Does Labour Really Need To Be Imported For Housing?

The framing of where frictions lie in any market are an interesting insight into the minds of people far from the coalface.

RBNZ Deputy Governor Grant Spencer has let a real zinger slip out in a speech to the Property Council when he says:

“A more responsive supply side is key and will require: a responsive and innovative building sector; an adequate supply of labour, some of which will need to be imported; and a responsive planning and consenting process. The accord between Government and the Auckland Council is a positive step in this direction.

This is simply not necessary. The construction sector might have strong confidence at present, but there is an enormous amount of skilled labour pottering around on small projects and deciding not to move to Christchurch or Auckland because the wages on offer aren’t high enough or the cost of shifting is too high.

A sensible policy solution would be making it easier for under-employed construction sector workers already living in New Zealand to make the move to cities where there is higher demand for their skills. This would involve addressing longstanding issues around contractor-subcontractor relationships, health and safety regulations, trade licensing and how the self-employed are treated poorly by central and local government.

A lot of policy wonks have no comprehension of how hard it is to find reliable workers in the construction sector. For people selling their labour, it amazes me that their “costs of production” can’t be taken into account but any firm will use “higher costs” as a standard reason for raising their price.

The wages on offer in Christchurch and Auckland are not enough to entice under-employed workers from other regions unless they have no overheads – single guys are pretty much the target market.

Through importing workers from overseas to do this sort of work, you’re actually imposing costs on taxpayers. Why? Because the skilled construction worker who *needs* $30 an hour to keep his family fed and sheltered won’t have the cash to make the move to Christchurch or Auckland.

This means that over time, the already terrifying level of hysteresis in the construction sector with many skilled tradespeople deciding not to get licensed because they’re sick of all the fees they have to pay and a lot of less skilled construction workers who have been doing intermittent projects in the provinces, will result in long term unemployed people who cost tens of thousands a year in welfare spending.

Immigration is a good thing – but using it as a “quick fix” for an industry that has been completely gutted by council cardigan wearers, central government busybodies and imported “expertise” (British project managers not used to NZ conditions were top spruikers of leaky building related product) is sadistic in the extreme.

A better solution would be this: if you have experience in construction and move to Auckland or Christchurch and gain employment in construction, you’ll receive $2,000 in cash to help with moving and an $20,000 tax credit over 2 financial years.

Familiarity with NZ standards and practices is far more important than rushing something. Has everyone forgotten what one of the key drivers with leaky homes and buildings was? Smashing out projects fast because everyone involved in the project was making no money and wanted to get in and get out.

More Immigration No Solution To Construction Skills Shortage

Michael Wilson has an opinion piece over at Stuff that argues for a return of “10 Pound Pom” or assisted immigration schemes.

If there’s one area where economists lose their minds, it’s immigration. Immigration is good, except when it isn’t. For the construction sector, more immigration is an absolutely insane idea. If you have any idea of how the construction sector operates, Michael Wilson’s column stinks of BS.

The construction sector has a “skills shortage” for 4 reasons as I see it:

  1. The cost of training is borne by sub-contractors who earn low margins on tightly negotiated contracts. They bear the lower productivity of apprentices and cadets for 4-5 years until they’re qualified. Then, most apprentices go to Australia. They have no incentive to train anyone because the marginal costs to them in terms of hassle exceed the marginal benefit of having a trainee on site. They can’t earn a return on their investment in trades training so they don’t hire any trainees! Ergo, as a consequence of under-investment in trades training and regulation, the sub-contractors in construction prefer a temp from Tradestaff when they need additional low or medium skill labour.
  2. The way contracts are designed in the construction sector mean that risk is pushed down the line. The person who is least able to manage the risk (a sub-contractor operating as an unsecured creditor save retentions) is the one who loses when construction firms go under. Aware of their position in the totem pole of risk, and the employment law implications of project-by-project work (if someone is an employee you can’t just fire and re-hire them as work comes and goes like in the US), they will do things themselves instead of hiring people. This means that a lot of construction sector labour doesn’t have much experience – learning by doing is harder with temps. Much of the problems are simply a function of laws around employment and health & safety.
  3. Because of the cost suppression in the industry at all costs, and the enormous supply side shock that was the cut-off of the lending spigot in 2007 to construction in this country, an enormous number of people who would hire construction workers and train them up means that from 2007 – 2013 a whole wave of people haven’t started their construction careers. Many builders and construction firm operators have exited the industry and can’t come back in even though there is high demand for their skills – because their last venture ended badly and they now have an extremely high aversion to debt. Because everything in construction is on credit, hardly anything is going ahead outside of construction projects funded by cashed up developers and the public sector. Local councils, regional councils and the central government are the bulk of demand for construction services in 2013.
  4. On the demand side – construction firms are aware of the people sitting on the sidelines with the skills they need but they are not willing to pay them enough money to justify getting back into the industry. The relationship between contractor and sub-contractor is a de facto employment relationship, and makes sense because construction is a project-by-project industry. But if there really was a skills shortage in construction I would not be personally aware of firms that used to employ a hell of a lot of people doing hardly any work (low demand) and getting tonnes of bids for sub-contracting work (excess supply?) that almost enables them to set the price their sub-contractors will perform skilled work for!

