No matter how much economists like to pretend otherwise, the so-called Nobel Prize in economics is not really a Nobel Prize. It is formally known as the Swedish Riksbank’s Prize in Economic Science in Memory of Alfred Nobel. It was not part of the original prizes that Alfred Nobel created more than 120 years ago but, since its inauguration in 1969, the economics prize has risen to be presumed as a formal Nobel prize.
This is unfortunate. As I explained a year ago, economics
is, has always been, and will always be a social science. Unlike physics, with which many economists would like to compare their discipline, it cannot be studied by means of rigorous mathematical models and strict, universally applicable laws.
I said this with reference to the work that awarded three economists the Nobel Memorial Prize last year. Their work, I explained, was not of a quality that could meet the original criteria for the prize regarding originality in scholarly contributions.
This year’s announcement of Claudia Goldin, a Harvard economist, reinforces my point, but this year they have gone one step further than handing out the prize for insubstantial contributions. This prize rewards research that does not even have a coherent foundation in economic theory.
If there is a theoretical foundation to Goldin’s work, it is Marxist feminism, not economics.
The Royal Swedish Academy of Sciences explains giving the prize to Goldin for her explanation of why women participate in the workforce. The Academy notes that women “are vastly underrepresented in the global labour market.” They also “earn less than men:”
Claudia Goldin has trawled the archives and collected over 200 years of data from the US, allowing her to demonstrate how and why gender differences in earnings and employment have changed over time. Goldin showed that female participation in the labour market did not have an upward trend over this entire period, but instead forms a U-shaped curve.
As it turns out, it is not a U-shaped curve, and therefore her research does not produce the results that the Nobel Prize committee likes so much. But more on that in a moment. The prize motivation continues:
The participation of married women decreased with the transition from an agrarian to an industrial society in the early nineteenth century, but then started to increase with the growth of the service sector in the early twentieth century.
According to Goldin herself, the substantial increase in women’s workforce participation happened in the early 1970s. In an article titled “The Power of the Pill” (Journal of Political Economy, August 2002), Goldin and her co-author Lawrence Katz conclude that the availability to women of a birth control pill was a major factor in explaining the rise of women’s workforce participation in the 1970s.
Goldin deserves recognition for the statistical evidence in this article. It is compelling, especially compared to other noteworthy contributions of hers. However, it is not convincing: in her pursuit of an explanation of women’s decisions on the work-life balance, Goldin does not even mention the one big factor that affected every worker in America in the 1970s. That factor is the interaction between high inflation and a very complex income-tax code.
Here is how this interaction worked at the time. From January 1973 to January 1974, U.S. consumer price inflation rose from 3.7% to 9.4%. It remained above 10% through April 1975 but remained elevated. By the end of 1978, it was back up above 9% and stayed there until November 1981.
Wages and salaries rose to compensate for high inflation, but those raises often evaporated thanks to an incredibly complicated federal income-tax system. A head of household, with a working husband and a stay-at-home mom, faced 34 different tax brackets with rates ranging from 14% on the first $1,000 to 70% at the highest end.
This created a rapidly rising marginal tax on labor income, but that was not all. The tax rates were not automatically indexed to inflation, which led to a phenomenon the Germans elegantly refer to as ‘cold progression:’
- Suppose a worker earned $36,000 in 1973;
- He paid 45% on the last $4,000 of his income, and an average of 31.3% on his annual salary (assuming there are no deductions);
- In January of 1974 he gets a 15% raise to compensate for inflation;
- He now pays a marginal tax rate of 52% and an average of 33.8% on his entire income.
Although these incomes were on the higher side in the early 1970s, the effect of taxes on people’s earnings was the same for everyone. The tax code raised the rate by 2-3 percentage points per bracket, which usually spanned $2,000.
The sharp rise in taxes with higher income precluded increased workforce participation by a single-income earner. A married couple was better off having the wife go out and work; if she and her husband had previously filed taxes as “head of household,” they would now move over to the “married filing jointly” column. This reduced the number of tax brackets to 25, with a little bit of tax-rate relief per bracket.
You do not have to be an economist to realize how significant inflation and high taxes were in motivating women to enter the workforce. The tax-inflation combo also explains why young women chose to work at a higher degree than before. Young couples simply had to save up more money before they could buy the two staples of American family life: a new car and a home.
The tax reform under President Reagan significantly eased the tax burden on America’s families. The tax system in place during Claudia Goldin’s period of choice, the 1970s, clearly incentivized women to enter the workforce. However, Goldin seems to be precluded from considering this, and the reason is found in the theory that she relies on when trying to explain her statistical findings.
