Does the public sector understand wages?

UK workers have been going on strike. But how do the teachers, nurses, and other public sector workers on strike know how much they should be paid? I can help steer them in the right direction with reference to the price system… let me explain.

Think about your own job - how do you know if you're underpaid? Overpaid? Or paid just about right? If you're in the private sector, there's a good chance that your pay is just about right, because there is nothing more efficient than the price system for determining the right levels of pay.

I'll oversimplify the following example slightly for the purposes of illustration. Suppose we have Jack, who is overpaid in his job, and Fred, who is paid about right. Imagine the country has lots of job vacancies at the right labour rates. If Jack's wages are cut to the marginal rate, then he'll be unhappy because he's no longer overpaid. If Fred's wages are cut, then he'll now be underpaid, and he can move to a job in which he will be paid his marginal rate.

Cutting Jack's pay was a good move for his employer, but cutting Fred's pay was a bad move for his. Why? Because Fred's employer has been outbid by a more competitive employer paying the marginal rate. Fred's ability to find another job at the rate he was on is pretty much all the evidence you need that he was not overpaid. But Jack's grievance at his pay cut stems largely from the fact that he'd find it difficult to get another job at the same rate, which is pretty much all the evidence you need that he was overpaid.

Remember, in economics, the price system for labour in terms of the employee also has a logical standard - the worker ought to be paid the amount that makes their job more desirable than the next best alternative. That's why there is competition for employers to pay rates that will attract the best employees.

I don't know what the exact rates of pay should be for doctors, nurses, paramedics or teachers, but I can tell what we should want to see if we want those industries to thrive. We want to see the wages set to enable the vacancies filled, and to the level that public sector workers are invested in their careers, and satisfied in their work, but not so satisfied that they are earning over their marginal rate. In economic terms, we want them to prefer their job to the next best alternative, and we want their pay to reflect those preferences in accordance with the price system.

The situation should reflect the following: given a pool of identical employees, some of whom are producing X a month in the private sector, and others who are producing X + Y a month in the public sector (and vice-versa), you'd want to move the marginal worker to the sector closest to X (where X is the correct marginal rate) - and this should extend in both sectors in all industries until the two productivities reach equilibrium. At which point, we have an efficient allocation, whereby the output of the doctors, nurses, paramedics or teachers would be the same as it would be in a private sector job.

There's another reason why it's important for public sector employers to pay their employees something approximating the market rates, and not underpay or overpay them. We want a society in which everyone is incentivised to contribute most, in accordance with their talents and skills - and, again, there nothing as efficient as the price system for determining who is doing what. Every highly skilled and talented individual who is hired in one sector is no longer available in the other.

If workers are overpaid in one sector at the expense of the other sector, then labour rates are not optimally set in a way that draws the right employees into the right jobs and careers. We don't want the brightest neurosurgeons incentivised to work in IT, we don't want the brightest data scientists in public sector middle management jobs, and we don't want our top physicists tempted to work in the retail industry. For that reason alone, as much as we don't want our public sector workers to be underpaid, we don't want them to be overpaid either.

As we've said, the best way to determine the right level of pay is the price system; and the best way to determine if the public sector pay levels are right is to ensure that they as closely matched to the equivalent roles in the private sector as possible. The trouble is, in most cases, it is difficult to know which jobs in the private sector are comparable or equivalent to jobs in the public sector - there are too many factors to make an easy comparison, which makes the desires and the negotiations somewhat intractable.

We really do think the quality of analysis needs to rise on this subject

Another one of those claims that kids are all so fat these days they’re about to pop if the diabetes doesn’t get them first. For a start, as Chris Snowdon keeps pointing out, none of us should believe the numbers about obesity in children in the first place. In this particular piece the relative measure of child poverty is used to show that parents cannot afford food. But relative poverty isn’t the correct measure of not being able to afford food in the slightest - we need absolute poverty for that. Which isn’t the measure being used.

We’re also amused by the insistence that the use of food banks is a measure of how bad the problem is rather than an alleviation of it. However, we think this is a just lovely example of how bad the thinking is in this area:

Compare this to analysis from Impact on Urban Health, which found that simply expanding free school meals to all children in state-funded education settings in England would inject £41.3bn into the economy and the way forward should be clear.

