Monday, 30 April 2012

Did he jump or was he pushed; is there a difference?

This New Yorker article about why so many Americans are single reminded me of the debate about unemployment prompted by Casey Mulligan. Here’s why:

From the New Yorker: " people live alone because they want to or because they have to?"

Paraphrasing Mulligan and his critics: “Are workers choosing to be unemployed or are they forced to be?”

[actual quotes from Mulligan: "there are sensible people...who will recognize that 2009 is not the time for them to...commute a long distance to work...[unemployment insurance has] dramatically reduced the costs to them of making this the year they coach junior's baseball team, or do some work on their house, or spend time with an ailing parent" "the market tends to create and allocate jobs for those people who are most interested in working" and "my research has been to examine...changes in the willingness and availability of people to work" versus Dean Baker's "this does not mean that less-educated workers could find jobs if they really want them"]

Both quotes reveal a simplistic view of the nature of choice. It’s as if our choices are fixed – and we will always make the same choice unless there is some barrier in the way. The New Yorker assumes that each of us either definitively wants to be single or wants to be married, and that we’ll get our way unless something thwarts us. The debate over Mulligan's claims, on the other hand, take literally the fact that we have free will – so if someone laid off from a Detroit factory or a Texas high school has chosen not to take the minimum wage job at Walmart, their unemployment is voluntary.

Mulligan’s view is often mocked – Ryan Avent calls it “The Great Vacation” (did he coin the phrase?) – but it does at least have some internal consistency. People intuitively object to this story because it seems to imply people’s preferences have changed, and they have just decided they now want more leisure. But in fact this model assumes that preferences are exactly the same, and it’s the available options that are different. Simon Wren-Lewis writes here:
"In RBC models, all changes in unemployment are voluntary. If unemployment is rising, it is because more workers are choosing leisure rather than work. As a result, high unemployment in a recession is not a problem at all. It just so happens that (because of a temporary absence of new discoveries) real wages are relatively low, so workers choose to work less and enjoy more free time"
One defence of Mulligan is to read his claim more narrowly: that unemployment benefit reduces people's desire to work by a bit, increasing unemployment by an unknown amount - which seems plausible - and not that the whole recession arises from this cause.

Regardless, the right approach to both claims - that unemployment is voluntary or that Americans are forced to be single - is that people's actions are a result of both our individual wants and the environment we find ourselves in. Our wants might indeed change over time – though this tends to be a slow process. Our choices change much more quickly, because the same person in a different environment will make a different choice from the same options. A man with £10 in McDonald’s may choose to eat, while a man with £10 in Gordon Ramsay’s may choose not to eat (even though technically he could buy something from the lunch menu). The man is the same, and his budget is the same, but his actions are different.

Even the idea of “the same options” is dubious. Has the man in Gordon Ramsay’s really been offered “the same options” as the man in McDonald’s? Is a worker turning down a cashier job in Walmart choose from “the same options” as a worker taking a project management job at Boeing? Economics is partly about abstracting away the differences between different situations, but we must recognise when we’re abstracting too much.

Standard economics takes us up to about this point, and Noah Smith says as much in this post. Each person has preferences which determine the relative exchanges they’re willing to make. These preferences define a particular value for my time – £20/hour – so that if the wage offered (adjusted a little to take account of employment terms, location etc) is greater than £20/hour, I’ll take the job; otherwise I’ll stay at home. Similarly, my preferences may determine that the effort and sacrifice of being in a couple has a certain cost to me, and only if the benefits outweigh that cost will I enter a relationship. Thus, I may be more willing to go into a relationship with a person who I find more attractive (thus increasing the benefit of the relationship) or if housing prices rise (increasing the cost of staying single).

The psychology of decision-making says things aren’t this simple. The factors that determine the cost and benefit of each option are not stable. My preferences fluctuate according to how I feel, and my perception of the options I’m choosing between will change according to what I’m thinking of, what I’ve been reminded of, and what I’m looking at. Some factors become more important because they are more salient, and others may be ignored altogether.

Some particular factors become important to me which, according to a rational utility model of choice, should not matter at all. For instance, the wage I was paid last month should not be relevant to whether I accept a job at Walmart this month. But you can be sure it will be. There are a whole range of possible reasons for this: I may have mortgages and bills to pay that require me to earn over a certain level; I may treat my last wage as a signal of what I’m likely to be able to earn if I hold out for a better job offer; or I might simply feel ashamed to accept a 50% cut in pay. Whatever the reason, either my preferences, or my beliefs about the context I’m in, or both, are now seen to be dynamic and not static.

This means it is too simple to say “my preferences have changed” or even “the environment has changed”. Both are always changing. My choices are constructed in each moment out of the information available to me from inside and outside my mind.

There is not even a clear distinction between preferences and context. My preference to work at £21/hour instead of staying at home is in turn influenced by the context I live in, in particular the level of my mortgage payments or whether I think the economy is getting better. So the choice is in fact a tradeoff between one external factor (the job offer) and a series of others (mortgage, economy) with my mind as the calculating device that sits in between, weighing up the factors.

