Why ‘penalty’ rates?
The government’s back-flip on AWAs, which will prevent ‘unfair’ loss of penalty rates, led to stories in the media about those who think they were hard-done-by under the previous WorkChoices rules, such as this one in The Age about about four schoolgirls who:
have worked for franchised food retailers in shopping malls, and all were signed up to WorkChoices agreements that stripped away penalty rates in return for small hourly pay increases
Politically, it no doubt makes sense to minimise the number of ‘losers’ in a reform. But as a matter of policy, it is far from clear why there should be mandated higher rates for particular hours of the day or days of the week. Google hasn’t been able to find me a history of penalty rates in Australia, but the standard argument for them is summarised in this speech to the NSW Parliament:
Shift loadings and penalty rates for work in ordinary time on weekends and work outside the normal span of hours are intended to compensate for the inconvenience associated with working unsociable hours. Work after 5.30 p.m. is generally regarded as being in unsociable hours, and has a negative impact on both personal and family wellbeing. …
Employees are less inclined to work on Saturdays and Sundays because they are dominant days for sport, leisure, community activities and religious celebrations. Time off during the week does not compensate for time lost on Saturdays and Sundays. This is the reason workplace arrangements have always recognised and endorsed penalty rates in the form of higher hourly payments for these days.
The very term ‘penalty rates’ is revealing. The higher wages are not to reward the employee for turning up at an inconvenient time, but to punish the employer for transgressing a prescriptive form of familism, which sets out what families must do at which times. This is an old-fashioned view of the family, the one found in the (in)famous Harvester Judgment of a man working full-time, with a wife at home to do all the cooking and shopping, minimising the need for paid workers to offer those services at ‘unsociable’ hours. It makes John Howard’s black and white TV era ideas seem modern.
The logic of penalty rates no longer works. How is work outside normal hours inconvenient for schoolgirls? School holidays aside, it is the only time they can turn up for paid work. As a student myself (many years ago…) I gladly pocketed penalty rate money, but I thought it absurd – it was when they asked me to work during the week that I faced inconvenience, not on Saturday afternoon.
Nor is the penalty-rate regime these days necessarily family friendly. While penalty rates may deter some employers from operating during ‘unsociable’ hours, for the very large number who do now open outside 9am to 5.30pm Monday to Friday the higher rates encourage workers to take those hours compared to those during the ‘sociable’ times, because they can take home more pay on the same number of hours worked. A more equal distribution of hourly rates would remove this incentive, leaving the ‘unsociable’ hours for those workers for whom the hours don’t cause any family problems. More equal rates would probably assist ‘fairness’ too, as those whose family commitments or preferences do prevent them from regularly working outside ‘normal’ hours would receive higher pay than now.
I am not arguing against all higher hourly rates at particular times. While in low-skill service industries there are many people for whom evening and weekend work fits well with their other activities (such as school or university), that is not necessarily the case in industries relying on higher-skilled occupations. The workers who take those jobs are often older and more likely to have family commitments, and extra money may be a necessary incentive to get them to turn up. But this would be driven by market pressures, not imposed politically as a ‘penalty’ for breaching a particular view of family life.
May 6th, 2007 13:38
Of course if a particular time is inconvenient for a worker then markets would need to generate a loading that would compensate that worker for the inconvenience. Thus it should be unnecessary to legislate for such loadings in an efficient labour market even if they were found to be morally ‘just’.
My guess is that Howard lost his nerve with this backflip. It means that very low productivity, low-skilled workers who find it very hard to get a job will now find it that much harder.
These are the people our justice-driven leftwing comrades would prefer to see collecting the dole anyway. Their objectives are being met.
May 6th, 2007 18:24
Oddly enough, I was just contemplating the moral/ethical basis of penalty rates (and wondering whether there is one) a few days ago. The way you put it above is interesting: a conflict between market efficiency and traditional attitudes to family and work. Thought-provoking post.
May 6th, 2007 19:32
I think that last point about market driven premiums in higher skilled industries quite telling. Weekend work is only the norm at the lower end of the scale (retail, hospitality, labouring, etc). Finding a plumber on the weekend will cost you a fortune, and professionals normally stay out of the office.
