Stumbling and Mumbling

The height premium

Tall people earn more than shorties. This new paper (pdf) estimates that, in the UK, an extra inch of height is associated with 1.5% higher earnings, for both men and women. This means that, for men in their 30s and 40s, the pay-off to 6 inches more height is equivalent to around a third of a university degree (pdf).
Why?  A big part of the answer is that tall people tend to be better nourished as children (or even in the womb), and this is associated with being smarter.
But this might not be the whole story. The authors estimate that, controlling for education only reduces the height premium by half for men (and two-thirds for women). Something else is happening.
That something, say the authors, is that tall people are more likely to work in high-skill occupations and industries, even with the same education as shorties.
My question - which the paper doesn't address - is: why?
One possibility is that employers taste-discriminate towards the tall. Another is that tall people - specially men - have more self-confidence and so are more likely to blag their way into good jobs. Or it could be that tall people have valuable skills not measured by formal academic qualifications; they are wittier, better-looking, more charming and - yes Megan - better in bed.
I favour the third theory. I'm 6'2".

Minimum wages & the left

Kathy G makes an heroic effort to attack economic fundamentalists’ opposition to the minimum wage. I fear, however, that this is the wrong ground for left economists to fight on, for two reasons.
First, rises in the minimum wage are a bad way to help the poor (pdf) even if they do have no impact at all upon labour demand. This is partly because such rises are often clawed back by losses of tax credits and benefits, and partly because the overlap between the poor and the low-paid is weak; many of the poor aren’t in work, and many of the low-paid are second or third earners in middle-income households.
There are, surely, many better ways of helping the worst-off than minimum wages.
Second, there are bigger flaws in orthodox neoliberal economics than the idea that higher wages cut the demand for labour, for example:
1. The notion of an identifiable and differentiable production function is pure bull.
2. Competitive forces are just not strong enough to weed out rent-seeking by private sector managers.
3. This being so, higher top-rate taxes might be efficient precisely because they do reduce labour supply, if they reduce the amount of rent-seeking.
4. It is at least plausible that, under certain circumstances, profits arise from exploitation.
5. Human capital theory (pdf) is, at best, woefully incomplete (pdf). Income inequalities cannot be fully explained by differences in skills.
I’m sure this list is incomplete. I’m just not sure how high on it the neoliberal view of minimum wages should be.

The last temptation of Chris

This morning, for perhaps the last time, I walked to the top of Primrose Hill. I looked down upon London and asked: do I really want to leave all this?
Yes.
Non-natives don't live in London for the amenities; this doesn't make sense in cost-benefit terms. Instead, they do so to earn money, to "get on". But even those who succeed in this lose something more valuable than money - their freedom. One of the mistakes vulgar libertarians make is to believe that it's only the state that restricts freedom, when in fact we can be enchained by our own past deeds and character.
And many - maybe most - quite rich men are so enchained. Some are trapped by ex-wives or school fees, others by expensive tastes in cars, yachts, wine or drugs. And others are imprisoned by their own ego. Many want a top job not because they need the money, or because it's an enjoyable thing to do - it's generally not - but because the feeling that they have climbed to the top of the ladder gratifies their self-esteem; this is why politics and office politics are often so bitter - they are about character, not money.
In leaving London, I'm leaving all this and seeking - and expressing - freedom.
Of course, I'll still have to work. But in working from home, it'll be proper work, done for its own sake and not as a means to climb any ladder.
This is not a question of improving the "work-life balance". The very phrase captures one of the evils of capitalism - that work and life are opposites. Instead, it's about integrating work into life; in not having to travel into an office, I'm smashing one of the big dividing walls between the two, and moving towards the Marxian ideal of unalienated labour.
Which is another way of saying blogging will be light for the next few days, as I metamorphose from an urbane metropolitan liberal to a petty-minded provincial. My next post will, insha'Allah, be from Oakham.

Brown's inability to argue

Even on the rare occasions when he is right, Gordon Brown seems unable to make a convincing argument. In criticizing the Lords' claim that immigration has had  "little or no" impact on GDP per head, he said:

Our GDP - that is our national income per head - has risen from being seventh out of seven in the G7 in 1997 to being second in the G7 today. So the GDP per head has risen from £13,900 in 1997 to £22,840 in the last year. So far from there being a negative impact on our GDP, our GDP has continued to rise and our GDP per head has risen faster than all the major other countries that we are dealing with.

