Should Women Pay Less Tax?

Economists are always thinking, and nothing gets those brains churning like tax incentives.* Alesina and Ichino recently published an article in the Financial Times arguing that the income tax rate for women should be lower. Download their paper (and brace yourself for algebra) here. Women, they say, have a more elastic labour supply, meaning that they are more responsive to wage changes than men.

The writers suggest the policy would further social goals by increasing participation by women in the workforce (as staying home with children would be more costly) while being revenue neutral. And then a classic: “A lower tax on women would lower their pretax wage and increase their after-tax wage, making it relatively cheap for an employer to hire women. Discrimination would then become more costly”. In other words, pay women less so their after-tax wage is equal or higher to mens’, or workplace discrimination against women can be lessened by creating incentives to discriminate against women. A contradiction in terms if I’ve ever seen one.

Further, the overall notion that women have a more elastic labour supply is problematic as it disregards class. How many poor women, a group that is disproportionately working, can increase labour hours in response to higher wages? The authors also believe women’s new found higher incomes will allow their families to purchase child care at market prices, which makes me wonder if the authors know how much unsubsidized day care costs. Poor to middle class families struggle to fund childcare, and it’s not a matter of an extra couple hundred bucks a month.

Contrary to what Alesina and Ichino say, this isn’t a policy where mainstream economists and “social activists” can agree on. Cute tax schemes won’t give women and their families more choices and make them better off. We can tackle this goal directly by, for example, increasing minimum wages (as women are more likely to be earning them) to living wage levels and funding a national childcare program.

* The writer is a self-hating economist.

CN profit drops, but don’t worry about that trusty dividend

CN announced today that their profit dropped 10% last quarter, down to a disappointing $324 million. The company said that if it wasn’t for the ongoing strike, profits would be up 10%. But don’t worry shareholders: the company is keeping it’s stock price high by continuing it’s share buy-back program, and won’t be touching that trusty 21 cent per quarter dividend. They must be planning on a favourable decision from the federally appointed arbitrator.

Banking on short-term memory: the ATM fee debate

Travis Fast

Canadian banks are so aristocratic in their attitude that when they are actually forced to defend themselves they always come up sounding flat and disingenuous. To be sure there is no doubt that it costs some money to maintain a network of some 4000 ATMs. But what the banks fail to mention is that this network has already been paid for in perpetuity.

The fact is back when the banks went through a major workforce downsizing operation in the mid 1990s they did so partly by arguing that many of their branches and tellers had become redundant in the face of technological advances (ATMs). The banks installed so many ATMs precisely because it allowed them to save on labour and operating costs. That is, ATMs pay for themselves compared to having real people and real buildings. In fact, the ATM side of the business is so lucrative that representatives of the Banking industry refuse to open their books to parliamentary scrutiny. No doubt due to an embarrassment of riches.

How lucrative is the ATM business? I don’t really know but we do have some useful analogues to get a sense of it. One of the best comparisons is to be found at your humble payphone. In fact, the phone network is a very close analogue to the ATM network and the cost of running both networks should be roughly comparable as well. If I can make a local call for .25 cents at a payphone and the phone company can still break even, it gives you sense of just how lucrative those ATM fees are. Think of it, $3.00 for a local call from a payphone. If only the CRTC was so generous to the telecoms.

A more sober proposal to regulate ATM fees would be to ban the practice of double billing whereby your bank charges you for using another banks ATM. For example if I use a Royal Bank ATM not only does the Royal Bank charge me $1.50 but my bank also charges me $1.50 for a total cost of $3.00. At the very least your home Bank should be barred from charging you the additional $1.50. This would mean that the cost of a local call was still six times higher than it should be, but at least it would not be quite so obscene.

Of course there are two other possibilities. The creation of a public banking system; or blow the retail canadian banking market open to real competition. Perhaps those are the choices the banks should be given rather then regulating their less than human service fees.

Why small independent businesses should be pro union

The traditional hostility of small independent businesses (SIBs) to unions has never made much sense to me. In short, it seems to be an irrational ideological hostility. Why irrational? Glad you asked.

The fact is that most SIBs will never be targeted for unionization. Operations with less than twenty employees that are not part of a larger chain or franchise have very little to fear from unions. As far as organizing goes such establishments are a waste of union resources. Organizing and servicing are not costless activities and if unions are to have any chance of recouping those costs through dues the establishments must be much larger in order to warrant the attention of organizers.

But if this basic economic logic explains why SIBs have little to fear from unions it does not say why they should be pro union and not just ambivalent. However, if one takes into account the world of big box stores and franchises, which have cost advantages, and hence pricing power, over most SIBs then one begins to see why SIBs ought to be pro union. In so far as unionization leads to increased wages over non-unionized labour, then, *ceteris paribus*, large establishments will have less pricing power that they can use to squeeze their SIB counterparts.