The point is, given that those who have the bargaining power take measures to protect their weekends and public holidays, isn’t this a rather clear signal that society values its socially coordinated leisure time? Penalty rates then become a way of providing that same bargaining power to ‘purchase’ leisure time to those who would otherwise lack it. Why should weekends only belong to those who can afford them?
May 6th, 2007 19:32
Well, the usual economic argument for penalty rates is to address a co-ordination failure – getting most people to take their time off at the same time allows economies of scale in both household production and leisure. IIRC Andrew Leigh wrote a paper on just this a year or two ago. But yeah, the traditional Australian approach to penalty rates doesn’t fit with modern labour market or social realities very well.
And harry I wish you wouldn’t keep ascribing bad motives to (unspecified) “left-wing comrades”. There is certainly a case to be made that this sort of regulation will put some people on the dole (though an oft overstated one IMO), but it doesn’t necessarily follow that those pushing these policies want that. If you start out by accusing people of bad faith you’re never likely to convert them to your views.
May 6th, 2007 20:02
Andrew did write on this, at least a Lies and Statistics piece for the Fin Review. Although, I’m not convinced by the argument – why is getting people to stop working an economic argument? The very term ‘co-ordination failure’ implies the existence of a ‘co-ordinator’. At this point we exit economics and enter superstition and mysticism.
May 6th, 2007 20:03
DD, very diplomatic. I would say that anybody who writes “These are the people our justice-driven leftwing comrades would prefer to see collecting the dole anyway. Their objectives are being met” is living in a very weird and hateful parallel universe – a long way from reality. Sad really.
I’ve worked nights and weekends all my life (big libraries keep those hours) and you can miss out, being rostered to work at those times. Next Sunday is Mother’s Day, which in our family is the only occasion apart from Christmas Day when the whole family gets together – would you like to miss out on such an occasion? Friends invite you to a concert on a night you have to work. You want to know you have some regular time to keep for a yoga or TAFE class, but can’t …. there are dozens of occasions when a normal social life can be messed up by being irregularly rostered on nights and weekends.
Where I work now, because there are so few of us, we just work to cover the opening hours, which means starting at 9.00 am and working through till 11.00 pm (on the days you’re rostered to ‘stay back’, then back at work the next morning. But we get paid penalty rates, so fair enough. But without penalty rates I don’t think it would be fair – see Matt’s point above.
May 6th, 2007 20:57
I had this exact discussion with one of my work colleagues this week. He is a very traditional maronite with a DLP family background. Real nice bloke. Anyway, he thought it was terrible that people could lose the differentiation between penalty weekend pay and normal work hours – weekends are for families.
So I asked him what he did last weekend. He went to the Saturday morning shops, movies on saturday, and after mass on sunday he went out for lunch, before dropping in at Bunnings to pick up some plumbing parts. I asked him if it was good for his family that the shops, movies, the restaurant and bunnings were open was good for his lifestyle. I then asked him if perhaps he should pay a weekend premium for the services and goods he purchased ( how about a fifty percent loading?). I asked him what sort of job opportunities are there for teenagers today compared with when he was into slot cars and marvel comics. His enthusiasm for penalty rates was beginning to wane. I reckon I’ll have him voting for JWH by the end of the year.
May 6th, 2007 21:01
Oh, and my nurse brother in law chooses certain shifts because they come with a penalty loading. He can then work less hours for the same pay. And then wanders around moaning how he ‘only works three days a week.” He must think we are all stupid.
May 6th, 2007 22:16
“Finding a plumber on the weekend will cost you a fortune, and professionals normally stay out of the office.
The point is, given that those who have the bargaining power take measures to protect their weekends and public holidays, isn’t this a rather clear signal that society values its socially coordinated leisure time?”
Many professionals put in time at the weekend, but the office is not ‘open’. Professionals tend to work on projects and often do not need extensive interaction with clients to get the job done. On the other hand, there are deadlines which can require very long hours, including weekends, to meet. Indeed, it is often easier to get projects finished at weekends because clients will generally not make contact.