But this, of course, should convince no-one at all. It's the post hoc ergo propter hoc fallacy. Countless other things affect GDP per head, and maybe it's these that have raised them instead of immigration.
If Brown wanted a quick soundbite to defend increased immigration, he might have tried some of Philippe Legrain's points. Or this:

If a foreigner brings a factory to Britain, everyone believes it's a good thing. So how can it be a bad thing if he brings labour power instead? What's the big difference between the two productive forces that makes one a welcome entrant and the other not?

Or this:

If someone freely chooses to employ another, and the other person freely agrees to work, what business is it of anyone else?

But Brown didn't use either. One reason for this is that his own position on migration - wanting to bad unskilled migrants - is itself incoherent.
But might there be another reason for the weakness of Brown's argument - that for all their "spin", New Labour generally has always been appallingly bad at arguing for its own position? And might this be what happens when a managerialist lust for power displaces genuine political and moral reasoning?   

Immigration & evidence

The Lords' report on the economic impact of immigration is better than I'd feared. But I've still got two problems with it.
One is this:

We found no systematic empirical evidence to suggest that net immigration creates significant dynamic benefits for the resident population in the UK. This does not necessarily mean that such effects do not exist but that there is currently no systematic evidence for them. (par 69)

But absence of proof is not proof of absence. It's always hard to find evidence about long-run economic effects, especially if the long-run hasn't happened yet.  And there are four ways in which immigration can benefit us in the long-run, in theory:
1. As the Lords say (par 56), it increases profits.  And in the long-run, profits get spent on jobs and capital equipment. That should increase the wages of indigenous workers.
2. Immigration helps reduce (pdf) inflation. That should reduce real interest rates, which again encourages capital formation and hence boosts indigenous wages.
3. There might be benefits to indigenous wages as workers learn from skilled migrants, or as diversity helps improve creativity and international networks.
4. "Immigration keeps labour costs lower than they would be without immigrants. These lower labour costs also benefit consumers, who then pay less than they otherwise would for products and services." (par 113) But surely, if consumers face lower prices, they'll spend more on goods and services generally, to the benefit of indigenous workers. Have you never heard of the Pigou effect?
Now, the committee is right to say these effects haven't been quantified. But, equally, it gives us no reason at all to believe they are all zero.  So, surely, there must be a presumption in favour of some long-run benefits.
My second concern is this:

The available evidence suggests that immigration has had a small negative impact on the lowest-paid workers in the UK (par 78).

But what would happen if the immigrants stayed at home in low-wage countries instead?
Take Wiki from Corrie. If she hadn't come to Underworld to sew knickers, she'd probably be sewing them at home instead. Her labour supply would therefore depress wages in Poland. That in turn would reduce the prices of Polish-made knickers. Which in turn would cause British consumers, at the margin, to buy Polish knickers rather than ones from Underworld. Janice and Kelly (pictured) would therefore lose jobs and wages anyway. They'd be no better off if immigration were limited.
Even if the immigrants didn't come here, then, they could still worsen the lot of low-wage British workers - that's factor price equalization. The Lords do not consider this possibility.
So, maybe the Daily Mash is right yet again, and the Lords are erring on the side of hostility to immigrants.
However, even if I'm wrong and they're right, the case against immigration is not made. Not at all. As Tim and Allan both say, if immigration is good for immigrants and no harm to the rest of us, then it should surely be permitted on utilitarian grounds, let alone liberal ones.

