Equality, freedom and wage labor

I haven’t been active in the debate between Crooked Timber members and various others (Bleeding Heart Libertarians, Matt Yglesias, Tyler Cowen) so far. Broadly speaking the claim on the BHL side has been that if only some minimal conditions (existence of a universal basic income, for example) were met, all employment contracts could be assumed mutually beneficial and there would be no need for governments to regulate their terms, for example to prevent sexual exploitation.

Most  at CT have been dismissive of these claims, but I’d like to explore the question a bit further. Is the objection that the necessary conditions aren’t likely to be met in practice, or that the employment relationship is inherently unbalanced, simply by virtue of the fact that one party gets to boss the other around.

Suppose that the following conditions were met

* Full employment, so that the cost to a worker of finding a new job is no greater than the cost to an employer of hiring a replacement

* A minimum wage adequate to allow a decent living standard without requiring acceptance of degrading working conditions

* A universal basic income sufficient to ensure that, even without working no-one need be poor

* A default employment contract, incorporating prohibitions on sexual harassment, rights to regular breaks and so on, unless these are explicitly contracted out

Would we then feel that legislative restrictions on employment contracts were needed, and, if so, which and why? Or, is the question badly posed in some way

I can think of two ways to argue that the question might be badly posed.

The first is that capitalism could not sustain such conditions, and so the question could never arise in practice.  For example, it might be argued that the tax rates required to finance a UBI would not be consistent with a high (post-tax) minimum wage, assuming that capitalists still had to earn a positive rate of return.  I’m not convinced of this, especially since developed countries seemed fairly close to meeting these conditions towards the end of the postwar boom. But, arguably, that’s why the boom ended.

A second response, which I find more appealing, is that such conditions would give workers sufficient bargaining power to demand union representation, and that union contracts would embody the standard protections.

But I’m also attracted to a third view, one which would give a little more ground to the BHL position, though at quite a high price. That is the view that, if only we had the substantial measure of economic equality described in the conditions above, we could indeed dispense with a lot of government intervention, and thereby enjoy more freedom in matters such as contracting over working conditions (or, as discussed in another thread, selling kidneys).

I’m not convinced that this is right, but I think a lot of the heat in the debate reflects the extreme inequality of current conditions, particularly in the US. The BHL side of the debate wants to believe that a modest tweak to current conditions would provide sufficient independence to make free contracting on equal terms a meaningful concept. The CT side mostly takes it for granted that the required degree of equality can’t be achieved in practice, and that it’s therefore silly to concede anything to demands for freedom of contract.

Obviously, I think CT has had the better of the debate. Still I’m attracted to the idea that a more equal society would also be one in which there was less need for detailed and prescriptive government interventions. Against this, I share the intuition that bosses will always be bossy and (at least some) will always try to abuse their position.

So, I’ll leave it there, and request civil discussion,

148 thoughts on “Equality, freedom and wage labor

  1. Australia’s franking system avoids double taxation but still starves growing businesses of cash.

    Equity finance is an option but it can be complicated. For small enterprises a lower tax burden makes more sense. You can collect when they start paying dividends to the owners or else via capital gains if the owners sell their stock in the interim. I’m not sure why the taxman should collect long before the investors do.

  2. @ 24: A lot of IT stuff is non-sensical to me. So we are square in the ignorance department, I suggest.

    You’re assuming a comprehension problem. I’m assuming something else.

  3. BilB :
    Face it, Terje.
    This NPT thing is a dead duck. It might be useful for a handfull of businesses with a specific labour access problem such as fruit picking and businesses that can obtain some benefit for having more people standing around (like walking billboards or as a deterent for security reasons), businesses such as Hoyts for instance, but for the rest of industry having more people even at half the price is still an extra expense with no gain. To take on extra people you need to have extra sales. No doubt PML would swing in here and say that having full employment would create the extra business, I don’t believe that. This is one of the fallacies of the NPT argument.

    No, I would simply direct your attention to where I already addressed this, in my comment of 22:41, on 20.7.12 replying to Critical tinkerer. I don’t know if you missed this or if mine was still hung up in moderation when you asked.

    Oh, and you really should not claim that “This is one of the fallacies of the NPT argument” about your own suggestion that I would claim “that having full employment would create the extra business”. Not only is that a straw man, it’s got nothing to do with the NPT mechanism at all.