In the retail, accommodation or entertainment sectors workers tend to deal with clients in multiple short transactions performed while the client is there. It is impractical for this to be done only 9 to 5 Monday to Friday; it never has been completely that way and the rise of full-time female workforce participation killed it forever. If this does not suit workers, they should think twice about which industry they work in rather than lobbying to change the world to suit themselves. It’s a bit like people who buy houses in flight paths and then complain about the noise.
May 6th, 2007 22:51
Professionals may work at home at the weekend but they have more control over what time they do it – so it doesn’t disrupt their social lives as much.
Another example from my own rich experience – when I worked in the State Library you were rostered on for weekends (15 weekends in the last year I worked there) and the cheapest way to roster staff was, instead of just rostering you on Saturday or Sunday, to roster staff to work half of Saturday and half of Sunday – that way they didn’t have to cover breaks. So you worked Saturday from 10.00 – 1.30 and Sunday from 1.30 -5.30. As you can see, that effectively wrecked both days and you had to pay for transport twice to work the number of hours you would usually work in one day. Without penalty rates you would have been worse off!
As for “lobbying to change the world to suit themselves”, we had penalty rates for the past half century, it was JWH who thought he could just change things.
May 6th, 2007 23:36
I think Andrew you are perhaps over-emphasising the family thing in your post. Here’s a nice quote from the AIRC:
The Commissioner made the following observation about societal changes relevant to penalty rates in the Hospitality Award, at 45:
“While trading patterns, hotel and shop hours legislation and social habits have altered markedly over the last decade or so, the norm remains for evenings, weekends and public holidays to be the time when friends, families and social groupings, however constructed, are able to get together to enjoy social and recreational activities. Social dynamics are such as to mean that as religious observance on Sundays undergoes change, so do some other forms of activity by way of supplementation. Shift work and work extending well outside the day time hours which thereby intrude regularly and substantially into social, recreational or family/friend times and the many aspects of life akin to them, causes, in the long standing view of the Commission, an equivalently substantial deterioration in the amenity of life. It is this that is to be recognised.”
http://www.airc.gov.au/my_html/P9677.htm
May 7th, 2007 00:26
In my experience, the idea that one earns more at night or on the weekends is related to the ideas of when people are more likely to be with or should be with their families – these ideas are very strong in the community.
Presumeably, these ideas would be stronger if almost everyone had similar timetables of “family-type” social interaction than if people had greatly varying timetables. That AIRC quote reads oddly to me, as it seems to not reflect the multiplicities of ways in which people live and interact with their immediately social groups. Certainly it is a dominant cultural feature that many people socialise on the weekend, but many people also work on the weekend. It is interesting that the Commission can determine how the amenity of people’s lives has or can change over time. It obviously has superior information processing ability.
May 7th, 2007 00:28
Russell, I do have to remark that many people who work not as employees (eg sole-practise lawyers) have to work all hours of the day and night to keep their business running. They have to survive. There are no penalty rates. Their families have to live with it, for better or worse.
May 7th, 2007 07:11
Russell – Without penalty rates, you probably wouldn’t have had such an arrangement in the first place. Because the library was forced to pay an expensive rate it looked for other ways to cut costs. You see this kind of thing around over-regulated workforces, eg people employed as ‘casuals’ even though they have regular hours over long periods of time because it bypasses unfair dismissal laws and excessive redundancy payouts.
May 7th, 2007 09:36
I’m not sure what the difference is between a minimum wage that applies all of the time and a (higher) minimum wage that applies some of the time. They both create inefficiency. And the arguments about fairness are the same – yes, it’s fair to have penalty rates if you want to advantage people who have jobs at the expense of those who don’t, but would like to.
As for economies of scale/scope in household production and leisure, I’m not sure this is so simple. Most working parents try to arrange their hours so that at least one is able to take care of children (or drive them to parties, sports and whatever else kids do these days). They may prefer for one to work mornings and the other evenings. Yes, having all the family together is important, but that is seldom a daily occurrence, even/especially for professional couples where at least one gets home after young kids have gone to bed. In any case, the family itself is best placed to take such facors into account in arranging working hours and other activities.
May 7th, 2007 13:21
Another reason for penalty rates has traditionally been to encourage employers to accommodate business expansion by hiring more staff, rather than forcing existing staff to work longer hours.
This, like the family time arguments, applied more before casual work became so prevalant.
