Census Data And Tyler Cowen’s Average Is Over

The second major release of 2013 census information happened last week. The 2013 regional census summary tables with household income information were updated, and a very rich set of data is able to be discussed.

Household income data is important in any discussion around inequality because we can use it to look at how the New Zealand population is moving to not only where the jobs are, but where they can afford to live the lifestyle they want.

A common refrain is that housing is too expensive in central Auckland, Wellington and Christchurch. With respect to median household incomes in these areas, that’s quite true. But since the 2006 census the median household income in Auckland has grown from $63,400 to $76,500; in Wellington City from $74,200 to $91,100 and in Christchurch from $48,200 to $65,300.

Percentage increases of 20%, 22% and 35% respectively lead to an obvious question that has to be asked – if Auckland has had the lower growth in median household income, why has it had the highest growth in median house prices?

But wait, the Auckland region is an aggregation of all of the different areas of Auckland. We have to look at local board areas to get a better idea. Taking higher income areas – Devonport/Takapuna where median income has grown from $68,800 to $85,800 (24%) and the Orakei local board area where median income has grown from $88,700 to $107,900 (22%) – there’s a big story inside relative income gains between different suburbs linking to relative changes in house prices.

How do I link this back to what Tyler Cowen was discussing in Average Is Over? Well, in order to live in central cities where higher salaries are on offer, the entry price point will rise relative to other areas over time as the economy moves closer towards higher levels of capital utilisation in service industry business processes.

More people will have to sell out of expensive central city areas and buy in cheaper areas in order to survive after retirement or any change in their ability to earn labour market income.

During this process, capital losses in suburbs that aren’t close to “good schools” and job opportunities are a distinct possibility. Perhaps many people who think they’ve gotten “bargains” will find that higher interest rates and capital losses in the medium term are not as pleasant as being able to say that they’re on the “property ladder”.

One thing that the income inequality crowd haven’t wrapped their heads around is that as Auckland becomes larger and more integrated into Asia Pacific conglomerates corporate structures, significantly higher income inequality is essentially a given. Hardly anyone is making the connection between technology driven job polarisation and the risks to non-superlative suburbs in terms of capital loss.

Tyler Cowen’s Average Is Over On Econtalk Podcast

Tyler Cowen is interviewed by Russ Roberts on the latest EconTalk podcast.

The subject of the interview is Tyler Cowen’s latest book Average Is Over.

If you’re interested in his thoughts on income inequality and how humans can complement machines, it’s well worth a listen. I particularly like the idea that people will self-select into lower rent areas of their home country or immigrate to countries with a lower cost of living if they find themselves not able to earn as much labour market income as they used to.

Within New Zealand, I would expect many cash poor baby boomers to be selling their real estate holdings in order to maintain their standard of living. They’ll buy cheaper houses within a few hours drive of key provincial centres. As long as they have enough disposable income to fly to see grandkids or whatever, it won’t be as big of an imposition as some might make it out to be.

He has some interesting thoughts on how young women are outcompeting many young men on conscientiousness:

Well, one thing we are going to get very good at in the future–you see it now–is just measuring quality. So, whether it’s doctors, lawyers, economics professors, there’s always a randomized control trial now; there are always numerical ratings. Everything has a Yelp rating or an Amazon rating or something. And we all know these are highly imperfect but basically they are still better than not being informed at all. So it’s like in the future there’s a credit score for everything. So people who test well young I think will have a lot more invested in them early in their lives, early in their careers; and they’ll have a head start. And another way to think of this is, I think, within 5 years the world’s best education will be available online and it will be free. Arguably that’s already the case. But the question is: Who is there to learn from this? It’s the people who are disciplined and conscientious, which is still distinct from just raw intelligence. Now, if you ask the question if you compare men to women on average which group is less conscientious, I think you have to hand that one to the men. At least the lower tail of the distribution. So I think we already see in higher education and many other areas women doing better. And not just better because there is less prejudice. They are just outright doing better and out-competing the men. And I think that trend will be magnified by this increase value for conscientiousness.

