Gender-Based Pay Discrimination and Pregnancy

It is a commonly-cited fact that in New Zealand (and around the world), men and women have different incomes; with women usually, if not always, receiving lower pay. Whether women receive lower pay for doing an identical job or are simply less present in 'high powered' jobs is unclear; I think it is likely a mix of the two. However, simply citing this fact doesn't prove the existence of residual sexism (although this may also exist). There are important (but not irremediable) differences between women and men in the current labour market which at least partially account for this difference in pay.

The one I want to focus on is pregnancy and childcare, which is an interesting problem of asymmetric information. Suppose that at a particular company, a woman and a man both work, and both add the same amount of value to the workplace. Their employer knows this, and so hasn't discriminated based on gender so far. The employer however knows that both the employees are young, and likely to have children at some point. Moreover, the employee cannot know estimate the exact probability of a person having a child; marriage is no longer a good guide, as many children are born out of wedlock. The only guide (that I can think of) would be age, which I will discuss later. So the employer, to maximise expected return from the employees, has to guess, using averages.

On average, women spend more time off work during pregnancy (because they physically have to), and (I suspect) spend more time off after pregnancy as well to look after newborn babies. This means that even if they are equally good at their job, a women's expected value to their employer is lower, even if they don't plan on getting pregnant (because the employer probably doesn't know this). This means that even in a world free of sexism and any other reason to discriminate through pay, women will be paid somewhat less than men (After some basic algebra and wild guesses I very provisionally estimate this to be by about 5%).

What should we do? A popular solution is so-called 'pay equity laws', which force employers to pay women the same as men. This seems intuitive if you think the problem is sexism, but if you (like me) think there are at least some other factors involved, what you are essentially doing is placing quite an onerous minimum wage, which is likely to result in less women being employed, and probably perpetuate differences in earning power. We obviously can't make men give birth, and we can't stop people having babies. What might be a better solution (to the problem I have outlined here) is that we try to encourage more men to take on equal (or to cancel out pre-pregnancy inequalities, slightly more) responsibility for newborns post childbirth. Maybe this goes against biology, I don't know. But I suspect that if this did happen, women's pay would start to close the gap.

Note: Obviously this shouldn't be the case with older women, as after a certain age they are unable to give birth. In fact we might expect to see the effect reversed, as men can still impregnate women up to a very old age! In reality I doubt we would however, as inequalities are likely to be entrenched by late-middle-age, and older people are probably less likely to have babies at all, making the numbers relatively insignificant.

X-Phi and Distributive Justice

On Public Reason they report an interesting experimental philosophy paper which tested people's intuitions on distributive justice in two cases.

In the first, they were told:

Suppose that some people make more money than others solely because they have genetic advantages.

The second group was told:

Suppose that Amy and Beth both want to be professional jazz singers. They both practice singing equally hard. Although jazz singing is the greatest natural talent of both Amy and Beth, Beth’s vocal range and articulation is naturally better than Amy’s because of differences in their genetics. Solely as a result of this genetic advantage, Beth’s singing is much more impressive. As a result, Beth attracts bigger audiences and hence gets more money than Amy.

Interestingly, but perhaps not surprisingly, people told only the abstract were far more likely to consider the situation unfair.

The question obviously has implications for Rawls' theory of distributive justice, which is fairly heavily reliant on

a) Reflective Equilibrium as a process for moral decision making
b) The unfairness of situations described above

The authors argue that:

Rawls, by his own lights, has reason to favor the judgments rendered in the more familiar concrete condition that deny the brute luck constraint over the judgments rendered in the less familiar abstract condition that affirm the constraint. A tension therefore looms between Rawls’s acceptance of the brute luck constraint and his methodology.

This is interesting stuff, but I think more depth into the psychology is needed (in the field, not in this specific paper necessarily). If we understand more fully the psychological processes which generate our moral intuitions, then we are better placed to how we should accord them value. This is really the area I see experimental philosophy making big headway in the future, as philosophers have been reticent to rely on psychological evidence in argument, and vice versa. In many ways, experimental philosophy is the behavioural economics of philosophy, and papers like this show why it is so promising, but also why it has still quite far to go.