By the way, in the non-unionised IT sector, work overload is frequently a serious problem. It prompted a huge rebellion at Electronic Arts and some other companies, leading to multi-million dollar settlements to overworked programmers and artists, and an industry wide examination of the issue of work schedules.
I’ve done 96 hour weeks, starting at 6 and working till 10, and that’s non-stop intellectual work, not reading the papers and having lunch. It rapidly loses its appeal.
So I think penalty rates have their place. They’re a bit like manners. The original reasons aren’t obvious any more, but still exist.
May 7th, 2007 13:51
Tony – I think overtime is a separate issue; it is a departure from agreed hours and therefore some added cost for the employer would often be a desirable feature of agreements.
May 7th, 2007 14:48
Sinclair, whether or not there actually is a co-ordination failure in deregulated working hours, the theory behind co-ordination failure is quite well developed and respectable in mainstream economics. It’s a recognised form of market failure, closely related to network externalities. I’m not just indulging in sociobabble.
May 7th, 2007 15:48
DD – I understand it’s not just you.
May 7th, 2007 16:02
DD, The left wing comrades are the union bosses who seek better paid jobs with those with them without considering the unemployment consequences of those decisions. If they care about employment issues why are they constantly pressuring for minimum wages and conditions.
Russell, You sound a pretty sad case yourself. If enough people refuse to work certain times, pay rates for those times will rise to attract the necessary labour. By the way I’ve worked a minimum of three jobs including nights and weekends (FT, 2 PT) for most of the past 14 years. The deal with the PT work is easy – if it exceeds my reservation wage I take it, otherwise I don’t.
May 7th, 2007 17:59
Sinclair, would you prefer to be in a barter economy rather than a monetary economy? Do you think economists should not study monetary issues? After all, money helps to overcome a potential coordination failure caused when there is not a “double coincidence of wants” in a barter economy.
May 7th, 2007 18:16
[...] deeper to find, well, nothing really. Andrew Norton looks at the substance of the changes, and casts a perceptive eye over the history of penalty [...]
May 7th, 2007 18:49
Damien, I think you’re being a touch esoteric, reflects your theoretical bent.
May 7th, 2007 19:02
Harry -
1) “without considering the consequences” is not the same as wanting those consequences. GWB did not want Iraq to be a mess when he invaded – he just did not consider the consequences.
2) And those union bosses deny that pressing for minimum wages and conditions causes unemployment.
The point is that even if you don’t agree with them on this you can’t honestly accuse them either of not considering the issue or of actively wanting unemployment. The latter in particular is an objectionable smear of the sort Stalinists used to practise.
May 7th, 2007 19:21
Sinclair, you implied in comment 5 on this thread that coordination failures were not a legitimate topic of study for economists. Specifically, you said:
“The very term ‘co-ordination failure’ implies the existence of a ‘co-ordinator’. At this point we exit economics and enter superstition and mysticism.”
All I was doing was providing you with an example of the economic importance of coordination failures. I don’t think asking questions about the role of money is particularly esoteric as far as economic analyses goes.
If you want more examples of the importance of coordination failures in economics, I sugest that you have a look at some of the papers in the two volume collection of papers on New Keynesian economics edited by Greg Mankiw and David Romer. The papers on coordination failures are in Part IV of this two volume collection of papers, which is the first section in volume 2. The reference details for volume 2 are:
Mankiw, NG and D Romer (1991), New Keynesian economics volume 2: Coordination failures and real rigidities, Massachusetts Institute of Technology Press, USA.
May 7th, 2007 19:42
Oh come on DD don’t be a dill. These restrictions drive unemployment.
Make low-skilled workers more expensive and less of them will be employed. The unionists are not especially stupid – they know what they are doing.
On objectionable smeers. You suggesat I am a ‘Stalinist’.
Pull the log out of your own eye, cobber.
May 7th, 2007 20:00
I have no knowledge of the motivations of union officials. However, I can think of a reason why they might want higher unemployment. Specifically, I suspect that the demand for union services is likely to be larger if unemployment is higher.