It would be interesting to test this at New Zealand universities. How are the GPA distributions different between male and female graduates? Without discussing specific labour market skills employers are looking for I’m not convinced this approach would yield any interesting conclusions.

Average Is Over By Tyler Cowen

I’m currently reading Tyler Cowen’s new book Average Is Over.

It is extremely interesting and it’s slow going because I’m constantly opening up a new tab to read more about whatever idea he is discussing.

The central thrust of the book is that if your skills are complementary to computers, then you are golden in the new labour market.

He also points out that firms won’t hire many people regardless of the wage (including unpaid internships) because the risk of damage to the firm’s reputation or business processes is higher than ever.

Most of the ideas I’ve encountered before, but this is a very accessible book and I’m learning an awful lot about the chess community.

It turns out the machines are far better than any grandmasters and we’d be better of dealing with that and teaming up with chess engines in a human-computer combination.

You can grab Average Is Over from Amazon in Kindle or Hardback format.

Moving Towards Lower Unemployment

There are two main types of unemployment : cyclical and structural. Cyclical unemployment is caused by a downturn in the business cycle. Structural unemployment is caused by changes in the structure of the economy

An example of cyclical unemployment is a retailer laying off workers because of lower consumer spending. An example of structural unemployment is a manufacturer laying off workers because a new production process means they’re no longer needed.

Since the Global Financial Crisis began, unemployment in New Zealand has increased significantly. The idea that there is some sort of “natural rate of unemployment” – called NAIRU in the fancy models built by the Reserve Bank – means that historically unemployment “should” be around 5%.

This month we learned that unemployment is at a 13 year high of 7.3%. That’s not good. Because of the limitations of the Household Labour Force Survey, we can’t really break down exactly who has lost their job because of a downturn in demand and who has lost their job because their skills aren’t sufficient to keep it.

This means that the government has to be careful about the narrative it’s telling around unemployment. If most unemployment is structural as opposed to cyclical, then a major shift in the rhetoric around unemployment has to happen.

Some employers claim that there is a skilled worker shortage. They claim that they have lots of applicants but even when they train people they can’t stick to the job. The quotes in the Herald from these sorts of employers go against basic labour market economics.

If there is a shortage of skilled workers, who may have gone to Australia to earn higher wages, then there are two options to plug that gap:

  1. Increase the starting wage on offer to close the gap between skilled wages in Australia and skilled wages in New Zealand.
  2. Lower your expectations about the quality of employees you can obtain in the current marketplace and mould your ideal worker by offering a clear pathway to higher wages if they stick to your training plan.

Many of the business owners who complain about the skills shortage are not offering decent wages or a credible pathway to decent wages through in house training.

In 2012, with the plethora of free information available on the internet, there is no excuse for employers wanting skilled employees to do a bit of groundwork and set up an in house training scheme.

They can even partner with local training institutes and polytechnics who might be more than willing to match hungry students to opportunities in the work place.

The reason that the $10.80 an hour “training wage” won’t work is that labour market economics do not work with my generation. There is no positive relationship  between employer and employee.

The incentives to work are heavily skewed by the option of remaining in study for longer periods of time or relying on parental support. When we’ve all been told we can be astronauts no one will take a job they don’t want to unless there’s a desperate need for money.

The labour market is so competitive that for many skills, there is no actual labour market but a job and project specific skills market. This is where freelancing and self-employment comes in.

For many reasons, including regulation and tax obligations, contracting arrangements have replaced many former employer-employee arrangements. Job security is a myth. It’s far riskier to rely on an employer than on contract income from a diverse group of clients.

This is a factor aggravating the current unemployment crisis. Why? Because if you low skills and no job, with little hope of moving beyond minimum wage, there is little incentive to obtain higher qualifications.

There are several policy options for the government to get their hands dirty and make hiring marginal workers more attractive. An enormous increase in the Work and Income programs that move people from welfare to work is just the beginning.