  4. critical tinkerer :
    @P.M.Lawrence
    We on the left are complaining about your assumtions that you start with not what follows in your work while you are defending your work and not thinking about assumptions. We are talking past each other cause of it.
    Your wrong assumptions are in the title.

    You have already been told, not just by me, that this stuff is not “assumptions”, it’s the result of arguments. Now, it’s quite possible for things like that to be wrong, but you can’t turn them wrong by calling them assumptions and saying you don’t accept those assumptions. And that is the cause of talking past each other – that you only accept the existence of opinions and assumptions, and insist that reason and argument have no place but must be taken as opinions and assumptions.

  5. “Equity finance is an option but it can be complicated.”

    Obviously, the proverbial Wall Street bankers thought so too because these ‘investment bankers’ found it easier to collect fees for processing sub-prime mortages and selling the falsely classified ‘investment grade’ CDO to the public instead of raising equity capital and lend to these borrowers directly. Clever, isn’t it, the assessment of credit risk is outsourced to people who have no chance to make a credit risk assessment, namely the buyers of these CDOs. Since these things didn’t exist for a long time, there was no historical data either for people to make an educated guess.

    And now we have the mess, including horrific growth in income inequality, mass unemployment, small businesses going to the wall and a government debt explosion and costly court cases.

    If the taxman (thank you for not saying taxwoman) had collected a lot of tax long before the investors became investors, the mess might be smaller.

  6. Ernestine Gross :
    @P.M.Lawrence
    I approached NPT with an open mind and came to the conclusion as stated @50,p2.

    I am sure it is my failing, but I genuinely could not see what you were getting at just there – apart from the fact that you believed there would be an incentive to fire some workers and replace them with others, and that the fiscal position would not be as I hoped. That is, I could not see why you thought that would be how things worked out. Like TerjeP, I could not see the relevance of “serious incentive compatibility problem”. I don’t mean I don’t get the concept, I mean I don’t get how it would come up. The simplest implementation would involve giving people anonymous, transferrable vouchers they could give their employers, which would be the supporting documentation to get the tax breaks. The incentives to make sure the vouchers reached the right hands at the right times would be just the same as with any money supported in a Chartalist way on the back of taxes: people would value the vouchers enough to look after them while they were used. So, either it’s a non-problem or you were getting at something else that I still don’t see.

    @9, p3, you tell me that I have misunderstood the idea of NPT.

    Actually, I went to a lot of trouble not to tell you that, partly because it is quite possible – a priori – that you know something I don’t, and partly because I wasn’t too sure what you did understand by all this, as I point out just above.

    So I very carefully asked if I was right in thinking your position was such and such, providing what I hoped would be further and better information in case that was your position and asking to be corrected if that was not your position.

    At this point, I still don’t know if you understand the NPT far better than I do, if you are missing something I have somehow failed to bring out, if we are at cross purposes, or something else. But I do know that, if I am in error, it must be an error subtle enough to have got by both Phelps and Swales as well as me.

    After considering your reply I now have a few questions, one theoretical and one applied:
    1. What is the problem to which NPT, as described by you, is a solution?
    2. How would ‘revenue neutrality’ be of any use to, say Spain which attempts to reduce its budget deficit and there are about 24% unemployed people? (Setting aside the revenue neutrality, I can’t see how NPT would be of any use to Spain’s population.)
    (De Gaulle comes to mind. The then French President is reported to have said: Researchers who search, we find. Researchers who find, we search.)

    The first question is badly formed, because first we have to know some background. In fact, NPT should not be thought of as a solution to a problem so much as the elimination of a labour market externality. That, in turn, presents a problem to the unemployed, those at risk of unemployment, and those whose conditions are affected by that; in a different way, it presents a different problem to those who would rather have larger aggregate output in the economy at the same cost (broadly understood); and so on. So the problem is different for people in the country to what it would be for those considering investing in the country from outside, and of course for some people it is a non-problem because they don’t have a dog in the fight – or even because they have an interest in palliatives over cures.

    Now, I personally have the first sort of interest in the issue, making it a problem in my own terms. But JQ presented the matter in his original post in the manner of a detached, intellectual challenge related to some discussions that had recently come up. That’s not to say that it is only a sort of puzzle, but rather that detached analysis is often the way to go – if nothing else, it helps keep things clear rather than emotionally heated. So I have been trying not to handle this as a real problem but as an intellectual one, but even so I know, wearing my other hat, that a lot of this could matter to a lot of people in a lot of very immediate ways. But not to everybody, and certainly not to those with an emotional or practical investment in helping the poor (as opposed to helping them not be poor).