May 7th, 2007 20:46
Damien, the probability of me ever reading or learning anything from a book entitled New Keynesian Economics is precisely zero. Afterall, the Pope doesn’t read books on satanism, now does he? (Not suggesting I’m the Pope). But lets consider the actual example. Adam Smith has a chapter on the origins of money where he describes it as a mechanism to facilitate trade and the division of labor. Forcing people not to work on weekends hardly facilitates trade (if fact the precise opposite). It hardly faciltates the division of labour (again the precise opposite). Bowles in his micro book argues for a taxonomy of ‘coordination failure’. We need to consider whether the actions of each party are positive or negative externalities (a strange idea already) and whether this induces substitution behaviour or compliemtary behaviour. Okay. If you believe that working is a negative externality that the government must limit and that other people will stop working when the government ‘solves’ the coordination problem then you might believe Andrew’s original argument. (leisure is compliemtary). To be fair, this type of argument is implicit in Prescott’s story about taxes leading to Europeans working less. But people have an incentive to cheat and open their stores on ‘holidays’. (Historically the ‘coordination failure’ has been so severe that the police powers of the state have been employed to prevent people from working [sarcasm alert]). So some leisure is substitutable. Let’s go one further, work has positive externalities associated with it (see chapter one of the Wealth of Nations, or James Buchanan). The coordination argument for anti-weekend work falls over. So even on the usual economic grounds the story is somewhat unconvincing.
But back to my original point: economists shouldn’t give policy advice as if some omnipotent, all wise, all knowing planner or coordinator were managing the economy.
May 7th, 2007 21:16
“Forcing people not to work on weekends hardly facilitates trade” – it doesn’t look like penalty rates force people not to work on weekends. In Perth, as many businesses as are allowed to open (and that’s plenty) are all staffed. At the time of the Sunday Trading referendum here all the businesses advocating it did so on the basis that they would be paying penalty rates.
May 7th, 2007 21:30
Andrew I don’t think you can disagree that, as the AIRC put it, being rostered on shift work results in a “substantial deterioration in the amenity of life” for many people – not all, but many. I think you are arguing that those people should find work without weekend/night rosters. If that’s what you’re proposing, do you really think that that is possible?
And, (sort of related) would you like to get rid of not just penalty rates but also a minimum wage?
May 7th, 2007 22:30
Russell – If people hate shift work that much, they should enter a different industry. As I said in my original post, I have no objection to different hourly rates for different times as such, just the imposition of them by an institution that is not a party to the contract.
May 7th, 2007 23:00
“they should enter a different industry” – well there we differ, I think if you feel you really want to be a nurse and would make a good nurse, you should be a nurse and be compensated for the rostered shifts and “substantial deterioration in the amenity of life”.
To go back to libraries – virtually all government department libraries are weekday 9-5 operations. Without penalty rates, for exactly the same pay and conditions in the State Library you would have to be available and work over the 7 day week and in the evenings – it just makes sense that you would compensate those who have to make so much more of their life available to their employer. If you don’t you’ll only have serious staff morale problems as the employees feel hard done by.
May 8th, 2007 09:24
On the other hand, perhaps the reason that so many people leave nursing is because in the end the shift penalties don’t compensate for the disutility of working shifts (revolving shifts, in particular – are they still the most common way of organising nursing?).
My husband recently had his hair cut by a woman who left nursing and retrained as a hairdresser once she started a family because she felt that nursing was incompatible with motherhood.
I think I am inclined to agree with Andrew on this – if shift work or weekend work is an essential part of the industry you want to work in, surely people would take that into consideration when making their career choices. For example, why would anyone enter a retail career and expect to be able to have every weekend free to spend with their family?
May 8th, 2007 09:34
On that issue of revolving shifts, I assume that this is primarily a way of sharing around both the ‘bad’ shifts and, coincidentally, the penalty rates that go with them. Given that revolving shifts are generally regarded as bad for your health, wouldn’t it be better to find people who are happy to work the same shift every day (with or without extra compensation), rather than everyone having to work shifts that don’t suit their preference.
I had an aunt who worked permanent night shift as a nurse for many years because this was the only way that she and my uncle could care for their severely disabled child at home (and afford to give all of their children the things in life they wanted to). They probably missed out on what a lot of commenters here regard as essential family time, but it was a decision they made for the sake of their family. And I never saw any evidence that the family suffered harm because of it.
