Will Taylor

High Wages and Productivity: Where are the emperor’s Clothes??

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So there is a big debate raging in the New Zealand blogosphere about the exodus of labor to Australia. Matt
joined in on the debate and made the very valid point that it’s real wages we need to care about, not the nominal wage and that for this happen we basically need productivity increase so that output increases. The same people with more money buying the same set of goods will just push prices up leaving us where we started.

While I don’t want to wade heavily into the debate, I’m still undecided what the best course to take is as I’m not totally convinced by the arguments from the left or the right. The one thing that does bother me is that strengthening employee power to negotiate higher wages seams to be though of as a magic wand. In line with Matt’s argument, giving workers higher wages doesn’t really do much if there isn’t a corresponding increase in productivity. People seem to have the causality all wrong, in general increases in productivity increase wages not the other way round.

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Matt Nolan

Migrant outflows to Australia, wages, and productivity: What is going on?

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A rising outflow of New Zealander’s to Australia is causing concern amongst a bunch of people. People move away for a number of reasons, as the Department of Labour nicely points out. However, as economists we like to think at the margin. We are not interested in the general reasons that people are leaving New Zealand, in so much as we are interested in the ‘marginal’ factors that are driving people overseas. The non-policy factors mentioned by DOL are constant, the weather will stay warmer, the country will remain as close, and the culture will remain similar. However, the policy factors (e.g wages, taxes) can be changed, and as a result will have an impact on the ‘change’ in migration levels (beyond some sort of trend).

The Standard provides one piece of the puzzle we require in order to control migrant outflows – we need higher wages. However, the solutions they provide may not necessarily be the correct ones. A important marginal factor in the decision on whether to stay and work in NZ, or do so in Australia is the difference in ‘real disposable income’. Ignoring non-wage income for now leaves us with ‘real disposable salary’. Increasing nominal wages may not lead to an increase in real disposable salary if all it does is increase inflation. If we pay everyone more $$$ but don’t increase the number of goods avaliable to buy, then the price of goods will increase and peoples true living standard will not change.

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Will Taylor

Teacher Crisis: Scraping the bottom of the barrel

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Interesting piece on stuff today about the teacher crisis currently happening in primary schools. Apparently it has gotten so bad that they are considering hiring teachers who don’t have adequate English language skills. A survey of 79 schools showed that three quarters of the shortlisted candidates were ranked as either poor or very poor. I didn’t realise that it was this bad.

Hiring primary school teachers who can’t speak adequate English is outrageous. It’s very common at university to have economics and finance lecturers who can’t communicate properly in English (attracting the best staff is a problem in the tertiary sector too given that we don’t have discipline specific salaries to reflect the high paying jobs economics and finance phds can get, see a great paper by Professor Glenn Boyle on the evidence) and I must say it’s a terrible learning environment. The subtleties of the English language often mean that by wording a question slightly differently it has a completely different meaning. Expecting a third year university student to decipher the actual question is one thing, our brains are fully developed by then. But when you have kids at primary school whose brains are still developing not being able to understand their teacher is another.
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Will Taylor

Student Loans: The good the bad and the Ugly

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National announced yesterday that it is going to keep interest free student loans. As someone with a student loan I love the scheme and the free money it gives me. When I put my economist hat I think that it is terrible policy since it provides terrible incentives to for students to borrow. I personally didn’t have a student loan until they became interest free at which point I borrowed as much money as I possibly could.

Not only are National not avoiding electoral suicide by alienating students, they have also said they will provide a 10% bonus on early payments of more than $500 to help combat the fact that students have no incentive to pay back their loan while they are still in New Zealand (0% nominal rate=negative real rate due to inflation, i.e. your debt shrinks over time, isn’t that cool?).

Now this sounds nice on the face of it, but David Farrar has put on economist hat and worked out that while this improved incentives for repayment, it exasperates the perverse incentives regarding borrowing. DPF notes that an optimal strategy for a student would be to borrow as much as you could and then pay it off at the end of the year giving you a nice 10% return for your effort. However the problem is actually worse than that. Read more

Matt Nolan

Interest free student loans and compulsory schooling: Is there a better way?

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Recently the two main political parties in New Zealand have announced schemes that aim to, in some ways, help up-skill 16 and 17 years olds. At the same time, National has come out stating that it will leave student loans interest free, but provide a reward for repayments (leading to much debate).

Although these may seem like separate issues, when I look at the economy the issues of youth employment/skills, education, and unemployment/employment are intensely linked. As a result any policy that the parties take up on one of these issues must take into account how it influences these other sections of society.

In this post my aim is to put forward my current belief of what an ideal policy would look like for these three sectors – that’s right, I said policy not policies. Personally I think that all three are so closely linked that we have to use the same or very similar instruments in order to provide the right sort of outcome. Now, this analysis will be unashamedly normative, I’m going to be packing it with value judgments. I will try to make these judgments clear so you can either i) attack me on them, ii) work out where my objective logic may have gone wrong, separate of the value judgments.

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Matt Nolan

The curse of the forecast

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This article came out at 9.30am stating that the New Zealand dollar was going to test $US0.80 again.

Even with an positive surprise in the merchandise trade figures, this is what happened:

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Macro-man notices a similar trend with Economist magazine covers.

Update:  If anyone wonders why the dollar is falling, it is because of concerns in the US (we are a carry trade currency, so if something goes wrong in the US people sell our currency and buy US dollars – crazy huh) about some bond issuers.