Job summit: For the Inquiring Mind blog

Adam Smith (the NZ blogger, not the 18^th Century Scottish Economist) has asked for comments surrounding the “job summit”. Given that this is a blog on New Zealand economics I would feel guilty about not sending some comments his way 🙂

There is a bullet point summary of the post at the bottom.

The idea of a “job summit” manages to capture one of the essential issues that makes government intervention during a recession possible (though it is not sufficient to make this intervention useful) – the possibility that the labour market is not clearing.

Why is our focus on the labour market? Well, if the labour market clears then we know that wages and conditions are such that the number of people willing to work and the number of employees that employers are willing to hire match. If this is the case, then any reduction in GDP will be the result of a real, required, change in the allocation of resources in the economy.

The fear is that (real) wages in some industries will remain too high following recent events – if this is the case then firms will cut staff levels more strongly than they should, and economic output and income will fall more sharply than the circumstances warrant.

Under this view the goal is NOT to “save jobs” or “prevent declines in economic activity” – both these goals could be counter-productive if the economy has truly experienced a structural shock. The real goal is too make sure that any endemic market failure in the labour market can be solved, to prevent unnecessary harm throughout the economy.

Now, this is not an easy feat – and it is not exactly clear that the government can improve outcomes in the current environment. However, with this in mind let’s discuss some of the upcoming stimulus plans.

Infrastructure

The government aims to move forward infrastructure spending to stimulate the economy. Now, there is a general feeling that the construction industry is struggling given the tightening of the labour market – so at first glance this may seem like a laudable idea. However, people that build roads aren’t the same people that build apartments and houses! If people cannot adjust their skills to move from residential building to infrastructural building – the stimulus will have no direct impact on employment.

Furthermore, the quality of spending matters. The government should NOT come up with new projects because it wants to stimulate the economy. A project that was of no value outside a recession is still of no value now.

However, moving forward already planned building projects can make sense if there is (temporary) slack in that area of the labour market – a factor that suggests that investment in residential building now would be extremely well timed (state houses etc).

Note how important the term “temporary” is here – trying to stimulate an area of the economy that is justifiably on its death bed will merely drag out the required adjustment (eg our retail sector).

Tax cuts

There have been calls for National to scrap tax cuts given the rising hole in the government’s budget. However, instead of scrapping taxes the government could simply think of different ways of using the tax cut to stimulate the economy.

For example, currently nominal wages are at a certain level – and so the entire tax cut would go to the employee. However, if the government instead stated that nominal wages must be cut by the amount of the tax cut then nominal wages would fall.

If we think the labour market isn’t clearing because nominal wages are “stuck” too high, then this type of tax cut would reduce the price of labour, leading to lower unemployment.  Furthermore, sections of the labour market that are currently paying the market wage would be pushed to increase nominal wages (so we are assuming nominal wages can rise but not fall) – implying that such a policy would improve the relative price signal in the labour market – an important issue when thinking about individuals investing in skills and the allocation of labour.

Education and the benefit – where we should be looking to ease the impact of a downturn

In the current economic environment, a sharp increase in unemployment in certain industries will often occur even when other industries are begging for work.

Fundamentally, the current shock has completed changed the set of skills that people in the New Zealand economy require. Although the issue isn’t as bad in New Zealand as it is in other countries (as we haven’t been over-building houses for example) there is still scope for some structural unemployment.

In this case, it would be good if people could “re-train”. Now this type of training is the same as standard investment – in this case the government can help by reducing uncertainty surrounding the investment and improving the availability of information surrounding the quality of the investment. Exactly how you do this is an issue for education experts – which I am not.

Now, I am not saying the government needs to throw money at education – if the investment is optimal then the individuals will make it anyway. However, making educational establishments flexible surrounding the number of students they can take on and the course they offer could be a good way of improving outcomes.

How does this relate to benefit policy? Well, it is the people who become unemployed now who need to upskill – these are the people that need to be told about the importance of further education. The Labour government was on the right track when they expanded apprenticeships – however, this all needs to go a step further. Helping people realise that they need “flexible” skills as well as hard and fast professions will help reduce structural unemployment – and help reduce the impact of recessions like the current one.

Bullet points

The fundamental statements surrounding a job summit here were:

• The aim isn’t to keep employment or GDP high – it is too make sure that the change in the economy represents the fundamental change in the structure of our economy,
• Infrastructure spending is no use if it focuses on areas were resources are already utilised, or on areas of the economy that need to shrink – marginal infrastructure projects are also not a good idea,
• Tax cuts shouldn’t be thrown away – but the target of the cuts could be moved,
• Education and benefit policy should be more closely integrated – campaigns stressing the importance of re-training, and aiming for “flexibility” in skills could be of use.

Note that the economy could shrink for the next three years, but as long as the labour market is able to adjust to the changing environment there is no role for government to improve outcomes – they can’t create value that isn’t there. Perpetually rising incomes are not a fact of life or a product of government policy.