I’m sorry, in the end I think that people who want to spend quality time with their families should be able to manage to organise that – including by changing jobs, if that is what it takes.
May 8th, 2007 09:53
“I think if you feel you really want to be a nurse and would make a good nurse, you should be a nurse and be compensated for the rostered shifts and “substantial deterioration in the amenity of life”.”
Russell, Russell, Russell! So if I really want to be a scientist (say) and would make a good scientist, I should be able to be a scientist and be compensated for working all kinds of hours? “Should” is such a great word, able to justify anything. Who will pay for my “want” to be a scientist? That’s not how the world works – just because I want to be X doesn’t mean that someone will pay me to be X!
May 8th, 2007 10:05
I feel that the discussions here reflect different views of how the world operates. Without speaking on his behalf, I suspect that Andrew N has the view that it’s great for people to have as many opportunities to earn money as possible to enable them to best organise their lives, and that there are a large number of different job/career offers out there providing these opportunities.
I suspect that Russell has the view that jobs/careers can be arranged by “someone” or “some force” to occur around people’s lives. I feel that this view (assuming my presumption of it is correct) is really quite paternalistic – as it presupposes that there is one general way of doing things and that this should be enforced, whereas I feel that people should have as freedom to organise their lives as possible. Many apologies, though, if my presumptions are incorrect!
May 8th, 2007 13:09
Sacha: “That’s not how the world works ” – that is how the world has worked and we liked it just fine, thanks very much!
““some force” to occur around people’s lives”, yes like the forces of the Business Council of Australia, and the ACTU etc etc. I suppose you could say that having awards and safety nets, is like Medicare, a paternalistic arrangement. But I don’t see it that way, I think it’s the way most people want to look after themselves and each other.
Backroom Girl: “wouldn’t it be better to find people who are happy to work the same shift every day (with or without extra compensation), rather than everyone having to work shifts that don’t suit their preference.” – this is Andrew’s point too but I don’t think it will work. I’ve been a rosterer in large organisations and you just don’t get enough volunteers for those shifts nobody wants. Besides people get trapped in jobs for all sorts of reasons – we’re not all young, well-qualified and fancy-free. There are a lot of middle-aged, unqualified, earning $40,000 a year workers out there who need a stable income and can’t easily move, and – to repeat my question – what should they have to make much more of their life available to their employer for no extra money? Is the minimum wage paternalistic?
May 8th, 2007 13:19
Russell – sorry but just because I want to do a particular kind of job doesn’t mean that I’ll do able to do it and get paid for it.
May 8th, 2007 13:19
“why should they have to make much more of their life available to their employer for no extra money? ”
Or why should the employer have to pay a lot more to someone who has made poor choices in their life, when other people are prepared to work for less?
I would not be suprised if premium rates for certain hours continue to be a feature of the labour market in Australia, but they should be agreed rather than mandated.
I don’t see what Medicare has to do with it; it is sensibly preventing (unlike in the US) the social welfare system from distorting the labour market.
May 8th, 2007 13:30
“when other people are prepared to work for less?” – so no minimum wage?
May 8th, 2007 13:31
But Russell don’t you think that if employers found they had to offer extra money to get people to volunteer to work certain shifts they would do that? Entropy’s example above suggests that you would certainly get volunteers under such an arrangement.
But the point is it would be a case by case basis, rather than across the board – in situations where there were plenty of volunteers (perhaps teenagers starting out who are only available to work evenings and weekends anyway, for example), penalty pay would not have to be offered.
And while I can understand that some people feel as if they are trapped in their jobs, most people do have other options if they really want to pursue them. You can look for a new job while still working in your current one, study part-time to upgrade your skills, take a pay cut in the short term to switch to a career that you think will suit you better in the longer term. Andrew’s original point is that lots of people do this all the time.
When I hear stories of people being trapped in crappy jobs for 10 years or more, I just find it difficult to believe that people really have no other option. That doesn’t mean I think that changing jobs or careers is necessarily easy, but people wouldn’t do it unless they thought they would be better off, would they?