    Now, as to Spain, there the issue is that Spain mainly has a different sort of problem. To use a loose analogy, the patient has a disease that – like many – has fever as a symptom, but where many fevers should be treated as such to cure the patient, here treating the fever (high unemployment) would not cure the disease (excessive financial commitments), though it might help to buy time to deal with the main problem – if only someone knew how to do that. In Spain’s situation, I would not be surprised if trying an NPT without the other measures hit the pushing string zone I described: “But you can only apply these virtual wage subsidies up to the size of the economy, because they can’t get bigger than the tax base involved; if you try more, it’s like pushing on string – everything goes slack. In the ultimate, if the population got too big or the economy got too small, it would be too much for the economy’s current capacity and would work through as Malthusian constraints. Now, many people deny that there are any such limits, because they think we can always push them back. But here we are looking at how to structure the economy properly, which means we have to pay attention to those constraints because that is precisely how we can push them back …” Revenue neutrality only works up to the size of the revenue base; after that, you push on string.

    I never claimed that NPT was a wonder cure for every economic ill, just that it addressed one particular area.

  7. Wall Street bankers operating in the US are subject to taxes on profits. So I’m not sure how your example is relevant.

  8. TerjeP :
    CT & EG – your assertion makes no sense to me.
    The simplistic NPT would offer businesses an annual tax rebate of $R times the number of full time equivalent employees for the tax year. Clearly this does not encourage any reduction in employment. Quite the opposite.
    A modified NPT might increase this rebate in times of high unemployment. The rule might be that businesses are paid 1.5 times $R when unemployment is over 10%. This higher rebate would clearly create a greater incentive to employ people.

    Unfortunately, setting it higher than matching unemployment benefits would undo a key feature: budget neutrality. Not only would higher tax breaks push for more employment, they would also cut the revenue base more than the savings on unemployment benefits, so that would affect the government in a way it wouldn’t like (I’m told “rebates” rather than tax breaks or offsets is wrong as with them the government can pay a taxpayer net). Not only would that matter for the politics and the sustainability, it might lead to overshooting the optimal level that helps GDP most. With enough overshoot, GDP would actually be lower even than in the damaged situation with high unemployment.

    I can’t see any scenario where such an NPT would make employers more inclined to outsource. And give no one business has any meaningful control over the unemployment rate it’s hard to imagine any other variation of the NPT were businesses gain by shedding staff.

    Not an NPT itself, but the carrying tax and various other taxes like Corporation Tax matter. Firms can shift locations to get under more favourable tax regimes. If other countries’ GSTs were low for other reasons, Australia might have to lower the take of its GST. But that would mean a lower maximum setting for the tax breaks before the pushing string problem hit. “Luckily”, governments don’t compete that much in a race to the bottom for taxes. More seriously, there are other practical ways to restructure the tax and revenue base and the tax break implementation so they would continue to work in the face of this – up until really hitting Malthusian constraints, if that ever happened. But that’s not currently an issue.

  9. @P.M.Lawrence

    Not only would higher tax breaks push for more employment,

    This is your wrong assumption i am talking about.
    Let me spell it again. Your wrong assumption that you work with is: If employment cost is reduced, employers would hire more people.
    Employers would hire more people only when demand is rising or expectations are that it will rise. The proof of this is that you can see plenty of employees not making their worth employed, as you pointed out, but only when demand is rising. In depression there are no such employees. We witnessed skyrocketing productivity in USA in 2009 at the time when unemployment skyrocket. The reason is that less esential employees were fired.
    If there is no expectation of rising demand for their products and services, there will be no more hiring no matter how much NPT lowers labor cost. That difference would go into profits. Work with that assumption and see if NPT would work. You will get the same conclussion as Iconoclast, Ernestine and me.

  10. @P.M.Lawrence

    I understand you say unemployed people will get a voucher that certifies the person for NPT. NPT is a tax concession for ‘the employer’ who hires a person who can present the voucher. If I have understood you correctly then I uphold my conclusion @50, p2. This is so because both unemployment data as well as a NPT com voucher system is public knowledge. Therefore ’employers’ also know it. I assume you agree that business people (‘the private sector employer’) want to make a profit and the higher the better. Hence the profit motivated ’employers’ prefer an employee with a voucher to an employee without a voucher because the after tax cost is lower. I assume you also agree that individual private sector employers are only interested in the profit of their enterprise and they cannot be expected to work through the implications of their actions for every member of society. By retrenching employees, the pool of unemployed is increased. By rehiring the retrenched people, they will come with a voucher. I call this a serious incentive compatibility problem. And this problem is unresolved.

