Vertical and horizontal equity: What are they?

This post is dry.  But if we want to talk about policy and fairness we gotta do some of the hard work making sure we understand how our ethical principles can be measured.  See it as part of trying to build more measures to help us understand arguments around policy given what Sen raises here.  So with that in mind lets define equity:

Equity.  Is the word economists unjustifiably confuse with fairness in order to pay lip service to distributional concerns

Ok I’m being a bit of a dork – in all fairness equity is a good start in asking these questions, but we have to see these measures as only a start!

At the most basic level, when we think about output/income and its distribution in society we consider the average of the income distribution (the mean) and its dispersion (the variance).  If incomes are rising over time as they have been for 200 years, then the variance also rises so we normalise such measures.  This is where inequality measures like the Gini coefficient come from.

The idea of (income) equity goes a step further than just describing the general distribution of income – it considers what happens when we impose an external policy that changes that distribution.  It measures a couple of principles that we may – or may not – value when applying a policy that changes the distribution of income:

  1. Vertical equity:  Captures the proportionality of the system applied – if we introduce taxes are people with higher initial incomes paying proportionally more, if we introduce transfer payments are people with lower initial incomes receiving proportionally more?
  2. Horizontal equity:  When we have two individuals we see as “equals” does this policy system treat them the same way?

With taxes and transfers these measures involve comparing the way people are treated by the tax-transfer system based on a view on what constitutes “equals”.  Specifically, these two concept can only fit together without conflict when looking at income if equals are defined as people with the same income.

Now in this post I will concentrate only on Vertical Equity – we can do Horizontal Equity another time!  And in line with my desire to be a bit more useful I want to focus on how we might measure these concepts, and what we are assuming when we do.

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Why my work week should be shorter

People, who are in labour force, generally spend one third of their daily time at work. A lot of them find working five days a week quite stressful and there are various reasons for it. I often question myself how the counterfactual of my work-life balance might look like to keep me motivated at work as well as to allow me to spend time with family/friends and devote leisure to my favorite hobbies.

An option that recently popped-up in my mind was about having a four day work week with the remuneration staying unchanged. This idea has already been implemented by a kiwi company Perpetual Guardian which is trailing to raise their productivity.

Let’s consider why the four day work week could be beneficial for both employees and employers.

Employee benefit

An extra day off normally improves our work-life balance – or in other words it allows us to spend more time on leisure (potentially also reducing work-related stress). For some people the cost of leisure is very high. Particularly, this cost is high for sole parents who have scarcity of time and support to spend on their children compared to the couples. Sole parents are also more disadvantaged compared to singles, by having extra responsibilities on their dependents.

What about the transportation burden? For some people, commuting is a big challenge, especially for those who live far away from the workplace. An extra day off would cut the transportation costs and would allow to alternate commuting time with additional leisure time.  Daily long hours on transportation are an external cost placed on the employment process which has a dead-weight loss, which can be reduced by needing to travel less often.

We probably all agree that having an extra day off would improve our work-life balance regardless of our family composition or the length of commuting.

So what happens if “the four day work per week” policy is widely implemented?  Is it a fixed day, should it be up to the employee to choose, or should there be some type of random rotation introduced?

My view is that the weekdays that employees are off should be rotated among workers. If not, then a Friday becomes another Saturday. In this case, everybody has a day off, and problems with “dentist visits” or “children’s school visits” remain unsolved. Adding another Saturday/Sunday to an employee’s life is great, but the marginal improvement is much less than having the day off with rotation.

Employer benefit

At first glance, the approach of paying same wage for 32 hours a week instead of 40, seems expensive. But have we already considered the productivity increase of employees?

An earlier post on  TVHE has already shown that the productivity drops as the number of hours of work rises. A Scandinavian research also demonstrated how the six-hour work day increases productivity here.

“A year’s worth of data from the project, which compares staff at Svartedalens with a control group at a similar facility, showed that 68 nurses who worked six hour days took half as much sick time as those in the control group. And they were 2.8 times less likely to take any time off in a two-week period”.

As a result, higher productivity would at least reduce the cost – if not completely cancel it out.

Although this does raise the question “if firms can get the same output from you in 32 hours instead of 40, and thereby can reduce their costs of operating even keeping wage payments the same (due to other variable costs), then why aren’t they?”.  So do you think there are reasons why firms may be failing to do this, even if the cost or low or it is even in their own interest?


Often time costs us more than million dollars as the happiness cannot be quantified or bought by money. Any company caring to keep their trained specialists around might want to be ready to cover this cost.

A successful outcome of the Perpetual Guardian’s trial on four day work could encourage other companies in NZ to think about how to widely apply this policy among their employees.

I wonder what your thoughts on this topic are. Do you think shifting from five to four days work might impact the NZ economy significantly?

The Indicators Aotearoa public consultation

Statistics New Zealand is asking for public consultation on Indicators Aotearoa New Zealand, a consultation motivated here.

Now given my own writing on the usefulness of GDP and my concern about injustice rhetoric being used for consumption instead of facing issues that matter I would be expected to have an opinion.

Sure I do, it makes sense to ask people what outcomes they care about in order to determine what we measure and what prominence it has.  So this is very cool to see – and I’d be keen for everyone to get involved in saying what matters to them.  Let’s see what they say:

“These indicators will be designed to be independent and to paint an enduring picture of how New Zealand is tracking, and will help underpin robust decision-making for years to come,” says Ms MacPherson.

“But to shape the measures which will be included in Indicators Aotearoa New Zealand, we need your help.

“That’s why Stats NZ wants to hear from you about what you’d like to see represented in the set of indicators. You might want to see measures about the state of our health, our environment, our infrastructure, or our social connections.”

Where we have a picture we can model trade-offs, when we can discuss trade-offs between competing factors that people care about we can discuss policy.  This is useful as long as we don’t get lazy on the modelling trade-offs part of course 😉

They state that you can give a submission at the link above or email  So why not give that a go.  I’ll be sure to think about the broad social issues that matter to me and send in my own submission at some point myself.  Neither of the links say how long we have to do this so we better be quick – quick but thoughtful of course 😉

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.

An example of misusing data/GDP/aggregates

What a perfect chance to rant after describing thinking about GDP this morning!  The econ news gods love to provide.

Look, I didn’t really agree with the Business New Zealand piece on New Zealand not being a “low wage” economy either – although I’d like people to be a bit clearer with their definition before they call anything low wage – but what the hell is this sort of article by a “data scientist”. [Note: I like data science and data scientists.  This is not an example of that.]

Now I’m back I’m calling this sort of trash “economics reporting” out – if we are going to publish articles where we are giving an objective rundown of the data we have to know the data and know the research at a basic level.

If we want to state our values (eg there are have nots in New Zealand that we want to support more) we don’t need to do this, we should all be allowed to state what we think matters and doesn’t matter.  But abusing the data and misstating trade-offs isn’t doing that, it is straight lace lying mate – irrespective of whether we disagree with the values associated with the person we are disagreeing with.

Reading it half a dozen times I think I’ve worked out what he is attempting to say.  Real GDP in NZ is probably between 15% and 30% lower in New Zealand than Aussie.  After tax wages are about 32% lower according to a measure they aren’t going to cite, because has no shame about what it does with data (Note: It is probably the OECD disposable income measures).  Therefore wages can go up by increasing the share of income going to labour and we don’t need productivity growth.  Ignore the logical incoherence of that conclusion for now, the very premise of it is flawed to hell.  Let me explain.

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