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.

The Shadow Labour Supply And Zero Marginal Product Workers

The Shadow Labour Supply consists of people who are not in the labour force i.e. not actively searching for a job, but still want a job.

This paper by Davig and Mustre-del-Rio explores the flows between the shadow labour supply and the labour market. It is very interesting because a significant rise in discouraged workers is not a good thing by any measure.

From 2008 to 2013, the estimated size of the shadow labour supply has risen from 4.5 million to almost 6.8 million people in the United States.

The shadow labor supply, consisting of individuals who are not actively searching for a job but would like to work, has grown considerably in recent years. Although this group has characteristics similar to those who are officially counted as unemployed, individuals in this group flow into employment at a lower rate. Still, they become employed at a much higher rate than those who indicate they do not want a job. Compared with that group, individuals in the shadow labor force are also more likely to start looking for a job.

Nevertheless, despite the swelling size of the shadow labor supply, a return of these individuals to the labor force in numbers that would considerably affect the unemployment rate appears unlikely. Variation in their job search behavior may influence the future path of the unemployment rate modestly, but not greatly. Although individuals in the shadow labor force do flow back into unemployment, the peak in their return to the labor force typically occurs in the first few post-recession years. The recent, post-recession peak of their flow back into unemployment has already occurred, in mid-2010. While another surge back into the labor force by individuals in the shadow labor supply is possible, historical evidence suggests it is unlikely. Broader variation in flows between the different non-employment categories, however, can have a more substantial impact on the unemployment rate over the next few years.

Arnold Kling speculates that these people realise that they are currently zero marginal product workers, so they might as well stop actively searching for work to preserve their sanity. He adds that people who are still looking for work unsuccessfully “didn’t get the memo”.

It isn’t a particularly nice conclusion, but this is economics not sociology. When you add in the reality that when nominal wages can’t be cut payrolls will, perhaps a lot of people are completely unwilling to re-enter the labour force at a lower wage and would rather go fishing than take a job at a lower wage rate.

I’m looking forward to whatever he writes about the topic when he gets back to it. His upcoming macroeconomics book should be really interesting.

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.