The compassion of unions towards the minimum waged


Source: page 451 and page 828 of the 3rd edition (1972) of University Economics by Armen Alchian and William Allen; the first part of the quotation is Question #30 at the end of Chapter 22. via Bonus Quotation of the Day… – Cafe Hayek


Great Escape passed by @WorldBank’s preoccupation with RCT (randomised controlled trials) as next big thing in development policy

Could civilisation have been the result of a plan?



Milton Friedman is said to have mesmerised several countries with a flying visit!?

Milton Friedman visited Australia in 1975. He spoke with government officials and appeared on the  TV show  Monday Conference. Apparently, that was enough for him to take over Australian monetary policy setting for the foreseeable future.


When working at the next desk to the monetary policy section in the late 1980s, I heard not a word of Friedman’s Svengali influence:

  • The market determined interest rates, not the reserve bank was the mantra for several years. Joan Robinson would be proud that her 1975 visit was still holding the reins.
  • Monetary policy was targeting the current account. Read Edwards’ bio of Keating and his extracts from very Keynesian treasury briefings to Keating signed by David Morgan that reminded me of macro101.

See Ed Nelson’s (2005) Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand who used contemporary news reports from 1970 to the early 1990s to uncover what was and was not ruling monetary policy. For example:

“As late as 1990, the governor of the Reserve Bank rejected central-bank inflation targeting as infeasible in Australia, and cited the need for other tools such as wages policy (AFR, October 18, 1990).”

Bernie Fraser was still sufficiently deprogrammed in 1993 to say that “…I am rather wary of inflation targets.” Easy to then announce one in the same speech when inflation was already 2-3%.


When as a commentator on a Treasury seminar paper in 1986, Peter Boxhall – fresh from the US and 1970s Chicago educated – suggested using monetary policy to reduce the inflation rate quickly to zero, David Morgan and Chris Higgins almost fell off their chairs. They had never heard of such radical ideas.

In their breathless protestations, neither were sufficiently in-tune with their Keynesian educations to remember the role of sticky wages or even the need for the monetary growth reductions to be gradual and, more importantly, credible as per Milton Freidman and as per Tom Sargent’s End of 4 big and two moderate inflations papers.

I was far too junior to point to this gap in their analytical memories about the role of sticky wages, and I was having far too much fun watching the intellectual cream of the Treasury senior management in full flight. At a much later meeting, another high flying deputy secretary was mystified as to why 18% mortgage rates were not reining in the current account in 1989.

Friedman’s Svengali influence did not extend to brainwashing in the monetarist creed that the lags on monetary policy were long and variable. The 1988 or 1989 budget papers put the lag on monetary policy at 1 year, which is short and rapier, if you ask me.

#Corporatewelfare since 2008 @JordNZ @MatthewHootonNZ @GrantRobertson1 @stevenljoyce

My latest corporate welfare report is out at the Taxpayers Union website. The company tax could be 6 percentage points lower but for this generosity of politicians picking winners.


Source: New Zealand Budget Papers, various years.

It is not as bad as you think under the last Labour  government budget. $700 million of  those hand-outs to business was seed capital for agricultural research institute. That institute to be run out of the investment income on that $700 million one-off injection which the incoming National Party-led government cancelled.

Another $675 million in that last Labour budget was to KiwiRail and OnTrack. Other than that, the Labour Party ran a pretty tight ship on business subsidies. There are no particular record of picking winners. Labour did buy a real loser in KiwiRail. You heard it here first.

Milton Friedman on Neo-Liberalism and the welfare state


Source: “Neo-Liberalism and its Prospects” by Milton Friedman (1951).

@AndrewLittleMP all but admits rents to go up after Healthy Homes Bill?

Opposition Leader Andrew Little accepts that mandating insulation and heat pumps into rental properties will increase their value. But he denies that this will affect rents!


Source: Healthy Homes Bill won’t up rents Little | Politics | Newshub.

An upgrade increases the value of a rental property if the improvements that increase its rental value. You cannot have the increase in the value of the asset without the increase in rent.

I will contract out the rest of my answer to David Friedman’s superb book Laws Order:

For an application of economics to a different part of the law, consider the nonwaivable warranty of habitability, a legal doctrine under which some courts hold that apartments must meet court-defined standards with regard to features such as heating, hot water, sometimes even air conditioning, whether or not such terms are provided in the lease—indeed, even if the lease specifically denies that it includes them.

