Matt Nolan

Falling wage rates: Should we be concerned?

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According to the Employers and Manufacturers Association’s 22% of job types are being done for a lower wage in 2009 then they were in 2008.  Furthermore, according to recent labour market data 1% of actual employees have received a pay cut in the past year.

At first this seems like a bad thing.  Falling wages mean falling labour income.  If other prices are unchanged such movement implies that people will be falling below the poverty line.  Furthermore, it implies greater levels of government spending – as income rebates are negatively related to income.

However, the pain the economy is experiencing is because of the recent recession, and the large shock to activity New Zealand (and the rest of the world) has experienced.  One of the reasons why we often urgently run to government stimulus during a recession is because wages and prices do not adjust to a change in the economic situation.

Specificially, nominal wages are said to be sticky.  If the nominal wage is stuck and we have a recesssion (which reduces the demand for labour) then we end up with a “surplus of labour” – or unemployment.  The less sticky wages are, the less unemployment the economy faces.

As a result, the fact that wage rates have been able to move downwards is a good thing – it suggests that the economy has been able to adjust and keep more people in work (and as a result, keep activity rolling at a higher level) then would have been the case if wage rates hadn’t been adjustable.

jamesz

Taking unilateral action

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When it comes to climate change the biggest argument against unilateral action is the lack of any tangible benefit. What can a single country really do to mitigate climate change? However, an article by Akira Yakita suggests that there are welfare benefits to action outside of the benefits to the climate.

His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.

While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ’98 to ’06, while the overall growth in car sales is ~1%pa.

Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.

Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.

jamesz

Differential funding for uni departments

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Peter Mandelson wants to revamp British universities to make them more inclusive and have them focus more on job-relevant courses. Proponents of liberal arts schools are predictably outraged. I agree with them that they shouldn’t be discriminated against. A fair system would make people pay for the benefit they receive from their education, and have the government subsidise to the value of any positive externalities from education.

To draw an analogy to university staff pay, the quality of university staff depends in part upon the difference between their university salary and their outside options. As Daniel Hamermesh puts it:

If a university went ahead and paid equally, lowering economists’ pay and raising French professors’ pay, it would have a great French staff and a dreadful bunch of economists.

Of course, Hamermesh is talking from the perspective of a US academic. In the US they pay different salaries for different disciplines. In NZ we do pay all university staff equally and the research bears out the truth of Hamermesh’s conjecture. So paying people with different market values equally is essentially a subsidy on those with low market value.

To come back to the issue of students’ fees, subsidising all students equally is a subsidy on students whose degrees have only private value. Surely, in order to be fair to all departments and all students, the subsidy on education should pay for only the social benefit. The entire private benefit to the student should be paid for by the student. At the very least the subsidy should be proportionate to the social benefit and differ across disciplines.

So who would be the winners and who would be the losers? Speculate away!

jamesz

Going vegetarian?

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A friend of mine who is passionately vegetarian pointed me to this report as a good economic reason to eschew meat:

…two World Bank environmental advisers claim that instead of 18 per cent of global emissions being caused by meat, the true figure is 51 per cent.

So am I thinking about becoming vegetarian since meat is known to be more costly than I previously thought? Of course not. As tempting as it is to see these things in black and white, it’s very unlikely that the cost of meat will ever get high enough that we cease to eat it. Rather people will substitute away from eating as much meat as the price rises.
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jamesz

Illegal downloading

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The Herald reports that most music is bought by the very same people who illegally download a lot of tracks. It says

plans … to crack down on illegal downloaders by threatening to cut their internet connections … could harm the music industry by punishing its core customers.

Now that seems like a stretch. The key here is to figure out a plausible counterfactual to the present situation. The Herald seems to be suggesting that, if these people didn’t have access to an internet connection then they’d lose all interest in music. Which is pretty unlikely! Let’s think about what might be a more plausible counterfactual.

Suppose there are two kinds of music: paid for and illegal. If illegal becomes more expensive all of a sudden – because of the risk of your internet being cut off – then two things happen. First, you’ll probably consume less music overall, because it’s more expensive now. Secondly, you’ll switch out some of your illegally obtained music for paid music because the two are substitutes. So a first look suggests that the music industry would probably be better off if the cost of illegal downloads went up, even if everyone who buys also downloads.
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Matt Nolan

More on drug policy

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Stumbling and Mumbling discusses the seemingly strange fact that public opinion is so heavily against the legalisation of drugs that pose a lower social cost than some already legal drugs.

Now the legalisation of drugs is an issue we have discussed at length here ( ).  Now if society is fully informed of the costs and benefits of drug use, then I am happy for policy to be instituted along these lines, since many drugs actually help health and make people feel better like cannabis drugs and other products, you can get online, which you can buy here and you won’t be disappointed on the quality of these products.

This does raise an interesting question for me though.  Why do countries with a closer tie to Britain (Britain, the US, NZ, Australia) seem to push an agenda of strong drug regulations when a number of other nations (the Netherlands, Portugal) tend to be more interested in allowing individual action to guide the use of these products?

What makes Anglo-Saxon countries so much more sure of their ability to centrally determine what is the best set of actions for their citizens?  What makes Anglo-Saxon governments so sure of their superiority relative to the people they are “serving”?