The evidence that Goldin presents in her birth pill paper is based on elaborate econometrics. She has done a thorough job with it, although she admits that most of the statistical data she uses has other originators. This dramatically devalues her original contribution, especially since the body of her work is confined to elaborate studies of statistical correlations.
It is assumed among economists, and others who rely on high volumes of statistical analysis, that if variable X correlates with variable Y beyond a certain point, and if no other variable shows the same level of correlation with Y, then X causes Y. This is a valid assumption, one that can be extended to far less sophisticated statistical inquiries than those for which Claudia Goldin has been awarded the prize.
The point where she runs into problems is where she tries to rationalize the correlations she has found. In short: she wants to motivate why those correlations are also causalities.
Back in the good old days when economists began their journey to a doctorate by studying political economy, they were very careful in developing credible theoretical explanations of whatever statistical evidence they presented. This has changed; economists have lost the ability to develop elaborate theoretical explanations.
Claudia Goldin is no exception—quite the contrary. Her birth control pill explanation of women’s rising workforce participation lacks any theory attempting to explain how women make work-life decisions.
Instead of explicating a theory, what she offers is an ad-hoc approach suggesting that women were forced into marrying and raising children as housewives because they were unable to prevent pregnancies. In short, women were trapped in marriages against their will.
This implicit premise runs well with Marxist-based feminist theory, according to which marriages are like capitalism. The man as the capitalist, the woman as the worker, and sexuality is the capital. Men and women struggle for control over it. Therefore, when women can control their own reproduction, they are liberated.
There is not a single publication anywhere that proves that Marxist feminism is correct. Yet Claudia Goldin’s theory about birth control pills and women’s decisions to work has passed the supposedly meticulous scrutiny for a Nobel prize.
Even more surprising is the fact that the Nobel Committee let her rise to the top of their list even though she does not even mention the influence of taxes on women’s workforce participation.
I suspect that Goldin ignored taxes for the very reason that she is a Marxist feminist. Her problem is clear: if taxes explain the increase in female workforce participation, it means that women do not see work as a means to liberation. On the contrary, they are liberated in their traditional marriages. That in turn would lead to the conclusion that when Goldin says that she has statistical evidence that the birth control pill increased female workforce participation, she is simply looking at a statistical correlation—not an analytical conclusion.
Just because winter precedes summer, does not mean winter causes summer.
In addition to ignoring taxes, Goldin runs into problems with the U-shaped curve that the Nobel Prize committee refers to. It appears in “The U-Shaped Female Labor Force Function in Economic Development and Economic History” (NBER Working Paper No. 4707, April 1994), where its appearance is a bit crooked:
Figure 1
According to Goldin, this figure plots workforce participation for “women 45 to 59 years old against (log) per capita GDP.”
Right here, Goldin has some explanation to do. What happens if we ‘unlog’ the data? This completely changes what Goldin has plotted as a U-shaped curve. Without having seen the original data, I will venture out on a limb and suggest that the U shape vanishes completely. If presented thusly, Figure 1 would show no correlation worth mentioning.
In short, Claudia Goldin is showing us a statistical mirage. Based on this mirage, she suggests that
a) female workforce participation declines as countries transition from agrarian to basic industrial economies;
b) their workforce participation flattens out as industrialization increases; and
c) a sophisticated services-based economy again makes it attractive for women to go out and work.
In other words, Claudia Goldin suggests that big, structural changes to the economy affect the decisions of women whether or not to work. This is not as absurd an approach as it may seem—much of what is currently common knowledge in economics began its life as broad-brushed hypotheses. The problem here is that there is no time lapse: according to Goldin, the data in Figure 1 is from 1980 (the 1985 reference pertains to the inflation-base year for GDP).
Put simply: she has taken a snapshot of the economies in a large number of countries and then drawn conclusions as to how those economies evolve over time.
At the very best, this is a tenuous explanation; at worst, we can dismiss it as pure speculation. Just to see how easily we can do the latter, consider the fact that in 1980, all the countries in the upper right corner—possibly with the exception of Japan—are high-tax countries in one way or another. We already looked at what the high taxes of the 1970s did to working families in the United States; the Nordic countries all struggled with confiscatory income taxation at that time.
Britain underwent a tax revolution in the 1980s for the very same reason as the United States did. Sweden had its own tax reform at the end of that same decade. Since the observations in Figure 1 are from a year that preceded those tax reforms, as well as those under President Reagan, it is not only possible, but plausible, that the higher rate of female workforce participation in these countries compared to others with lower taxes, is a necessity, not a joyful choice.
The fact that Claudia Goldin does not see any of this, can confidently be attributed to her apparently implicit reliance on Marxist feminist theory. By awarding her the Nobel Memorial Prize in economics, the Swedish prize committee has effectively rewarded said theory—not some significant progress in the science of economics.