The immediate effect is that certain tenants get services that their landlords might not otherwise have provided. Some landlords are worse off as a result; some tenants are better off. It seems as though supporting or opposing the rule should depend mainly on whose side you are on.

In the longer run, the effect is quite different. Every lease now automatically includes a quality guarantee. This makes rentals more attractive to tenants and more costly to landlords. The supply curve, the demand curve, and the price, the rent on an apartment, all shift up. The question, from the standpoint of a tenant, is not whether the features mandated by the court are worth anything but whether they are worth what they will cost.

The answer may well be no. If those features were worth more to the tenants than they cost landlords to provide, landlords should already be including them in their leases—and charging for them. If they cost the landlord more than they are worth to the tenant, then requiring them and letting rents adjust accordingly is likely to make both landlord and tenant worse off. It is particularly likely to make poorer tenants worse off, since they are the ones least likely to value the additional features at more than their cost.

A cynical observer might conclude that the real function of the doctrine is to squeeze poor people out of jurisdictions that adopt it by making it illegal, in those jurisdictions, to provide housing of the quality they can afford to rent.

If my analysis of the effect of this legal doctrine seems implausible, consider the analogous case of a law requiring that all cars be equipped with sunroofs and CD changers. Some customers—those who would have purchased those features anyway—are unaffected. Others find that they are getting features worth less to them than they cost and paying for them in the increased price of the car.

Does invested $1 in retrofitting saves $6 in health expenditure? @PhilTwyford @PeterDunneMP @AndrewLittleMP

Various bold claims have been made about the payoff from investing more in retrofitting insulation into housing. The government recently spent $600 million on such retrofitting of insulation.

There is a private member’s bill before Parliament to introduce minimum standards for rental properties with regard to insulation and other matters. Little is by the Leader of the Opposition Andrew Little said for the consequences for rents of this additional expense to landlords.

Ian Harrison of Tail Risk Economics initially estimated that the $600 million invested in retrofitting of insulation will save barely half of that:

After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear.

The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.

After meeting with Ian, I read through the rather dull background documents behind a cost benefit analysis relied upon by the government to spend the $600 million dollars.

The most interesting part of the cost benefit analysis is most of the benefits come from fewer cardiovascular related hospitalisation of the elderly and not from respiratory diseases among children.

I found the error was far more fundamental than a incorrect transfer of a calculation between tables discussed in the first publication by Harrison. I had to read the background documents several times to understand what had been done wrong.

The cost benefit analysis for the Warm Up New Zealand Heat Smart Programme assumes that the number of elderly occupants of the newly insulated house increases by one each year and after 5 years, one of these dies but is replaced by a new elderly occupant.

We have modelled the probability of a vulnerable person avoiding mortality as a result of the intervention. The probability of this is (112.7/1000)*0.27= 0.03 (3%). We treat avoidance of mortality by treatment in each year as independent events.

The multi-year benefit calculated above would accrue based on the life years gained as a result of deaths avoided in year one.

However, we would expect these benefits to accrue in year two for different vulnerable individuals (aged 65 and over with a cardiovascular related hospitalisation in previous 18 months), and for different individuals again in every subsequent year that the treatment continues to have an effect, i.e. an on-going stream of benefits of $1,050.74 per year. This assumes a constant proportion of people aged 65+ who have recently been hospitalised with circulatory problems….( p.38).

In the first year of the new insulation, the first occupant benefits and the net present value is included in the benefit cost analysis calculation – the erroneous benefit cost analysis calculations which its authors still defend.

In the 2nd year, another elderly person moves into that same house and the same calculation is done for them. In the following year, yet another elderly person moves into the same house and the net present value calculation is repeated.

By the end of 5 years, there are 5 occupants in this house all benefiting from the same insulation investment. In the 6th year, the first elderly occupant dies to be replaced by a new elderly occupant who then gains from the insulation upgrade.

There was double counting of the number of people who benefited from the insulation as Iain Harrison explains

The analysis assumed that there was not one, but five occupants who had been hospitalised with a cardiovascular illness in the previous 18 months in each of the relevant insulated houses. There should have been only one such occupant.

The retrofitting of insulation was estimated to cost $600 million. Iain Harrison estimated the benefits to be $300 million, not $1.2 billion. That is a benefit cost ratio of 0.5.


