Matt Nolan

Youth minimum wage and youth outcomes

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One question I’ve been receiving a lot during presentations is “what is the cause of the really high youth unemployment rate”.  I have been answering with two things:

  1. The youth minimum wage was significantly increased, making young people more expensive (but also making more young people want to participate in the labour market)
  2. A recession disproportionately hits the young, as they have less human capital and can be seen as a more “risky investment” then other labour types.

I usually go on to say that I can’t say which factor is bigger – I would need someone to do empirical work.

Luckily for me, the work has now been done.  The Department of Labour commissioned a report by Dean Hyslop and Steven Stillman which went through these issues.  Now these guys are top draw, so I’m pretty comfortable just stealing their results 😉

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Matt Nolan

Wealth distribution and demographics

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A very good point from Stephen Gordon at Worthwhile Canadian Initiative that the growing concentration of wealth may, in part, be to do with changing demographics.

Although I doubt this is the sole factor behind the growing concentration of wealth, it is a factor I’ve been thinking about – and that I’m keen to see someone else quantify.

One thing we have to keep in mind is that standard economic theory does predict a growing concentration of wealth as

  • the idea of  “rational expectations” when some agents are not rational implies that rational agents will tend to suck up wealth from irrational agents – it is a common misconception that “rational expectations” requires any agents to be “rational” in the strictest sense …  however, it does imply that agents that are “more rational” do receive transfers through time from their “irrational” buddies.
  • the fact that individuals have different discount factors suggests that more patient individuals who are more patient will tend to accumulate more wealth.

Now this isn’t necessarily even an issue, after all if people built up wealth due to their own choices they deserve it.  However, trying to understand how much of the recent change is due to the full functioning of financial markets in recent decades, how much is due to demographics, and how much is due to other policy change is important to understand before we really know anything.

Matt Nolan

Bleg: Generation war

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Every generation likes to complain about the one above it.  However, Generation X’s distaste for the Baby Boomers seems intense.

This isn’t a new thing, although the recession helped to intensify it I can remember these sorts of angry debates going on when I was a child (I am Gen Y, so I’m not taking sides here).

Every person I’ve spoken to who is in Gen X seems to believe that baby boomers have taken all their resources and run off with them.  At the same time baby boomer get annoyed because there has been significant improvement in both technology and civil liberties from when they were growing up – and yet Gen X continues to complain that they don’t have enough.

Is this just an example of people whining at each other, as they always do, or does one of the sides have a case here?

Matt Nolan

Targeting non-tradable inflation: Some points

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Bernard Hickey has stated that the RBNZ needs to target non-tradable inflation.  Fair enough, I’ve heard the argument for that before.

However, he says we should do it because of the “structural flaw” in our economy and to “help exporters”.  Ok, but remember that the RBNZ controls monetary policy – not all the structural policies in the economy.  So what happens when they target “non-tradable inflation”

  • The RBNZ lowers non-tradable inflation by increasing interest rates further … likely leading to an even higher currency.

In this context, the stated aim of targeting non-tradable inflation doesn’t met the goal.

Now Bernard Hickey likely believes that there are structural reasons why non-tradable prices are growing more quickly than relative-tradable prices.  And he would right.  The reasons are:

  • The Baumol effect, where services become relatively more expensive as we become more wealthy
  • A related issue that tradable goods experience larger increases in productivity than non-tradable goods (as they tend to be more capital intensive, and face more competition)
  • Competition issues due to our scale
  • Issues of the size of government
  • The combined impact of our rising terms of trade and productivity improvements in developing economies (which has held down imported cost pressures – ex fuel).

In this context the only two “policy relevant” issues that have changed the “structure” of our economy are competition issues and the size of government – both things that fiscal authorities and competition authorities should look at … not the RBNZ.  All the other changes were responses to fundamental changes in our economy.

Protip:  Our manufacturing sector is shrinking because it is relatively less efficient than the rest of the world – we are “relatively better” at making other things (comparative advantage).  NZ has done amazingly well from this – with our real incomes holding up, and our employment ratios still elevated, even WHILE the world has experienced the largest economic shock since the Great Depression.

tl;dr  Targeting non-tradable inflation won’t give the “structural changes” that are desired here – and “structural” issues are due to competition and fiscal policy, not inflation targeting.  Changing around the inflation target will actually lead to the opposite outcome than the one that is being targeted.

Matt Nolan

NZ fact of the day

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So, US real median incomes in 2010 were down 6.4% from their 2007 level, and down 7.1% from their 2001 level.  That is a pretty danged poor result, the situation over there has been pretty messy over the last decade.  The median income figures are biased by the fact that the cost of goods purchased by low income households have in many cases fallen (think cheap washing machines, and the $2 shop) while higher end products haven’t experienced the same sort of price declines.  Yet even with this excuse, it does appear that middle-class America has seen a tough time.

Now this is from census data – and NZ hasn’t done a census for a while so I can’t really tell how we’ve done in the same accurate way.

But what I can do is go to the HES (Household Economic Survey) provided by the good people at Stats NZ.  By taking the median households pre-tax income figure, and adjusting it for NZ’s CPI (excluding the recent change in GST – as that was met by a corresponding change in income tax) I get the following regarding the year to June 2010 [note, I’m a moron and used the June 2011 CPI, hence the adjustment – this is fixed below]:

  1. Household real income is up 2.3% 4.4% from the June 2007 year.
  2. Household real income is up 19.1% 21.6% from the June 2001 year.

Also note that the median figure for the  US is $49,455 (in 2010 US dollars).  In the June 2010 year the US/NZ dollar exchange rate averaged 0.70c … and as a result our median income was $44,429.  This is significantly closer than I would have expected, given underlying production in the US.

If we expect the dollar to be at $0.80 during the June 2012 year (not a huge assumption given where the dollar has been), and we assume that real median incomes stay unchanged during this two year period the median NZ household income level would actually be higher than the median US household income level – that is complete madness.

Matt Nolan

Watch the curve: Thoughts for the RBNZ September MPS

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Tomorrow its more than likely the RBNZ will leave the official cash rate unchanged.  Following that a lot of people are going to say one of the following:

  1. Bah, the world is in crisis they should slash rates
  2. Bah, inflation expectations are elevated and CPI growth is high, they should be increasing rates

Or who knows, some people will probably say both.

Anyway, even if they leave the official cash rate unchanged this does not mean they would have done nothing – in truth even when they leave the OCR unchanged they may loosen monetary policy due to the seizing up in global financial markets.  They do this by changing their forecast for where the official cash rate will go:

Source (RBNZ)

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