NZ isn’t the US: Employment rates

So often we hear that, even though the unemployment rate is falling in the US, employment is low.  It is the low level of employment, and the lack of integration in the community that entails, that is causing so much anger over there.  The lack of opportunity illustrated through the low employment rate is one of the key pieces of information pulled out to suggest something must be done.

Often people in New Zealand talk as if whatever is happening in the US is happening here, therefore something must be done.  However, lets be a bit more careful – especially as in the case of the employment rate that is untrue.


remprSource:  Stats NZ.  Quandl.

Yes, the story is more complicated (Working for families increased the number of second earners in the labour market, a factor that will in of itself have pushed up the participation and employment rates).  But if anything that suggests we need to be a lot more careful applying “lessons” from the US situation to New Zealand.  We are not the United States – a point we’ve noted when looking at median income comparisons in the past ;)



Low productivity isn’t lazy

Good post on the Productivity Commission blog, Prod Blog.

When it comes to labour productivity, or productivity more generally many people in society assume that an economist saying “productivity is low” is the same as saying “people are lazy”.  But this is far from the case.  Lisa Meehan clears that up for us:

Poor labour productivity doesn’t mean that Kiwi workers are lazy.  Labour productivity measures how much output is produced per hour worked; it doesn’t tell us anything about how hard we’re working.  In fact, as we discuss in our paper, New Zealanders work long hours compared with the OECD average.  The problem is that despite these long hours, NZ has low GDP per capita – that is, the problem stems from poor labour productivity.

Put another way, ‘labour productivity’ is a convenient (and useful) metric to think keep tabs on our wider productivity performance.  But, by itself, the catch-all labour productivity measure tells us little about the performance of workers alone.

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LVR speed limits are here

RBNZ restrictions on high loan to value ratio (LVR) mortgages came into effect on 1 October 2013. They are already biting – with ASB pulling its high LVR approvals. By definition, the new rules will reduce high LVR borrowing growth, but not necessarily total borrowing (because banks are now incentivised to lend ‘traditional’ mortgages). The international evidence on impact on house prices is mixed at best and the RBNZ’s regulatory impact assessment is pretty up front about it.

Where I disagree

The purpose of the new rules is to reduce the amount of risk accumulating in the banking sector. The RBNZ’s aim should not be to reduce credit growth or house price growth per se, rather systemic risk arising from high risk debt that may have implications for financial stability, and in turn, economic stability. But it feels like the RBNZ is really targeting house prices.

The RBNZ should keep the financial stability tools as separate from monetary policy as possible. Focussing on risk in the financial system in a consistent manner would keep monetary policy independent/free of political interference. Politicians will be running interference with this policy – as we have already seen from National, Labour and Greens. This political interference should be a good reason to ask if the RBNZ should be doing both monetary policy and financial stability.

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“Why LVR’s were introduced”

Graeme Wheeler has written an op-ed on “Why Loan-to-Value Ratios were introduced“.  Good, communication is an important part of what a central bank needs to do – especially when introducing new things!

I’ll leave the comments on this to someone else, I’ll just note:


Descriptively, Hickey and Labour are both right on LVR’s

I’m not commenting of course, but both LVR restrictions will limit lending to SME’s and on house building.  As is stated by:

This was known before the LVR restrictions were put in place, hence why it is seen as an indirect tool.  Mortgages are used as a cheaper finance option for small firms, this is one of the most widely known “secrets” around (sorry that article is only available to Infometrics clients it seems) – the regulations were put in place knowing that it would credit constrain these groups.  Whether this is appropriate or not … well that would be commenting.  If you want to in comments go for it ;)

Note:  The link isn’t available, sorry – I thought our articles from March 2013 were freely available now, but seems not!  The article is on LVR’s and risk-weighting adjustment (before it was clear which tool the Bank was going to use), but in the LVR section the quote I wanted is:

Furthermore, it is important to ask who will be getting credit constrained by the introduction of LVRs.  Who are the sorts of people that load up on mortgage debt?

It is our view that the credit constraints will be most binding for the following groups.

  • Young borrowers who haven’t built up sufficient equity
  • Small business holders who rely on mortgages to fund investment in their business
  • The construction industry, by making it more difficult for people to use their property as equity when looking at infill or the construction of a new house

As a result, the introduction of a maximum loan-to-value ratio will lead to collateral damage for small firms and some private investment in the residential building industry.