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Sunday, April 01, 2007

Dangers of Uninformed Statistical Inferences

Don Boudreaux:
Not long ago, Corinne Maier boasted in The New York Times that "... in many years French workers have a higher productivity rate than their American counterparts."

Measures of productivity do regularly reveal French workers to be more productive than American workers. So Ms. Maier, a trained economist, must be right to conclude that this statistic is "proof that you can work better by working less."

In fact, she's probably mistaken.

France's labor regulations are much more burdensome than those in the US. By artificially raising the cost of hiring workers in France, these regulations make it unprofitable to hire the lowest-skilled workers. One result is that only higher-skilled workers get jobs in France. But because US labor regulations are less restrictive, a higher proportion of low-skilled workers find jobs in America.

With a larger proportion of highly skilled workers, France's average productivity is bound to be higher.

But the French shouldn't be cheering.

I drive this point home to my students by asking them what would happen to average worker productivity if Uncle Sam were to impose a minimum wage of $500 per hour. The correct answer is: "The productivity of the average worker would skyrocket!" This achievement, however, would be no cause for celebration, for this higher productivity would result chiefly from the firing of all workers incapable of producing at least $500 worth of output per hour. Measured productivity in America would jump impressively even as the US economy tanked and most workers were cast into lasting unemployment.

The larger lesson is that proper interpretations of statistics often are surprisingly counterintuitive.

After all, our intuition tells us that countries with higher labor productivity do better economically than do countries with lower worker productivity. But our intuition is wrong.

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