Work Choices, Welfare to Work and Utilitarianism – Fred Argy

The interesting piece by Paul Frijters on utilitarianism as a policy guide prompts me to draw attention to a recent piece I did for New Matilda and is now available on Policy Online. It tries to compare Howardâs Work Choices and welfare to work reforms with an alternative âsocial democratic❠(SD) policy agenda which relies on social investment of various kinds to achieve the same policy goal â i.e. a higher employment participation rate â but in a way which is much more distribution-neutral. It then attempts, inter alia, a utilitarian evaluation of the relative merits of the two strategies. Let me sum up my conclusions here.

A utilitarian comparison between the two strategies can start by simply adopting the economistâs approach to reform evaluation. This involves focusing on aggregate utility and ignoring distribution, assuming that rational individuals successfully maximize their own utility in the market place and assuming that GDP is an adequate indicator of the sum of the individual preferences. On this narrow criterion, there is nothing between the Howard and the SD alternative as they both have the capacity to improve GDP per capita by similar amounts.

Once one goes beyond the narrow economistsâ approach, the differences between the two strategies become quite stark. First, the quality of life dimension (the non-material aspects of well-being) becomes more important and it seems to clearly favour the SD strategy. For most vulnerable workers (i.e. those without individual bargaining power) the Howard reforms will mean less income security, less say in the workplace decisions that affect their wellbeing (such as on working hours) and less capacity to achieve their desired work-family balance than the alternative SD strategy.

Secondly, on a wider perspective, the distribution of the costs and benefits becomes important. To assume, as many economic rationalists do, that a dollarâs worth of gain to one has the same utility weight as a dollarâs worth of loss to another, irrespective of their starting incomes, is quite simplistic. Surveys consistently show that people generally become happier when their incomes rise from low to median – but after that they do not get any happier as they get richer (unless they markedly out-perform their peers). I believe one can presume that, on average, marginal utility is higher for low-income people than for high income people.

While the nationâs total employment and economic âcakeâ increase by a similar amount under both the Howard and SD agendas, the net gains are very differently distributed. Under the Howardâs workplace/welfare agenda, the losers (in income, opportunity and quality of life) are low-paid workers â at least until the benefits start to trickle down to them while the winners from his reform will generally come from much better-off homes. Under SD, the losers would only be the relatively well-off taxpayers â at least until the social programs have had time to âpay offâ and enhance the revenue base. The losers under Howard are almost certain to have a higher marginal utility than the losers under SD.

On utilitarian grounds, therefore, SD seems superior.

This entry was posted in Uncategorised. Bookmark the permalink.
Subscribe
Notify of
guest
12 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Fred Argy
Fred Argy
14 years ago

Correction. The last sentence of the parasgraph before last should have read “I believe one can presume that, on average, marginal utility is higher for low-income people than for high income people”.

Ken Parish
Admin
Ken Parish(@ken-parish)
14 years ago

Done.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Fred, I think you agree that the WorkChoices package will stimulate employment at least to some extent. Without disagreeing with your general thesis, why do you leave out of your discussion this bit of good for those at the bottom?

Secondly – and I might try to post on this when I get some time, I think this comment kind of misrepresents the discipline.

To assume, as many economic rationalists do, that a dollar

Paul Frijters
Paul Frijters
14 years ago

Fred,
the crux of the debate will be your contention that ‘there is nothing between the Howard and the SD alternative as they both have the capacity to improve GDP per capita by similar amounts’. I am not sufficiently familiar with either to comment on whether you’re right, but I’m willing to eat my hat if John Howard agrees with this.
I agree with the rest though: if you take the mainstream assumption that utility diminishes (the first ‘law of Gossens’) and that every person is of equal innate value, more redistribution from rich to poor that does not create disincentives is welfare improving. I believe mainstream classical economics has been called a last outpost of socialism on that basis. Oh irony ….

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Who would try to get Howard to agree with something he doesn’t want to? Not too sure of that as a criterion of anything.

Fred Argy
Fred Argy
14 years ago

In answer to your query, Nicholas: in my “On Line opinion” post I argue that – both in theory and on the empirical evidence – the two strategies can produce similar employment outcomes. So there was no reason to take account of the positive employment effects of Howard’s agenda.

Paul, my post in On Line opinion also argues that the productivity outcomes are very similar. It follows that per capita income outcomes are much the same.