Every time Walmart moves into a new community SIBs tremble at the prospect. As well they should. It is very hard to go toe to toe in pricing war with such a behemoth. However, were stores like Walmart, Canadian Tire, and Home Depot to be unionized then they would have much less pricing power and this would mean less price competition for their SIB counterparts. Ipso facto, the anti union stance of many SIBs is an irrational ideological belief.

**Of course all things are not equal and in many cases unionization increases productivity thereby off-setting the cost of higher wages.

Thinking of Investing in Canada Post’s Permanent Stamps? Think Again!

Canada Post recently launched it’s permanent stamp. Purchase the stamp now and never have to worry about increases to stamp rates that force you to buy those pesky 1 cent stamps.

Thinking of hedging against future stamp price increase by stocking up? Think again. Canada Post can only legally raise stamp prices by 66.67% of the inflation rate. According to my calculation, the average inflation rate in the last 30 years is about 4.8%. Two-thirds of that is 3.2%. A pretty shitty annual return if you ask me. This is especially true if you consider the last 10 years where inflation averaged under 2%.

Don’t be tricked by Canada Post’s marketing. You’re better off throwing your millions in the TSX Composite, which averaged about 8% over the same period.

Government as Payday Lender?

Last November, Manitoba began it’s crackdown on payday loan companies by forcing them to license. The business model is pretty simple: those that live paycheque to paycheque are short some weeks and need to borrow money. The companies in this market, which include MoneyMart, provide the service… for a heavy price. While Federal law defines criminal interest rates as 60% and above, many payday lenders get around the limits by charging administration or other fixed fees that make the effective interest rates much higher.

Manitoba is going the regulatory route, which is an important first step. But ultimately poor people need better access to credit — true in the developing world and the developed. Microcredit has been the focus of about 25,000 development economics papers (estimation by author) in the last 20 years. Microfinance operations were originally initiated by locally-led NGOs, who found that, to the surprise of many, dirt poor borrowers had repayment rates upwards of 99%. The private sector has learned from these findings to make money in the developing world lending small amounts of money at relatively low interest rates. For example, Scotiabank has microfinance operations in the Caribbean.

So why has the credit market failed the poor in Canada? I’m not exactly sure, but it likely has something to do with (a) lenders’ inability to be perfectly informed about the borrower’s repayment characteristics; and (b) lack of regulation, effectively letting lender’s get away with it.

Governments, through tax collection, administration of social programs, etc., have an informational advantage and, I suggest, would be able to run a fair and efficient lending program that relies upon the principles learned from the developing world experience. (Privacy concerns would of course have to be addressed.) Relative to other programs aimed at helping the poor, the program would be extremely cheap if not self sustaining (after an initial capital outlay), especially given governments cheap access to credit. The initiative could also involve borrowers working to organize and administer the program, ultimately a way to close the gap between designers and users of social programs. So Manitoba, what are you waiting for?

North Bay P3 Math

It hasn’t been covered in southern Ontario, but there is an emerging controversy over the cost of a public-private-partnership (P3) arrangement undertaken to expand and manage the North Bay hospital. See the article here.

Those following my regular rants on P3s may find it surprising that I agree with the province in their methodology for calculating total cost. The province originally announced the project as a $551 million venture. The project involved a company (Plenary Health) building, financing, and operating the additions to the hospital. The province has agreed to pay Plenary Health $35 million a year over the 30-year contract period.

The Ontario Health Coalition and others did the quick math, 30 times $35 million, and got $1.05 billion. But that comparison is illegitimate — streams of payments over time must be adjusted into today’s terms as $35 million in the future is not worth $35 million today (for those interested, see a discussion on discounting )

The real problem with the province’s math is in the figures and analysis that have not been shared with the public, particularly when it comes to cost comparisons to non-P3 arrangements. Infrastructure Ontario, the province’s P3 broker, put out a press release citing a report by PriceWaterhouse Coopers that estimates the savings (relative to traditional infrastructure delivery) of the P3 at $57 million.

But the consultant’s report hasn’t been made public. No questions can be asked about the assumptions underlying the report, which would range from financing cost differentials between the government and the private sector to hospital operating costs under a government model. As far as I’m concerned, the conclusion is useless without the full report. The public has been completely ignored — perhaps the term private-private partnership is more appropriate?

CN Workers on Strike

Just a couple of quick and dirty facts about the financial health of CN.

According to the Report on Business CN is the 34th largest employer in Canada with 21, 540 employees. Their reported revenue per employee was $333,676 and their reported profit per employee was a whopping $74,420; making CN one of the top ten most profitable companies per employee of the top 50 employers in Canada. On a profit, after tax basis, CN is 19th largest company in Canada.

