Thursday, 4 May 2017

Good points on pay equity

Today's reader mailbag brings a few excellent points on the government's pay equity deal for homecare workers.
I think your discussion of pay equity (at least the bit you quote in the blog) does not clearly distinguish between two very different questions: (i) is there an equity issue (ie evidence of discrimination against women)? (ii) is government intervention likely to create more distortions than it solves. One of the reasons I think Hayek is very powerful (cf the "Constitution of Liberty" on anti-trust legislation) by being happy to allow there will be many distortions where real world markets do not deliver efficient outcomes. The force of his argument is that the justification for government intervention has to show how the intervention improves on than outcomes after intervention.

In this context, there is nothing inherent to the way markets operate that will deliver equity and if consumer (or government funding) preferences are racist and sexist, so will the outcomes be. You can demonstrate (as Becker did in the late 1950s) that people make themselves materially worse off by acting in this way, but this is just one of many examples of people trading material welfare to maximise utility (the other obvious ones are giving to charity, voting to pay higher taxes and paying to reduce risk).

But that is not enough to justify government intervention. To justify intervention, it needs to be shown that the outcomes are "better" after the intervention. For instance, if the care industry responds to additional funding by investing in human and physical capital that means many people currently employed in the industry lose their jobs, the outcome may be fairer in the sense of having removed gender inequity for those who are qualified, but have done so by punishing those unable to get qualifications and/or younger people. In fact, you will find in health and social care that occupational licensing has tended to do precisely this, but with a twist that many of the people on lower pay are simply reclassified. So nurses used to do a wide of range tasks. It is no longer worth employing a fully trained nurse to do the lower skilled tasks so "trainees" do some of them and others are done by people explicitly labelled for those lower skilled tasks (e.g. "cleaners").

Therefore my prediction of the impact of the legislation is this:
  • After the initial redistribution there will be a joint effort by health unions and employers to increase the training barriers to be eligible for the higher pay;
  • This will include an extended training period when younger people will be paid at a lower rate because they are "training". Much of the on-the-job component of training will be doing many of the lower skilled tasks previously done by everyone;
  • There will be a plethora of new job titles created, where all will have lower certification requirements than "fully qualified" carers and therefore have lower pay.
  • Most of the people in the lower qualified jobs will be women, earning slightly less than they would previously have earned. They will be disproportionately from poor backgrounds, more likely to be Maori and PI, and will find most practical means of promotion blocked because of the new licensing requirements...
I am not sure that counts as equitable...?
I agree with my correspondent that Becker models under-emphasise that the path to equilibrium can be slow. Taste-based discrimination only really holds up where the customers have a preference for discrimination (unlikely in the homecare case) or where there's a severe lack of competition - and that's the dominant funder problem that MBIE's RIS talked about.  

I fear that my correspondent is right about what comes next. I hope that what comes next is the DHBs shifting to allow more people to hire their carers through MyCare. It's better for the homecare clients and better for the workers and cheaper for the health system. But I'm a bit pessimistic there too - it would require back-end changes that DHBs seem to like throwing into a too-hard basket. 

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