Yes, we knew this and Ritchie didn\’t

Women are being priced out of the job market because of deep government cuts in state funding for childcare, according to research published on Sunday.

The study by the Institute of Public Policy Research (IPPR) thinktank challenges the claims made by ministers that their flagship welfare reforms will \”make work pay\” and encourage people off benefits and into work. Instead, the IPPR analysis highlights figures suggesting that the increased cost of childcare is persuading many mothers to stay at home to look after their children themselves. The research focuses on low- to middle-income families in the \”squeezed middle\”, who are already suffering from declining real wages as pay is either frozen or increased at a lower rate than inflation.

Based on official employment data, the IPPR found that while unemployment had fallen by 20,000 over the past year to 2.45 million, the number of unemployed women had risen by 42,000.

We could call this a contribution to our understanding of the Laffer Curve. Or different reactions to marginal tax rates for women with children and everyone else. We could also point out that it\’s something well known in the literature.

Bundle everything together: benefits, child care costs, income tax rates, the lot. The varying influence of all of these is the marginal gain from working or not working, as the case may be.

Our income and substitution effects (the two which together determine the labour supply at any particular marginal rate. One says that people have target post tax incomes, if taxes rise then they\’ll work more to make it. The other says that as taxes rise leisure becomes relatively cheaper than work so people will take more leisure. Both work on everyone some of the time, at some rates, some people are influenced more by one than the other. It\’s the complex interplay of these that builds both the labour supply at any one marginal rate and also contributes to the shape and peak of our Laffer Curve.) work in different directions which is what makes untangling them rather difficult.

However, we do know something about how these play out. The \”fuck it, it\’s not worth working for this pittance, I\’ll stay at home and do something else\” is stronger for women with children than it is for everyone else. Fairly obviously, as there\’s something to do, look after the kids, and that something has costs associated with it over and above marginal tax rates: the cost of child care.

Which leads us to that thing we know from the literature. Higher tax rates have a different effect on labour supply from women with children than they do on the labour supply of others.  Not so much different in direction as more of the \”fuck work\” effect at any particular level of marginal taxation.

The higher that marginal tax rate goes the more we expect women with children to stay home: more than we expect everyone else to. Another way of putting it is that the peak of the Laffer Curve is lower for women with children than it is for everyone else.

This is so generally agreed that there are serious proposals in the literature for women with children to have lower marginal tax rates than everyone else.

Which brings us to Ritchie. In one of his papers, I think it was a budget submission for the TUC, he made precisely the opposite assumption. That a rise in marginal tax rates (to 75% I think it was) would create more labour supply from women with children. That the income effect was stronger in such people than it was in everyone else, rather than the weaker which we know it is.

It\’s the only way he could make his sums add up. By entirely ignoring everything we know on the subject.

Yes, this is why you should nominate Richard Murphy as most influential leftwhinger of 2011. Ignorance and bias, a winning combination.

2 thoughts on “Yes, we knew this and Ritchie didn\’t”

  1. Let me fly a kite here – how much of our economic growth is due to the formalisation of things people do rather than people actually doing more of them better? A woman with kids going out into the workforce, increasing GDP, and paying some of that to a nanny, increasing GDP (and hence tax revenues) is not a different situation economically from the nanny doing whatever the woman was doing. OK, it’s not that simple, you could have a woman with kids doing a high value-added job, a nanny can care for more than one family at a time, and so on. But it seems clear that over decades and centuries we’ve had a lot of stuff shifted out of the informal and unmeasured economy and into the formal and measured economy.

    Tim adds: This is clearly true. Keynes noted it by saying that GDP declines when a man marries his housekeeper.

    Childcare is perhapsthe most obvious of these. Where it doesn’t really make much difference, where total output is about the same, therefore we’re not as a whole being amde any richer by it happening. Except of course in that high powered lawyer going to work and hiring Traceee to look after the kids.

    However, in many of the other things, the cooking, cleaning, laundry etc, we really have got a long way. Because by putting these things into the market we can have again the division and specialisation of labour. Sure, that bird at the steam laundry is just doing shirts: but with her skills and advanced machinery she’s doing hundreds a day. Sure, we’re getting the same number of meals cooked but the three people in a small restaurant kitchen are turning out 50 a day: not the six each meal time that three housewives will in total. And of course three cooks in a cook and chill factory even more.

    So, yes, quite a lot of economic growh (I’ll quantify it in a bit) has come from formalising what was already done. But this is still a good thing as once formalised we can make the doing of them more eficient.

    One estimate of economic growth in the 20th cent was, per capita in the rich countries, 8x. Whatever it was that we weer already doign…..let’s just say “women’s work” in the household, that we’ve now formalised, can’t be more than 2x (ie, women were half the adults, their work wasn’t counted, now it is). The other 6x came from something else…..

  2. Come on! dont poke fun. He was too busy brushing up on his copy of “Banking for communists, how to give ones wallet to glorious leader”.

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