jamesz

Poor migrants

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Contrast this new government policy:

Poor migrants who speak little or no English are to be subject to stricter immigration laws… Immigration categories are to be changed in an effort to “reduce the number of unskilled migrants who find it difficult to get jobs and are more likely to get benefit payments”.

to this academic research:

The vast wage differences across countries are a sizeable economic distortion, and offer the possibility of large gains through international migration. From a development perspective, a key challenge is to increase the opportunities for poor, relatively less skilled, individuals to participate in migration.

Read more

jamesz

Size matters

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The Economist thinks that the prevalence of small firms in Greece is a problem.

A bias to small firms is costly. The productivity of European firms with fewer than 20 workers is on average little more than half that of firms with 250 or more workers (see right-hand chart). …If the best small firms were able to grow bigger, Greece and the rest might solve their competitiveness problems…

This is pertinent to New Zealand since we also have a small number of very large firms, although we may not have the prevalence of very small firms that Greece does. Beyond the arguments over data issues, it’s interesting to ask whether we might agree with The Economist that this poses a problem for growth. Certainly, New Zealand’s growth might be higher if firms grew, but then why haven’t they already? Not because the owners don’t want to reap the rewards of growth, surely.

Of course, what we need to ask is why the proportion of small firms/large firms is the way it is. The Economist points to tax and labour laws in Greece that punish large firms. In New Zealand it is hard to point to similar legal barriers to growth in firm size, as far as I know. It may be that New Zealand firm owners prefer smaller firms, or that it is difficult for firms to find local, skilled labour (random speculation, not to be taken too seriously). What this highlights is the importance of understanding the differences in countries, as well as their similarities, before rushing to emulate them. Are we the next Ireland/Singapore/Finland? Well, no, we’re a bit different from all those countries and we can’t replicate their successes without understanding those differences.

Matt Nolan

Weekend reading

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This post from mainly macro combines my favourite (although getting dated) book on macroeconomics, my preferred methodological statement for economic modeling, and tackles the idea of microfoundations in macroeconomics.

One of my favourite blog posts in a while – I suggest you have a peek at it.  One thing I would note is that, for applied macro, one day we will realise that microfoundations provide many potential paths to a single macro relationship – and in order to get anything policy relevant we will need to come up with an idea of what is “plausible” in order to narrow this set.

This involves not just working with data, but having to make subjective calls – and that is the area where things get hairy fast.

I’d also note that microfoundations are a huge part of academic economics as they are currently doing the technical work of creating micro models that provide potential explanations of macro phenomenon.  This is an essential task, even if much of the work ends up with potential explanations we view as “not plausible” in the end.

jamesz

New blogger: Acemoglu

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Daron Acemoglu has a new book out with James Robinson–the catchily titled Why Nations Fail–and they have a blog to support it. Add it to your reader because, seriously, Daron Acemoglu daily in your inbox: what’s not to like!?

jamesz

Behavioural prejudices

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Eric has a post up in which he criticises behavioural economics:

Behavioural economics usually leaves a bad taste in my mouth. Too much of it just feels like …it was done in the 50s and 60s.

Essentially, his problem with the field appears to be that its results are often used to rationalise paternalism. I don’t have time to respond in detail now but my first thoughts are:

  • Don’t dismiss results just because you don’t like the potential implications or the messenger. That would be like me saying I don’t like the Coase theorem just because it’s constantly misused by libertarians.
  • There is a big difference between disliking a result and disliking the conclusions that some people draw from it.
  • Behavioural economics is a very young field so it’s not surprising that it feels like mainstream economics from fifty years ago. It hasn’t yet matured into a coherent framework, but we should encourage practitioners to move in that direction, rather than dismissing it for lack of maturity.
  • The research in behavioural economics has, until recently, been spearheaded by psychologists so it isn’t necessarily tightly tied to the sort of framework economists use. That’s not a problem, it’s an opportunity for economists!
  • The youth of the field and its present empirical focus mean that it often feels very piecemeal. At the very least, it certainly doesn’t have the monolithic feel of mainstream choice theory. It’s hard to say whether economists will be able to tie it all together into as satisfying a framework as standard choice theory, but the lack of an overarching theory doesn’t make it wrong. It may be that economists eventually just have to accept that their field is becoming more fragmented, which just reflects the difficulty of accurately describing human choices.

I’ll return to some of these themes over the course of the week as I have more time.

Matt Nolan

A famous fallacy

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Apologies for the lack of posting.  I am currently in the process of finalising forecasts at my workplace – which of course involve traveling to the farthest reaches of New Zealand and battling mythical animals.  In many ways its similar to the labours of Hercules – and as a result gives me little chance to post.

However, I do plan to write on the welfare reforms at some point, as its an issue I like to have an opinion on.  This means I have to quickly point out that a lot of commentators and politicians are making a simple error – and they should stop – they are committing the lump of labour fallacy.

Sorry but the government doesn’t actually create jobs per see, outsourcing doesn’t “reduce the stock of jobs” here, and jobs are not the be all and end all of the universe.  What matters is income, living standards, and subjective happiness – issues jobs are related too.  However, the focus on work helps us to miss the point, and convinces politicians to introduce dumb policies that make many, if not all, of us worse off.

Now, time to get back to the Waikato to make battle with their ridiculously strong quarterly retail result.