My mind of course is not perfect, and it can only roughly estimate the strength and future path of each factor. So it relies (I rely) on rules of thumb, heuristics, to save time and make it possible in practice to actually make any decisions at all. Those heuristics themselves can change over time, as I have new experiences which I learn from – and which may invalidate old heuristics or lead to new ones. Maybe the last time I took a low-paying job, in high school, my brother got a better one the following week, and laughed at me. The heuristic that I might learn from that is fairly clear, even if I’m not conscious of it when I make my decision now. If I turn down this job and don’t get another offer for three months, perhaps my heuristic will change.

Can we even distinguish between heuristics, preferences and environment? Not clearly. From the outside we cannot tell whether the man turning down the Walmart job is doing so because he has a clear, conscious preference for a £20/hour job, or whether he’s subconsciously applying a rule of thumb his brother taught him by teasing 20 years ago, or whether he simply cannot afford to work for less because it won’t pay the mortgage and he has to hope for a better offer next week. Even internally, the man himself probably does not clearly know the difference between these three causes. So is it meaningful to say that they are three distinct phenomena?

We haven’t even discussed the signalling and cultural implications of taking a job at Walmart, or the influence of the way in which the offer is communicated (“We’d really appreciate if you’d take this job, to help us to serve your community better” or “Head Office has approved your application for employment, and subject to security and identity checks you may arrive on Monday at 8am sharp.”). Language and culture too shape our interpretation of the choices we are offered and the factors that we take into account; this can be seen as part of the cognitive process or as part of the environment in which we choose.

We are left with two ways to think about choice. The first option is to declare the process of choosing to be too complex for simple interpretations like “unemployment is voluntary” or “Americans are single because they have no choice” to be entirely true (or entirely false). The second option we can find a new and more accurate abstraction to describe choice – I like to think of it as “a cognitive algorithm which translates external and internal signals into actions”. In this view, the idea of voluntary unemployment or involuntary singledom simply lose their meaning. The very term voluntary becomes moot.

Then, did the unemployed man jump or was he pushed? All we can say is that a confluence of factors - physical, or emotional - and his response to them, caused his fall.

Where, then, has free will gone? Was it ever there in the first place? That must wait for another post.


norm said...

I was a steelworker, retired going on four years now. I collected unemployment many times over the years. I was laid-off from three different jobs at one time in my work life, the steel job, a building job and an oil field job. I went back to school...
The steel firm I worked for paid into a government fund that covered their workers for half pay while they were laid off, they also paid money into a fund of their own that covered 40% more of our wage. They did not do this because they loved us or were kind. They wanted us to be around when things picked up again; it's hard to hire a steelman off the street-it's not paddy-cake.
We have a down turn now that has gone on a bit longer than usual, it is just natural that some people will start saying that the rules have changed. People who hire skilled labor still need a place to park them when times are tight and they always will. We have to pay them or they are going to go somewhere else and that is the real issue in the end.

Lord said...

It is difficult to even speak of this for what assurance is there of being in a position to reject a job when it is not offered to you, and most of the evidence is it is not offered to you, whether for fear you would not be happy with it, would feel entitled to more, would demotivate fellow employees, or would be there only temporarily. Rejecting a job implies voluntary while rejecting an employee implies involuntary to some extent.

Consider also how the argument changes between capital and labor. The right usually argues if investment is slack it is because it is too difficult and we must make it easier while if labor is slack we must punish it to force it to work harder. We should also consider if investment is slack punishment may force it work harder while making labor easier may induce more of it.

Leigh Caldwell said...


The treatment of capital and labour is not as asymmetrical as it might seem. In both cases, the economic advice is to increase the incentive to be productive - i.e. to increase the difference between the returns to not working, and the returns to working. (where "working" in the case of capital means putting it to work as an investment).

These incentives can be strengthened either by increasing the penalty for not working, or increasing the gains from working - or both.

In the case of capital, we "punish" people who don't invest their capital by reducing interest rates, and trying to create some inflation. In some cases we increase the returns to investment by offering tax breaks for the profits from investment, or reducing capital gains taxes.

In the case of labour, Casey Mulligan's argument is that we should penalise not working, by reducing unemployment benefit, and increase the returns to working, by reducing payroll tax or income tax. The payroll tax cut in the US already does the second part.

While these techniques will work, my argument is that the process of choice - whether to work or not, regardless of whether we call it "voluntary" or "involuntary" - is more complex than just financial incentives, and there are probably other ways to increase investment and reduce unemployment which might be more effective.

Lord said...

The right barely supports increasing returns to labor and opposes those measures to penalize capital, and those measures to increase returns are counterproductive. Lower taxes promote consumption of gains, not reinvestment, while higher taxes promote deferral and investment.

Harry said...

Hi, Nice post! Would you please consider adding a link to my website on your page. Please email me back.