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Insights 08: 11 March 2016
Poorly Understood: The state of poverty in New Zealand
Dr Oliver Hartwich discussed the OCR with Paul Henry before the RBNZ's surprise cut on 10 March
Three things you need to know about our latest report, Poorly Understood

Living wage, killing opportunity
Dr Eric Crampton | Head of Research |
Sometimes, the supermarket sticker price is just there to make the sale price look better. Anchoring expectations matters.

And so the living wage movement’s push for $19.80/hour was a masterful piece of political tactics.

The $0.50 hike in the minimum wage, 3.4 percent when inflation is running at or below one percent, should have drawn criticism for being too large. Minimum wages were hardly low to begin with: relative to the median wage, ours is one of the highest in the developed world. Are we trying to throw people out of work?

Instead, the hike mainly drew criticism from the left as being inadequate. Why? Because the living wage advocates timed their updated $19.80/hour figure to coincide with the minimum wage increase.

It is worth going through that living wage figure just a little bit.

The living wage is advertised as being the wage necessary to support two kids with one parent on 40 hours per week and the other on 20 hours per week. The minimum wage then gets criticised to the extent that it fails to live up to that standard.

But the living wage fails to withstand critical scrutiny.

The calculations began with focus groups of poorer people, asking what level of expenditure would be necessary for an adequate lifestyle. The resulting figure suggested that 80% of the country has inadequate income. But the Household Economic Survey shows strong majorities of people, even in the lowest income bands, say their incomes are adequate.

And so they re-did the figures, building up from some estimated levels of expenditure on basic items. But they assumed everyone shops at the most popular supermarkets and that nobody ever buys anything on special. It seems just a little implausible.

But there is a bigger problem here, even if the numbers were right. Not every job has to provide a sufficient income for raising a family with a couple of kids, and living costs vary across the country. Entry level positions on lower pay give people a chance to build up experience to move up. Knocking rungs out of the ladder is poor policy.

And, minimum wages are poorly targeted: many minimum wage workers are in richer households.

Wage subsidies like Working for Families target aid while doing less damage to employment. But too high an anchor on minimum wage expectations can be an anchor on employment.

A surprise from the RBNZ
Robert MacCulloch | Matthew S Abel Chair in Macroeconomics, University of Auckland |
How central banks communicate their monetary policy intentions to the market matters.

First, central banks must be credible. That is, they should do what they say they will do. Second, they should be transparent. That is, informed market participants should not be taken by surprise by central banks’ decisions.

Why this insistence on ‘no surprises’? Because surprises can create policy uncertainty and make planning by business leaders harder. Uncertainty can hurt the economy.

It’s easy to know when Official Cash Rate announcements are a surprise to the market. When they are, they immediately lead to shifts in interest and exchange rates. Anticipated announcements, meanwhile, lead to little or no changes.

So was yesterday’s OCR cut expected by the market? Most definitely it was not.

Bloomberg, for example, reported: “New Zealand’s central bank unexpectedly cut interest rates to a fresh record low and signalled further easing may be needed.” As a result, “the kiwi plunged by more than one U.S. cent.”

This was a big surprise which no one could have seen coming. Even Oliver Hartwich, the usually well-informed Executive Director of The New Zealand Initiative, got it wrong. 

Speaking on The Paul Henry Show, Oliver had predicted that there would be no change.

He was not alone with his view: 15 out of 17 leading economists surveyed by Bloomberg also believed that there would be no change. As did 17 out of 21 economists asked by Reuters.

When asked by Paul Henry how confident he was in his prediction, Oliver quipped “When have economists ever been wrong?” Whether it was his German sense of humour or that he was only hedging his bets, Oliver had a point. That is because his prediction was the rational one to make, based on the available information.

I have no views on whether cutting rates yesterday was a good idea or not. But I do have a view that the RBNZ should try to communicate its intentions better to the market.

After all, our central bankers should enable businesses to plan better. They should not make their lives harder.

Professor Robert MacCulloch is the Matthew S Abel Chair in Macroeconomics at The University of Auckland.

Olympian's prawn addiction
Jenesa Jeram | Policy Analyst |
Too many New Zealanders are walking around with a shameful addiction.

Your family members, colleagues or even spouse may be secretly struggling. Deluded by unrealistic expectations of romance and physical attractiveness, they should know it is okay to seek help.

I am, of course, talking about the embarrassing yet unshakeable addiction to TV3’s The Bachelor.

Just kidding. The Bachelor is awful, but apparently socially acceptable. Olympian Nick Willis’ prawn addiction* on the other hand? That’s shocking enough to make mainstream news.

My problem with this coverage is not that it made me feel uncomfortable. It is that the whole story is so utterly boring.

I probably should have stopped reading after such insightful gems like “It [prawn] is not sexy nor appealing.” Why watch it then? I don’t think The Bachelor is sexy or appealing, but I don’t expect the Herald will trip over themselves to publish my opinion. It’s a matter of taste.

More problematic is the modern characterisation of addiction: defined as pleasurable activities that become compulsive and interfere with normal life.

How very perceptive. People like doing things that make them feel good, and may even go out of their way to do them. Things that are pleasurable stimulate the pleasure centres of the brain.

But with such a loose definition, why just stop at prawn?

Last year health experts tried convincing us that cheese is as addictive as crack cocaine. Yet cheese-related crime rates remain low. Even in Remuera, where they supply the good stuff (Roquefort, of course).

Other addictive foods identified by Otago University’s National Addiction Centre include ice cream, muesli bars and mayonnaise.

I think I’d be more scared of meeting a methamphetamine addict than an ice cream addict at the end of a dark alleyway. And I can’t imagine a muesli bar addict experiencing Trainspotting-esque withdrawals.

Maybe Willis sharing how compulsive behaviour affected his marriage could help other couples going through the same.

But labelling everything enjoyable as addictive (thus dangerous) is unhelpful. Let’s not forget that love messes with the brain too, and can make people do crazy things.

Besides, what is problematic in one marriage may be the secret to another marriage’s happy ending.

*I’m not talking about prawns here, but the more common term for “adult entertainment” may not have made it through the work email filters. 

On The Record
All Things Considered
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  • The world's 'hottest felon' is out of jail, and heading for the catwalk
  • And, that's why it's okay to start a sentence with a conjunction
  • Why do we work so hard
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