TCS Daily


The State of Working America

By Tim Worstall - August 30, 2004 12:00 AM

I'm alerted by economist Arnold Kling to a report from the Economic Policy Institute on "The State of Working America 2004/2005." My previous experience with their particular fount of economic illogic made me want to read further. That's what I'm here for folks, doing the boring stuff so you don't have to.

What the EPI wants to show is that cutting working hours leads to higher productivity and that there is thus not a trade-off to be made between work and leisure. We can have both in violation of our second thing about economics, that there is no such thing as a free lunch. Expressly:

"Now that countries with progressive social policies have productivity levels which surpass U.S. levels, policy makers should look beyond our borders for model social policy."

I was at this point going to launch into tortured explanations of exactly why the EPI is wrong in its analysis of the figures, how confusing hourly and annual figures makes the conclusion meaningless, how in the actual report the workings point to an entirely different conclusion from that in the release which is the only part policymakers will read (am I the only person reminded of the IPCC here?) and in sum, generally make a mockery of their pretentions to scholarly rigour. As this would be terminally tedious for all of us I thought I would rather simply make fun of a few of their points. I am aided in this by being able to refer to Kling's post:

"As [Berkeley professor of economics] Brad DeLong once pointed out to me in an email, you would expect hourly productivity (which the EPI is using) to be higher in Europe than the U.S., because of all the cost-increasing labor market restrictions there. Any business anywhere will avoid hiring workers beyond the point where productivity fails to match costs."

Now I'm not sure about your opinion but mine is that when even a Professor at Berkeley tells you there is something wrong with a piece of leftist economic research, well, yes, I think we can assume that there really is something wrong with that piece of research.

After I'd read through the press release, the downloadable chapter, read around a bit and had a little think I was able to formulate a considered and elegant summation of the report. It's rubbish.

It is not, unfortunately, uncommon rubbish. The same ideas (or now that we're all up to date on netiquette I suppose that should be "memes") have been floating around in other places: Ruth Lea in a recent Telegraph article points out some errors and one lady writing in the Spectator was so confused on the point that she not only said this:

"The French tradition of the state regulating working hours has stimulated a more productive use of labour. "

she went on to write a whole book about her misunderstanding.

There is a simple mistake that all of these people are making (not Ruth or Arnold, they are arguing against that very mistake) and it is indeed so simple that even left-leaning economist Brad de Long has noted it. If you raise to a company the cost of employing people they will employ fewer of them. More importantly, they will only employ those who are more productive than those higher costs. We would then expect to see the less productive workers not employed at all.

What do we in fact see in countries with high social costs associated with employment? Amazingly, high unemployment generally and especially so amongst the untrained young (I hope it isn't too much of a shock to you that those who don't know what they are doing are generally less productive than those who do). The EPI report tries to explain this away by pointing out that there are some European countries which do not have high unemployment rates, yet it fails completely to adjust for the various disability, sickness and make-work training schemes. The UK alone has 3 million people on Disability Benefit, some 5% of the population and while there are obviously people who actually are too ill to work and are worthy of society's support, it really does stretch the imagination to think that not a single one is a work-shy malingerer, or that for some (the benefit is higher than unemployment pay) it is an alternative to unemployment.

In the end we come to a true understanding of what is going on, rather different from the report's conclusion above. The high social expenditure economies have high labor productivity on an hourly basis for those in work. The US has a higher annual productivity across all of those in the economy as more work, or if you prefer, fewer are condemned to the irrelevancy of the unemployment (however disguised) scrapheap. Indeed, it must be that way as average (and median) incomes in the US are higher than in Europe. (As Professor Krugman tells us, average wages in an economy are determined by average productivity in that economy. It couldn't possibly be true that the EPI could disprove such a luminary now could it?)

There are innumerable little bits and pieces that could be made fun of so I'll just pick those I consider the most egregious.

For example, there are 30 members of the OECD currently, yet the report only deals with data from 20 of them. If I am allowed to exclude whatever part of a data set that I wish to then I can prove absolutely anything, perhaps even that John Kerry went to Cambodia. It is also interesting to note that those countries excluded include those that work longer hours than the US and have lower hourly labor productivity; but then there couldn't actually be a reason for that, could there?

One nation used as a poster child for this vaunted high productivity is Norway, which apparently has an hourly rate at 131 percent of the US rate. Now the Norwegian economy is heavily dependent upon the extraction of oil and gas. In fact, so dependent that it is about 20% of GDP and that fifth of total production is performed by only 23,000 workers. Not only will that tend to boost the productivity statistics but I have a feeling that this is something that progressives would, at another time, claim was an unsustainable raping of an irreplaceable natural resource, one that should be deducted from, not added to the GDP accounts. Funny how facts can change depending upon what you want to prove isn't it?

Much is made of the fact that the US has a higher poverty rate (and in something called "shameful", child poverty rate) than all of the other OECD countries. It does indeed sound terribly bad doesn't it? Yet the fact that poverty rates are relative within a country, not either absolute or relative across countries is not mentioned. All that has actually been noted with such poverty rates is that the US has a wider distribution of income, not something that we didn't already know. Using the Worstall Calculator (envelope, back; pencil, sharp) I was able to show in moments that 500 professional athletes on $5 million a year would move the US poverty threshold $40 a year higher, condemning yet more thousands of children to the hell which is poverty. Or not, as the case may be, for it is only when you state that poverty is relative that such absurd results can be achieved.

To cut to the quick this report is simply a piece of outrageously biased rubbish, desperately straining for the occasional gnat sized statistic to support the introduction of a highly regulated, high tax, high social expenditure economic system into the US. Effectively, more like the sclerotic economies of Europe, with low growth, low absolute standards of living and high unemployment.

We shouldn't worry too much about it, for after all, this is only a Presidential election year, the report comes out on September 6th and

"The Economic Policy Institute is a nonprofit, nonpartisan economic think tank founded in 1986."

Bah, Humbug.

Tim Worstall is a TCS contributor. Read more of his writing at www.timworstall.com


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