Risk attitudes and unemployment

Why has the trade-off between unemployment and inflation improved so much in the UK since the mid-80s? Standard explanations focus upon the decline of trades unions, stingier unemployment benefits and the fact that the entry of China and India into the global economy has weakened workers' bargaining power by increasing the threat of offshoring.
Reading this paper, however, reminds me of another possibility. It estimates that among German trades unionists there is a negative correlation between workers' attitudes to risk and wages. Controlling for obvious things, unions with more risk averse members settle for lower wages.
This is simply because risk averse workers aren't going to risk unemployment by pushing for higher wages.
This reminds me of an old (well, pre-webbed) paper by Andrew Newell*, in which he argued that the low-inflation/low unemployment of the 1950s and 1960s ended because workers became more risk-tolerant. In the 1950s, workers were scared into accepting low wages because they remembered the mass unemployment of the 30s. However, by the late 60s this generation was retiring, and being replaced by a cohort that had known nothing but full employment. Its lack of fear of the sack led it to push for higher wages - thus raising the equilibrium rate of unemployment.
This can be spelled out in a standard "battle of the mark-ups" framework, shown here**. The PS curve shows the real wage which drops out of firms' pricing decisions; I've drawn it horizontal but nothing for our purposes hangs on this. The WS curve is the wage-setting curve; it slopes upwards because higher employment leads to demands for higher real wages.
The equilibrium rate of employment - the Nairu - is the employment level at which these two curves intersect - E* in our diagram. Any rise in employment above this would lead to demands for higher wages, to which firms would respond by raising wages to preserve their mark-ups. The result would be accelerating inflation. Only E* brings peace in the battle of mark-ups.
Newell's argument is that increasing risk tolerance in the late 60s caused the WS curve to shift left to  WS',  as workers demanded higher real wages at E*. That caused inflation to rise and employment to fall as higher unemployment was needed to hold inflation down.
Now, here's my question. Could it be - partly - that the Nairu has been low recently for the same reasons Newell said it was in the 50s? Workers in their 40s and older are scarred by memories of the 1970s, 1980s and 1990 recession, which causes them to fear unemployment and moderate their wage demands.
If so, might the equilibrium rate of unemployment rise in coming years as these retire, to be replaced by younger workers with happier experiences and lower risk aversion?
In other words, might it be that the instability of the 1970s-early 90s is in part the cause of the macroeconomic stability we have recently been enjoying?
Alternatively, might this suggest an overlooked benefit of the expansion of higher education? In creating a cohort burdened with high debt, this might help keep people risk-averse, and so keep the Nairu down. If so, perhaps the macroeconomic returns to education are greater than generally thought. 
* The passing of the Golden Age, Centre for Labour Economics paper no.347.
**Any macro textbook goes into this in much more detail. Try Wendy Carlin and David Soskice's Macroeconomics: imperfections, institutions and policies.

The cost of Konnie Huq

Alice Miles deplores Gordon Brown's message for Konnie Huq  on her leaving Blue Peter. Ms Miles is right, but for the wrong reasons. Mr Brown shouldn't be thanking Konnie. He should be decrying the adverse effect she's had upon the British economy.
The reason for this is simple. Anything that makes being out of work more pleasant encourages people to linger on benefits. And the sight of Ms Huq on daytime TV has just this effect. Why bother going out to work when you can stay home and look at her? (Of course, you could record her whilst you work - but how will you find time to watch her amid all those episodes of CSI?)
In this sense, Ms Huq's influence upon the economy has been massively pernicious. Let's do some sums. There are 5.2 million people of working age claiming state benefits. Let's assume that Konnie's appearance on Blue Peter  caused - at the margin - 5% of these to stay out of work. That's 260,000 people.   If we assume these would have earnt £15,000 a year, then the economy lost £3.9bn a year.
This means that, over the 10 years Konnie's  presented Blue Peter, we've lost the equivalent of a year's spending on the defence  budget.
Her leaving the programme could therefore be a positive supply shock. It'll encourage some people to find work, which in turn will raise output and reduce the inflationary pressures Mervyn King warned about last night. I suspect, however, that this effect will only partially offset  the effect Carol Vorderman's boob job has had in curtailing labour supply. Never mind the credit crunch - that's been the biggest economic disaster of recent years.
The point: does this seem absurd? It shouldn't. It's merely the logical consequence of the assumption that people on benefits could work if they want to. Perhaps it's this premise that's wonky.

