be the work of the public sector.
In almost any exchange between a customer and a private business, over-charges and under-charges play out in the customer’s best interest. If a hotel or restaurant accidentally over-charges you, a refund is surely made (often with sincere apologies and some form of compensation for the trouble). If a grocery store under-charges you for fruit purchased, no letter comes through the post asking you to make up the sum.
But when HMRC makes not one bad calculation, but a series of wrong calculations for millions of customers, the inconvenience falls on the taxpayer, who will have to make up the difference calculated or wait months for her rebate.
Of course, taxation isn't a voluntary transaction, the taxpayer isn’t considered a customer, and the government’s a monopoly—so blatant incompetency shouldn't be a surprise at all.
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.
For example, a key argument against cannabis legalization is that it has grown much stronger over the decades, thanks to the intensive breeding of strains with a high THC content. However, this 'skunkification' can be understood as an effect of prohibition. Given that the punishment for getting caught with x amount of marijuana is the same whatever its potency, dealers have an incentive to source something which is measure for measure stronger, and buyers have the incentive to buy it. Just as liquor replaced beer during prohibition, the bud 'arms race' makes sense within a framework of crude legislation and illegality. There's certainly demand for less potent weed, but given competition between dealers and the fact that suppliers would need to grow and shift bigger volumes to make the same amount of money, there's little incentive to supply it—especially in an industry where there's little capacity to advertise the product.
In contrast, a regulated market can offer anything from mellow hash to super-skunk, as evidenced by a visit to any of Amsterdam's coffeeshops, where information about product, advice on what to expect and stringent quality control are also the norm. Decriminalization and the marketing of less potent strains not only allows users to find what suits them best, but could potentially reduce the harms and mental health issues which have been associated with today's super-strong cannabis.
Risks associated with other drugs are similarly exacerbated by prohibition. In an underground market it's difficult (and expensive) to be exactly sure of what you're purchasing, there's few routes of recourse or warning others, and accidents happen. In the last few years 'ecstasy' pills containing PMA—a compound with similar effects to MDMA but with a far high toxicity—have been poisoning clubbers and were directly responsible for 17 deaths in 2012. In Portugal, the decriminalization of the personal possession of heroin alongside innovative public health programmes has seen the number of new HIV cases amongst intravenous drug users plummet from over 1,000 in 2001 to 56 in 2012, with the total number of drug-related deaths falling from 80 to 16 in the same period.
Whilst drug use will always carry health costs, money raised by taxes on substances like cannabis or MDMA could contribute to the public coffer, and fund research and treatment centres for users. It's also worth putting these harms in perspective; the risk of death from illicit drugs is minuscule in comparison with lack of physical activity or a poor diet. Most recreational drugs are far less harmful to us than alcohol and tobacco—and in the case of ecstasy, apparently no more dangerous than horse riding. And whilst dependency on a drug is no good thing, dependency alone doesn’t necessitate harm, as the UK's casual caffeine addicts demonstrate.
Source: http://www.nhs.uk/Tools/Pages/NHSAtlasofrisk.aspx
In fact, health isn't really the biggest issue when it comes to drug prohibition—crime is. It is staggering that we continue to expend resources every year maintaining a model which gives an industry worth hundreds of billions of pounds to cartels and criminal gangs who cause violence, fear and instability from Peckham to Michoacan. In fact, one of main reasons Uruguay legalized cannabis this year was to prevent a rise in organised crime there spiralling out of control.
Back home, the Home Office estimates that drug-related crime costs the UK £13.3bn a year. It's thought that between one third and a half of all acquisitive crime in the UK is drug-related, with three-quarters of heroin and crack users admitting to committing crime to fund their habit. However, dispensing with outright prohibition and instead treating addiction as a public health issue before ensnaring addicts in the criminal system can have significant benefits. For example, providing access to drugs like heroin in a controlled manner has been shown to significantly cut the level of crime users commit, and costs far less to fund each year than a prison sentence.
On top of this, the criminalization and subsequent marginalization of casual drug users is a catalyst for further criminality. From school expulsion to a criminal record, the sanctions imposed on individuals lead to lost opportunities and closed doors, particularly for the under-privileged. With other options ruled out, a further life of crime can be the most rational choice for some.
Decriminalizing drug use would also allow police to redirect their time and resources to more effective pursuits than booking stoners and stop and searches. Early indications post-marijuana legalization in Colorado suggest that crime is down 10% over the year and violent crime down 5%, thanks in part to freeing up police time for more serious offences.
