On participation and wages

Last week the Reserve Bank released their official cash rate review.  As always, it was a good review laying out the important trends that are influencing their thinking when it comes to setting the official cash rate.

However, there is no fun in leaving it there.  There is one part of the statement I want to be pedantic about:

Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation, and strong net immigration.

There are two parts I want to discuss here:

  1. Increased labour force participation:  The Bank is essentially saying that wage inflation is subdued, relative to what we would expect given the increase in employment, due to the fact that labour force participation rose.  They are right, totally and completely – labour demand shifted right, and the supply curve was such that most of the change came in quantity not price, neat!  However, this can give a misleading impression of the future if we don’t read it carefully – let us not forget that labour force participation rates are at a record high at the moment.  As a result, the “capacity” in the economy is more limited – and future lifts in labour demand are likely to lead to nominal wage pressures (note this isn’t the same as higher real wages per se – but more like an increase in inflation expectations) than lifts in employment.  This is indeed what the Bank was hinting at with the statement prior “Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non-tradables inflation.”
  2. Strong net migration:  Hold on a second.  We keep being told that strong net migration is pushing up inflationary pressures.  Now we are being told that net migration reduced inflationary pressures (note that “wage inflation”, again not real wage growth, is a lot closer to real inflation, and real inflation expectations, than a point in times annual increase in the CPI).  Higher population growth does indeed increase “demand” and “supply” so the relevance to monetary policy itself is indeterminate.

Anti-Dismal is back live!

Hi all, I am a month slow on noting this as I haven’t been reading blogs over the past couple of months – so just pointing out now that Paul Walker is back blogging over at Anti-Dismal again.  I’d suggest heading off and reading this recent post.

Truly, the link between factors such as agglomeration, scale, productivity, and dispersion of income is a pretty danged important issue – and one that keeps being looked past when discussing inequality trends IMO.

Tweeting the curse of distance

Via Owen Williams on Twitter came this gem:

This is true, shipping is a pretty big deal.  However, Aaron Schiff pointed out another common cost of being in NZ:

This is of course the curse of distance – both from the “production” of goods and from large centres of “consumption” (where the fixed cost of transporting can be spread over more customers).  The OECD has discussed this cost before, and NZ’s Productivity Commission also mentions it when discussing why productivity in New Zealand is relatively low.

Nice to see Amazon giving us some concrete examples we can use to discuss the phenomenon though – well nice until you want to buy anything ;)

A response to Danyl on data and inequality

Over at Dim Post I see Danyl is discussing the latest (2014) Household Income Report and Piketty’s book Capital in the 21st Century.  Excellent – there are lots of important and interesting issues to discussing look at these sources.

However, in this instance the data he is using and his interpretation is sadly a bit off.  I thought I’d discuss why this is here. Read more

Potential output in monetary policy

When it comes to “potential output” there is often a view that the economies potential to produce is determined by the labour, land, and forms of capital that are available to create this output from – and this is right!  Furthermore, each of these factors tends to produce a diminishing amount of additional output as you use more of it.  Although the factors of production are often complementary this often implies a situation where – in the long-run – the potential for output (and growth in said output) in a nation is fundamentally about technological change and the quality of institutions.

However, in a recent speech by John McDermott of the RBNZ he points out that, when it come to considering monetary conditions, the type of “potential output” we are interested in is a bit different.

Read more

Rates and property values: it’s the relativity that matters

I have a very minor quibble with today’s article in the herald titled “Higher rates the flipside of soaring house prices“.

The crux of the article is this redacted quote

If you live in Auckland and neighbouring houses have sold for unheard-of prices in the past two months, you can expect your home’s official value to shoot up.

The flipside? The new values will be taken into account when setting new rates next year.

While I’m not privy to the precise detail of how rates are calculated (nor do I want to be!), my understanding is that the council sets a fixed amount they want to raise via rates, and then allocates that across houses via relative values.

Because the pot is fixed as such, if all house values increase by the same amount, we would expect the share of rates that each house pays to stay the same (this is where I expect someone with an intricate knowledge of rates calculations to jump in and correct me…).

Therefore it is only if your property value  increases by more than other properties, we would expect your share of rates to increase. So if you own a house in an area that has rapidly gentrified since rates were last set (Guessing places like Onehunga, New Lynn etc…), then the share of rates you pay will probably increase, since your property value has likely increased by more than the city wide average.

The first sentence of the article I have quoted is probably getting at this, but I just thought it was worth making it explicit that the general increase in house prices in Auckland doesn’t necessarily mean you are going to pay more rates.