Sensitivity analysis

by John Quiggin on December 27, 2006

One of the points on which economists generally agree on is that sensitivity analysis is a good thing. Broadly speaking, this means varying the (putatively) crucial parameters of a model and seeing what happens. If the results change a lot, the parameter justifies a closer look.

In the case of the Stern Review of the economics of global warming, sensitivity analysis quickly revelas that the crucial parameter is the pure rate of time preference. This is the extent to which we choose to discount future costs and benefits simply because they are in the future and (if they are far enough in the future) happening to different people and not ourselves. If like Stern, you choose a value near zero (just enough to account for the possibility that there will be no one around in the future, or at least no one in a position to care about our current choices on global warming), you reach the conclusion that immediate action to fix global warming is justified. If, like most of Stern’s critics you choose a rate of pure time preference like 3 per cent, implying that the welfare of people 90 years (roughly three generations) in the future counts for about one-sixteenth as much as the welfare of people alive today, you conclude that we should leave the problem to future generations.

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

What we earn, what we should earn

by Ingrid Robeyns on December 27, 2006

Can you ask your siblings and friends how much they earn? Can you ask your co-workers? I guess in many or most places in the world, this is a taboo. This is regrettable, since there are many unjustified earnings inequalities, often related to factors such as gender, race and nepotism. Unjust earnings inequalities can only fade away if individuals demand equal wages for equal work, but therefore they first need to know how much those who are doing this ‘equal work’ are earning (and in many countries much more is needed, such as a shift in power between labour and capital, to put it in these grand terms).

In 17 countries, there exists an internet tool, called the “wage indicator”:http://www.wageindicator.org/main, that can tell us how much people in a certain profession (with the same age, seniority, etc. etc.) earn, which may be useful information if you need to negotiate your wage, or if you think you or your colleague should be earning more. For labour scholars, the information gathered by the tool can be used to investigate pay inequalities, and many other trends and facts related to earnings and the workforce. “The Dutch version”:http://www.loonwijzer.nl/main/ was launched in 2001, and at present the wage indicator is available in “many countries”:http://www.wageindicator.org/main/Partnersworldwide, such as “South Africa”:http://www.mywage.co.za/main/, “India”:http://www.paycheck.in/main/, “Finland”:http://www.palkkalaskuri.fi/, “the UK”:http://www.paywizard.co.uk/ and “the USA”:http://www.worklifewizard.org/main/.

Clearly the wage indicator has its limitations too. One limitation is inherent for almost all surveys: sometimes you feel that your experience does not fit the questions, and therefore that you can’t answer the question properly. For example, when I had to give the number of years I had been employed, I didn’t know whether I should count my years working on my PhD or not (in the Netherlands and Belgium doctoral students are – euh – not students but employees, whereas in England, where I got my PhD degree, they are students.) Another problem is that there needs to be a minimal number of respondents who have responded to the questionnaire before anything statistically representative can be said about the average earnings of people with your profile. Hence even if you have no personal interest in figuring out what the typical person with your profile earns, you can do labour scholars a favour by filling out this survey. And by reporting any oddities you come across, or your views about these tools, in the comments section. I don’t personally know the scholars who run them, but I’m sure they’ll find us.