The immigration puzzle

The remarkable thing about immigration is how little of it there is. Take three datapoints:
1. George Borjas points out that 10% of Mexicans now live in the US. Sure, this is much more than a few years ago. But it means nine of 10 Mexicans don't respond to the fact that real incomes are four times as great in the US as at home.
2. Between May 2004 and September 2006, only 0.66% of people living in A8 accession countries applied to work in the UK (table A of this pdf), even though incomes there are only around a third of UK levels.
3. A survey of young people by the World Bank shows that fewer than 20% of Ethiopians, Bangladeshis or Albanians would emigrate permanently, given the chance (p196-97 of this pdf).
There's a ready explanation for this. Risk aversion, the costs of moving, not knowing the language and the home bias stop people moving; I suspect songs lamenting being away from home are a staple of any culture.
This matters, because commenters here have said that free migration would lead to a massive inflow of workers and hence downward pressure on wages. But if people don't like leaving home, this danger isn't so great. And you'd expect it to diminish over time to the extent that poorer countries catch up with richer ones. So perhaps the cost of freedom - and remember, the case for free migration is above all a case for freedom - won't be so great.

Superstars and "talent"

Top bosses and film stars get multi-million pound salaries because talent is scarce. Everyone knows this. Which is a shame, because it's bull, as this fantastic paper by Marko Tervio explains.
Start from the premise that talent is initially unknown, and can only be revealed by working with expensive equipment. So, for example, we can only find out if a manager is any good if he's in charge of a big venture, or if an actor has box office appeal if he's in a mega-costly film. It is, therefore, very expensive to learn who's got talent and who hasn't.
What's more, people with talent cannot offer to share this cost with employers, either because of lack of cash or risk aversion: people don't pay for the chance to become bosses or film stars.
In these conditions, what's scarce isn't talent, but revealed talent. There might be loads of people with the ability to be film stars or bosses, but only a handful get the chance to show what they can do. Marg Helgenberger gets big money not (just) because she's a better, more popular or more beautiful actress than others, but because she's a proven quantity.
This has three consequences:
1. The industry employs lots of mediocrities on good money - people just above the threshold of acceptable competence. Employers prefer these to untried but potentially better workers because the risk of a single failure - the box office flop of a $100m film, or the failure of a large company - far exceeds the possible benefit of finding lots of people a little better than the barely competent.
2. Output is inefficiently low, and prices high. This follows from the industry being staffed by the barely competent rather than the brilliant.
3. People who have proved that they are genuinely brilliant earn huge salaries as economic rent.
Tervio illustrates this with Hollywood films. Compare films today with those made by the studio system of the 1930s and 40s.
Today, there's vast inequality among film actors, as there's only a handful of proven box-office stars, and the quality of films is indifferent.
By contrast, the studio system allowed potential stars to share the costs of revealing their talent with producers, by entering long-term contracts which gave low pay even to stars; the lower cost of making films then also helped. This allowed for many more great films to be made, as more great actors could enter the industry, but with less inequality among the stars.
In this sense, superstar salaries arise not because talent has become scarcer, but because it's become harder to reveal talent.
In other industries, however, the opposite trend exists. Clive reminds us that in the 1980s a mere economics writer got a flash Beemer from the Indy. This would be unheard-of today. This is because back in the 80s, it was hard to reveal a "talent" for writing on economics. Today, any idiot can do this (see here, passim), so revealed talent has become more abundant.
(For Katherine).

Law vs empowerment

With the EU debating whether to increase the rights of agency workers, Sunny asks: "should liberal-lefties be for temp-worker rights because it affords them equal awards and protection, or opposed because it reduces their employment opportunities?"
I think we should dodge the question. Instead, we should ask: why is it that we think the law is the only way to improve workers' rights?  There's an alternative - to empower them. I mean two things:
1. A generous citizens' basic income would give workers the freedom to take or leave low wages and bad working conditions.
2. Stronger trades unions would allow temporary workers to improve their conditions in places where they are exploited by monopsonists, whilst recognizing that in other firms, improved conditions would lead to job loss. A blanket law lacks such flexibility.
These routes, surely, offer more scope for achieving real freedom and equality than does paternalistic statism.
They also pose a challenge to vulgar libertarians, or bloggertarians. They say: if you want to get the law off your back, you should empower workers. For those who conflate libertarianism with class hatred, this is embarrassing.