May 8th, 2007 13:46
“And while I can understand that some people feel as if they are trapped in their jobs, most people do have other options if they really want to pursue them.” – I’m just going by my experience where I’ve worked alongside many people who didn’t have other options. (A lot of such people in the public service!)
“you would certainly get volunteers under such an arrangement” I doubt it would all work out so neatly – you might get takers, but many of them might be people with no other options.
One of the differences in our positions is that Andrew thinks that “someone who has made poor choices in their life” should be stuck with the consequences. Most people on the left (doubting that it was all ‘choices’ anyway) would want some measures in place to ameliorate the position such people are in.
May 8th, 2007 14:49
Sinclair,
Your original comment made a very sweeping statement about coordination failures not being a suitable subject for economists to study. I was responding to this general comment.
It is worth noting that you seem to be under the mistaken impression that economists assume there is a central planner. This is indicated by the following two quotes from your some of your previous comments on this thread.
From comment 5:
“The very term ‘co-ordination failure’ implies the existence of a ‘co-ordinator’. At this point we exit economics and enter superstition and mysticism.”
From comment 28:
“But back to my original point: economists shouldn’t give policy advice as if some omnipotent, all wise, all knowing planner or coordinator were managing the economy.”
If an all knowing benevolent central planner existed, neither coordination failures nor market failures more generally would be problem. The reason that economists are concerned about the potential for market failures is because an all knowing benevolent central planner does not exist. as such, we are interested in the extent to which decentralised resource allocation mechanisms can improve social welfare and what improvements might be made when they don’t yield a desirable outcome.
Why don’t you think you could learn anything by reading mainstream economics?
May 8th, 2007 15:45
The term ‘coordination failure’ implies a coordinator. Let me quote from Bernard Salanie “Microeconomics of market failures” (2000, MIT Press).
Salanie then gos on to say this is a narrow approach etc.
Two reasons why I’m less likely to learn something from modern economics. (1) Economists don’t update their expectations. A lot of modern economic theory advocates ‘market socialism’; economists, however, have not revised their views in light of the socialist calculation debate – von Mises and Hayek lost the theoretical debate but time resolved uncertainty and they were shown to be correct. (2) A of modern economic theory is predicated on agents having knowledge they could not possibly have in practice, so Hayek’s information problem is fatal to a lot of it.
May 8th, 2007 15:57
“I’ve worked alongside many people who didn’t have other options. (A lot of such people in the public service!)”
Russell – surely you’re not saying that people who work in the public service don’t have useful skills that they could transfer to other jobs
Or is it just that in the end they decide to stay in their public service job because of the better working conditions, superannuation scheme, job security, etc? If that’s the case aren’t they expressing a preference for the job they have?
I just think you have an unnecessarily pessimistic view of most people’s capacity to affect their own lives and make decisions that are in their own best interests. And even though people may have made poor decisions in the past (dropping out of school, for example) those decisions are not necessarily irremediable. I’m all for people having the opportunity (and where necessary some help) to make the most of their lives, but in the end not all options are open to all people and we all have to make choices.
We do seem to have strayed a bit from the subject of Andrew’s original post though, which I think was about whether people necessarily needed to be ‘compensated’ for working outside of Monday to Friday 9-5 and whether the mandating of such penalty rates might actually work against some of the people that I’m sure you care about getting jobs in the first place.
May 8th, 2007 15:58
Sinclair, is this a problem of agents having infinite (or all possible) information and the ability to perfectly process it?
May 8th, 2007 16:13
This is a prblem of dispersed information. The government can never have enough information to make the types of decisions that modern economists claim that it could or should make. This issue is set out here.
May 8th, 2007 16:53
Sinclair, the existence of a coordination problem does not imply a coordinator. Rather, it implies the absence of a coordinator. Indeed, if a coordinator existed, the coordination problem would disappear.
The information assumptions made by modern economists vary with the situation they are modelling. If you think that modern economists are ignorant of Hayek’s work on knowledge then you are sadly mistaken. Indeed, Hayek won a Bank of sweden prize in Economic Sciences in memory of Alfred Nobel back in 1974 in part because of his work on the informational advantages of markets. However, modern economists also understand that while there are advantages to decentralised solutions in terms of no one agent needing to have access to all available information, there are also disadvantages in terms of the potential for asymmetric information to result in market failures. Akerlof, Spence and Stiglitz won a Nobel prize for their work on asymmetric information back in 2001.