That analysis is here and no, really, just no. The world doesn't work that way. As even a moment of thought will tell us.

GDP - that’s the measure we use of the economy after all - is the final value of output (or if we prefer, incomes or consumption) at market prices. So, if we remove something from market prices - decide to offer something free instead of charge for it - then we reduce GDP. Because we’ve just reduced the amount of economic activity we’re measuring by our use of market prices. QED.

We agree entirely that GDP doesn’t measure everything, not even everything important. And yet this is still true. We’re not going to gain additions to our economy by making something free. The claim we are just shows that folk aren’t thinking on this subject.

Decentralisation does actually mean local decision making

This is not specifically to make fun of the LibDems - not specifically, you understand - but it is to point out the absurdity of what is being complained about here:

Pothole repairs delayed by up to 18 months

Data from 81 councils was analysed by the Liberal Democrats which say that the roads postcode lottery in the UK must end

That potholes might take 18 months to repair doesn't strike us as a very good allocation of resources. We’ve long had a more than sneaking admiration for the guerilla gardeners of the native Bath of the one of us - leave a pothole too long in that city and they’ll plant a flower or three in it to highlight the hole.

However, it is necessary to grasp what decentralisation means:

Helen Morgan MP, the Liberal Democrats local government spokesperson, said that potholes were plaguing the country’s roads and the postcode lottery had to end.

Assume that we decentralise decision making. Push it down to the appropriate level perhaps. Then - because this is what decision making is about - there will be, in different places, different decisions made about resource allocation. Some will decide to fix potholes in a few weeks, some in many months. Locals can then vote for their local decision makers as they wish - and as decided by their views of the decisions made on fixing, or not fixing, potholes.

That is, local democracy means we’ll have a postcode lottery over everything that is subject to local democracy. That’s the very point of our having that local power nexus, so that locals get to decide about their locality.

Complaining about potholes is fine. Complaining about postcode lotteries is fine. Complaining about both at the same time is cakeism. For what is local democracy if it isn’t the creation of a postcode lottery?

This time isn't different, of course it isn't

So, government lashing the cash out to favoured businesses seems not to work very well:

‘A naive and stupid idea’: how Rishi Sunak’s Future Fund spent millions on failed firms

The then chancellor’s loan scheme, set up as Covid hit, was supposed to keep dynamic startups going, but ended up giving taxpayer cash to long-established or lame-duck businesses

This does surprise everyone, doesn’t it?

Which is to be somewhat unkind of course. But perhaps also realistic. This was something devised on the fly, in an emergency. Government closed down the economy, government might want to do something about that. But the real reason it didn’t work well is described here:

In May 2020, shortly after the fund was created, the BBB chief executive, Keith Morgan, wrote a “reservation notice” to ministers warning of concerns that the scheme would only attract “second tier” companies that could not attract investment from elsewhere

Getting government money comes with significant costs. So, those who can gain their necessary investment elsewhere tend to do so. The people who apply to the government schemes are those that can’t gain that necessary investment elsewhere. Precisely and exactly because submitting to politics means submitting to politics only the second-raters submit to politics for their money.

Board meeting minutes, leaked last year, revealed that the BBB’s non-executive director Dharmash Mistry warned that the fund risked creating “zombie businesses” kept alive artificially by taxpayers’ cash. New data obtained by the Observer suggests that he was right to be concerned.

Quite so. And given the constraints on handing out government - taxpayers’ - money this puts the kibosh on that whole idea of the subsidised industrial policy. By definition it will be the second rate - the not very good mousetrap - that gains the government support. The better mousetrap already has the world’s chequebooks lined up outside its door.

There is also no way out of this conundrum. We all agree that capitalists are greedy so they’re going to rush into financing the things most likely to do well. It’s simply inevitable that any political financing scheme will be financing the dross that doesn’t cut it on purely commercial terms. It’s not even that government picks losers so wondrously well - it’s that government will only get the losers to pick from.

It’s not going to work so we should stop trying to do it.

And they were doing so well about globalisation too

Parts of this are true, others are nonsense:

The world desperately needs a fairer economy – here’s how we can make that happen

Mia Mottley and Ngozi Okonjo-Iweala

Inflation and the climate crisis are hitting developing economies hardest. Trade is the key to helping them

So far so good, yes, trade is indeed the key to that global development which will, for the first time in the history of our species, abolish absolute poverty. That devoutly to be desired end goal being perhaps a couple or three decades away.

