Friday, February 10, 2012

Charles Murray versus Art Laffer

David Frum and Paul Krugman notice a passage in “Is the White Working Class Coming Apart?” that suggests that the income effect may dominate the substitution effect when it comes to the labor supply curve:

As of 2009, a very bad year economically, the median hourly wage for drivers of delivery trucks was $13.84; for carpenter’s helpers, $12.63; for building cleaners, $13.37. That means $505 to $554 for a forty-hour week, or $25,260 to $27,680 for a fifty-week year. Those are not great incomes, but they are enough to be able to live a decent existence – almost twice the poverty level even if you are married and your wife doesn’t work. So why would you not work if a job opening landed in your lap? Why would you not work a full forty hours if the hours were available? Why not work more than forty hours?

Paul comments:

But this argument applies just as much to the rich as to the poor. And strange to say, you never do find conservatives arguing that we shouldn’t worry about higher tax rates on the rich, because they’ll just work harder to be able to afford those luxury goods; or that a higher inheritance tax probably expands work effort, because it would force the Paris Hiltons of this world to go out and get real jobs.

Art Laffer wanted us to believe just the opposite – that higher tax rates would induce Paris Hilton to work less. In other words, the Laffer curve presumes a very strong substitution effect and a very weak income effect. I guess Charles Murray’s assertion here questions the underlying premise of the Laugher Curve!


Luke Lea said...

You have to wonder about the reliability of these figures. Where are the error bars?

A word about the methodology would help.

Sandwichman said...

Charles Murray is a decoy.