There seems little reason for such a harsh and wasteful system as prohibition to still be in force across so much of the world. Of course, prohibitionists are also afraid of the 'normalization' of drug-taking culture and the message this might send (someone does, of course, have to do this). Many genuinely worry that legalization would lead to a spike in drug use, degeneracy and harm. Evidence from places like Portugal (where if anything, drug use has declined) simply hasn't hasn't borne this out, though. In fact, Release's survey of global drug laws concluded that a country's drug-enforcement policies have very little correlation with the levels of drug use and misuse in that country.
Libertarians and the curious can go one further, and ask if it would really be such a bad thing if drug use were to rise post-legalization. Some illegal drugs might make a good substitute for our legal ones: it's feasibly better if some people chose to stay at home and smoke a joint, or pop pills on a night out instead of drinking a bottle of vodka, scoffing kebabs and getting in fights. And there's also the important fact that's often overlooked in the 'sensible' drugs debate: that most people who've taken illegal drugs have enjoyed doing so. Pleasure is derived from them in the same way it is from alcohol, nicotine, chocolate and sex. Experiences with drugs will make some people's lives richer, and there's a strong case for allowing people to weigh up their personal costs and benefits to find this out.
Of course, this epicurean argument will never sit with Westminster politicians or the Daily Mail. But it shouldn't have to—the huge cost and the utter failure of prohibition should be enough to spark a genuine dialogue on alternatives.
In this respect, the UK seems caught in a strange place. A recent Observer survey found that 84% Britons think that the war on drugs is futile, and over half back the trial of Colorado-style cannabis legalization in this country. The Lib Dems also recently pledged to end jail sentences for drug possession. Yet just days after this announcement the mainstream media goes crazy for a 'definitive study' apparently equating cannabis with heroin, leaving it up to others to point out the that paper was a narrative review and thus not systematic, and was written by an author who wants to decriminalize cannabis and has called for liberalizing the international control system.
We'll never end up with a satisfactory solution to the drugs question until the media and politicians start discussing the topic with honesty. Perhaps the optimum solution isn't a libertarian paradise. But whatever it is, and whatever your political leanings—if you are concerned about the social cost of illegal drugs, it's high time to accept that prohibition has failed.
Surprise! If you set a target then people will game that target
This shouldn't come as the greatest surprise to anyone ever but sadly it does to those who would plan our lives. If you set people a target for something then they will game that target. This is true whether it's of bankers vying for bonuses and pushing losses outside the bonus period, people making tractors where if you measure them by the tonnage they'll make heavy tractors and, in today's example, if you set car manufacturers mpg targets for their vehicles then they'll game the measurement of mpg:
Motorists are usually advised that smaller cars can travel more miles per gallon (mpg) than those with larger engines, making them cheaper and more environmentally friendly to run.But manufacturers’ estimates of fuel economy, based on official laboratory tests, may not reflect the reality when the vehicles are driven on the road.
Tests on 500 vehicles, half petrol, half diesel, each driven for three hours on roads in Britain, found that the cars travelled on average 18 per cent fewer miles per gallon than stated in manufacturers’ specifications.
Emissions Analytics, a data company which measured the cars’ fuel consumption and emissions, explained that this was due to cars accelerating more and travelling at higher speeds on the road than in official testing regimes.
The test drivers are of course all practicing perfect economical driving while, and this problem is worse for very small engines, we real drivers give it a bit of welly to compensate for those very small engines. And of course this is a general fault with any and every target of this type. Showing, once again, that if you want to ration something (here the desire is to ration fuel consumption) the best way to do your rationing is by price. For price is the one thing that doesn't lie in these circumstances.
It's such a simple concept that it really is amazing that those who would plan our lives still don't get it.
Voters are very ignorant, and that should terrify you
Voters are very ignorant about the basic facts of politics. This is where Americans fall when asked what the US government spends the most on: And here is how the money is actually spent:
As I've often asked before, how can we possibly expect voters to elect the right people if they know so little about the issues at stake? It's like asking a blind man to be your ship's navigator.
Governments have vast powers and responsibilities. Their reach is essentially limitless. And the people who decide what they do are hopelessly ill-informed about the world. Forget the Hayekian knowledge problem – the voter ignorance problem means democracies cannot hope to elect decent governments with the priorities and policies that the voters themselves would want if they were well-informed.
Elite rule might have been the answer, but elites are dogmatic, closed-minded ideologues. No, there does not seem to be any group we can rely on to rule. Voter ignorance should make us extremely reluctant to bring the state in to solve some problem we're having.
And before you tell me that democracy is the worst system we know of, apart from all the others: Are you sure?
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.