    I fully concur this thread deals with theoretical issues. Hence my post @50, p2. As for JQ’s specific question, one of his conditions is full employment. Another condition is equal transactions costs for ‘the employer’ and ‘the employee’ in the labour market. These conditions would at most strengthen my argument about a serious incentive compatibility problem being created by the introduction of NPT.

    You say my first question is badly formed. My first question is: “What is the problem to which NPT, as described by you, is a solution?”

    We are talking theory here, and not bleeding heart emotional conversations or the promotion of some personal preferences for institutional arrangements. I assume we agree on this. In this case, it is common knowledge, at least between you and me, that the introduction of a solution to a problem which does not exist results in the creation of a problem.

    As for the applied problem of Spain, I’d like to reiterate the financial mess was created by the private sector (in contrast to Greece).

    I do not agree on your version of NPT[FN1], I still see NPT as one possible policy tool in the industry policy area as per my post @50, p2.

    [FN1] NPT is nothing but a tax subsidy paid to employers.

  11. Ernestine Gross :
    @P.M.Lawrence
    I understand you say unemployed people will get a voucher that certifies the person for NPT. NPT is a tax concession for ‘the employer’ who hires a person who can present the voucher. If I have understood you correctly then I uphold my conclusion @50, p2. This is so because both unemployment data as well as a NPT com voucher system is public knowledge. Therefore ‘employers’ also know it. I assume you agree that business people (‘the private sector employer’) want to make a profit and the higher the better. Hence the profit motivated ‘employers’ prefer an employee with a voucher to an employee without a voucher because the after tax cost is lower.

    I take it that you do appreciate that, once the system came in, there would be never be any employees without vouchers, apart from those who had already surrendered their vouchers for that period?

    I assume you also agree that individual private sector employers are only interested in the profit of their enterprise and they cannot be expected to work through the implications of their actions for every member of society. By retrenching employees, the pool of unemployed is increased.

    That is absolutely true. But how does that matter?

    By rehiring the retrenched people, they will come with a voucher.

    But, precisely the same incentive applies to retrenching them in the first place, in the opposite direction.

    Let me provide a worked example. Fred Nerk works for Bill Berk for $40,000 p.a., while Joe Erk is unemployed and receiving quarterly benefits of $4,000 (which cost the government $1,000 in administration). The NPT is implemented using vouchers. Bill Berk panics at his apparently higher tax bill, until he realises that he himself, Fred Nerk, and all his other employees now have vouchers triggering tax breaks of $5,000 each quarter (issuing them is administratively cheap, since practically everybody gets them). Joe Erk walks up, under the mistaken impression that only the unemployed are getting vouchers, and makes the following proposal to Bill Berk: “If you hire me instead of Fred Nerk, I’ll give you my quarterly vouchers for tax breaks and we can split the difference, making you $2,500 better off each quarter and me $2,500 better off each quarter than Fred Nerk was – I’ll get $50,000 p.a., and worth every penny for finding this loophole for you”. But Bill Berk knows he is already handling the vouchers that Fred Nerk gets, and that he would lose those under the proposed arrangement. So he says to Joe Erk, “Nice try, but that wouldn’t make me better off because I would lose the vouchers I am already getting from Fred Nerk. But I’ll tell you what, in return for your vouchers I’ll give you $18,000 p.a., and you can come and sit next to Fred Nerk and help him when he needs it until you get more useful for something.”

    I call this a serious incentive compatibility problem. And this problem is unresolved.

    Were you under the impression that only the unemployed would generate the tax breaks? If so, you fully and clearly identified a genuine problem area that the NPT carefully avoids by not targetting people. That turns it into a non-problem.

    On the other hand, if you are looking at something else again, then it is something that I still have not spotted, and we are still talking past each other.