The reason that Michael Wilson and the guy from Fletcher Construction are completely and utterly wrong about the supposed skills shortage is that they are ignoring the tens of thousands of people around the country with construction sector experience sitting on the sidelines because they have a gap in their CV from the past few years when their skills were needed but banks pulled funding for their employers!

They are also ignoring the fact that the uncertainty around the Christchurch joke of a rebuild has seen some firms lose hundreds of thousands of dollars relocating people and equipment to Christchurch eager for work and finding out that the rebuild process will never happen because there’s a cold war between local and central government over how that process plays out. They also come up against Christchurch’s unique business culture that prefers Mainlanders to North Islanders at all costs. Why is this not discussed at all?

There are also thousands of tradies who left for Australia and as Australia slows down as big resource projects get pulled, they will be able to plug some of the “gap”. They will have more capital and are more likely to start their own businesses and employ other construction sector skillsets. So, any “skills shortage” will reduce as the tradies who didn’t make it in Australia come back.

If Michael Wilson had actually talked to people with knowledge of how the construction sector operates, he’d realise that the rates construction firms are willing to pay are too low. Importing more workers to push those rates down even lower is hilariously stupid. Who will train these people to adhere to NZ standards and unique construction practices necessary for our environment? If NZ experienced construction workers can’t find work in the current environment and uncertainty in Christchurch means they can’t justify moving to Christchurch “where the jobs” supposedly are, how is it a skills shortage?

There is no skilled worker shortage in construction. There is, however, a reluctance on the demand side to increase the price they are willing to pay to get the work performed on the time schedule they are demanding. If the rates went up, more apprentices would be hired, more labourers would be hired, more people would gain experience and the self-perpetuating construction skill conveyor belt would kickstart again.

All of this could have been predicted by anyone who spent 10 minutes on a construction site smoko break over the past decade. All of this could have been avoided if we have a finance sector that functioned as an efficient allocator of capital to construction projects. All of this could have been avoided if government had not interfered in construction so much with rules that turn marginal projects unprofitable. All of this could have been avoided if we got over the idea that someone who has never set foot on a construction site has any specialised knowledge to contribute to policy affecting the construction sector.

READ: When Company Registration Is Too Easy

Mysterious businessmen from Russia and Brunei are being chased by members of Auckland’s Iranian community over alleged misrepresentations that led to hundreds of thousands of dollars in losses.

In the High Court in Auckland last month, Arefi Hassan and six other Aucklanders secured freezing orders against accounts connected with Goldex International Services (GIS) and two individuals, the Brunei-based Haji Abd Rahman Awg Haji Damit and the Russian Demin Sergey Vladimirovich.

According to the judgment delivered by Judge Sarah Katz, the frozen New Zealand-based accounts are suspected to contain $430,000. Sunday Star-Times understands this figure represents only a small portion of the plaintiffs’s alleged losses.

Source: Court orders gold trader’s accounts frozen

New Zealand prides itself on being one of the easiest places to do business in the world. It is cheap and easy to visit the Companies Office website and complete the paperwork for a company, open a bank account and start trading within 2-3 days. Because of this, we are more likely to have startup businesses and self-employment as long as people are aware that the benefits of limited liability are easily accessible to anyone over the age of 18 and with proof of identity.

The flip side of easy access to the Companies Registry is that New Zealand is a sitting duck for people who want to take advantage of the ease of doing business for less than entrepreneurial reasons. While the people involved in this incident are yet to be convicted of a crime, it is not a vote of confidence that the High Court froze their assets.

What is disturbing is that Mr Hassan claims to have “lost everything” from his investment, including his house. This implies that in order to invest in this amazing entrepreneurial opportunity the house was used as security for borrowing and the proceeds of some loan paid to Goldex International Services.

Putting aside the inability of investors to make good decisions, this is obviously nuts.

A) You never borrow against your house for an investment property.

