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.

ESRI Pre-Budget Conference

This event is taking place this morning  –  the publication is here.

John Fitzgerald’s paper “Fiscal Policy for 2013 and Beyond” is also here.

Tim Callan’s paper “Work Incentives in Ireland” is here.

Nevin Institute: Quarterly Reports

The latest reports from the Nevin Institute are available here.

ESRI QEC; Central Bank; Fiscal Analysis

The ESRI QEC was released last week  –  summary and special articles available here.  One of the special articles is by Ide Kearney on measuring the fiscal stance; the Central Bank has just published a new Economics Letter on the fiscal compact here (written by Colin Bermingham and Laura Weymes).

DE/FI/NL Finance Ministers’ Statement

The joint statement of the German, Finnish and Dutch Ministers for Finance can be read here.  It includes this section on ESM bank recapitalisation.

Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include:

  1. direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU;
  2. the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities;
  3. the recapitalisation should always occur using estimated real economic values;
  4. direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.

This is not EU policy and there does appear to be some contradictions with the June 29th Euro Area Summit Statement but it does give some important interpretations about how that statement could be implemented.