    I fully concur this thread deals with theoretical issues. Hence my post @50, p2. As for JQ’s specific question, one of his conditions is full employment. Another condition is equal transactions costs for ‘the employer’ and ‘the employee’ in the labour market. These conditions would at most strengthen my argument about a serious incentive compatibility problem being created by the introduction of NPT.
    You say my first question is badly formed. My first question is: “What is the problem to which NPT, as described by you, is a solution?”
    We are talking theory here, and not bleeding heart emotional conversations or the promotion of some personal preferences for institutional arrangements. I assume we agree on this. In this case, it is common knowledge, at least between you and me, that the introduction of a solution to a problem which does not exist results in the creation of a problem.

    In my view, there have been endemic problems in the unemployment area for generations, with even periods of low unemployment requiring heavy intervention that brought its own costs in the form of side effects.

    As for the applied problem of Spain, I’d like to reiterate the financial mess was created by the private sector (in contrast to Greece).
    I do not agree on your version of NPT[FN1], I still see NPT as one possible policy tool in the industry policy area as per my post @50, p2.
    [FN1] NPT is nothing but a tax subsidy paid to employers.

    It’s hardly “nothing but” that, since it is carefully structured not to involve or require funds flows in that direction. That makes it a virtual subsidy, with all funding costs carefully engineered out. Anybody who pulled out the corresponding numbers from the intermediate calculations, then called them a subsidy being paid, would be mistaking them for an amount the government could get. But if the government simply cancelled the NPT tax breaks and left the carrying taxes at the higher rate they were set to so they could carry the tax breaks, that wouldn’t bring in that amount – because the tax paying sector wouldn’t be able to pay that much.

  12. I understand you say unemployed people will get a voucher that certifies the person for NPT. NPT is a tax concession for ‘the employer’ who hires a person who can present the voucher. If I have understood you correctly then I uphold my conclusion @50, p2.

    This confirms for me that you have not understood the NPT proposal made by PML.

  13. Unfortunately, setting it higher than matching unemployment benefits would undo a key feature: budget neutrality.

    I wasn’t advocating such a change. Merely trying to explain that making it vary based on the unemployment rate wouldn’t lead to employee churn or lower employment as suggested by EG. However the quote in my previous comment demonstrates that EG is thinking of some sort of bounty scheme for giving a job to an unemployed person which is not what NPT is about. So clearly there is a misunderstanding. I’m not sure why because I think your proposal is quite clear.

  14. P.L.M. and TerjeP, good luck to you in trying to fix a problem by the same or related means by which it was created. No wonder, the actual problem to which your version of NPT is supposed to be a solution is not precisely defined. This is the end of my interest in this topic. I make this clear so that you don’t spend time writing lengthy posts, allegedly for my benefit.

  15. I make this clear so that you don’t spend time writing lengthy posts, allegedly for my benefit.

    How magnanimous.

  16. Ernestine Gross :
    P.L.M. and TerjeP, good luck to you in trying to fix a problem by the same or related means by which it was created. No wonder, the actual problem to which your version of NPT is supposed to be a solution is not precisely defined. This is the end of my interest in this topic. I make this clear so that you don’t spend time writing lengthy posts, allegedly for my benefit.

    I do not write this for E.G.’s benefit, but for the benefit of those readers who may come after and may mistakenly take her views as accurate descriptions of what I was trying to bring out.

    PLM is a computer language, and it is not a proper reference to me. Insignificant in itself, the error shows a tendency not to pay attention – particularly since it is not an isolated incident.

    The “actual problem to which [my] version of NPT is supposed to be a solution” is precisely defined: it is one particular negative externality currently obtaining in the labour market, driven by a disconnect between the costs of unemployment and the costs and benefits of hiring and retrenching, that suboptimally promotes unemployment and lowers production. Of course, defining it that way takes precise technical terms, which come over as jargon to those who are unfamiliar with them, so it helps to use metaphors and analogies to show these things to a wider audience – but that does not mean the problem is not precisely defined, it only means that loose analogies and overview presentations are only those.

    If “good luck to you in trying to fix a problem by the same or related means by which it was created” is supposed to mean that the only way to fix a problem is not to get to grips with it, huh? If nothing else, wouldn’t that practically guarantee ending up without a precise description and understanding of the problem, the very thing E.G. claims as a flaw? Doesn’t this open up a heads I win, tails you lose thing, since either we are condemned for facing the problem or we are condemned for not having faced the problem?

    But if it only means that, having come to grips with the problem, we are suggesting doing the same or similar things as led to the problem, well, no – we are suggesting undoing, working against the harmful stuff. By that reasoning, any Pigovian solution to an externality is something that perpetuates it, and in general that any work in a problem area is bound to make a problem worse. “You cannot untie your tangled shoe lace by working with it! That’s how it got tangled in the first place!”