B) You never put all of your eggs in one basket.

C) You never do anything or sign anything until you have done due diligence on everyone and every entity involved.

D) You don’t invest in anything unless you are clearly knowledgeable about finance and due diligence.

It sucks to see the loose company registration rules getting abused by foreign nationals. But this is the price we pay for New Zealand’s “Wild West” approach to commercial law. In order to get the benefit of lots of startups, we pay the price of a few duds along the way. We even get to help Iran and North Korea get shit done!

No Recovery Can Be Guaranteed


A recovery from the global financial crisis can’t be guaranteed. There’s no reason why employment, consumer spending and business confidence have to recover in New Zealand.

The unwinding of what George Soros calls the “superbubble of credit” has barely begun.

For a while there I thought that we’d start to see some sanity around housing. But prices are on an upwards march again, absolving the need for the government to address rising superannuation costs.


Banks are relaxing lending standards and setting themselves up to pass stress tests. Financial stability is apparently high, but we can’t see the models the RBA and RBNZ use because that would reveal how precarious the situation actually is.

If banks stop the growth in mortgage lending, the whole house of cards will collapse. In order for perpetual growth to shine upon their balance sheets and executives to get their million-plus bonuses they can’t afford to stop lending on housing stock.

In order for a recovery to be called a recovery, hundreds of thousands of people unemployed or under-employed have to get something out of it.

It’s not like they control any capital with which to benefit from gains in technology, automation or inflation.

For those at the top of the food chain, there hasn’t been much of a recession. Only those who borrowed far too much had their wings clipped.

All the others have kept on benefiting from asset-price inflation and successfully watered down any attempts to reign in excess.

During the 2000s, rising house prices and easier credit papered over the stagnating New Zealand economy.

But interest-free repayment periods come to an end and the flow-on effect of a protracted downturn in construction hits people on lower incomes even harder than Radio New Zealand listeners could comprehend.

The exodus to Australia, driven by the working class and skilled tradespeople, can’t be permanent. Under the Special Category Visa regime Kiwis aren’t eligible for Australian welfare payments.

This means that when the mining bubble collapses and destroys the house of cards that is the Australian economy, the reversal of emigration will turn New Zealand into an even more screwed country.

I laugh when I read articles about “average pay rises”. The only people who get pay rises are connected to the public sector in some way, shape or form.

Out there in the real world, casualisation and sub-contracting arrangements that resemble old employer-employee relationships in every which way except name, have hollowed out the labour market and turned it into a project-specific skills market where the risk is borne by the contractor.

No recovery can be guaranteed because the risk/reward equation is so heavily skewed towards people who’ve already made a bundle, having no incentive to put what they’ve earned in the boom at risk by taking on additional investment projects.

Australia Is In For A Hard Landing

Starting in 2005 a resource boom in Australia has propelled their economy onwards and upwards. All good things come to an end, and I believe that Australia is in for a hard landing. The combination of a shock to commodity prices, piercing of a housing bubble and extremely poor productivity growth since 2005 could lead to a serious drop in Australian GDP when the day of reckoning arrives.

McKinsey Global Institute have produced an essential study that breaks down what has caused Australia’s growth spurt since 2005, and how the causes of growth have differed from previous growth spurts in the early 1990’s and early 2000’s. It’s called “Beyond the boom: Australia’s productivity imperative“.

Their analysis looks at five different contributors to growth:

Terms of trade: The effect of changing prices for imports and exports

The increase in terms of trade has been fuelled by massive increases in commodity prices. The Reserve Bank of Australia governor is quoted in the report that while one container of iron ore was worth 2,200 flatscreen TVs in 2005 it’s now worth over 22,000 flatscreen TVs. The Australian dollar is at very high levels and is currently at 1.03 USD/AUD – above parity!
Additional capital: The increase in capital stock

The increase in capital stock in Australia since 2005 is astonishing – some A$120 billion in additional capital investment has been made in iron ore and coal mines, roads, ports, natural gas exploration and other resource industry projects. That alone is responsible for 53% of the growth since 2005, meaning any reduction in capital investment would significantly reduce Australian economic growth.

Additional labour: The increase in the total number of hours worked in the economy

Since 1993 Australia has averaged 143,000 immigrants per year and its own growing population has led to a massive increase in the size of the workforce. Massive Kiwi immigration has thus played a key role in accelerating Australian growth. MGI state that the increase in labour is the steadiest contributor to Australia’s growth.