Source: Iain Harrison, The mortality reduction benefits of insulation: the error identified.

@jacindaardern @NZLabour’s Healthy Homes Bill will raise rents to poor tenants and students


Source:  David Friedman, Chapter 1: What Does Economics Have to Do with Law?

Long-term costs of cutting emissions grow hazy



What 3 skills do public policy analysts need?

I used to argue that the quality of public policy making would double if public policy analysts remembered the first 6 weeks of microeconomics 101 but on reflection more than that is required.

I picked up my initial insight out when working as a graduate economist in the Australian Department of Finance. That was a few years ago.


I am now concluded that policy analysts also need to know the basics of the economics of tax incidence. Who pays the tax depends on the elasticities of supply and demand rather than who writes the check to the taxman.

The number of times that I have read media and public policy analysis saying who pays the tax is the writer of the cheque to the taxman is beyond counting.


There is also what to do about unemployment and inflation. Do not just do something, sit there might be good advice on most occasions. As Tim Kehoe and Gonzalo Fernandez de Cordoba explain in the context of first do no harm:

Looking at the historical evidence, Kehoe and Prescott conclude that bad government policies are responsible for causing great depressions.

In particular, they hypothesize that, while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression.

A challenge for @GarethMorgannz on disagreement in public policy making



P.T. Bauer on @BernieSanders extending #fightfor15 to entire Third World!

India tried that in the 1950s as part of its five-year plans. It did not work that well. Bauer said that in development economics there is a “need to restate the obvious.”


Source: Ending the Race to the Bottom – Bernie Sanders.


Source: Indian Economic Policy and Development – P. T. Bauer (1959) – Google Books

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McDonald’s Workers Just Lovin’ Their #ZeroHoursContracts @suemoroney @IainLG @FairnessNZ

Revealed preference rules. Not only do about half of unemployed turned down offers of zero hour contract jobs, those that switch from a zero hours contract to minimum hours are not much different from the number of people in these type of jobs who would be quitting to another job anyway.


Source: McDonald’s Workers Are Just Lovin’ Their Zero Hours Contracts – Forbes and McDonald’s offer staff the chance to get off zero-hours contracts | UK news | The Guardian.

@TBillTheProf unintentionally destroys the case for a #livingwage @Mark_J_Perry @arindube

Living wage advocate William Lester published a briefing for the Washington Centre for Equitable Growth that destroys the case for a living wage. He did not intend this but he documented in detail the exclusion of inexperienced workers from the restaurant industry in San Francisco after a living wage was imposed. He compared San Francisco’s minimum wage of $12 per hour with North Carolina which only pays the federal minimum of $7.25 per hour.

What Lester found was a systematic increase in hiring standards. The living wage in San Francisco of $12 all but ended the hiring of inexperienced workers as shown in the chart below. This is exactly what basic price theory predicts. I put the two pie charts in his paper into a single bar chart so this powerful effect of the living wage on hiring standards is not lost.


Source: The consequences of higher labor standards in full service restaurants – Equitable Growth.

The most fundamental criticism of living wage and minimum wage increases is they exclude workers who do not meet the new labour productivity level required to make it profitable for employers to hire them.  UK research found the same thing – an increase in hiring standards and tougher shortlisting. Lester welcomes this transition of the restaurant industry in San Francisco into a career for professionals. As he says in his briefing paper:

Concurrent with this wage compression was a rise in professional standards as employers sought to hire and keep already well-trained workers at higher wages and with expanded benefits. Both developments reduced turnover and attracted more professional employees who maintain a high level of customer service.

As with all minimum wage and living wage advocates, he is incurious as to what happens to those low skilled, inexperienced workers and new workforce entrants who no longer meet the hiring standards of San Francisco restaurants because of the large minimum wage increase.

As Lester concedes in his conclusions about what will happen if the San Francisco minimum wage of $12 an hour, the highest in the country, is extended to other cities and states:

Higher professional standards may limit entry-level opportunities within the industry, while lower standards may result in more employer-provided training for new workers.

Employer funded on-the-job training is often a major part of a job package. It is well-known in the labour economics literature since the time of Adam Smith that any job is a package of wages and other attributes including learning opportunities.

Workers sell their services and buy learning opportunities; firms buy labour services and sell jobs with varying learning possibilities (Rosen 1972, 1975, 1976). The rational allocation of time results in most careers starting with large investments in full-time schooling and then mostly investments in on-the-job training (Becker 1975; Ben-Porath 1967, 1970; Weiss 1987).