International trade has a critical role to play in creating the better jobs, value addition and greater resilience that countries are seeking. We know that over the past 40 years, global economic integration has helped lift more than 1 billion people out of poverty.

Entirely so.

But even before the pandemic, it had become clear that many people in poor countries had not received a fair share of the gains from globalisation.

And that’s not true. Those places that have participated in the globalisation of free market capitalism have got rich. Those folk and places which did not have not. The clue being in the idea that only if you take part in the thing that makes people rich will you get rich.

Open and predictable markets are a prerequisite for this re-globalisation process. But they are not sufficient. Access to finance on prolonged and low-cost terms is an indispensable part of building a more sustainable, more inclusive global economy. The Bridgetown Initiative put forward by the government of Barbados calls for a reassessment of the current global financial architecture to drive multilateral and private sector financial resources towards climate mitigation and resilience. Following through on this initiative could play an important role in addressing the climate finance needs of developing countries and indeed the financing of the sustainable development goals.

But as the evidence of the last 40 years tells us, that first sentence is all that is needed. Free trade - including the freedom to set up and trade - is all that is required. That’s what has lifted that 1 billion out of abject penury. The mistake here is to try and insist - as is being insisted - that since that works we must not do that any more. Instead we must have that guided and political development that doesn’t work.

One obvious point about which is that development, economic growth, is about adding value. If there’s subsidy to the economic activity - especially if that subsidy is necessary - then by definition the activity isn’t adding value. Because things that add value don’t need subsidy, subsidy is definitionally the value that isn’t being added.

One not cynical in the slightest view of the argument being put forward here is that we’ve two politicians insisting that economic development must be politically guided. Otherwise, what use is there for politicians without an economy to guide?

Another entirely uncynical view of the argument here is that now that we know what abolishes poverty - free trade and capitalism - then the insistence is that we must stop using what we know works in abolishing poverty in order to abolish poverty. Which, while an accurate description of the argument being put forward, sounds like very bad logic to us.

Why not, you know, do what we know works, what we’ve established by experimentation? Get the politics and politicians out of the way and leave economic development to the people who actually do economic development - free people deciding what’s in their own enlightened interests?

We should be buying our windfarms from China, obviously

A report:

Chinese companies boast what one industry insider dubbed a “landslide” price advantage over their Western counterparts. Their products cost less than half — and sometimes as little as a quarter — of Western equivalents.

Therefore we should buy Chinese windplants, right?

Major industry players told the Financial Times in September that European wind turbine manufacturers were “financially struggling and cutting jobs.” And last year, five Western firms warned in an open letter to the European Commission that they were “losing ground” to Chinese companies.

“It’s on price and financing conditions that the Europeans are really, really struggling,” when pitted against Chinese firms in third markets, Pierre Tardieu, Chief Policy Officer at WindEurope, a trade group, told me.

There are those - the EU is trying to insist on domestic content rules for renewable energy installations for example - who insist that such things must be home made. But this is entirely wrong.

Not just because saving money by buying cheap is a good idea in the first place. But because of what Nick Stern told us. Dealing with climate change will cost money. Humans do less of more expensive things, more of cheaper. Therefore we must be efficient in dealing with climate change so as to do more - not less - dealing with climate change.

We should be buying Chinese windmills not just because we’re hateful neoliberals, not just to count the change, but because saving Gaia depends upon buying Chinese windmills. So, let’s do that then.

Aren't markets just so gorgeously, wonderfully, cuddly?

The Guardian tells us, in doleful tones, that:

‘There will be fewer British tomatoes on the shelves’

Oh, right, so why’s that then?

…soaring energy costs force growers to quit…after hefty rises in the cost of production – including energy to heat and light greenhouses ….In a typical winter, only about 5% of the tomatoes consumed in the UK are grown in Britain, and this winter it was probably a lot less, as farmers did not want to pay the bills for the lighting and heating required…..In the summer months it can be more than 50%, gradually gearing up from the end of March, but it is still all grown in greenhouses that require heating, mainly with gas, and costs have ballooned since the war in Ukraine began just over a year ago.

