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Column: The problems with Richard Tol’s ESRI working paper

Are economists better placed than psychologists to explain why people go to work? Nat O’Connor looks at the controversial ESRI working paper.

Nat O'Connor

THE ESRI WITHDREW a working paper last night. The Irish Times reported that this was ‘unprecedented’. However, they obviously missed the fact that another ESRI report (on waste incineration) was being ‘re-examined’ by the ESRI last year.

Working in a think-tank that also publishes discussion papers that are the author’s sole responsibility, I have a certain sympathy for the ESRI’s position. The whole point about working papers – and the Cost of Working piece was just that, not a ‘report’ as The Irish Times claims – is that they are open for discussion and debate, and there is an opportunity for new information and new analysis to influence the author’s thinking before a final version is produced.

Taken to a logical extreme, it is always possible that working papers in the social sciences are simply wrong. The margin of error in statistical analysis always allows for a few lemons. But this is not always obvious and we need the publication of more, and more diverse, analysis in Ireland, not less.

The pity about this brief storm is that the withdrawal of the paper will focus more attention on its uncertain conclusions than if it was quietly ignored. It’s worth noting a couple of things about the paper (a pdf version of which can be read here).

‘Looking only at short-term cash incentives won’t tell the whole story’

First of all, the data is from the 2004/05 Household Budget Survey, at a time when we had practically full employment in Ireland. While the ‘incentives’ might seem to have made moving from welfare to work unattractive, the fact was that practically everyone was actually working and many people left welfare to take up employment. This somewhat deflates the central argument of the paper.

The paper rightly points out the fact that childcare costs are extremely high and that they – and other costs – are a barrier to people entering work. There is no doubt that there is a weight of evidence that people, especially women, are put off from entering the labour market because of the costs of childcare. People parenting alone are particularly affected by this.

But the paper does not examine other costs, and factors that offset these costs. For example, housing costs are a major factor. People who gain employment will lose rent supplement, whereas people living in local authority social housing can maintain their lower-than-average ‘differential rent’ when they gain employment. (Differential rent is not a bad thing, as cheaper rent makes it possible for some people to take lower paid employment). In other words, there are lots of major variables not examined in the paper that change the incentives about working.

Moreover, are economists better placed than psychologists to explain why people go to work? During the boom period, some people went to work for marginal benefit, when costs like childcare are factored in. However, people work in order to maintain social networks, for a sense of personal independence and for lots of other reasons. Looking only at a set of short-term cash ‘incentives’ won’t tell the whole story.

Finally, there are other important factors to be examined. NERI point out that the ratio of people unemployed to job vacancies in Ireland is the second worst in the EU. In other words, there are far more people looking for work than there are jobs, and no amount of changing incentives is going to improve that. The real focus should be on boosting demand in the economy to generate more employment opportunities.

Nat O’Connor is the Director of TASC, an independent think-tank dedicated to addressing Ireland’s high level of economic inequality. This article was originally published at Progressive Economy.

Richard Tol: This says more about the ESRI’s professionalism than mine  >

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