What does this mean if lots and lots of Kiwis return to New Zealand? Well, the Australian economy recovery could potentially be lower than if they stayed there. The same obviously applies to other sources of Australian immigration – Southeast Asia, UK, Ireland, South Africa. Birth rates in Australia seem to be propped up by the baby bonus they have there. If fiscal necessity means that has to be cut the rise in natural born population will decrease sharply and affect this contributor to growth by the 2020s/2030s.
Capital productivity: The amount of output generated per unit of capital stock

Between 2005 and 2011 capital productivity has plummeted and led to tens of billions of dollars in losses of national income. MGI argue that this is because of the massive time lags between planning a resource project and getting the first shipment despatched, which can feasibly take years because of the size of the projects.

This finding is amazing – all of this capital investment, yet the losing capital investments are essentially cancelling out many of the one-off gains from a resource boom. This does not bode well if commodity prices decline, because that would reduce the value of resource projects already committed to and underway even further.

Despite hundreds of billions in domestic wealth, hundreds of billions more is being borrowed from overseas to finance these capital investments. If Australia’s exchange rate plummets in the wake of reduced commodity prices the repayments on bonds issued in USD, EUR, JPY, RMB or even SGD will skyrocket and reinforce a downward spiral of investment.
Labour productivity: The amount of output generated per hour worked

Despite having 25% more capital at their disposal from 2005 to 2011, output only increased 7%. Over the past 6 years labour productivity increases have only contributed a roughly a third as much as they did between 1993 and 1999. (A$17 billion vs A$57 billion). Other sectors in Australia have been achieving lacklustre labour productivity growth of ~1% a year.

All in all, MGI conclude that at least 50% of the growth from 2005 to today is one-off effects of the mining boom. The reality is that Australian multifactor productivity is actually declining at 0.7% a year. McKinsey talk about four different scenarios for Australia, linked directly to how much they increase productivity. They call these scenarios “hangover”, “lucky escape”, “earned rewards” and “paradise”.

This is how they arrived at their numbers:


Using the methodology that MGI used to calculate these 4 scenarios, what happens if we make the assumptions slightly more negative? If the “hangover” situation occurs, there is not much breathing room until the total change of total income becomes negative.

In the “hangover” situation, if the relationship between additional capital and capital productivity (-43/120) holds the negative contribution of capital productivity would surely be (-43/120)*107= -$38.34 billion. That would change the “hangover” calculation to : -109+107+28-38+8= -$4 billion.

Any further deterioration in Australia’s terms of trade would make the reduction in total income even higher. Any decrease in additional capital would make the reduction in total income even higher. This report reinforces my bearish opinion of Australia – they’re squandering their resource boom resources and not focusing aggressively enough on improving multi-factor productivity.

And let’s not forget where a lot of this capital investment is coming from:

When Australia’s terms of trade decline, any foreign-denominated borrowings will be more expensive to repay. This could prove fatal to any recovery because a substantial proportion of national income will be spent on debt service instead of capital investment, further reinforcing the hard landing provided by a decline in commodity prices.

Australia is in for a hard landing because they’ve squandered their natural resource dividend on a housing boom and holiday homes in Bali. Their failure to address productivity issues in the resource sector and other sectors will make the inevitable recession far more painful than it could have been if a more responsible approach to shoring up the long-term prospects of Australia had been taken.

Charting Our Unemployment Crisis

Key Points:

  • Unemployment is at a 13 year high of 7.3%
  • Our recovery from the global financial crisis is pathetic. Our annual GDP growth rate is a national disgrace.
  • Labour costs have increased almost 40% during this period
  • While labour productivity has stagnated
  • There isn’t much of a relationship between business confidence and the unemployment rate
  • Exports have been growing and less labour intensive production methods favoured
  • Increased M3 since 2008 hasn’t reduced unemployment

The news that unemployment is at a 13 year high of 7.3% is absolutely shocking. It’s even worse when you realise the number of measurement problems that Statistics New Zealand can’t overcome because of the nature of macroeconomic data measurement. Statistics NZ does a reasonable job with the HLFS so we have to work with what we’ve got and not get sidetracked by “what counts as unemployment” sideshows.

John Key needs to urgently review his government’s policies. Saying that he won’t “change tack” when there is no hope on the horizon for the extra 78,000 unemployed people in New Zealand is not good enough. Blaming the global financial crisis is not an option when there is an underlying productivity sickness in the New Zealand economy.

Reserve Bank governor Graeme Wheeler should definitely consider a cut in the OCR before 1 January so my iPredict contracts pay out. It could also boost aggregate demand. There is still some room for New Zealand’s monetary policy to move before it hits the zero lower bound / liquidity trap situation. But that is neither here nor there. And US unemployment has barely changed despite the Federal Reserve cutting the discount rate to 0%.

