7 October 2021. Economists | London
The trouble with economists; London’s low wage sectors
Welcome to Just Two Things, which I try to publish daily, five days a week. (For the next few weeks this might be four days a week while I do a course: we’ll see how it goes). Some links may also appear on my blog from time to time. Links to the main articles are in cross-heads as well as the story.
#1: The trouble with economists
In his newsletter, Ryan Avent’s ire has been piqued recently by the hubris of economists in the face of climate change. Specifically, his ire has been piqued by an economists’ projection of the likely effects of climate change out to both 2200 and 2400. No you didn’t read either of those dates wrong.
The paper he mentions, by the way, thinks that climate change will result by 2200 in a loss of amenity of 10%. Which of course, isn’t trivial. It’s always good to be precise about 180-year outcomes.
(Siemens imagines the future. Image via Ars Technica/flickr, (CC BY-NC-ND 2.0))
What I enjoyed about this piece was both his analysis of why we’re in a position where we take such nonsense seriously, and what we might want to do instead. So I’m just going to pick up some extracts that allow me to thread my way through his argument.
So let’s start with why we end up taking economists seriously, where he starts by summarising the argument made by Binyamin Applelbaum’s book on this subject, The Economists’ Hour:
Whatever the policy question—whether there ought to be a military draft, for example, or how to regulate corporations—events tended to unfold in a fairly predictable way. Economists applied a mode of analysis to a phenomenon which seemed to cut to the heart of the problem, often because the economists abstracted away from important aspects of that problem. Then, partly because of the balance of political interests, and partly because it’s hard to beat a number with no number, the economic way of looking at things won out over alternate perspectives.
By the time the limitations of this approach became clear, of course, the circus had moved on. And since economics continues to be over-influential in policy matters, at this point the profession can probably afford to shrug.
All the same, as Avent observes:
To be actually useful and robust, an inquiry into most any economic question ought to rely on many sorts of analysis: including the use of models made tractable by simplifying assumptions and econometrics, but also simulation and more qualitative sorts of work—drawing on other social science fields, and even the humanities, as Dierdre McCloskey argues. If economics wildly overrates the utility of quantitative analyses built on absurd oversimplifications, then that’s a problem for all of us.
But it’s the absurdity of trying to make a credible model-based projection out 180 years or more using economics tools that has really got him going. After all, looking back 180 years (that’s back to 1840) tells us pretty quickly that quite a lot of assumptions are going to be wrong. (I’m reminded here of Vaclav Smil’s observation that a scientist arriving even in the late 19th century from thr 1840d would be utterly baffled because the fundamentals of science changed in the meantime.)
It is my personal view that a scholar with an appropriate degree of intellectual humility would not attempt to publish an analysis like this, because the uncertainty is simply too enormous and there is a chance that the headline figures will be misused. But if I were going to set those things aside and plow ahead nonetheless, I would definitely want to make some attempt to assess how climate change might affect prevailing institutions, systems of government, norms, beliefs, etc. If that seemed too hard, I might at least present, as part of the lit review, a survey of historical work on how climate variability may have affected society’s critical institutions in the past.
Of course, they are economists, so they don’t do this. They just assume everything away. (There’s a well known joke along these lines about an economist stranded on an island).
Avent suggests that the economists might point to one of those long-term charts showing living standards increasing steadily over that period. And as he observes, these charts ought to be the subject of quite a lot of critical study. (He doesn’t say it, but there are credible arguments that say that this long upward trajectory simply tracks our access to coal and then oil, which ought to give us some pause for thought right now.)
We ought to be absolutely captivated by those charts, and absolutely obsessed (as some economic historians are, bless them) with discovering: what extraordinary forces kept growth on that path, where they came from, why they aren’t present in other countries, and under what circumstances—or climates—they might erode. That kind of trend line doesn’t just happen. Why it looks like it does is among the most fascinating questions in all of science, nevermind economics. And yet economists are, to a remarkable degree, uninterested.
Obviously if you want some really credible long-term forecasting, you’d be better off with the well known futures report by Zager and Evans:
There are a lot of misleading assumptions about the London economy, because people see the wealth but don’t see the poverty.
So it was interesting to see a chart in a recent piece on the On London website that compared wage levels in London in different sectors with the London Living Wage.
(Source: On London)
So what the blue lines on the chart show is the wage levels of the people at the 10th percentile in different sectors (meaning that nine-tenths of people in the sector are better paid than they are).
What the orange lines show is the wages levels of people at the 25th percentile (meaning that three quarters of people in the sector are better paid than they are).
These are standard ONS employment categories.
The horizontal line shows the London Living Wage, currently at £10.85 per hour.
There are some quick observations from /this chart. The first is that in only 5 of the 15 sectors do those people on the 10th percentile make the London Living Wage, generally regarded as a minimum affordable standard of living for the city.
The second is how compressed the gap is between the blue and orange in most of these sectors, suggesting that the problem of low wages is prevalent.
As the author Richard Brown notes,
London jobs do pay a wage premium, but this is less than 10 per cent at the bottom end of low-paid sectors such as hospitality, security, residential care work and construction. In other words, the workers who most need the wage premium to live in London are also those least likely to get it.
And the result is that there are increasing labour shortages in these sectors.
A city which can’t pay its service workers enough to live on is a city that is no longer sustainable, economically or socially. It’s another data point that suggests that London’s current economic model is broken.
j2t#182
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