Finally our unemployment figures make sense

Dr Eric Crampton
5 July, 2022

The economists descended on Wellington last week. Or, at least, many shuffled their way from the Ministries over to Victoria University to meet with academics from across the country for the annual three-day conference of the New Zealand Association of Economists.

The NZAE annual meetings are a strange and wonderful thing, whether by accident or by design. In larger countries, economists’ conferences tend to be more specialised. Academics attend some conferences, including academic researchers based in places like the Federal Reserve, but few practitioners attend. Other conferences cater to policy practitioners in the bureaus – with fewer academics in attendance. The NZAE meetings mix things up, so policymakers get to hear from academics and vice versa.

Both sides then can learn an awful lot. And I learn that I need to clone myself when interesting sessions run in parallel.

Treasury Secretary McLiesh opened the conference; her address is available online.

She made more than a few points that are underappreciated in policy debate, or at least too easily overlooked. Economists often compare living standards by looking at measures of GDP per hour worked across countries. But New Zealand’s measure of hours worked differs from that used abroad, making hours worked here look higher than in other countries. It can affect the measures.

More substantially, Secretary McLiesh signalled a renewed Treasury interest in regulatory improvement for easing supply-side constraints.

Some academics in the room were nonplussed, as they didn’t hear much that they did not already know.

But the signal about how Treasury is reading the policy environment was valuable and encouraging.

So too was Treasury Chief Economist Dominick Stephens’ challenging of commonly-held views that government needs to push the country ‘up the value chain’. He reminded the audience that gains from specialisation are real. I was reminded of a truly excellent column by Canadian economics columnist Andrew Coyne, who noted that investors are better placed than governments for assessing which projects are most usefully undertaken at home rather than abroad.

I learned a few other things that morning. Economists interested in labour market power and wage setting try to estimate levels of ‘monoposony’. Basically, if a firm tries to hire a few more workers, will it push up wages across its whole sector in ways that might discourage it from wanting to hire in the first place? MBIE’s Corey Allen finds that monopsony in New Zealand private sector labour markets seems comparable to levels in the United States.

I would be keen to see that work extended to education and health, where the simplest explanation for a whole lot of how those sectors work is that government really does not want to push up its wage bill across the whole of the sector. In short, the government seems to behave as a true monopsonist would. I wonder whether some government views on how private-sector labour markets work are simply generalisations from how the government behaves when it is a dominant employer.

After lunch, the Productivity Commission’s Lynda Sanderson told us about a very neat, but awful, natural experiment around the Recognised Seasonal Employment scheme. The RSE scheme allows accredited employers to bring seasonal agricultural workers in from the Pacific Islands. Critics argue the scheme displaces local workers. Covid border closures meant that some firms, but not others, missed out on their expected RSE workers. Firms that missed out did not seem to wind up paying more to recruit domestically.

Later, Treasury’s Cory Davis worked through the distributional effects of rising carbon prices. As expected, while rich households will wind up paying more in carbon charges in absolute terms, or at least in most areas, poorer households pay a larger fraction of their earnings on carbon. Effects in food and fuel were rather regressive.

I would be intensely curious to see what that same model would show if the money that the government earns when it sells carbon credits were rebated back to households as a carbon dividend. In Canada, 80% of households pay less in carbon taxes than they receive from Canada’s carbon dividend. I expect results here would be similar, if Minister Robertson cared more about those distributional consequences than about having a slush fund for pet projects.

The best session of the conference covered urban land use policy.

Treasury’s Chris Parker presented theoretical work showing how urban land prices become unhinged, and housing overall becomes severely unaffordable, when cities are constrained against growing out. Urban densification is necessary. But unless downtown apartments compete with houses at city fringes, restoring affordability will be far harder than it needs to be. Reforming council incentives, along with infrastructure funding and financing, will be needed as well. The work also showed how, when policies are set appropriately, urban land prices reflect the value of local services.

Infrastructure Commission economist Peter Nunns challenged some prevailing views about underinvestment in infrastructure. The problem may be less about the quantity of spending, and more about what we get out of it.

In some sectors, like wind farm projects, New Zealand matches international cost trends. For large horizontal infrastructure projects, we fare more poorly. For projects like rail tunnels, country-level learning-by-doing seems to matter. Countries that have already built a lot of rail tunnels seem to be able to deliver more of them at lower cost per kilometre. New Zealand may have some distance to go on that learning curve – and may yet need some enabling reform to consenting processes.

Finally, consulting economist Stuart Donovan provided some estimates of agglomeration effects across New Zealand towns and cities. Agglomeration effects reflect the increase, or decrease, in productivity that a city enjoys through scale – if it grows a bit, by how much does overall productivity change? Satellite cities within commuting distance of larger centres seem to overperform. Allowing more of them to emerge might not be a bad idea.

In Thursday’s sessions, I learned that statistical models assessing hospital performance are even more fraught than I had expected; that price setting by the Commerce Commission in regulated markets is more art than science; and, that alcohol outlet density is not nearly as bad as a lot of people claim.

Some work, primarily from public health researchers, finds correlations between alcohol outlet density and harms. But Waikato University’s Michael Cameron showed that while there are correlations between the two, establishing what causes what is rather more difficult. Cameron’s still-preliminary work suggests that those correlations drain away when causality is taken more seriously.

The University of Sydney’s James Graham also presented fascinating papers on compounding intergenerational inequities from poorly-performing schools, and on the effects of the early 2000s US tax cuts on American house prices.

On Friday, Statistics New Zealand’s Alexandra Ferguson explained what’s been going on in the unemployment figures. The session was completely packed out; economists were sitting on the floor. It’s been a big and annoying puzzle for a lot of us.

To put it briefly, the Household Labour Force Survey has been showing record-low unemployment numbers. But there are more people receiving the Jobseeker Work-Ready Benefit than there were before Covid. What’s up with that? It is hard to make sense of it.

Ferguson showed that a relatively small proportion of officially unemployed people take up the job-seeker benefit. If you expect to be between jobs only briefly, applying is not worth the hassle. But a jump in the proportion of the unemployed who took up the benefit in June quarter 2020 has persisted since.

While she did not provide any explanation for the change, the simplest would seem to be that benefit receipt is somewhat sticky. Once someone has gone through the hassle of applying for and receiving the benefit, they are a bit less likely to find a job afterwards than they otherwise might have been.

Lockdowns in 2020 meant a lot of people who might not otherwise have bothered applying for benefits decided to do so, and the Ministry for Social Development might have been laxer about enforcing work-ready requirements when it was effectively impossible to be out searching for work. MSD should perhaps consider tightening up those requirements again, given the state of the labour market.

I caught perhaps half of the sessions I would have liked to have attended and have been able here to report on fewer than that – one hallmark of an excellent conference. Fortunately for me, and for those of you who did not attend but who may be looking for a little light reading while in Covid isolation, many of the conference papers are available.


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