You should both read my On Line opinion post – although you may still disagree with me after reading it. There is a longer article of mine that will appear in the Journal of Public Policy, which I would be happy to email either of you.

By the way, I owe Club Troppo an apology for misnaming the internet journal as Policy Online in my earlier posting. It is On Line policy and it is easily accessible.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
14 years ago

Yes, fair enough Fred. My apologies for not mentioning the comparative point.

I still think it’s important to point out that a policy like Workchoices has two effects on the people at the bottom of the labour market. One depresses the wages of the employed, the other brings people into the market – and one can argue about the relative strength of the two effects.

You write

Under the Howard

Fred Argy
Fred Argy
14 years ago

OOps, I am really careless!! The journal is On Line opinion (not On Line policy) and it is easily accessible.

By the way, Paul, in my two papers I allow for some disincentive effects from redistribution and still conclude that the productivity outcomes are much the same for both the Howard and SD strategies.

Tom N.
Tom N.
14 years ago

MORE ECONOMIC SELF-MISREPRESENTATION!

Fred said that the economist

Fred Argy
Fred Argy
14 years ago

Tom N, touche. I am aware that the enlightened economist takes a broader view and does not equate GDP with welfare.

In my defence, I did refer to the ‘narrow’ economist approach. And I was mainly concerned that economists, in their discussions of the GDP effects of a reform like Work Choices, often neglect distribution and quality of life effects (less so environmental effects).

By the way, I am no ‘professor’! Just a former adviser to governments with some academic qualifications in economics.

Paul Frijters
Paul Frijters
14 years ago

Tom,
are you really given such a hard time over the materialism-outlook of economists? I take a lot of pride in the fact that economics as a profession is gutsy enough to simply state that we think that materialistic concerns are a prime motivator of humans and that we can learn a lot from studying people as if that’s all they care about. The power of that simplification is still the main thing I teach my students. IMO many of our greatest successes come from that stance and outsiders who criticise us on that basis are IMO engaged in wishful thinking. The question is on the one hand whether we can improve on this traditional focus (i.e. can we do even better?) and on the other hand whether the consequences of the immense economic growth that is now occuring are so bad that it’s time to rethink whether it might be desirable to yetison the engine of growth. Why be ashamed of something that is a source of pride though?

Tom N.
Tom N.
14 years ago

Fred,
Yes, I noticed you used the term “narrow” later on, although the first time you mentioned “the economist’s approach to reform evaulation” it was missing, and it was your description of that approach that concerned me. Re: you not bothering to formally become a professor (whereas Paul did), I guess that just reflects that you had higher (monetary plus psychic) opportunity costs, jah? :)

________

Paul,
Like most Australian economists, I have been given a hard time by ill-informed (or well-informed but intentionally deceitful) critics who think that “money, markets and materialism”, to quote Pussey, is all that we think about, take into account or accord value to.

I do not disagree with the point that much can be learned by studying people as if: (a) their own utility; and, more restrictively, (b) the utility they derive from material consumption; is all that they care about. The problem arises when the lessons from such exercises (and particularly (b)-type exercises) are carried over into policy advice without considering the implications of relaxing those assumptions, where appropriate. And a problem for the profession arises when its members speak as if those exercises are all one needs to either understand the world or to prescribe what should be done.

I work in a different part of the economics profession than you, which might explain our different emphasies. I do not have the luxury of ignoring the important for the theoretically elegant or the empirically convenient, or at least not as much scope to do so as you may. When I come accross evidence of human behaviour in a particular area that diverges significantly from the homo oeconomicus model, for instance, I must get my hands dirty, relax the underlying assumptions, see what falls out, and then advise governments on what, if anything, to do about it. But even when human behaviour does not obviously diverge from that model, I do not deny – nor is there any reason to deny – that an array of non-material objectives may underlie people’s choices, together with material ones. I never thought, and was never taught, that utility is only about the material; quite the contrary. Once again, as the Productivity Commission said:

A night of hot passion is not necessarily of any less value to an economist than a roll of bank notes.

In my experience, and for the purposes to which I put it, economics does not fall apart when one recognises that there are non-material considerations in people’s utility functions. Certainly, things get murkier and harder to measure (although we can’t measure all the material things generated in an economy anyway), but that does not mean that a (broad) economic decision-making framework is of no use or value.

Tom