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An interesting idea to combat wage inequality

August 27, 2011 Leave a comment

I recently came upon an article by Daniel Indiviglio published in The Atlantic that put forth an interesting idea for combatting wage inequality. It immediately caught my attention as it stands out from most ideas for improving wage equality. Generally, ideas put forth to limit these disparities involve taxation and redistribution, or government mandated minimum wages. Occasionally there are even calls for some form of oversight or controls on the highest wages, as was the case with Wall Street bonuses following the economic meltdown. What almost all the generally proposed solutions have in common is that they all require the government to infringe on individual’s rights to their property. While the vast majority of people, myself included, have no problem infringing on these rights to some extent, a solution that does not require increased taxation or limiting individual’s rights to accept certain wages would be preferred.

So what exactly is this proposed idea? In one word, information. More specifically, publicizing information on wages and benefits for all jobs, and even potentially for individuals. The basic logic behind this is that individuals require information in order to act. Because compensation tends to be kept quiet, it is difficulty to negotiate for better compensation or to know if changing careers might be a better option. By providing people with information equivalent to what their employers already know, they can see if their wage is too small relative to what others make, and then either negotiate for increased wages or find another job.

While little empirical research has been done into this, there are still many reasons to think that it might have some effect. The few job markets that do tend to have widely available compensation information have very high wages and a tendency for employers to go out of their way to ensure that their compensation remains competitive. These two job markets, Wall Street bankers and CEO’s, both have strong and continually improving wages.

It would be silly not to recognize that there is a large difference between the job markets for CEO’s and those for minimum wage level jobs, and it is highly unlikely that this information alone would dramatically reduce the discrepancy between these two groups, but better information would likely put some pressure on companies that hire workers around minimum wage to compete on wages as anyone looking for a job can see if McDonalds is paying a little more than Wendy’s. From my personal experience at entry level jobs, people tend not to look for new jobs until they find out what sort of wages they could make in similar jobs. If that information was widely available a company would have trouble keeping compensation below any other similar company.

While doing some research into this I discovered that Finland actually does something similar to this. Income tax information is made public for the majority of people. Finland also has relatively little inequality although this is simply one data point and does not strongly suggest causation.

Categories: Economics, Politics

An Ageing Country

March 11, 2010 Leave a comment

On a recent episode of Radio Freethinker we talked about issues surrounding overpopulation and aging populations. Because of time constraints I was unable to fully discuss the economic and political issues facing Canada and other countries that are facing rapidly ageing populations. I’ll use this blog post to better explain some of these issues.

I recently read an article in the Globe & Mail about the non-partisan Parliamentary Budget Office releasing a report skeptical of the Conservative Government’s belief that they can easily return to fiscal responsibility without massive changed to taxation or spending. What the report ultimately argues is that the effects of Canada’s aging population are being ignored by the official reports coming from the government. According to the low estimate of the PBO, Canada will reach a federal debt to GDP ratio of¬† 200% by roughly 2070 as opposed to the official estimate of maxing out at 32.1% in 2011 and then falling. These two reports paint very different futures for Canada’s fiscal policy, and I want to explain some of the economic issues that the official report seems to ignore.

The primary economic issue that arises from shifting population demographics is a shifting dependency ratio. In general, the dependency ratio is the ratio of the working age population to children and those over 65. This way of measuring isn’t perfect, as some people over 65 are still employed, and some people of prime working age are not, and are dependent on others, but overall it provides a general approximation of the actual ratio.

According to the PBO report( which uses a dependency ratio that ignores children, which exaggerates the effect somewhat), as of 2008, Canada has a 5 to 1 dependency ratio. This means that there are currently 5 working age Canadians for every Canadian 65 and older. If we assume that working age Canadians and retired Canadians have roughly an equal standard of living (measured in dollars spent by them, or for them, a year), then it logically follows that each working Canadian has to give up 20% of their production in order for each retired Canadian to have an equal standard of living. The PBO report also projects that by 2033 this ratio will be 2.5 to 1. This now means that every working age Canadian will have to give up 40% of their production in order to maintain equal standards of living for retired Canadians.

Assuming we don’t have unexpected technological increases, or higher than usual investment, this will mean that the average standard of living in Canada will stay fairly constant or at the very least grow little. Increases in productivity will be partly offset by a labour market decreasing faster than total population.

On top of this basic economic problem, there is also the political problem of how this will be payed for. If senior care is largely payed for by government then this will mean that the government will have to raise taxes are strongly cut back in other areas. The political ramifications of this will likely be immense, as people don’t generally like rising taxes, especially if the benefits go to other groups. If senior care is largely payed for by savings from seniors themselves (which is likely no longer a possibility, as baby boomers are expecting the government to provide their health care as well as other benefits), then their decreased consumption in the past would have caused increased investment which would increase future productivity. This would help offset the effect of a lower dependency ratio discussed earlier.

The PBO report focuses on the consequences which affect the federal budget, but a large part of social program spending is done by provinces. About 80% of health care costs are payed for by the provinces and territories. Health care costs are also disproportionately high towards those 65 and older. In British Columbia, the cost in care per year is 4 times higher for those 80 and over compared to those aged 1 to 64. As the number of people 65 and older increases, health care costs will rise dramatically.

Whether Canadians like it or not, we will soon be facing large economic issues, and political decisions will decide who pays. Will retired people face lower than expected standards of living so that workers can make more? Or will workers give up some of their consumption in order to better provide for retired Canadians?

Austrian Economics vs. Keynesian Economics: A Rap

This catchy rap is also informative! I was going to write a blog article explaining the lyrics but then I found out that I was beat to it by “VA Classical Liberal” at the Daily Kos (and to be honest, he or she probably did a better job than I would have). This debate has never been more important with countries all around the world following Keynesian policies to try and get out of their economic mess and yet very few people have even a basic understanding of the economic arguments against these policies. Most people have some basic idea of Keynes theory, but if their introduction to it was anything like mine, it was treated more like gospel than a theory. I would highly recommend taking 15 minutes and reading over the blog post on Daily Kos and getting a brief taste of Austrian Business Cycle Theory.

Categories: Economics