Do A Better Job—Get Paid More—Too Radical For Government

    Do not think about, write about or deal with  human behavior without determining the effects of incentives.

    Wherein we see, once again, unions distort wage returns. Unions certainly bring death to industries and only exist in government-controlled enterprises where nothing has to do with reality.

National Post – (Latest Edition)
William Watson

U.S. inequality rewards abi+lity

Do unions mainly exist to reduce the correlation between skills and wages? Maybe inequality
is not a problem

Everyone knows the United States has the highest income inequality among the rich nations of the world. OK. Which rich country offers the biggest payoff to ability? The United States does. Put the two together. If U.S. inequality is the result of the U.S. rewarding ability, is there really a problem?

That the U.S. labour market is in fact the most responsive in the OECD to differences in abilities is the conclusion of a new study by the labour economist, Eric Hanushek of Stanford University and the Hoover Institution, and three German colleagues. They make use of an OECD-sponsored survey of almost 35,000 people in 22 OECD countries that took place in 2011-12. The survey asked participants detailed questions about their incomes, work experience, education and so on and then (imagine!) administered tests of their numeracy, literacy and ability to solve problems.

Hanushek and his colleagues took the results and used econometrics to tease out the relationship between the test scores of prime-age full-time workers (those aged 35 to 54) and their wages.

Their basic result is that skills are indeed a good predictor of wages. On average, the more skill people had, the higher their wages. Which is reassuring. We hope and assume the labour market rewards real abilities of one kind or another. And it apparently does. With all countries’ data pooled, a one standard-deviation improvement in a person’s numeracy test score was associated with an 18 per cent higher wage. (In this case, one standard deviation represents 49.8 points on a 500-point numeracy test in which the average score was 279.)

The raw correlation with literacy was similar though slightly lower, at 17 per cent, while that for problem-solving was 14 per cent on average. When all three were tested at once, numeracy was slightly more important than literacy while problem-solving—surprisingly—had about a quarter their combined effect. It may be that if you’re literate and numerate, problem-solving comes naturally.

There were also interesting differences in the effects across countries. Numeracy was markedly more important a determinant of wages in the US while literacy was in this country.

In Japan and the Slovak Republic, for some reason, literacy was actually negatively correlated with wages. The more literate you were, the lower your wage. (Japan did have the highest average and most closely bunched test scores for numeracy.)

But what’s even more interesting is that there were big differences in the responsiveness of wages to skills across countries. As mentioned, American wages featured the highest correlation with skills. The payoff to numeracy in the US was almost 28 per cent, compared to the all-country average of 18. By contrast, the payoff in the Nordic countries was less than half that. In Sweden it was just 12.1 per cent; in Norway 12.7; in Denmark 13.7 and in Finland 14.2. The pattern for literacy was the same: big payoffs in terms of higher wages in the US, much less so in the Nordic countries.

What determines these differences across countries? Hanushek and his colleagues tested whether the responsiveness of wages to abilities in a country was in turn correlated with things like the degree of unionization, the size of the public sector, minimum wage laws and so on.

It turns out such variables do matter. As the authors put it, “Intriguingly, returns to skills are systematically lower in countries with higher union density, stricter employment protection legislation, and larger public sectors.”

<insert>

   Government distorts everything. This is just one more example.

Intriguingly, indeed! As they go on to say, “the consistency with standard conceptual models is striking.” By which they presumably mean that unions mainly exist to reduce the correlation between skills and wages by paying people according to their experience or status rather than their ability. In the public sector, as well, pay by performance is a mainly alien concept.

In the U.S., of course, pay by performance is almost the rule. Well, not quite the rule. But estimates suggest upwards of 40 per cent of American workers have some form of performance incentive in their compensation. So it’s not really surprising that pay and skills should be highly correlated.

But all of this does tend to take the steam out of the current storm over inequality. If American wages are, more than in most places, determined by skills, it’s hard to see how inequality in wages is unfair, as Occupy types usually assume. It’s not as if the money is being stolen. It apparently is being allocated, more than in other countries, according to people’s skills. Skill isn’t the only thing you want wages to depend on. Effort is also important, as well as imagination and entrepreneurship. But skill should count, too. After all, even the Marxists decreed “From each according to his ability…”

Moreover, if greater equality is wanted, the tax system can transfer funds to people who have trouble earning enough on their own in the labour market. (This study looked at pre-tax earnings, not after-tax income.)

There’s also room for discussion about why the distribution of skills—as measured by results on the OECD ’s numeracy test, at least—is wider in the US than elsewhere. Education in the U.S. is still left mainly to public schools. If they’re not doing an adequate job, maybe they need to be shaken up. A good start might be to increase the correlation between teachers’ measured skills and their wages.

<end>

    There is only one rule that should be in effect. Do the job properly or lose it. This will never happen in government “service.”

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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