  17. @P.M.Lawrence

    Apologies for having written P.L.M. instead of P.M.L. Otherwise:

    If NPT is linked to unemployment (in aggregate) then businesses do have an incentive to fire people (create unemployment) and then rehire (not necessarily the same people) and get paid for it. In the corporate sector the ‘competition’ for profits (and bonuses) is such that there could be race for strategic head culls (contemporary management language) and smal business owners wouldn’t necessarily mind making more profit. There is a serious incentive compatibility problem.

    Without further restrictions, your argument about the fiscal position does not hold.

    However, if NPT is linked to economic conditions, experienced by a segment of businesses and considered temporary, and management’s performance is satisfactory with respect to a set of specified conditions (eg debt/equity ratio, business internal gini coefficient), then NPT could provide a mechanism in the area of industry policy. In other words, management would have to apply for NPT.

  18. Ernestine Gross :
    @P.M.Lawrence
    Apologies for having written P.L.M. instead of P.M.L. Otherwise:
    If NPT is linked to unemployment (in aggregate) then businesses do have an incentive to fire people (create unemployment) and then rehire (not necessarily the same people) and get paid for it.

    If implemented properly, NPT should be linked to the amount of employment at the level of the firm. That means it would be directly linked to employment (in aggregate). Employment and unemployment are complementary, but they are not direct inverses as their total is only roughly constant, since the total size of the labour pool varies with demographics etc. That means NPT would be indirectly linked to unemployment (in aggregate), but not wholly determined by it.

    Under these conditions, the spill and fill process you describe would actually work out as follows:-

    – businesses that fired people (creating unemployment) would lose the NPT tax breaks on those people at that stage;

    – if they then rehired (not necessarily the same people), they would then regain the NPT tax breaks on those people, but it is loose use of language to call this “get[ting] paid for it”, as the net funds flows would never be towards the businesses involved but towards the ATO;

    – so there would be no net advantage generated by the process taken as a whole.

    This follows from the fact that NPT tax breaks would be generated by staffing levels without regard to previous employment or unemployment status, precisely by not targetting NPT preferentially to any segments of the pool of legitimate labour.

    In the corporate sector the ‘competition’ for profits (and bonuses) is such that there could be race for strategic head culls (contemporary management language) and smal business owners wouldn’t necessarily mind making more profit. There is a serious incentive compatibility problem.

    Since the only incentives should apply to overall staffing, and not at all to churning employees, the only way they could make more profit from this would be to take on more employees, net. But as that is the object of the exercise, it is not an incentive compatibility problem at all.

    Without further restrictions, your argument about the fiscal position does not hold.

    The fiscal position issue – the effects on government revenues and outgoings, taken together – works out in a way that follows from the specified matching of NPT tax breaks to the costs of unemployment benefits and the uplift of nominal tax rates (gross before the NPT tax breaks, and matching them). These are indeed restrictions, but they are not further restrictions; they are fundamental parts of the specification of an NPT. So, how if at all are they inadequate for the purpose? That is, how would initial revenue fail to keep up given the uplift of nominal (gross) tax rates, and/or how would later budgets fail to keep up given the linkage between the NPT tax breaks and the costs of unemployment benefits that ensure that revenue falls from increasing employment would be matched in lock step to falls in costs of unemployment benefits?

    However, if NPT is linked to economic conditions, experienced by a segment of businesses and considered temporary, and management’s performance is satisfactory with respect to a set of specified conditions (eg debt/equity ratio, business internal gini coefficient), then NPT could provide a mechanism in the area of industry policy. In other words, management would have to apply for NPT.

    Anything like that would, by definition, not be an NPT of the sort proposed, precisely because it would involve targetting that would encourage economic activity to divert around the preferential incentives that would arise from that.

  19. @P.M.Lawrence

    You asserted there is an ‘externality problem’ in the labour market. An assertion does not amount to a description of the problem. Therefore I maintain the poblem to which your version of negative payroll tax (NPT) is supposed to be a sulution does not exist and, furthermore, proposing a solution to a problem that does not exist creates a problem.

    b) you are not going to change my mind with a story as to what would happen. Furthermore, asserting

  20. Please delete :b) you are not going to change my mind with a story as to what would happen. Furthermore, asserting” in my post @45

  21. Ernestine Gross :
    @P.M.Lawrence
    You asserted there is an ‘externality problem’ in the labour market.

    Not at the comment you are replying to, I didn’t.