A picture is worth a thousand words. I think charts can help us think about our unemployment crisis. The fact that they prompt more questions than provide answers is a sign that we are on the wrong track. A failure to implement different labour market policies could accelerate our decline into middle income nation ignominy. What those policies should be is a matter for a later post.

This chart clearly shows that the recovery from the global financial crisis is not nearly as fast as the recovery from the Asian financial crisis in 1998 and its impact on our exports and GDP. This does not bode well because GDP growth compounds over time – even 1% less growth now is an enormous reduction in living standards extrapolated out to the 2020’s and 2030’s when the retiree to worker ratio will be at its lowest and we need a lot of excess wealth stored to pay for superannuation and health care.

This chart clearly shows the rise of labour costs as shown by the Statistics NZ index. You can read more about how its calculated at Statistics NZ.  There has been almost a 40% rise in the cost of labour in 13 years. But what has happened to productivity during that time?

This graph shows that labour productivity has grown roughly 7.5% (8/106) during this 13 year period. That is substantially less than the increase in labour costs. Employers have to finance higher labour costs with something. They’re not getting it all from higher productivity and more output. This means that workers at the margin will find themselves laid off.

Tyler Cowen’s “zero marginal product of labour” theory he’s blogged about could conceivably apply to swathes of currently unemployed Kiwis. They were the last to be hired and the first to be fired. With structural changes in the labour market due to technology, an argument could be made that cyclical unemployment doesn’t explain all of the increase in unemployment since 2008.

Increases in GDP growth certainly reduced the unemployment rate in the early 2000’s. But with unemployment now at 7.3% that’s almost double what it was at the beginning of 2008. I won’t share the graphs from Trading Economics / Statistics NZ but the number of employed persons has grown from ~1.8 million to ~2.2 million. During the same time our population has increased from ~3.8 million to almost 4.5 million. It would be interesting to study the role that immigration has played on the domestic labour market and exploring if there is any impact from work visa or working holiday visas on the sort of jobs at the marginal end of the labour force.

M3 is defined by the Reserve Bank as the broadest monetary aggregate.

M3 is the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits.

Since the beginning of 2008, M3 has grown around 25%. This has not had any significant impact on reducing unemployment, in fact it has accompanied the rising unemployment rate. Why aren’t banks lending more to businesses to spur a recovery? Why are all the anecdotal stories I hear about stingy bankers failing to fund another promising business proposition?

Monthly mortgage loan approvals are up 40% on two years ago and running at $1.3 billion a month. Imagine $1.3 billion a month being funnelled into net new business lending and the long-term implications for productivity growth. Banks are fuelling the fire with the likes of 95% mortgages while bending any businessperson wanting to buy machinery or get a letter of credit over a barrel.

An increase in credit of this magnitude should be going hand in hand with a major rise in business investment. But that’s being thwarted by bankers who’d sooner give you $500,000 for a villa in Newtown than $50,000 for a piece of machinery. They have no vision or ability to comprehend reasonable business plans and their “fairweather friend” attitude means they have no credibility as financing partners.

But if we grow our exports we can create jobs and catch up with Australia! This chart is for the kooks who think that higher unemployment is because our export sector is struggling. If that was true the unemployment rate would have plummeted over the past four years.

Despite the high dollar, exports have increased almost a third since the onset of the global financial crisis. This could be because of the commodities boom and demand from China. It could also be because exporting industries have switched to less labour intensive forms of production. This would lead to less need to hire more workers if you’ve automated your factory.

There are some people who take business confidence seriously. But how can you look at the following and not detect a certain partisan bias? I think business confidence cannot explain why businesses aren’t hiring. They’re supposedly more confident than they were in the middle of a massive housing boom yet don’t want to add more workers.

Note that business confidence was slightly negative when unemployment was low in 2006, 2007 and early 2008. Perhaps business owners really don’t like paying wages and are invested aggressively in cost reduction and automation so they don’t need to go anywhere near the labour market. With some of the rules surrounding employment law, I would not be surprised but will refrain from comment until I’ve looked into the data more closely.

This was my first post full of charts and my brief analysis. If you’d like to add something please comment. I’ll be performing this sort of analysis more regularly.

It’s not as rigorous as building an Excel model for your consumption but it does involve a bit of reality based thinking.

I’d like to know what you think of my analysis and would be grateful for any pointers to interesting working papers, commentary or journal articles.

It would be really appreciated.