Competition

Click here and then click play to watch Australia and NZ battle it out for higher income per capita and better infant mortality rates, since last century.

Very cool website.

Loan Sharks

A guest post by NZ Labour MP Chris Chauvel on the No Right Turn blog brings up the issue of loan sharks, and in particular, whether the Government should legislate them out of existence. Chauvel is of the opinion that they should be and has a members' bill in the ballot to do just that. He says:

Loan sharks prey on the vulnerable with unscrupulous rates of interest and this includes many of our Pacific people. They are the scourge of our community and instead of lending a helping hand keep borrowers in poverty.

And:

Market forces are clearly not an appropriate determinant of interest rates at this low end of the socio-economic spectrum. It's all very well to guarantee bank deposits and slowly roll out a nine-day fortnight. But this is something that would help those in real financial trouble. I call on the Government to do the right thing and take action in this area now.

Some of Chauvel's proposals have merit, in particular allowing loan sharks to charge fees, although I don't know why they should need to be registered to do this. However, I think the bill is a bad idea.

Why do these people take out loans at all, if the rates are so high? This sentence of Chauvel's is revealing:

Increasing numbers of people are pawning items like bikes and children's toys just to meet essential expenses like their power bill. I saw an elderly man taking his weed eater into a loan shark outfit in Wellington, and it was distressing to watch first hand.

It is certainly tragic for someone to have to sell their bikes to pay for their power bill. But why are they doing this? It is because they don't have enough money to pay their power bill at all, and they consider it a good trade to sell these things. Chauvel proposes no remedy for this situation (also known as relative poverty), so it seems he would prefer people sit in unpowered houses full of bikes and toys. I suspect the people in question may disagree.

In this vein, I would argue against the implicit assumption that taking out these loans is always irrational. Chauvel engages in a little evocative rhetoric with "loan sharks prey on the vulnerable" and gives some dubious examples but doesn't really argue for this at all. It's the classic prohibitionist fallacy - to assume that anything with high costs is necessarily irrational. But this isn't a useful approach. I think these loans can often be rationally entered into; if you are starving and need money for food, and you aren't getting paid for a while, it is quite plausibly rational that you might sacrifice some pay in the future so that you can eat now. Perhaps the stigma among your bogan friends of not owning a car is bad enough that you would be willing to pay extra to own it right now.

These sorts of situations are hard for our highly-paid politicians and moderately paid pundits to understand, no matter where they sit on the political spectrum. I think it is easy once you are in power and engaged in high-level discussions and important decisions, it is easy to run together an admirable concern for the poorest members of our society with an unfortunate paternalism with regards to their intelligence and ability to make decisions. If you think that poor people are inherently stupid, this sort of legislation intrinsically looks more useful. If you do not, then it looks highly patronising.

Even if you don't agree with what I've just said, you should of course still worry about the black market. As Chauvel observes, loan sharks already engage in activities of dubious legality, so it is not much of a step for them to move to the all-out illegal trading. Legislation will not stop high-risk borrowers needing short-term credit, nor, without quite substantial levels of surveillance of transactions, even stop loan sharks from operating. I predict that if this law passes, we will still see loans being given out to poor people, but with the loan sharks resorting much more quickly to violence and intimidation. Then we will see actual loan sharks, and it will not be good news for the poorer citizens of New Zealand.

Two somewhat unrelated asides:
Firstly, it is interesting that with respect to the credit crisis, we criticise lenders for underpricing the risk of loans. But here, we slam them for correctly pricing risk!
Secondly, does anyone know why they are called sharks? I suppose if they stop lending they die, much like sharks can't stop swimming. But if you generalise it, that applies to any job. Is it because sharks hunt and eat smaller fish? Surely then a more accurate metaphor would be 'loan humans'. Hm...

Assumptions

This is from my microeconomics textbook.

For simplicity, suppose that medieval England was a single, large, price-taking firm that produced one type of output with a constant-returns-to-scale Cobb-Douglas production function Q=L^αK^1-α, everyone works and all capital is used.