May 8th, 2007 18:35
Hayek is sometimes quoted, but not appreciated. Stiglitz argues in his book “whither socialism’ that he couldn’t understand Hayek because Hayek didn’t use math to explain his theories. Surprisingly, Stiglitz does seem able to understand Keynes and Marx.
Adam Smith tells us that individuals seek their own interest and ‘are led by an invisible hand’ – so there is no coordinator. So if there is no coordinator, and no coordinationg function, how can it be described as having failed? All that you, as an observer, can say is that an apparently valuable transaction did not occur. But until you face the oppourtunity costs that the actual decision makers face, you cannot know if the transaction was value enhancing. Of course, totalitarians who second guess the market define this as a failure and use their powers of coercion to force transactions to occur.
May 8th, 2007 18:53
Sinclair, that is just plain silly. Your view of markets amounts to a tautology: Markets cannot fail because by definition markets succeed. This just confirms that Austrian economics amounts to a religion, not a serious social science!!!
May 8th, 2007 19:00
I think you’ll find I’m relying on an economist, also a Nobel prize winner, who isn’t an Austrian economist. In addition to Adam Smith, of course, who also wasn’t an Austrian. While I don’t want to detract you from your thesis, you might benefit from read “Cost and Choice“.
May 8th, 2007 19:05
Sinclair, if you look at the standard exposition of market failures, they tend to involve situations where trade doesn’t take place because the expected private benefits to the transacting parties do not exceed the expected private costs to those parties. Only in situations where these expected private benefits and expected private costs aree also the expected social benefits and expected social costs does the invisible hand actually work.
May 8th, 2007 19:06
I’m happy to point out what wrong with “serious social science“. If you’re suggesting this book was disappointing, I agree. Those argument could be better made.
May 8th, 2007 19:09
In theory, yes. How do you, as an external observer, know what the private benefits and private costs are?
May 8th, 2007 19:10
So there are other religions out there in addition to Austrian economics!!! Sinclair, perhaps you should go and read some of the mainstream economics literature. Perhaps you could start with the work of John Hicks, Paul Samuelson, Ken Arrow, Gerard Debreu, George Akerlof, Michael Spence, Joe Stiglitz, Jim Mirlees and William Vickrey. Just to mention a few more Nobel laureates.
May 8th, 2007 19:11
So you don’t believe social science is possible, Sinclair?
May 8th, 2007 19:16
Sinclair, ask yourself the following two questions:
1. Is it possible to build a theory that allows agents to respond to variables or parameters that are not observed by the model builder?
2. Are there techniques available to handle some of the problems caused for empirical analysis by unobserved variables, even if those techniques are not perfect?
The answer to both of these questions is yes.
May 8th, 2007 19:18
This may come as a shock to you Damien, but I have read these guys (although not much Debreu). But there is a distinction between reading someone and accepting their premise. So let’s have a look. John Hicks, the man who apologised for IS-LM. Paul Samuelson, the lighthouse man, Ken Arrow on R&D I have written on before, Arrow and Debreu on new welfare economics suggest that the market can accomodate any level of government intervention (but don’t explain why the Soviet Union isn’t the worlds richest economy), Akerlof – I actually like him and use his lemons article to start off my Advanced Corporate Finance class, Mirlees on tax is good fun – the most productive member of society should pay no tax (been saying that for years), Vickrey on road pricing is interesting but there are public choice issues that need be addressed.
Damien I don’t hold the views I do because I’m ignorant, I hold them because I think for myself. I understand you are unused to that situation.
May 8th, 2007 19:21
#57. In an econometric sense? Yes. It is possible to construct proxies, instrumental variables, and use natural experiments and the like. In a policy sense for fine-tuning the economy? No.
May 9th, 2007 11:49
As far as I understand it, the labour market has determined that not all hours are equal. One hour worked, say, 3-4pm on a Wednesday is not equal to the same period of time 3-4am on a Saturday. The labour market has used a government instrumentality to impose this cost, but remove it and I’m not sure that a non-mandated “penalty” would find its way into agreements.