Monopsony in the NZ labour market?

As part of catching up with what has been happening in New Zealand I am reading what I can find from New Zealand economists.  In doing so I wandered onto this piece by Shamubeel Eaqub of Sense Partners.

Firms are finding it hard to recruit, as the pool of qualified job seekers who are not already employed is so small. … (But) Wages haven’t risen in tandem. Wages have been increasing in some sectors like construction, but have been stagnant in others. … One explanation for this may be a lack of competition in a local labour market.

The increase is from a low level and evidence from the US on minimum wages suggest such increases don’t cost jobs, but improve the incomes for the working poor.

So there are two claims embedded in this that I want to think about a bit here: Competition through monopsony and the efficacy of a higher minimum wage in the NZ context.

Is there suggestive signs of monopsony in NZ’s labour market (Tl;dr is YES and NO), does this imply minimum wages could increase employment (Tl;dr is YES if monopsony holds), does this suggest higher minimum wages would increase, or at least not reduce, employment (Tl;dr is probably NO at current levels).  Although we will be going through a bit more than this in what has turned into a long post.  Let’s do this.

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Why am I paying $5 for a coffee?!?

Coffee consumption and Wellingtonian’s willingness to pay for it is a puzzling topic to me.

Due to cultural habits coffee is a highly preferred morning beverage in New Zealand. There are lots of coffee shops in Wellington offering pretty much similar variety of coffee products and yet even with the flood of providers there is no lack of customers and as a result it doesn’t appear to be particularly competitive. In countries like USA, due to tough competition in catering business, a cent increase in a product would normally reduce profits of the company. The competition pushes business owners to offer constant variation in products where consumers do have more options and are more open to sample beverages that are not traditionally consumed. Most Wellingtonian cafes don’t experience this pressure and hence the options of offered beverages are on average the same. And this yet has no decline effect on profits for the NZ coffee shops.

Let’s look at why the Wellington case is particularly strange. My daily observations indicates that, seemingly irrespective of the relative prices charged, two coffee shops in Wellington will still have a sufficient number of customers. It is a puzzle to me to understand why I would be willing to pay 5$ per a cup while the next door offering is 4$? Is it an asymmetric information case where the shop owner knows about his high prices but the customer doesn’t have the information on the comparative prices? If this is the case, is the marginal difference of 1$ an information search cost for the consumer?

Last year the coffee shop “Coffix” ran an advertisement on setting flat prices ($2.5) on their coffees. Once, while waiting for my order from “Coffix”, I was observing a scenario where the customers from the next door café didn’t mind paying minimum $4 for their coffees. The question is again-why?

Why is the elasticity of willingness to pay for coffee from YOUR CAFE so low in Wellington?  I am not asking why coffee prices are so high (they are) in Wellington, but why are Wellingtonians  so unwilling to change where they buy coffee in the face of a lower price available elsewhere?

Possible explanations in my opinion might be:

  • Income relativity. If my income is above the median, the marginal difference in coffee prices (varying from 0.5$ to 1.5$) seems quite low.
  • Convenience of the place and the aura. Consumers might prefer to catch-up with friends in a cosy interior.
  • Distance of the place – even a meter vicinity might be more appealing for some customers.
  • Established relationship with the café staff. Such feelings like you are always welcomed at your usual place might prevail your low willingness to pay.

I very welcome your thoughts and arguments regarding this topic. I am very curious to read your point of view on what drives the motivation of consumers’ behaviours in New Zealand.

Countdown and wholesalers: Are consumers the ones benefiting?

There has been a bit of discussion about Countdown hurting wholesalers to get prices down, flexing their muscle shall we say (here and here).  The Commerce Commission is concerned about this and is investigating.

Via Twitter I noticed that the concerns about supermarkets being bullies has led to an increasing desire to do something about supermarkets in general in our papers.

Now having a government run supermarket enter and then arbitrarily mess around with the price and availability of goods and services “for our own good” makes me throw up in my mouth a little – honestly the anti-obesity rhetoric thrown in the piece is beside the point, and shows how a desire to “do something” can be taken too far.  Note:  A lot of the suggested policies such as “removing GST” or “adding vouchers” exist without randomly owning a supermarket, the point should be actually asking if they are a good idea in the first place – a point that seems to escape our columnist, unless she believes the analysis is well covered off by merely going ‘obesity is bad man’.

But there is a broader point here. Read more

The Reserve Bank of Air New Zealand

With Bitcoins and Argentinian hyperinflation in the news, it seems like an apt time to discuss what currency actually is.  In a novel way Benje Patterson discusses this with regards to Air New Zealand’s airponts program – and given this he tries to figure out how exactly this program should be valued (Infometrics link)!

Airpoints Dollars conform to the standard definition of a currency – they are a medium of exchange for goods and services, they can be used to store value through time, and they are a quotable unit of account.  Air New Zealand operates a fixed exchange rate policy for its currency, where one Airpoints Dollar can be redeemed for one New Zealand dollar worth of flights.

Furthermore, in addition to being a currency, the Airpoints Dollar loyalty scheme also adds to Air New Zealand’s bottom line.  Air New Zealand is the sole institution with the ultimate authority to issue the Airpoints Dollar currency and back-of-the-envelope calculations show that the value of the airline’s loyalty scheme could be around $400 million.



Marriage, investment, and sunk costs

At the moment, many of my friends are getting married.  At the same time some of my other friends who are not married are telling me they don’t understand why people get married.

While I am not married, I think the idea of marriage is grand.  I think it is a great way of dealing with a social issue that involves both search and relationship specific investment!

Now, you may think I’m being too romantic here by bringing up terms like “relationship specific investment” – but let us not forget the awesome power of economics for dealing with these ideas.  The question is, given marriage as an institution what specific type of co-ordination failure did marriage turn up to solve?

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Regional trends in the airline industry

Benje Patterson has decided to have a look at domestic air travel – with reference to the entry of Jetstar in June 2009 (Infometrics link here).  Their entry, and the associated increase in competition in regional air routes, can be expected to have spillover benefits to the regional economies that are exposed to this:

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