Matt Nolan

Higher minimum wage – higher employment?

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Over at Not Sneaky they are discussing how a higher minimum wage may lead to higher employment when we have a firm that has market power in the labour market (hat-tip CPW). The argument is a very interesting one as economists often view a minimum wage as a way of placing a price floor, which leads to a lower level of employment and social ‘surplus’.

On the blog he uses this fine graph to explain the result. The purple line illustrates the path of wages and employment. According to that, there is a range where higher wages create greater employment in the labour market. Let me attempt to explain this.

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Matt Nolan

Relative prices and GST

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Over time we have been covering specific issues with how income tax and GST influence economic activity. This post was supposed to describe how an increase in GST with a proportional decrease in a flat income tax would lead to no change in consumer activity. This required the assumption that the incidence of tax on the household in both cases was equal, which will not be true.

Next we discussed the incidence of income tax in this post, which allowed us to say that some of the burden of the tax falls on labour, but some also falls on the firms that employ workers. The next step is to look at the incidence associated with a goods and services tax, and some of the inefficiencies that this issue causes for this tax type. Read more

Matt Nolan

Poll tax on kids

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Sticking to the recent theme of externality taxes, some researchers from Perth suggested that Australians should ‘fine’ parents for each kid they have above two. Now we know I’m a big fan of externality taxes, but I’m not too sure about this one.

As we have already established a carbon trading scheme, this externality tax is not being used to cover carbon creation from the consumption or production of certain goods – the kids will pay for all of this when they grow up. This leaves us with the carbon emissions that the child makes from living, by doing things such as breathing.
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Matt Nolan

The desirability of rent controls

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Over at Marginal Revolution, Tyler Cowen posts on what some people have to say about rent control. Several points are put forward as to why rent controls are a good thing, namely:

  1. People do not become happier from a larger, or better quality house and so a lower quality – lower price equilibrium would be preferable.
  2. Given this, lower prices will increase the supply of property over time by getting owners to put more small apartments in a given building.
  3. As it is harder to find an apartment temporarily people are forced to commit to a region for a longer period of time, which may provide a positive externality, or help to solve prisoners dilemma issues through the use of a repeated game.

If you cannot be bothered reading my long, boring post on the issue, then you can just say whatever you think about the above points in the comments 🙂
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Will Taylor

Thoughts on the Warehouse Decision

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I found this point particularly interesting

“it is not possible to conclude that the relevant markets would be more competitive if the Warehouse Extra concept is pursued by the acquirer than if the Warehouse is not acquired”

I have always been of the opinion that the Extra concept would be much more effective in the hands of Woolworths or Foodstuffs due to the massive scale they have in the wholesale market. One of the supermarkets could then use the “halo” effect to the benefit of their grocery operations. I think this would lead to more competition than the status quo.

Another really interesting point is that the high court ditched the 5% price effect threshold in favor of 2% and still found that the acquisition wouldn’t substantially lessen competition. While this is interesting in it self, it also has profound implications for future mergers as the commission will have leeway to use different thresholds depending on the situation now that there is high court precedence for doing so

Matt Nolan

Fat tax?

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Following the discuss on lower GST for healthy foods I feel it is appropriate to discuss the other side of the coin, a tax on inherently unhealthy food, a fat tax.

You know the type of foods I’m talking about, chocolate bars, chips, V’s (I can see all this on my desk, looks like this tax will hit me pretty hard 🙂 ). If there is a social cost to the consumption of these types of goods we should tax them, and send the funds to the place where the externality will fall.

In this case, drinking too much V will lead to me needing to use health services more than I would have with no V. In order to ensure a socially efficient outcome, V needs to be taxed, and the money needs to be sent to the hospital. This will lead to me reducing my consumption of V (not likely) or paying the value of the negative externality I impose on society (my health care bill) or a mix.

Now this tax is on the consumption decisions of people, so the level of the tax will depend on how much we believe the consumption of V’s adds to the cost of running health care in NZ (or any other externalities it may cause). If we are so keen on taxing smoking, fuel, and alcohol, then why aren’t we taxing Moro bars and V’s?

Update:  Here is an article that goes into (marginally) more detail about a fat tax.