On the face of it, this looks like an absurd assumption. You might be tempted to say that while it might have teaching value, as an actual approximation it would be a waste of time.

However, as the question goes on to show, it actually provides a decent approximation to reality. Obviously it is too simple to make too specific predictions, but if you calculate the effect of a halving in the labour supply (which is what happened in the Black Death, apparently), the results you get are a pretty good approximation of what actually happened (wages increased substantially as the marginal product of labour went up). You wouldn't want to stake your reputation on it perhaps, but it serves as a good illustrative lesson of how you can actually derive fairly useful results from very simple models. Oversimplification is something that economics is often criticised for (although it's interesting that the critics rarely extend this to physics, which has similar levels of abstraction. Perhaps this is because physics is harder to use as an ideological tool, creationism notwithstanding). So perhaps examples like this are useful for those of us who wish to defend it.

Active and Passive Investing

In a previous post I argued that the debate over the New Zealand Super Fund was leading to a recurrence of popular misunderstandings about financial markets, particularly with respect to 'timing' or 'beating' the market.

A fallacy I didn't address, but perhaps should have, was the (related) idea that now is somehow a 'good' time for active investing - that by picking stocks that you suspect are going to rebound in terms of price, there is an opportunity to make a lot of money, rather than just riding up the market by buying indices or something similar. A lot of people seem to believe this is the case with the New Zealand Super Fund.

Here, Kenneth French explains why this is wrong. Consider two types of investment strategies - active investment and passive investment. Active investors try to time the market, pick under-priced stocks, etc. Passive investors just have portfolios that represent the market, so when the market as a whole goes up so does their portfolio, and when it goes down their portfolio goes down. When you phrase it like this, it is clear that both groups have to have the same returns on average. Passive investors' returns obviously average out at market levels. The market is only made up of active and passive investors, so active investors have to average out the same as well! However they usually charge higher fees. So in fact now, like every year, is a bad time for active investing.

Public Goods and City Councils

This article raises interesting questions about the role of local bodies, but it made me particularly think about how they collect our rubbish.

(Rodney Hide) listed these (core functions) as transport and water services and public health and safety, such as rubbish collection.

As it stands, I don't think the current setup is ideal.

Why do they provide rubbish collection at all? Presumably there is a public good argument - an untidy town is detrimental to all, but there is an incentive to free-ride on the cleanliness of one's neighbours. However, at least in Wellington they make you voluntarily pay for rubbish collection through buying rubbish bags. So it seems like they put the incentives right back there, which kind of defies the point of centralised bodies providing public goods.

However I suspect there is a greater complication - they also clean the streets, parks and pavements. If private firms collected your rubbish, you could just get the same thing for free by dumping it in the park and getting the council to pick it up. So the private firms would go out of business, and the council would have a whole lot more work to do cleaning the parks. If you don't think people would do that, you haven't seen the streets around the student flats in Otago University.
However, we should note that these incentives still exist as long as the council makes us pay for rubbish bags.

If rubbish-collection is a public good, it should probably be free. Otherwise it should be privatised. I can't really see the benefits of having a user-pays, centrally provided system like this.

Luck, Size, and the NZ Super

In light of recent substantial budget deficits and worsening outlooks, the NZ Government has cancelled contributions to the NZ Super fund in the medium term. The Super Fund is an investment fund whose board of directors reports to the Government, and up until the financial crisis it had made above-market returns, but now is (I believe) slightly below par. It was intended to cover some of the cost of superannuation in the future.

Unfortunately, the debate around the cessation of payments has caused some recurrent fallacies about financial investment to, uh, recur. Unsurprisingly this is most common at the moment among those who support the parties in opposition, but I suspect that the same fallacies are broadly shared irrespective of political affiliation.

The first is that it is possible to consistently 'beat the market'. Share prices, we are told, are really low at the moment, and so if we buy them all now (or the Super Fund buys them on our behalf), when they go back up again we will all be rich. It would be fabulous if it were as simple as buying low, selling high. It supports our basic intuitions about trends - things usually carry on in the same direction if they have been doing so for a long time. Population increases, economic growth increases, so on. But this intuition fails us when it comes to financial markets.

