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Tag Archives: Incentives

A recent analysis of bus drivers for the Minnesota Metro Transit system provided some interesting data:

  • Base pay for drivers is nearly $50,000 a year.
  • The top earner in the system made $120,000 a year.
    • He did this by working, on average, 74 hours a week.
  • Overtime in the system has jumped by 52 percent from 2008 to 2010.
  • A driver on overtime – paid at time and a half – saves Metro Transit $4 an hour on average.
    • This due to the fact that the agency would have to pay for training, additional benefits and pension.
  • A union agreement says that no more than 24 percent of Metro Transit’s workforce can be part time – prompting the agency to turn to overtime.
  • In October, 89 percent of weekday overtime assignments were during rush hour and lasted less than three hours.

The incentives are undeniable.  For a system that demands flexibility; traffic doesn’t occur in neat 8 hour blocks, the rules prohibit the proper response.  Further, regulations surrounding benefits, those benefits that include vacation, retirement and health care, make it more cost effective to work an already employed person than to hire someone else.  And lastly, being a Metro Transit driver isn’t all that bad; 50 large is a good deal of money.

Finally I’d like to point out that for at least one of these drivers, the overtime is a feature and not a bug.  And it’s a feature because of decisions HE’S made in HIS life:

Lance Wallace is happy to drive a few extra hours if it means his wife can stay home with their four children – all younger than 5.

The New Hope man is among the top 5 percent of overtime earners at Metro Transit. Picking up extra shifts and working nearly every day, he averages 60 to 70 hours a week. The $37,700 in overtime he earned last year pushed his total earnings to $86,400.

“I don’t really want to work overtime,” Wallace said. “But I do it to make up the income.”

The extra work doesn’t make him “overly tired,” Wallace said. In fact, after working two jobs before, he “feels good” to now work where he can dictate his own hours.

Mr. Wallace is a father.  A father of FOUR.  A father of FOUR in a family that has the mother stay home.  And of those FOUR kids, all are younger than 5.  And this father of four young children is happy that he’s able to work the hours he does in order to prevent having to carry two jobs.

My point?  Incentives matter.  Raising the cost of hiring means that you will see less hiring.  Wage earners will enjoy working more hours if it benefits them, not the other way around.  Government union work pays well.  People who have 4 kids in 4 years time have a more limited ability to dictate their time.

The other day I asked if we could incent people to cross a reasonably busy freeway by growing the financial reward for doing so?  For example, line 1000 people up on an interstate highway and place $5 on the other side.  Some number of people, maybe zero, will try to cross to claim that $5.

Now make it $500.  More people will try to cross for $500 than will try for $5.

We all agree.  We get it.

In short, we know that incentives matter.

Go back to the scenario.  Suppose that the financial reward for crossing the freeway became large enough that a relatively significant number of people made the attempt.  And one of them was struck by a car and perished as a result.

Who is to blame?

  1. The driver of the car?
  2. The the individual creating the incentive?
  3. The individual who attempted to cross the freeway?

Assume:

  1. 1000 people on the North side of an East-West freeway.
  2. Someone on the South side of that same freeway with money to give away to anyone who crosses the freeway.
  3. An amount of traffic that would allow a pedestrian the chance of crossing with a reasonable danger level of being struck by a car.

Do we all agree that more people will cross the freeway as the amount of money on the other side increases?

 

I stumbled upon a recent report, Hat Tip Calculated Risk, that is saying a number of states are changing their unemployment eligibility standards.  Apparently the number of weeks that a person is eligible for unemployment has been a standard 26 weeks:

…the maximum number of weeks that jobless workers can receive unemployment insurance to less than 26 weeks—a threshold that had served as a standard for all 50 states for more than half a century…

So, for 50 years we have been following a standard without question.  It turns out that at least 6 states in the good ol’ US of A actually DO read TarHeel Red.

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Let’s get one thing clear.

