Matt Nolan

Dom post article: Beware those bearing gifts of productivity

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Article is here.

Discussion on Rates Blog is here.

Money quote:

Both political parties are unwilling to face that, with respect to government policies, there is a fundamental trade-off between some social values (fairness, justice, etc) and the level of productive activity.  This trade-off is one of the primary reasons for the existence of government – and yet neither of the political parties seem willing or able to recognise it.

As a result, next time we hear the government discuss the importance of productivity, or we hear some international body talk about the goal of productivity growth, let’s try not to forget that there is a trade-off – and let’s ask exactly what this trade-off is.

Matt Nolan

Wages: Real debt, relative prices, and the labour market

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In a recent column by Paul Krugman, he bemoans the fact that wages appear to be falling (ht Economist’s View). His primary justification for this comes from the following section:

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Nigel Pinkerton

Judith Tizzard down but not out?

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I saw this in the Herald today and it got me thinking:

If Ms Lee wins the byelection, the next person on National’s list, Cam Calder, will enter Parliament.

Correct me if I’m wrong, but electorate seats aren’t supposed to change the total number of seats a party gets (unless you win more than your party vote like the Maori party did). Labour avoided the “Vote Twyford, get Tizard” dilemma when Phil Tyford stepped aside. But the fact that the Greens will split Labours vote and give the fresh face of Melissa Lea a chance raises an interesting possibility.

If Melissa Lea wins the seat then her title will change from list MP to MP for Mt Albert, but National won’t get any extra seats in parliament. This will leave a vacant seat that Labour will have to fill by taking the next person on their list.

So is it “vote Lea get Tizzard” after all?

Update: Seems that if National wins they do get another seat – so a byelection can change the proportionality of parliament. Seems weird!

Matt Nolan

NZIER: Suggestions for unemployment policy

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Interesting piece from NZIER on unemployment policies.

It is a fairly broad sweep over the issues – and so does not go into many of the technical or policy related issues of some concepts. However, it provides a clear way of viewing a number of the potential policies.

However, I was surprised to see no mention of the “paradox of thrift” or how unemployment was fundamentally a “surplus” and thereby represented a “market failure”. If we are going to discuss a set of explicit unemployment policies we need these factors to justify it.

Matt Nolan

A “mum” view on economists

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In preparation for Mother’s Day on Sunday it is important to see what mum’s think about economics.

Over at www.postcardsfromyomomma.com we get to find out (ht Kids prefer cheese via Marginal Revolution)

Backstory: After I got a D on my economics exam.

Honey, econ is for boring and ugly people. You shouldn’t be in that class, you’re too pretty and creative. I’m sick of these hard classes. Next semester sign up for gym classes.

Boring? Ugly? Not creative? I don’t like where this mum is going …

Matt Nolan

What was with the strong wage growth?

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The recent labour market data illustrated that employment was falling – but interestingly average wages rose 5.3% on a year earlier.  Does this mean things are stronger than expected?  [I would note that this number didn’t surprise any of the economists I have talked to today – it is just possible that some people may see it as surprising].

The short answer is no.  Lets look at some reasons why:

  1. Wages are a lagging indicator – generally, people move wages based on where wages have moved previously as well as what they can negotiate.  In such a situation it takes wage growth longer to change than employment.
  2. We are looking at a “mean wage” – as a result the composition of jobs matters.  If only unproductive jobs are getting flushed out, the “mean wage” will grow more strongly than the effective underlying wage in a fully employed economy.
  3. When employment is falling, staff are getting fired.  At some level this may increase the “marginal product” of staff in a similar role.  If this is what is going on, then firms will share the cost savings associated with sacking some staff with the other staff through wage increases.

Fundamentally, wages lag movements in the economy.  So don’t let anyone tell you that the strong wage growth implies that our economy is looking super duper – as that isn’t the normal direction of events.  Keep an eye on the leading indicators:  house sales, durable goods sales, consumer and business confidence, and commodity prices.