To find out why, we have to turn to the Efficient-Market Hypothesis, in its weak-form incarnation (which is the most empirically supported one). As any financial prospectus will (or at least, should) tell you, past returns are no guarantee of future performance. It is impossible to predict what is going to happen in the market because if it were, people would. For example, if prices were going to rise at some point in the future and this was predictable, demand would increase. But then prices would rise already! What this means is that it is impossible to systematically make economic profit (or above market profit) from any given investment strategy, except by luck. For the most part share prices are like an old man at the supermarket, they follow an unpredictable, random walk.

This obviously precludes a lot of talk about how the NZ Super Fund managers are skilled, unskilled, or whatever. Kenneth French gives a good example of how it is easy to mistake luck for skill:

Consider, for example, a hedge fund with an annual volatility of 20%. (To be more precise, the standard deviation of the fund's excess return with respect to the appropriate benchmark is 20%.) If the fund's average abnormal return is 5% per year over a ten-year period, many investors and financial reporters would conclude that the manager is truly gifted, with a real knack for identifying under- and over-valued securities. But they would probably be wrong. Suppose the manager's true alpha is zero, so he really has no skill beyond that needed to recover his costs. If we pretend his returns are normally distributed, the probability that his average abnormal return exceeds 5% per year for a ten year period is more than 20%. In other words, in a group of hedge fund managers with standard deviations of 20%, we expect one in five to have a ten-year average annual abnormal return of at least 5%—even if none actually have any skill. We expect one in twenty of the unskilled managers to produce a ten-year average annual abnormal return of at least 10%.

French and Eugene Fama (the 'inventor' of the EMH) have an interesting paper on this here.

The second argument for why we need a super fund is that somehow it can make more money simply by virtue of being large. I cannot, to be honest, see how this could be true. But even if it were, the New Zealand Super Fund is hardly a massive player on the global stage. China, for example, has a fund (used for different purposes) of over $1t. If there were advantages to be made from having more money, other people would be getting them first. Some economies of scale are non-rival, it's true. But it seems unlikely that the NZ Super fund will somehow be able to buy stocks at below-market rates just because it has lots of capital.

As I've said before, the real test of someone's conviction that there is a lot of money to be made on the financial markets is their own financial position. If beating the market is so easy, do it yourself.

Won't somebody think of the opportunity cost?

A classic mistake in any public policy debate is to only point to the benefits and accounting costs. We are often told that such a policy will benefit New Zealanders in way X (such as providing them with warmer houses) and will only cost so much ($1.5b, for example). Comparison of these allegedly leads us to good public policy.

This seems reasonable, but to any economics student the mistake is obvious - it misses out opportunity cost, or what is foregone to pay for the policy. The reason it does this (and this is done all the time, at least here in New Zealand) is that often these arguments rely on a very blurred line between benefits and externalities.

One way to catch yourself from doing this, and to also explain the point I am trying to make, is to think to yourself - would people buy this if they were just given the equivalent amount of money? If they would, then your policy seems a little redundant. But few public policies are like this. The real issue comes when people would not buy the thing you would have the Government provide/subsidise, etc. You should then think to yourself, why not?

Perhaps there is a benefit or cost that goes to others when they buy it that they won't take into account. This is a decent reason, although it leads to other fallacies which I will hopefully discuss later. Perhaps people are cognitively biased in some sense that you are not (i.e. addicted to something), so their choices will not actually make them happier. Perhaps the spending serves some legitimate redistributive purpose.

However, if none of these options are true, it seems that you are left in a tricky place with policy. What you are doing is making people less happy than they could be! Surely this shouldn't be your goal. Sadly, this is the case with a lot of Government spending, but it is particularly evident in the recent decision to subsidise home insulation (and not even means-tested, at that). The supporters of the plan are happy to point to the many benefits we will see, and as someone who lives in a freezing student flat I can more than sympathise with this. However, why aren't people insulating their houses already? The answer is surely that there are other things they could buy that would make them much happier, like paying off their debts, or buying food.

It is an unfortunately masochistic political system where politicians must make society less well-off to stay in power.