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Insights 16: 14 May 2021
NZ Herald: Oliver Hartwich says NZ's labour markets have worked well, why overthrow them?
Podcast: Roger Partridge and Oliver Hartwich on Fair Pay Agreements
Radio NZ: Eric Crampton asks if waiving Covid vaccine patents improve worldwide access?

Economic logic vs. politics
Dr Oliver Hartwich | Executive Director |
A worker producing $30 worth of widgets per hour but receiving a salary of $40 per hour would soon lose his job. No employer would be willing to subsidise their employees like that.

The only chance for the worker to keep his job and receive $40 per hour would be to increase his output to $40 per hour.

Where wages exceed productivity, jobs disappear. This economic logic is so strong, it is almost a truism.

Yet no matter how solid the logic, political temptations run much stronger. A case in point are the so-called ‘Fair Pay Agreements’ (FPAs).

The idea behind FPAs is simple. By allowing employees to negotiate together with employers across an industry, they shall gain higher wages.

There is only one problem. In the long run, wages can only rise with productivity increases. See above.

New Zealand’s system of workplace relations goes back to 1991. That was when the Employment Contracts Act was introduced. It allowed direct negotiations between companies and their employees.

Since then, labour productivity and wages have been largely tracking each other. Which is to say that New Zealand’s system of workplace relations works.

New Zealand workers got paid according to their output and unemployment was low. The Initiative documented this in our 2019 report Work in Progress.

Which makes you wonder what is the point of FPAs?

The answer is, there is no point other than a political one. Introducing collective bargaining gives New Zealand’s trade unions a new lease of life.

Following the 1991 legislation, unions had lost much of the reason for their existence. Subsequent wage developments also demonstrated that employees did not need unions to benefit from productivity improvements.

The Government’s plan to introduce FPAs is both pointless and disruptive. Pointless because it cannot succeed in boosting wages. And disruptive because it introduces new conflict lines into perfectly functional labour markets.

Economists disagree on many things but not on the link between productivity and wages. As Ludwig von Mises wrote almost a century ago, “There is only one thing that can raise wages: a rise in the general productivity of labour.”

FPAs are a display of economic irrationality. They would hurt everyone apart from the unions.

If the Government cared for higher wages, it should focus its efforts on improving New Zealand’s productivity. Empowering unions will achieve the opposite.  

Read our report Work in Progress: Why Fair Pay Agreeements would be bad for Labour here

Housing Wealth and Consumption – Revisiting Pigou
Dr Dennis Wesselbaum | Senior Lecturer, University of Otago |
New Zealand’s housing shortage causes a lot of misery. An inflexible housing system makes it very hard for supply to respond to changes in demand. This affects the availability of housing, house prices, and rents.

At the same time, this also makes other policies more complicated, because of what economists call the Pigou Effect.

The Pigou effect is a wealth effect and postulates that the amount of real money people hold affects their consumption behaviour. Housing is a huge part of household wealth for those Kiwis who own homes.

What we should, therefore, consider is a Housing Pigou Effect: when house prices go up, people who own houses feel richer and, hence, change consumption.

While this “feeling” richer can be an illusion, because the housing wealth is illiquid and the capital gain can only be realised when the house is sold and one finds a cheaper (e.g. because of size, location, or quality) house to live in, it can still affect consumption and saving behaviour.

Reserve Bank research in 2008 showed that an increase in housing wealth increases consumption and that Kiwis treat changes in house prices as permanent, rather than temporary. Net financial wealth (gross financial wealth minus total household debt) can even decrease when house prices increase, because households borrow more against their house.

This has implications for monetary and financial stability policy.

Because housing supply has been very inflexible, changes in demand quickly affect house prices. Rising house prices then – via the Pigou effect – affect aggregate demand and the prices the Reserve Bank targets.

Borrowing against higher house prices can also drive up a household’s leverage, potentially increasing default risk. This could expose banks in the case of a sharp drop in house prices. This is important for macroprudential policies, such as loan-to-value ratios or countercyclical capital buffers.

It also has worrying implications for housing policy. If reforms that address underlying supply issues meant that house prices would fall, there would be flow-on implications for aggregate demand and inflation, because of the Pigou effect. This might create some resistance against fixing housing market problems.

Overall, economic policy making needs to consider these non-traditional factors. Policies such as KiwiBuild, the housing package introduced earlier this year, or recent changes to monetary policy making, should have been informed by research insights, such as the relevance of the Housing Pigou effect.

Understanding these driving forces of consumption and saving and how these change over the life-cycle is an important, policy relevant, and open research question.

Don’t stare at Brussels lest the Brussels stare back
Dr Eric Crampton | Chief Economist |
The third column in our Insights newsletter is meant to be lighter. Something a bit wry or humorous – an amuse-bouche to close out the week.

And honest to God I intended to write something like that.

At the end of April, Radio New Zealand reported a bit of trouble in European trade negotiations. Europe’s Geographic Indications system might be dropped on us as part of the deal, restricting Kiwi cheesemakers against using European protected names, even here at home.

The system goes well beyond sensible restrictions against using place names in your product name when doing so would be confusing.

In 2019, they granted geographic indication protection to the name Havarti. Only Danish cheesemakers can use the word.

I had no clue that Havarti came from Denmark. The name sounded vaguely Scandinavian, but who could really tell?

So, I planned to make fun of the whole concept. I imagined exporting HavartiNZ to Europe while claiming that GorgoNZola had been ours all along because it has NZ in it. And wouldn’t it be fun to ban Italian growers of Chinese Gooseberries from using the term Kiwifruit?

But I thought I’d first check the EU databases.

The horror.

The Havarti regulation wasn’t just some swipe-of-a-pen thing in Brussels.

It was designated pursuant to Article 50(2)(a) of Regulation (EU) No 1151/2012, after opposition from Germany, Spain, the US Dairy Export Council and others, under Article 51(2) of the same regulation. There were series of letters back and forth in 2014, deadline extensions, submissions by opponents, assessment of the conflicting arguments by the Commission, submissions from Denmark demonstrating a reputational link between Denmark and ‘Havarti’ and more.

The 27-paragraph decision surely cost hundreds of hours of work. Each hour of work going into the decision was pure waste and destruction.

The database of geographic indications runs to thousands of entries, including places from outside the EU. 

Real people who could have led productive lives instead spend their time running the Geographic Indications system. Is it dozens of wasted lives? Hundreds?

Brussels would undoubtedly welcome New Zealand joining the system and pouring real resources into banning Italian growers from using the word Kiwifruit. It all works to the glory of the Brussels abyss.

I do not know what sorts of trauma counselling MFAT provides our trade officials. But I hope they have a great weekend. They are earning it.

On The Record

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