Who can blame workers for wantng their share of the largesse? Equity holders perhaps. Good thing they have the Cons to back them up.

US Manufacturing and Labour income shares of value added

Travis Fast

Over at Relentlessly Progressive Economics (no-affiliation) Erin Weir has commented on the absurdity of Neil Reynolds* proposition that the key to productivity growth in manufacturing is slashing workers. The absurdity lies in the contradiction between short term gains in productivity driven by labour shedding and work intensification and more medium to long term growth in manufacturing (and ultimately manufacturing productivity) by expanding investment. All Reynolds is really pointing to in the US is that US manufactures have done a good job at pumping and dumping such that productivity looks good for now, but in the future such a strategy will ultimately lead to the furthering hollowing out of US manufacturing.

The FT recently ran an article about the 4-year, quarter-to-quarter tear that profit growth has been on in the US. Interestingly, the article notes that unfortunately investment has been slumping. So Reynolds laudatory celebration of the US model is not only premature it is dangerous.

Over at a Worthwhile Canadian Initiative, Stephen Gordon made a passing comment that the skew of income distribution in favour of capital maybe the result of an increasing pool of retirees drawing on pension income. I find this claim suspect because labour force participation rates have been growing. So the real metric here is the number of employed divided by the number of retirees and not the merely the percent of the population over 60 as his own graph does. Why professor Gordon chooses 60 and not 65 is beyond me, perhaps that was the only readily available comparative series. Whatever the reason, if one is attempting to track the number of retirees over the last say five years the cut off ought to be the average age of retirement and not 60.

But to bring some more clarity to the issue we can look at what has gone on in US manufacturing which speaks both to Reynolds’ and Gordon’s argument. In the graph below I have plotted three different measures of labour income shares of value added (two relative measures for manufacturing).

us-mfg_labour-income-shares-and-employment.jpg

The first plot (black line with trend), measures the labour income share of value added in manufacturing. Clearly labours’ take of the total output they produce is declining. This is Reynolds’ supposed productivity miracle in action. The next plot (the dashed red line) plots labour income for the total US economy divided by the total value added in the total economy. Here we see only a small decline in labours income share. Notice, however, that both of the time series show an upward and temporary blip in 2001. This makes sense, owners of capital were not able to shed labour fast enough to preserve their overall income shares thus causing a temporary increase in labours relative cut. Also note that our series ends in 2003 just as the massive profit party was beginning in the US, so our series actually overstates labours income share of value added for both manufacturing and the total economy.

The last plot (the green hashed line), plots labour income in manufacturing as a percent of total, economy wide, labour income. This a nice metric because it provides a compound measure of the both the decline in manufacturing employment and the decline in the ability of manufacturing labour to preserve their relative share of the output they produce.

*It must also be said that Reynolds take on the job shedding in China is rather silly. China has been unwinding inefficient state enterprises which has provided much of the supposed loss in manufacturing employment. Similarily, just as shifting workers from low productivity sectors like agriculture to higher productivity sectors like manufacturing increases overall productivity along side, ceteris paribus, declining employment growth despite increasing employment in manufacturing.

When the business lobby (and their economists) do and do not embrace the law of supply and demand

Travis Fast

British Columbia and now Alberta have removed restrictions on the employment of teenagers under the age of fifteen. In both cases, it was business lobby groups that demanded, and got, the changes to the provincial labour standards acts. In order to put these changes into context we need to rewind the clock to when youth unemployment was double the average rate and wages for the hourly paid labour force had been stagnant for the better part of two decades: the mid 1990s.

Back then business lobby groups and their brain trust (your garden variety economist) were arguing that the solution to unemployment was to lower UI eligibility and benefits and reduce welfare payments. People were unemployed because these two programs in combination forced the reservation wage above the minimum wage. That is, such policies were said to be interfering with the proper operation of the forces of supply and demand. The coercion of labour markets needed to be liberated.

Fast-forward a decade, now the forces of supply and demand are working, in some small degree to labours advantage, and our good business people and their associated lobby groups and economists have successfully argued that the solution to labour shortages is not to raise wages to induce a greater supply of labour, but, rather, to manipulate supply by bringing in foreign workers on special limited term contracts and to lower the legal age of employment; that is, let us be clear, to legalize child labour.

Don’t expect economists to get all upset about this as they tend, like business people, to worship the forces of supply and demand when they are working in the interests of owners and shun them in favour of the big corporate nanny state when the forces of supply and demand are working in the favour of labour; kind of like their attitude towards monopoly pricing.

Labour market coercion apparently is only natural when it lowers wages not when it raises them. And this gives the lie to all the neoliberal rhetoric about free markets. It appears labour will not even be allowed to have the last of the summer’s wine from this bull market.