As the training provided by restaurant employers is useful to other employers, the trainee must fund it through trading off wages for this training. Once trained, the employee can command a higher pay because other employers are willing to pay them more now that they are trained. Again, this is a standard result in the human capital literature.

Where the human capital is more specialised to one firm or job, the employer and the trainee share the cost. A classic example of this is an apprenticeship.

Source: IZA World of Labor – Do firms benefit from apprenticeship investments?

In San Francisco, employers expect recruits to be fully trained and experienced. They provide little in the way of on-the-job training. Their recruits must have been able to afford to fund this in their previous jobs by trading off wages for training as Lester notes in his working paper:

…San Francisco employers were less likely to report lengthy formal training periods for either front-of-house or back-of-house workers. Instead, there is an overall higher level of skill expectation and—as is the case for many professions—workers are expected to acquire and exhibit industry specific knowledge on their own. 

In North Carolina, as Lester notes, the restaurant industry hires younger workers with less formal education and offers them intensive on-the-job training:

The restaurant industry in the Research Triangle region tends to hire younger workers with a lower level of formal education. Specifically, 49.5 percent of workers in there are under age 24 or have less than a high school education, compared to  38.9 percent in San Francisco. Conversely, 40.6 percent of workers in San Francisco have some college or a bachelor’s degree or higher, compared to 29.7 percent in the Research Triangle Region.

North Carolina restaurants sought to hire unskilled workers who were friendly and reliable as Lester notes:

One manager of a neighbourhood bistro in Raleigh explained what he looks for in a new front-of-house worker: “Basically, we require [that a server] can work a four-shift minimum per week and go an entire shift, an entire eight-hour shift without smoking a cigarette and [without] any facial piercings or anything. Beyond that, just come in with a smile on your face.”

The restaurant industry in North Carolina is willing to give people low skilled,  poorly educated and inexperienced a chance to work if they are willing to work. Lester reports this when quoting an upscale bar-and-grill manager on his hiring standards:

We look for at least one year’s experience, but the biggest thing we look for is we look for the person. We don’t look for the skill. I could teach anybody how [to] wait tables [and] pour drinks. I can teach anybody how to cook steaks. What I can’t teach is how to be a good person.

Lester then discusses with some degree of approval the hiring standards in the San Francisco where restaurants are professional careers:

Rather than viewing servers as essentially interchangeable labourers who can be trained quickly and easily if they possess a modicum of personal hygiene and a friendly personality, employers in San Francisco exhibited a clear description of what a “professional server” was.

One mid-scale restaurant employer said of her front-of-house staff: “We have a lot of people who have made it a career and they’re investing in the knowledge of the product and learning their trade or already know their trade because they’ve done it for years.”

Much to the surprise of believers in the inherent inequality of bargaining power between employers and workers, employers invest heavily in low-skilled employees despite the fact this makes them employable elsewhere. Lester again:

“Training is a huge investment for us and it is constant,” [a manager] said. “Training days depend on the position. Bartending training is ten days and servers require eight days. In the kitchen it’s probably about ten days. Every day they write note cards on all their recipes. But they’ll take a final. When they take their final, their test in the kitchen, they have to know every ingredient, every ounce, and every item, for the entire station. That’s why we require them to write note cards.

Even at higher-end restaurants, employers in the region have built a human resource system that accepts a high rate of turnover. “We try to stay ahead of the game so that we’re always hiring, we’re always interviewing, but hopefully it’s not desperation hires,” says another manager. “And we try to have a mix of needs like people who need fulltime, who can work lunches and brunches and all of that, to servers who really want very part time so that you can kind of over staff on busy shifts and then there’s always someone that wants to go home. There’s always a student that would like a Saturday night off.”

Lester paints a picture of a San Francisco restaurant industry that expects workers to fund their own industry specific human capital. In North Carolina, employers provide those training opportunities to minimum wage workers despite this making these up-skilled employees an attractive proposition for rivals to poach. By depriving low skilled workers of this opportunity of both wages and employer-funded training, a living wage would make them worse off.

I am at a loss here. How can the progressive left regard the exclusion of low paid, low skilled workers as a good thing? How do they put food on the table in San Francisco other than through a welfare check? How do they get their first job?

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