Incentives to work

Callan, Keane, Savage, Walsh and Timoney have a new paper on the incentives to work in Ireland. This is an important topic and I am glad to see continued research on this.

For the first time, Callan et al. include the cost of working in their analysis. We showed earlier that this is an important consideration. Our paper was primarily intended to address a blind spot in labour economics (which disregards expenditure patterns); our calculations were illustrative only. Unfortunately, what was meant to be an academic contribution became a public issue.

Nonetheless, it is useful to compare numbers. Callan et al. use the latest available data, and their earnings and benefits data is the best available. Earlier McGuinness and O’Connell showed that our wage equations, which omitted age as that was absent from our data, were severely biased. Callan’s estimates of the costs of childcare are from the same source as their income data. More importantly, they have information on the age composition of the household, whereas we had to work with average costs for a typical family. In these regards, the new analysis is superior to our work.

The main difference, however, is due to transport costs. There, Callan et al. run into the same problem that we did: The primary data are incomplete and one needs to rely on secondary data. This introduces all sorts of biases.

I am not convinced that Callan et al. got this right. They include only the cost of commuting, disregarding extra school runs, social calls associated with work etc. They ignore that commuters would own a different car than people who stay at home. In our paper, we compared travel costs in work and out of work, correcting for income, regardless of whether travel was from home to work and back.

Callan et al. use three methods to compute the typical cost of travel to work.

Method 1 is distance times cost per kilometer. They find 17 euro per week. But that is for the cheapest car. The range is 17-41 euro per week.

Method 2 is public transport: 14-25 euro per week.

Method 3 is based on the National Travel Survey. The starting point is an unreferenced 78 euro per week in travel costs. They then attribute 1/3 of this to commuting, and find 25 euro per week. The language is vague, but 1/3 strikes me as the national average rather than the average of those in work.

I suspect that Callan et al. underestimate the travel cost due to work. According to their Table A1.1, travel costs in the range of 15-25 euro per week, increase the fraction of people who would be better off on the dole from 4% to 5% (a 25% increase). Extrapolating, this would be 6% for a cost range of 50-100 euro per week (a 50% increase).

Childcare raises the fraction of people who would be better off on the dole from 4% to 6% (for all) and to 12% (for those with children).

Combining childcare and transport costs, 6% x 1.5 = 9% (for all) and 18% (for those with children).

McGuinness and O’Connoll found 9% (no children) and 19% (1 child under 5).

I therefore think that, although the new estimates by Callan et al. are more carefully done than our initial estimates, the new numbers are too optimistic.

Note that all of these calculations ignore undeclared income.

22 thoughts on “Incentives to work”

  1. I’m glad to see that research has continued in this area (and I’m also glad to see that Richard is continuing to contribute to it), however, is this now the ‘definitive’ paper from the ESRI on this topic? Or can we look forward to more publications in the short term that seek to provide more accurate estimates?

  2. “They ignore that commuters would own a different car than people who stay at home.”

    If someone gets a new job and decides to buy a nice car, that is hardly a cost of work. That’s just the effect of having a higher income.

    That was one of the major flaws in the Tol et al, paper. The income effect wasn’t properly controlled for.

  3. Richard, Rory makes a valid point above – What do you mean about the “different car”?

    Cost of running a car will depend on ‘size’ (remember many people will have the same car they had before they became unemployed), how old it is (more repairs), along with tax, fuel etc. Where does depreciation fit in to the analysis?

  4. @grumpy / rory
    The data reveal that those who drive longer distances, do so in more expensive cars. That makes intuitive sense.

    Of course, you do not buy a new car the day you’re hired or fired, but we are comparing population averages.

  5. @Iain

    There is ‘no definitive’ paper possible here.

    The reason is that ‘no definitive data set’ exists that includes all the variables of interest.

    It follows that researchers must work under such constraints and much depends on how such researchers ‘make do’ with what is available. It also follows that it is much easier to criticise omitted variables than to praise the effort that goes into finding relevant variables.

    It is worth noting that Tim Callan is one of the world’s, yes the world’s, leading researchers in this area. Input from Richard and his colleagues and from McGuinness and O’Connell are contributing to the much neglected area of labour economics in Ireland.