Of course, we’re not happy about that energy price rise - as we’ve been saying, should’a gone fracking.

However, since that energy price rise did happen clearly there have to be changes to who does what where. At some level of relative costs growing tomatoes in Spain and shipping them costs more than in these British greenhouses. At some other level of relative costs - the energy part of the transport costs is obviously vastly lower than the energy required to grow - then using the foreigners is cheaper.

OK, so against a constantly shifting background of changes in such relative costs we need a method of working through who should change doing what and where. In real time by preference.

By some wondrous chance we’ve actually got such a system too. Prices as they operate in a free market.

There are, of course, those who intimate that this is a market failure, a problem with the use of markets:

Diplock says: “If the British tomato is to have a future we need support from consumers, the supermarkets and government.”

Our response being, well, why? The entire universe, through those relative prices, is screaming at us to get our tomatoes from elsewhere. Why should government policy then demand not just that we ignore reality but actively fight against it?

Ah, yes, sorry, we forgot. That’s why people go into politics, isn’t it? To be able to ignore and or fight reality….

Memo for the TUC - Jobs are a cost, not a benefit

It worries that it is necessary for us to point out the most basic facts of economic life to people. Surely public policy can be worked upon by those even vaguely economically literate? But it appears not. From the TUC we get this nonsense, they forgetting - or even not knowing - that jobs are a cost, not a benefit:

The report released by the TUC, a federation representing 48 unions, argues for a radical increase in investment – calling for £18bn more a year to be spent on operating trains, trams and buses to help cut car use by 20%, improve quality of life and boost the UK economy.

That boost to the economy from the report:

Additional operating expenditure by 2030 of around £7.5bn per year for buses, £0.5bn per year for trams and £10.9bn per year for trains, to provide public transport services good enough to attract the necessary extra passengers.

…..

5. In addition to giving us public transport fit to tackle the climate emergency these

investments would bring major economic and social benefits:

a. Around 140,000 direct jobs in bus, tram and rail operation created by the uplift

in public transport services (a new job for every two existing jobs).

b. Around 620,000 jobs created through the proposed bus manufacture and

construction of bus priority infrastructure up to 2035.

c. Around 110,000 jobs associated with tram construction up to 2035.

d. Up to 1.8 million jobs supported indirectly in association with the additional rail

investment up to 2035, although not all of these would be ‘new’ jobs.

That’s 890,000 new jobs, plus 1.8 million indirectly. And all for only £7.5 billion a year.

So, now, think for a little bit. The major complaint about the British economy these days is a shortage of workers. We’re supposed to raise the pension age to gain more workers. Stop taxing pension pots so much in order to gain more workers. Some go far enough to suggest we should subject ourselves again to the Tyranny of Brussels in order to gain more workers. It’s been standard to call for years for higher labour productivity - being able to make more things with fewer workers.

Then along comes this bright idea that we should deliberately tax ourselves £7.5 billion a year for the benefit of needing 2.6, perhaps 2.7, million workers? About 10% of the entire labour force of the combined countries that make up the UK? We’re to deliberately engineer the need for much more of what we’ve not got enough of?

It would be polite to call this merely insane.

The mistake here, and it’s one of those doozies of complete economic ignorance, is to fail to realise that jobs are a cost. A job is a cost of getting the thing done. We no more want to create jobs than we do to increase the costs of doing something therefore.

Think through what happens here. The UK workforce is 100% employed - close enough at least. So, we’re to divert 10% of that to building trams. That means we’ve got to give up 10% of everything else so that we can have the trams. The cost of the trams is the ballet, NHS, teaching, home care, vibrant arts system, windmills, nuclear fusion and everything else we don’t get because an entire 10% of the workforce is off building trams. And we’re only going to charge ourselves that £7.5 billion in operating subsidies to be made that 10% poorer.

Well, we suppose it beats most Modern Monetary Theory but other than that it seems to have little to recommend it.

The idea of an organisation which fights for the workers is just fine. But is it really asking too much that the people running it be competent? Have the first grasp of the subjects they intend to opine upon?

Jobs are a cost, not a benefit. Those not grasping that are not competent and do not have the first grasp.

