Inequality and Guard Labor

April 27th, 2014 at 1:22 pm

Excellent piece of work here by Samuel Bowles and Arjun Jayadev showing the correlation between inequality and guard labor across countries.  Why didn’t I think of making this graph?!

A few notable points:

–The authors stress that they are observing correlations but neither do they shrink from suggesting obvious causal linkages.

–They note in passing that this same relationship exists across American states, which underscores the validity of the relationship.

–It’s not hard to imagine, as they suggest, that there are cultural, political, and policy differences that lead a Scandinavian country, like Demark, to have both low inequality and fewer guards as a share of employment; this doesn’t disprove causality at all—it just points out that these relationships have more causes than you can plot on two axes.

–They note another correlation not shown here: higher social welfare spending, less guard labor.  I’m reminded of a pretty solid literature showing that some of the net benefits of investment in quality early childhood education comes from reduced costs associated with crime.

–There is a school of thought that higher inequality increases the incentives for rewards and innovation, since it increases the benefits of “winning” and the costs of “losing.”  Perhaps, though there’s certainly no evidence in correlations between the growth of inequality and that of productivity.  But I find this connection more compelling and concerning:

“You have money spent on guarding stuff rather than making stuff,” said Michael Hood, an economist at Barclays Capital. “There’s a large population standing around in blue blazers rather than engaged in more productive activities.” He was talking about Latin America, but could have been describing things in the United States.

ineq_guard

Source: NYT, link above.

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9 comments in reply to "Inequality and Guard Labor"

  1. Brett says:

    That seems like it would be limited by the cost of labor. You can have a ton of guards standing around if you either have comparatively cheap labor (the PIIGS up there in the top right corner), or a lot of cheap immigrant labor (the UK, US). If there’s no cheap labor then you either have to hope your technological security measures work, or spend more time lobbying for a competent police force.


  2. smith says:

    U.S. data on productivity is a) misleading, and b) incorrect. This blog tries not to shirk from inconvenient facts. So in discussing inequality, which it dislikes, it still admits that productivity has risen. Here is what’s missing to put the role of productivity in context:

    In a downturn or difficult times, businesses cut payroll. We like to think they let go the least productive (dead wood). But of course they may also let go the most highly paid (and replace older with younger). In either case, productivity rises, even though quality may suffer as experience declines. One could argue hard times make for a stronger economy as marginal businesses fail, and workers adjust. But our present extended recession is cyclical, not structural, and highly wasteful, whatever the benefits to productivity, and hence profits. This is part of a business mantra since the 1980s, downsize, cut expenses instead of improving quality or expanding. Growth through consolidation, businesses buying competitors, or expanding by taking over markets of failed competitors, also increases productivity while at the same time cutting payroll and leading to inefficient concentration and control of markets.

    Since productivity is output/input or in simpler terms, (price of widget)/(cost of widget) or
    (price of widget consulting)/(cost of widget services), the above only addresses reducing the costs, the denominator of the numerator/denominator. So what about the numerator?
    (the number for productivity increases if the top number, the numerator increase or the bottom number, the denominator, decreases)

    Here are three ways to artificially increase the numerator. Artificial in this case means inflating prices without any benefit, increase in actual goods or services/per cost, which is what we actually value in productivity. I’ll make three points.

    A) Trading – In a service economy, consultant A can charge $1,000/hour to B. B can turn around and charge $1,000/hour to A. Reports are traded, advice is given, nothing is produced. More of our economy functions exactly like this, and rising inequality fosters it’s growth.
    B) Rents – Monopolies, oligopolies, and concentration of wealth, allow price inflation without any benefit. It contributes to rising inequality.
    C) Health costs and defense – While health and defense get their share of rents, they especially don’t add benefits. If we’re spending more on lung cancer drugs because more women smoke and big pharma profits, that’s not progress even though productivity rises. (See also big agri, obesity, and diabetes) Likewise, despite peace dividend, check current spending vs. 2000, and then add homeland security not included. To make things worse, both health and defense industries are particularly vulnerable rents due to limited competition.

    So there is good increased productivity and not-so-good increased productivity, and I think we get mostly the latter. I’d write a 700 page book about this if I had grant money.


    • Robert Buttons says:

      Too late. Bastiat already wrote the book on good and not-so-good productivity, and it’s WAY shorter than 700 pp:
      “Ce qu’on voit et ce qu’on ne voit pas”(1850), more common known as the broken windows fallacy.


    • smith says:

      I left out an important source of productivity from inflated GDP. It is due to inequality and bidding. Excessive pay to the 1% enables them to bid against each other for goods and services because their climbs beyond very low inflation and beyond their previous need. Bidding up the price of items increases prices and thus GDP without actually adding value. Bidding in this sense doesn’t necessarily connote direct competitive buying among each other, though that is one aspect. It can be bidding against the 2% or other elements of the 99% or it can be against themselves and savings. Generally sellers would be foolish to charge the 1% less than they can afford to bear.


  3. Robert Buttons says:

    There is one prominent economist at the NYT who lauds economic benefits of preparation for a fake alien attack. By that logic, more guards, even if they aren’t guarding anything, is a good thing.


  4. Bob says:

    Not to sound alarmist but we have large numbers people who, until recently, were engaged in private military security (mercenaries) who have less work now that the Iraq and Afghanistan wars have wound down. Add to this a large number of exiting military and a soft labor market and there are a lot of potential hired guns out there.


  5. root_e says:

    And that is a calculation totally outside the domain of standard econ and game theory where it is assumed that the unemployed starve quietly secure in the knowledge that things are pareto optimal or something.


  6. Kaleberg says:

    The similarity to the Soviet Union is striking. There is the stagnant economy, huge increases in military spending, a vastly growing security state, and a horde of apologists chanting blind economic slogans while totally insulated from the effects of their policies. As during the Cold War, the central power has to rely most blindly on its ideological rantings as it is most afraid of being called to account for its incompetence. Meanwhile, the satellites can go their merry way improving their economies, as long as they avoid the wrath of the IMF.

    It might help if one measured labor productivity in terms of what additional goods and services the one providing the labor gets, rather than in terms of some abstract function. As they used to say in the Soviet Union: “They pretend to pay us, and we pretend to work.”


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