    An assertion does not amount to a description of the problem.

    However, in another comment, I did give a succinct description of the problem: “it is one particular negative externality currently obtaining in the labour market, driven by a disconnect between the costs of unemployment and the costs and benefits of hiring and retrenching, that suboptimally promotes unemployment and lowers production [emphasis added]”. That only degenerates into a mere assertion that there is such an externality if you edit out the part I just emphasised. But doing that makes it a straw man.

    Of course, that is merely describing the problem, without proof; but on the one hand that was all that was at issue just then, and on the other hand further and better particulars – including proof – are available in the material I referenced, starting with the link I provided. For someone with your background, able to appreciate the working, I would suggest getting that from scrutinising Professor Swales’s modelling. Alternatively, if you prefer independent working and you have the time, I would suggest you yourself model what would happen under an NPT implemented according to the specifications provided, taking care not to build in conclusions by using aggregates around the very bifurcations being tested; any model that does not build in conclusions should reveal Swales’s result, an increase in both employment and GDP under a wide range of other economic settings. The latter should in itself show that current behaviour is suboptimal, since it could be bettered.

    Therefore I maintain the poblem to which your version of negative payroll tax (NPT) is supposed to be a sulution does not exist and, furthermore, proposing a solution to a problem that does not exist creates a problem.

    Isn’t that argument by repeated assertion itself, the very thing you suppose I did and which you reject?

    The pathway I followed to the idea that there was a problem, which is not necessarily the one followed by Swales or Phelps, started by my noticing that it is now quite common to have both high unemployment and high workloads among the employed. Without that amounting to proof, it suggested that there might be a bifurcation of the sort associated with phase change. If that were so – if – then there would have to be behaviour that could be described on a graph for which the corresponding curve reversed its slope. So I went looking for a mechanism that might deliver that, and then I noticed that you could get precisely this from the disconnect I mention above (you get the same thing in relation to “Vagrancy Costs”, observable in economic history in times and places in which there was no safety net to head those off). Now, the disconnect is a logical consequence of how things are presently structured in the welfare area, what with pooling all funding needs to be met through Consolidated Revenue and so on; the only empirical knowledge needed is that that is how Consolidated Revenue is set up. That is all that is necessary to put together a formal proof along the lines I found – and, of course, Swales and Phelps got there by other pathways, described in their own independent work.

  22. critical tinkerer :
    @P.M.Lawrence

    Not only would higher tax breaks push for more employment,

    This is your wrong assumption i am talking about.
    Let me spell it again. Your wrong assumption that you work with is: If employment cost is reduced, employers would hire more people.

    Let me just remind you, if this is wrong, it is not a wrong assumption but a wrong conclusion. That is, it is not an input to my reasoning but follows from it – so, it could be wrong if that is wrong, but it is by definition not a wrong assumption. EG herself noted this elsewhere.

    Employers would hire more people only when demand is rising or expectations are that it will rise. The proof of this is that you can see plenty of employees not making their worth employed, as you pointed out, but only when demand is rising.

    That’s not a proof, because it is a circular argument. That is, it rests upon observations of conditions under which the damaging mechanism is operating (if there is indeed such a mechanism). So the observations do not test what would happen if the proposed fix were applied.

    In depression there are no such employees. We witnessed skyrocketing productivity in USA in 2009 at the time when unemployment skyrocket. The reason is that less esential employees were fired.
    If there is no expectation of rising demand for their products and services, there will be no more hiring no matter how much NPT lowers labor cost. That difference would go into profits. Work with that assumption and see if NPT would work. You will get the same conclussion as Iconoclast, Ernestine and me.

    Even in the worst case you expect of neither increased demand nor expectation of it, employers would still hire more if an NPT were in place, simply to get the tax breaks, because those don’t just cover the benefits the unemployed get but also the administration costs of those. That means that any firm with lower administration costs could hire people, even if it had to offer the unemployed slightly more than they were getting on benefits. But – short of yet further governmental burdens – practically every firm could hire a few that way, because they would have far fewer layers to churn the funding through, and once they were hired it is likely that some work or training would be worth having done by those hired. See the example scenario I gave earlier, involving Bill Berk, Fred Nerk and Joe Erk, in which Joe Erk eventually does get a job offer.

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