Excellent, that's air travel and climate change dealt with then

As Madsen Pirie of this parish has pointed out, e-fuels seem like a useful solution to jet engines and air travel. As Tim Worstall of this parish has also pointed out they seem like a pretty good idea. Not that we need any more proof than that but we’ve got it all the same. In the recently released Tesla Master Plan 3 we find:

Longer distance flights, estimated as 80% of air travel energy consumption (85B gallons/year of jet fuel globally), can be powered by synthetic fuels generated from excess renewable electricity leveraging the Fischer-Tropsch process, which uses a mixture of carbon monoxide (CO) and hydrogen (H2) to synthesize a wide variety of liquid hydrocarbons, and has been demonstrated as a viable pathway for synthetic jet fuel synthesis….

So, there we are then, done and dusted. Everyone from Plane Stupid to those mithering about how to get batteries into a transatlantic ‘plane can now go and do something more useful.

Technology for the win we might say.

One more thing though. Such e-fuel would - at least at this level of development - be more expensive than fossil derived. But it’s not obvious that flights would be more expensive. Because of course now that the fuel is net zero there is no justification for Air Passenger Duty, which would then have to go. Given that APD is in fact a little higher than the agreed Stern Review externality costs of CO2-e emissions that might well mean cheaper flights even as the fuel itself is more expensive.

Because of course they would lift the tax once the logic for its existence has disappeared, wouldn't they. Wouldn’t they?

The Laffer Curve really does exist - no, really!

That there’s a tax rate too high to maximise tax revenue seems like a reasonable enough statement. That there’s one that is too low to maximise revenue is an obvious one. The Laffer Curve is merely the insistence that both of those things are true. That there’s an optimal tax rate to maximise revenue collection. That is also all that it says.

However, we do need to be careful here. For the Laffer peak is going to be different in different societies, with different tax rules. Further, it’s going to be different for each different tax in each such different society. The rate for a transactions tax will be very low indeed - that 0.01% on financial market transactions was, even by the calculations of those who proposed it in the EU, above that revenue maximising rate. It’s long been said that stamp duty on share purchases is above the revenue maximising rate. Wealth tax rates might well not be quite the revenue enhancer that many seem to think they will be:

A record number of super-rich Norwegians are abandoning Norway for low-tax countries after the centre-left government increased wealth taxes to 1.1%.

More than 30 Norwegian billionaires and multimillionaires left Norway in 2022, according to research by the newspaper Dagens Naeringsliv. This was more than the total number of super-rich people who left the country during the previous 13 years, it added. Even more super-rich individuals are expected to leave this year because of the increase in wealth tax in November, costing the government tens of millions lost tax receipts.

We’re not about to try and calculate whether that is in fact revenue losing but we would like to just point to it as being one of those interesting questions.

His move to Switzerland follows a relatively small increase in tax aimed at the country’s super-rich, who face wealth taxes at both the local and state level. That includes a municipal tax of 0.7% on assets in excess of NOK 1.7m for individuals, or NOK 3.4m for couples. There is also a state wealth tax rate of 0.3% on assets above NOK 1.7m. In November, the government raised the state rate to 0.4% for assets above NOK 20m for individuals, and NOK 40m couples, taking the maximum wealth tax rate to 1.1%.

A 1.1% tax on billionaires’ wealth isn’t, in fact, going to make much difference to total tax revenue. And we are at least arguably seeing that 1.1% is above the revenue maximising rate for such a tax. Or, another way to put this, wealth taxation isn’t quite the Deus ex Machina of the welfare state that some are claiming it is. The amounts to be raised aren’t worth the behaviour change they engender.

Of course, there is also that new new left idea. That it’s the inequality itself which is the problem and that methods of reducing the inequality, in and of itself, make the world a better place. So, people leaving Norway with their wealth makes Norway a better place. At which point no doubt the new new left will be able to show us some improvements in Norwegian society worth the tax revenue being given up. No doubt - they’ll be queuing up to do so, right? Along with the manner in which Switzerland is getting worse as the rich people go there.

Ourselves we think the inequality is in itself the evil argument is insane. Or, to be milder about it, not backed up by any empirical evidence. But that’s not in fact the hurdle that needs to be crossed here. Rather, is the reduction in inequality worth the loss in tax revenue from the exodus? We look forward to any explanations of why that might be true - not that we’d believe them but we do look forward to people trying to make that case.