Additional tax credits for employers who pay for training and commit to clear income trajectories for employees who progressively move from novice to skilled worker on time would help too.

Simultaneously, a more realistic approach to education subsidies is in order. We need to stop the fantasy that we can all act like aristocrats at Oxbridge studying society and culture degrees.

The arts are important, but having an income to pay the bills is more important. And increased focus on linking the education system to the skills employers need is definitely good policy.

One of the key changes that needs to happen is the reinforcement of how important mathematics is. If you want to work on most modern factory floors you need to be able to program expensive machines for low tolerances with special manufacturing machine programming languages.

Despite what you thought about maths at high school, mathematics can be learnt by anyone with the drive and dedication to work their way through Khan Academy or MIT OpenCourseware.

Becoming proficient in mathematics is becoming more important for workers in all fields who want to earn anything above minimum wage. If I had my way, a modest weekly bonus would be paid to beneficiaries who worked through online education websites regularly.

There is another bottleneck in the labour market that needs to be reformed urgently : the unrealistic standards imposed by HR on hiring “outside the box” people who could deliver substantial value innovations for their employers. I’ll be writing more about that over the next few months.

The current beneficiary bashing rhetoric employed by the National government isn’t helpful at all. It will simply breed resentment for those people who are actually victims of the business cycle.

Not everyone is capable of accurately forecasting the demand for their skills over long periods of time. Blaming people without any economics under their belt for not realising the job polarisation trends in the economy is sadistic.

In recognition of this, a more supportive attitude that realises that workers without previous high skill work experience are ideal for employers to mould into excellent employees if they are simply given a chance to prove themselves.

Lowering wages without simultaneous reductions in the cost of living leaves us at the status quo. Because inflation happens constantly, low starting wages with no reasonable prospect of pay rises will simply not motivate anyone who can think clearly about the value of time and money.

Moving towards lower unemployment will take time. But the government can take a more aggressive approach in kickstarting the process by drastically increasing the attention it pays to upskilling and encouraging self directed learning.

 

Are Jobless Recoveries The New Norm?

This week at Vox EU an interesting piece by Henry Siu & Nir Jaimovich argues that jobless recoveries, at least in the United States, are the new norm. It’s called “Jobless recoveries and the disappearance of routine occupations“.

They talk about job polarisation where there is an increasing division between high skill and low skill jobs, with the “middle” jobs that are routine and can be automated or mechanised are no longer needed. The reduced reliance on labour-intensive production methods in manufacturing and increased reliance on software and robots to perform routine tasks is an example of this trend.

To examine this against they data they constructed a counterfactual scenario – if routine employment rebounded after a recession the same way as it did before job polarisation started happening, what would total employment look like?

In the 2001 recession:

For the global financial crisis:

They conclude:

The loss of routine jobs in recent recessions has given rise to jobless recoveries. Aggregate employment struggles to rebound following recessions since middle-wage, routine occupations no longer recover. Moreover, employment growth following recent recessions has been unevenly distributed across pay, concentrated in high- and low-wage occupations. A recent report by the National Employment Law Project (2012) indicates that the recovery from the Great Recession has been particularly lopsided, with the majority of jobs added being low-paying jobs.

What does this mean for New Zealand’s unemployment crisis? If the US situation applies to New Zealand then we should be very concerned indeed. We already suffer from low levels of labour productivity and rising labour costs. More flexible hiring practises including the 90 day trial period have not made any difference in net job creation.

It means that we need to think careful when thinking about who is unemployed. Are they unemployed for cyclical reasons – because their employers failed due to lower demand for the goods and services they produced? Or are they unemployed because their job is no longer needed or they no longer have the skills necessary to perform a similar job in the same industry?

If the structural changes in the labour market are not addressed promptly, hysteresis will set in and the long-term unemployed from the past few years will be permanently locked out of the labour market. The urgency of addressing this problem is clear – if workers aren’t supported through the retraining and adding skills process they will not be able to participate in any recovery in the labour market.