  6. At the Conference this morning and Callan’s presentation was excellent.

    “Method 2 is public transport: 14-25 euro per week.”

    On this, he did say that 14e would be based on a short-hop commute cost around Dublin and 25e longer distances. I use the DART for a standard enough commute and have to pay 21.10 for a weekly ticket.

    I’d have thought there was some underestimation there myself especially for those with Commuter tickets or Bus Eireann.

    *Even allowing for the fact he did say that the costs were inclusive of the Taxsaver PRSI scheme*

  7. I saw somewhere recently that the cost of running a car in Ireland was estimated at around EUR 5000 per year.

    If Dublin had a decent public transport system wouldn’t the savings over time be significant ? Especially once oil goes to $ 300 a barrel.

  8. My own fuel costs are 100 euros a week….
    Have an 11 year old car but looking at a loan I am unconvinced that I can make the payments, especially on this side of the budget.
    Caught either way, tax or loan!
    Anyone have a horse?

  9. @richard

    “The data reveal that those who drive longer distances, do so in more expensive cars. That makes intuitive sense.”

    I think this is quite fuzzy.

    On average the data would show that people who have more money drive bigger, more expensive cars. To some extent there is an incentive/requirement to drive a bigger car for commuters, but if you observe the school run in any affluent area you will find cars, despite being generally used only for short distances are generally big & expensive. This too makes intuitive sense.

  10. @richard

    Yes, I’m suggesting it is fuzzy, not that the corrolation doesn’t exist.

    The context in which the research will be used is in relation to people swapping between employed and unemployed, which makes factoring in a bigger car more a matter of choice than necessity.

    I imagine on average, younger, lower paid commuters drive cheaper cars than older, higher paid ones. The size of the car is not dictated by the commute.

  11. “The data reveal that those who drive longer distances, do so in more expensive cars. That makes intuitive sense.”

    Long distance commuters who were forced out of Dublin and beyond Cavan town by rising house prices during the boom wouldn’t necessarily have the flash cars.

  12. “… we find that a majority of those who are potentially better off out of employment are actually IN employment.” p. 76

  13. A big omission, admittedly acknowledged, is the value of having a medical card. In the UK and in most of the EU-15, there is not the same rise in medical costs that typically occurs in Ireland when taking up employment. This would make a significant difference to the international comparison tables in the case of families with young children.

  14. @Richard Tol

    Your earlier paper [CPT] helped to focus attention on the cost of childcare in Ireland – what are your views on how ChildCare is addressed here by Callan and his colleagues?

  15. @DOD
    It is more advanced than what we were able to do.

    Callan and co find that wages would be lower than benefits for 4% of all people of working age, and for 12% of people with small kids. This again underlines the cost of pre-school childcare.

  16. @Richard

    “Of course, you do not buy a new car the day you’re hired or fired, but we are comparing population averages.”

    Why, though, if we’re talking about people on the margin between unemployment and low-level employment?

    @Murt Ó Séaghdha

    “A big omission, admittedly acknowledged, is the value of having a medical card. In the UK and in most of the EU-15, there is not the same rise in medical costs that typically occurs in Ireland when taking up employment. This would make a significant difference to the international comparison tables in the case of families with young children.”

    That’s assuming currently unemployed people can find a participating GP. I’m guessing a lot of those who have lost their income in the past couple of years are struggling to get medical cards.

  17. An interesting supplement to this study would be a sociological and psychological comparison between working and claiming the dole.

    On the one hand, being unemployed bestows a great amount of personal freedom on the social welfare recipient – freedom to take the kids to and from school, to pursue leisure activities, to engage in independent learning, to lie in bed in the morning etc.

    On the other hand, being unemployed can lead to a loss of self-esteem, boredom and the loss of a social or intellectual outlet.

    Obviously people react differently to working and not working (some people love their jobs, others hate them and would prefer to do other things). I think these issues are going to become more important in the future as the nature of work itself changes – not everyone can or wants to work in the “knowledge economy”, and manufacturing and construction don’t look like great sources of employment for the foreseeable future.

    Lots more on this on FTAV:
    http://ftalphaville.ft.com/blog/2012/09/26/1179371/the-decline-or-the-redefinition-of-labour/

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