Matt Nolan

Record price for dairy products – are the manufacturers ‘taking advantage’ of us

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I fear that someone may look at the December PPI data and get a misleading impression about where the dairy money is going, this fear seems mildly justified by the tone of this piece by NZPA.

Looking at the December quarter figure by itself, we see a massive 15% increase in the price of manufactured dairy goods (the price dairy products are sold to clients of the manufacturer (eg supermarkets)), while the cost of inputs to the manufacturer rose only 0.8%. Furthermore, the price received by dairy farmers (where the income will be flowing in) only increased by 0.2%.
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Matt Nolan

Cigarette cases: Are they ‘too tempting’

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More research out of Massey has recommended increasing government regulation. In this case, researchers found that the display case for cigarettes makes them too tempting for those trying to quit and for rebellious teenagers. As it is election year, politicians are interested in this ‘issue’ and are thinking about tightening the regulation surrounding these cigarette cases.

Externality taxes and regulation are two of our favorite topics on this blog (see here, here, here, and here), and as a result we have to talk about it.

In order to start to analyse this problem, I’m going to use one of our old posts on porn and manipulation.
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Matt Nolan

Petrol taxes and inflation

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At Kiwiblog there is mention of Don Brash stating that we should think about allowing the Reserve Bank to increase and reduce the petrol tax. This is something that the Reserve Bank has actually suggested itself (at the same time they suggested a floating GST rate).

As far as I can tell they want to do it as during a boom asset prices drive consumption, so if you tax petrol you introduce a negative income effect which lowers consumption – opposite for a recession. This works because demand for petrol is inelastic (as there are few substitutes for driving your car), and as a result the amount a person spends on fuel will increase with the price – leaving them less to spend on other stuff. This will reduce demand-pull inflation, and allows the RBNZ to keep a fund of money that they can inject into the economy when a recession is threatening. A benefit is the fact that the administration costs of the tax are low, as the institutions are already in place.

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jamesz

Revealed preferences in prostitution

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The stereotypical customer of prostitutes is a seedy, desperate old man in a trenchcoat. I have tended to think (without any empirical evidence, I hasten to add) that it’s more likely to be a stereotype based on prejudice rather than experience or observations. After all, not many people have the opportunity to observe a representative cross-section of brothel clients. However, today’s article on Stuff reporting that many prostitutes are being displaced by under-age sex workers was very disturbing.

Of course, it is terrible when children are pressed into such occupations and our first reaction is shock that it happens at all. What I find almost more worrying though is that there is demand for their services. Economists use the theory of revealed preference to analyse these choices. The idea is that a person looking for a prostitute has the option of engaging either an under-age worker or a legal worker. If they choose to engage the inderage worker in those circumstances then it indicates that they prefer sex with an under-age girl. Given that they could be charged with a serious crime if caught, the cost of an underage prostitute is significantly higher than the cost of engaging a legal prostitute. This suggests a strong preference for under-age sex among those men who choose to use the services of under-age workers.

If Stuff is correct that workers over the age of 18 are being displaced, it suggests that many men who seek to prostitutes’ services are not just seedy but have a tendency to prefer under-aged sex. So maybe the stereotype isn’t harsh enough!?

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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