  1. I care for the people less fortunate.
  2. The government has no role in that caring.

Okay, that’s two, but the second is important.  The government has a role.  And that role is to act as the referee in disputes.  It is to make sure that we all face the same rules and laws.  Sure, there is a cost in maintaining a government, so we tax to pay for it.  But that role of government is not meant to take money from those who have it and just flat out GIVE it to those who don’t.

When that role is given to the government, bad things happen.  Really bad things.

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For a long time I have railed on the current policy of providing long-term unemployment benefits to people out of work.  I’ve gone further and documented available jobs in my area.  Granted, the jobs are rather unattractive and have, in some cases, offended friends and family who maybe themselves or know someone who has been or is currently, unemployed.

I’ve suspended that series.

However, my point all along is not that people who aren’t taking those jobs but relying on benefits are lazy, it’s that they are rational.  The incentives are all wrong.

For example, if I’m unemployed and collecting $350.00 a week what is the marginal value of me taking a job that pays, say $8 an hour for 40 hours?  Well, it works out like this:

  1. $8*40 hours equals $320.00
  2. The first $50.00 is “burden free”, so that means only $270.00 of my $320  counts against me.
  3. Because my benefits are $350 and I “earned” $270.00, my unemployment benefit check is now $80.00.
  4. Adding my wage and my check, my new take is $400.00.
  5. Because I was earning $350.00 BEFORE my job, my incremental “raise” is 50 bucks.
  6. For 40 hours of work I earned an extra $50.00.
  7. That is about $1.25 an hour.  And when I say about, I mean exactly.
  8. Who expects anyone to work for 1 twenty 5 and hour American?
  9. No one.

And THAT is why our unemployment rate is so high.

Anyway, that’s not my point.  This is:

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There was a time, not so long ago, that people were free to choose.  They could do a thing, and, based on that thing, expect a specific outcome.

This was as true in banking as it is in everything in life.  There is no free lunch.

However, then came along lawmakers.  Those people who think they can institute “fairness” and legislate morality.

These people felt they could pass laws that would limit banks and limit ill begotten profits all in the name of “the common man”.

Now we see the fruits of their labor.

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We have a long way to go folks.

If you need further proof, just check out this story:

Strategic default — opting to walk away from a mortgage you can afford — isn’t a new phenomenon in the housing crisis. But with home values continuing to decline, more owners are finding themselves in a position where they may see it as a savvy business decision to destroy their credit rather than wait years for prices to recover.

Likier put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge.

He listed the townhouse for $249,000, figuring he would bring $20,000 to the closing table to facilitate a deal. The listing has since dropped to $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.

And the real killer?

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he’s comfortable with his decision.

Yowza.  A tough decision.  And one I agree with.

See, when working with contracts and finances, the deal is what the deal is.  The bank is no more willing to do the right thing” than you should be.

So this makes sense:

“I did a lot of soul-searching about whether it was morally the right thing to do,” he said. “I felt there was no moral obligation to make a payment. The contract says it’s a financial obligation, not a moral obligation.

“I was in a boat with a slow leak. It was manageable, but I know I was slowly sinking.”

Until we stop that sinking, we’re going to see more and more of this.

I have come to understand that many of the friends and colleagues I disagree with are not disagreeing with me because they want bad things to happen.  On the contrary, I feel that those folks are just as interested in the welfare of our country and the people in it as I am.

Rather than mean spirited, they are well intentioned.  It’s just that each have our own version of the path to those intentions.

But, when well intentioned people craft laws in the dead of night and don’t read those laws, bad things happen.

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I told my wife on Friday or was it Saturday okay, today, that I think I’m turning into a curmudgeony old man.  I forget stuff, get irritated at others when I do.

I DON’T like it when people drive on my grass [i’m still cool with kids, so I guess I’m not wholly there yet] and I like my driveway leaf free.

And I’m noticing that service ain’t what it used to be.

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