Wednesday, March 21, 2007

Is Wage Insurance What I've Been Looking For?

Greg brings up the new wage insurance proposal that I have been meaning to blog about.

He's skeptical. I'm interested.

In part my reasons are political economy. I am looking for a mechanism that will prompt all Americans to buy into to globalization and technological change. I understand that globalization per se is overly blamed for job losses but I think that's the term the populace uses for "things beyond our control."

I want to assuage their fears and let them know that the things beyond their control are evolving in a way that on average will benefit them more than it will hurt them.

Secondly, I am concerned about the welfare implications of policies which pass our basic cost-benefit test. If I am forced to choose between assuming that the marginal utility of income is constant across the population or that everyone has the same utility function with respect to aggregate consumption, I won't hesitate to choose the later.

For non-nerds I mean that if I either have to assume that $1000 means just as much to Bill Gates as it does to Bill the Plumber or to assume that Bill Gates would value $1000 the same as Bill the Plumber, if he had Bill the Plumbers income then I am going to go with the second one.

This means that I have to worry about who gets what benefit. I believe there was a time when Milton Friedman's comment that we are generalized in consumption and therefore will all benefit from lower prices was enough. However, I think that the new economy is systematically biased in favor of talented people in ways that cannot be ignored.

15 comments:

dWj said...

I think the wage insurance idea makes more sense for older people than for younger people. A thirty-year-old whose comparative advantage vis-a-vis a foreigner is not what he is currently doing should be expected to find something else to do, and twenty year olds should be left encouraged not to become such thirty year olds. His father, who could less reliably have imagined how the world would change in thirty five years, is probably harder to retrain, and doesn't have all that much time left in the job market anyway, perhaps should be the recipient of a partial cushion for a few years.

dWj said...

Oh, incidentally:

Who do you think has a higher marginal utility of beanie babies, the guy you know who already has a bunch of them, or the guy who doesn't have any?

I suppose if you have to make one assumption or the other, sure, pretend utilities are the same. I would think my ideal, though, would be somewhere in between the two options you presented; there are people who choose money over other things and there are people who choose nonpecuniary benefits. I know people with graduate degrees -- in real subjects, not literature -- who have low-paying jobs that they chose over less-interesting career paths.

Karl Smith said...

Who do you think has a higher marginal utility of beanie babies, the guy you know who already has a bunch of them, or the guy who doesn't have any?

Thanks for making this point. This is why its a question.

Perhaps, wealthier people are wealthy because they have a higher marginal utility of income at any given point.

Incomes are endogenous and so it doesn't make sense to assume that preferences are the same for people with different income.

However, if you have to choose one over the other, then I have to go with identical utility functions.

Camdyn said...

Good for people to know.

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