Matt Nolan

Migrant outflows to Australia, wages, and productivity: What is going on?

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A rising outflow of New Zealander’s to Australia is causing concern amongst a bunch of people. People move away for a number of reasons, as the Department of Labour nicely points out. However, as economists we like to think at the margin. We are not interested in the general reasons that people are leaving New Zealand, in so much as we are interested in the ‘marginal’ factors that are driving people overseas. The non-policy factors mentioned by DOL are constant, the weather will stay warmer, the country will remain as close, and the culture will remain similar. However, the policy factors (e.g wages, taxes) can be changed, and as a result will have an impact on the ‘change’ in migration levels (beyond some sort of trend).

The Standard provides one piece of the puzzle we require in order to control migrant outflows – we need higher wages. However, the solutions they provide may not necessarily be the correct ones. A important marginal factor in the decision on whether to stay and work in NZ, or do so in Australia is the difference in ‘real disposable income’. Ignoring non-wage income for now leaves us with ‘real disposable salary’. Increasing nominal wages may not lead to an increase in real disposable salary if all it does is increase inflation. If we pay everyone more $$$ but don’t increase the number of goods avaliable to buy, then the price of goods will increase and peoples true living standard will not change.

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Matt Nolan

Interest free student loans and compulsory schooling: Is there a better way?

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Recently the two main political parties in New Zealand have announced schemes that aim to, in some ways, help up-skill 16 and 17 years olds. At the same time, National has come out stating that it will leave student loans interest free, but provide a reward for repayments (leading to much debate).

Although these may seem like separate issues, when I look at the economy the issues of youth employment/skills, education, and unemployment/employment are intensely linked. As a result any policy that the parties take up on one of these issues must take into account how it influences these other sections of society.

In this post my aim is to put forward my current belief of what an ideal policy would look like for these three sectors – that’s right, I said policy not policies. Personally I think that all three are so closely linked that we have to use the same or very similar instruments in order to provide the right sort of outcome. Now, this analysis will be unashamedly normative, I’m going to be packing it with value judgments. I will try to make these judgments clear so you can either i) attack me on them, ii) work out where my objective logic may have gone wrong, separate of the value judgments.

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jamesz

Rational repression

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Perhaps it is apropos to start the new year’s blogging with a look back at history. A working paper reported at Vox examines Stalin’s gulags from an economic, rather than political, viewpoint. In Western capitalist economies it is the threat of losing one’s job that motivates effort in employment. If you shirk and are caught then you get fired. However, in a centrally planned economy there is no possibility of getting fired: everyone has a role to play and nobody is left out. How then is a dictator who’s done the hard yards planning out the lives of an entire country for five years to motivate his workforce? Miller and Smith suggest that Stalin used the gulags as a device to enforce discipline among workers. Read more

Matt Nolan

Higher minimum wage – higher employment?

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Over at Not Sneaky they are discussing how a higher minimum wage may lead to higher employment when we have a firm that has market power in the labour market (hat-tip CPW). The argument is a very interesting one as economists often view a minimum wage as a way of placing a price floor, which leads to a lower level of employment and social ‘surplus’.

On the blog he uses this fine graph to explain the result. The purple line illustrates the path of wages and employment. According to that, there is a range where higher wages create greater employment in the labour market. Let me attempt to explain this.

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Matt Nolan

Flexible working hours – Genius or madness

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The flexible working hours bill aims to increase the degree of ‘flexibility‘ in the labour market for households with a child under the age of 5 or a disabled child under the age of 18. Now I’ve heard all sorts of complaints and complements about this bill, so I’ll try to talk about the way I see it.

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Matt Nolan

Income tax and tax incidence

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There seems to be a significant debate between the left and right wing blogs about whether Bloomfield Hills is over-taxed or not. However, there is one thing that both sides agree on, if taxes are cut by $1,000, this gives people $1,000 more to spend. This is the point I’m going to discuss.

Households receive a net wage, which is their gross wage – income tax. The household requires a certain net wage before it will enter the labour market (say the benefit + the opportunity cost of leisure time), and may also require a premium to choose one firm before another firm (when labour supply is restricted).

Now the gross wage + non-labour costs (which we will assume are exogenous, even though they aren’t really 🙂 ) is the cost to the firm of hiring that employee. If taxes fall, the net wage the household receives would be higher. However, the relationship between employers and employees determines the gross wage. If the employer knows that taxes will fall, they can reduce their employees gross wage and leave their net wage the same (I know that firms often can’t do this because of labour laws and wage stickiness, however in a dynamic sense they could just reduce the rate at which they increase an employees wage). Ultimately, the division of the tax depends on the relative bargaining power of the different agents.

If there were ‘many’ firms and ‘many’ employees, the incidence of tax would depend on the relative elasticities of demand and supply for labour. Often labour demand is assumed to be relatively elastic while labour supply is highly inelastic. In this case most of the tax is borne by the employee and so a cut in taxes will mainly benefit them.

However, if we have a high rate of unemployment, labour supply will become relatively more elastic, which implies that some of the burden shifts onto employers.

If we have a monopoly firm and many (homogeneous) low-skilled employees (flat labour supply curve) the tax burden will be fully taken up by the firm. This is because the monopoly will only want to pay enough to get the employees to work, and so the net wage will be set at the reservation level. If you cut taxes you cut the gross wage required to get this net wage. Note: This result would not hold with asymmetric information (worker effort) or heterogeneous agents (as a higher net wage would then be required to intice more workers – labour supply would be upward sloping).

Ultimately, where the burden of income tax falls is a difficult issue, and depends on the specifics of the labour and goods markets. However, it is not clear cut that if my taxes are cut I would end up with that much extra money. As a result, we have to realise that a cut in income taxes will result in a reduction in firm costs as well as an increase in consumers spending power.

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