The ideology of incentives

Nick Clegg says we need a cap on benefits “not least to increase the incentives to work.” This runs into an obvious objection - that the big problem right now is not so much a lack of incentives to work but a lack of opportunities to do so. There are 2.69 million unemployed chasing 459,000 vacancies - that’s 5.85 unemployed per opening.

Prating about incentives when the big issue is the lack of demand for workers requires the sort of stupidity that doesn’t emerge unaided. It requires the help of ideology. There are several cognitive biases which lead people to over-rate the importance of incentives  to work.

For folk to the right of Clegg - and there are some - one of these is seeing what we want to see bias. If you inhabit the dreamland in which market forces always work well, one way to reduce the cognitive dissonance that arises from the fact that millions are unemployed is to emphasise incentives in an effort to diminish the significance of market failure. It’s for a similar reason  that libertarians overweight the importance of minimum wage laws as a cause of joblessness. Some people go to great effort to deny the fact that the labour market is probably the most inefficient of all major markets.

There are four other biases:

- The fallacy of composition. I’ll concede (more so than most lefties I suspect) that many individual  unemployed people would have a good chance of getting work if they tried harder - if they, ahem, brushed up their CV (as Iain Duncan Smith did) or were more flexible. But what is true for one is not true for all. If all jobseekers were to try harder, there’d still be millions out of work.

- The fundamental attribution error. If you come from the sort of background where you can do anything if you try, you will naturally come to exaggerate the importance of individual agency and to downplay the role of environmental factors, such as there being few jobs available.

- The halo effect. Clegg says it’s fair that those out of work get less than those in. It is, however, a common error to believe that if something has one good quality, then it has others; which is why the good guys in the films are so often better-looking and better shots than the bad guys. It’s tempting, then, to think that what’s fair is also what’s efficient. But it ain’t necessarily so. (The left, of course, is especially prone to this error).

- The action bias. Governments can’t do much to greatly increase labour demand, especially if they are committed to fiscal tightening. But they can “improve incentives.”  And because politicians have a bias towards doing things, they act like lonely men who exaggerate the virtues of their few friends and exaggerate the importance of incentives.

Now, I don’t say this to dismiss all talk of incentives. Instead, such talk is an example of what I’ve called the “small truths, big errors” syndrome. And sometimes, this syndrome is motivated by bias and ideology.

Comments

[Luis Enrique]

for simplicity's sake say the govt has two places where it can try to do something about unemployment: 1. incentives in welfare system 2. creating more jobs.

another reason why the govt may favour 1. over 2. at the moment - in addition to ideology - is that 1. (superficially) promises to save the government money whilst 2. would cost it money.

[Alex]

"Prating about incentives when the big issue is the lack of demand for workers requires the sort of stupidity that doesn’t emerge unaided. It requires the help of ideology" >> preach it, brother.

[Paolo]

Regrettably, I am afraid that there may be more to the supply-side angle than unemployed's incentives (or lack thereof). I suspect that there is a belief that by tightening benefits for the unemployed the govt is sending a signal to employers that they should be confident there will be plenty of cheap labour force available so they should invest with confidence. So the argument would be that the pain for the unemployed is only a temporary price to pay to stimulate supply-side jobs creation.

[Leigh Caldwell]

I'm not pushing this as a serious response, but this argument is incomplete:

"many individual unemployed people would have a good chance of getting work if they tried harder...But if all jobseekers were to try harder, there’d still be millions out of work."

In fact, if 500,000 of the current unemployed were to find work, it would have an aggregate demand effect which would create new vacancies for many of the others.

This would probably take some time to happen and it's hardly a useful policy to pursue, but it partly counters the fallacy-of-composition argument.

[Alex]

By the same token, Leigh, if you expect wages to fall in order to clear the labour market, that would reduce demand and...

[Matbu764]

I have to say as someone who has probably been slightly right of centre traditionally, I have been massively disappointed with the response of much of the right to the current economic situation. They seem to be stuck in aggregate demand denial land and are often excessively worried about some sort of impending mythical hyperinflation that simply isn't going to happen. This is true in Britain, Europe and the U.S.

Surely some demand induced inflation would be a good thing right now anyway, the bank rate can't go low enough to clear the market, more inflation will make the real rate lower which will get us closer to a market clearing position. Fiscal austerity isn't exactly helping right now either.

Chris is right, we need to deal with the demand problem first. After that's done we can have a discussion about any structural issues that may or may not need to be fixed in the economy. But let's be honest these sort of incentive policies, even if they do have some merit, have only very marginal effects, they can't possibly be behind the current unemployment figures. The only thing that can have as big an effect as we are seeing there is a lack of demand.

[Straus]

I don't think the coalition is claiming that the benefits cap is going to have a significant impact on employment - or at least not in the short term. Surely, it's more about creating a system that will incentivize work in the hope of economic growth returning. A big problem with the New Labour boom was that it left too many UK nationals marooned on benefits - partly because too many of them thought it wasn't worth their while competing for relatively low paid jobs.

[Keith]

There is no point trying to divine a rational basis for coalition policy. It is bashing the poor for fun. To appease some stakanavite/ puritan ideology. The refusal of the wealthy and their surrogates to accept the obvious need for demand management and regulation of finance is a deplorable throwback to 1921 or 1931 thinking. As the head of the IMF pointed out in Berlin but far too politely and eliptically. Hard money and hard faced meaness towrds people you can kick with the help of the criminal corrupt press fresh from phone hacking. Those patriotic press barons defending the nation from immigrants and the unemployed from their family château in France since they are far too Patriotic too live or pay tax in Britain.

[human mathematics]

If all jobseekers were to try harder, there’d still be millions out of work.

Not necessarily. The hard workers could generate enough value that their employer would wish to hire more.

Viewed alternatively, if everyone worked 10% harder (or smarter), it's reasonable to think that might aggregate wealth.

It sounds like you are "overweighting" short-term constancy of parameters (Keynesian-ly).

[Straus]

Demand management may have some short term marginal effects. But the crisis in the western economies has much more fundamental roots, one of which is that workers in the West are not working nearly hard enough. And one of the reasons for this is the perversion of the welfare state.

In the 19 century, Westerners used to see the Chinese as lazy and unenterprising. Now the boot is on the other foot.

[Midlands Mike]

To all of this, you can add the idea that very few politicians have the intellectual ability to see anything else. I have seen this is the world of private business. cutting spending is something a certain breed of manager does because he ( and it usually is he) cannot think of anythng else to do.

[Alex]

one of which is that workers in the West are not working nearly hard enough

how do you integrate this supposition with the fact that there is not enough work to occupy them all? further, I somehow missed your link to comparative man-hour productivity data. I fixed that for you:

http://www.bls.gov/ilc/intl_gdp_capita_gdp_hour.htm#chart04

[Tim Almond]

What's the source of that 459,000 figure? I note that there were also 459,000 vacancies in November 2010.

[alastair harris]

the fallacious argument that there are more unemployed than jobs is the big error here, and clearly a result of bias.