Tuesday, 5 June 2018

609 paragraphs later...

Stopping well-dug-in incumbents from using their market power to prevent or deter competition has always been one of the most challenging issues for competition policy. It's important - maybe even more important than before, with the emergence of the new generation of 600 pound gorillas (Amazon, Facebook, Google) - but intrinsically is also very hard to define and police.

For one thing, we want the 600 pound gorillas to be vigorous competitors and not just sit like Smaug  on their monopolistic hoard of profits. But it's not easy to distinguish 'vigorous' from 'anti-competitive'. A behemoth offers a big discount: is that a big win to celebrate for consumers, or a proscribed attempt to scare away potential entrants?

It doesn't help that our current law (section 36 of the Commerce Act), and the New Zealand jurisprudence around it, aren't in the best place. Anti-competitive abuse of market power is a hard thing to grapple with at the best of times, but you wouldn't bring our knife to that gunfight.

The Aussies are onto it. Last November their new approach came into effect, with section 46(1) of their Competition and Consumer Act now reading "A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition".

Previously their wording was the one we are still running with, "A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: (a) eliminating or substantially damaging a competitor... (b) preventing the entry of a person ... or (c) deterring or preventing a person from engaging in competitive conduct...".

Junking "taking advantage" means that the complex legal exercise of linking the use of market power to the conduct (the 'counterfactual test') can also be thrown overboard. That's been the element that has stymied our Commerce Commission from getting any results and has led it to flag away trying to enforce s36. And introducing "effects" means that the big bunfight over "purpose" can be sidestepped. Barring the occasional smoking gun of damning internal e-mails, "purpose" is susceptible of many interpretations and it can be a lottery which view a court will take (and one that cuts both ways, judges wrongly seeing abuse where there wasn't, or, also wrongly, seeing no abuse where there was).

"Effects" is no walk in the park, either, but at least it offers the chance to do some empirical analysis of what happens in a market when a powerful incumbent does something, and takes us away from trying to peer into people's state of mind.

All of which is by way of introduction to what must be the last gasp of the old Aussie regime, the Pfizer case, which has just had its latest outing in the Aussie courts. You'll find all the details here at the very useful Australian Competition Law website. It dates back to 2012, when the Aussies were operating the old version of the legislation, the one we're still lumbered with.

What happened was that Pfizer held the patent on a widely prescribed and enormously lucrative drug, Lipitor, which helps control cholesterol. But the patent ran out in 2012 and, unsurprisingly, various manufacturers of a generic version were drooling at the prospect of getting into the game. Pfizer knew the boom days were over for Lipitor but reckoned it might at least minimise the hit to the bottom line if it could make a go of competing in the generic market with its own generic version.

Its bright idea was a trio of direct selling to Aussie pharmacies (bypassing the big drug wholesalers which chemists typically use); setting up a bank of dollar credits for pharmacists based on how much Lipitor they sold before the patent ran out; and then paying out the credits if pharmacists signed up to a deal where they agreed to sell large quantities of Pfizer's generic version rather than the opposition's.

Enter the ACCC in 2014. Unsurprisingly: patent-holders up against patent expiry have got up to some very questionable things overseas. In particular the ACCC didn't like that requirement to stock up big on Pfizer's generic version, as it looked as if it was intended to lock up most of the market and starve the other generic manufacturers of oxygen. I didn't like the look of it, either, and I'm not surprised the ACCC challenged it. Abuse of dominance is always a grey area, but I've always liked Robert Willig's characterisation of it as not leaving enough room on the dance floor for the other dancers. The bulk purchasing requirement looked like it failed the dancing room test. If I was on the ACCC I'd have probably pressed the Go button, too.

And it would have blown up in my face, just as it has in the ACCC's. The ACCC lost the first case, in the Aussie Federal Court, in 2015, and now it's lost the appeal to the Full Federal Court. The upshot is that Pfizer was found to have had market power, found to have taken advantage of it, but - wait for it - not with the proscribed purpose.

Both courts ended up accepting Pfizer's explanation, that "at all relevant times, Pfizer was seeking to position itself to remain a viable supplier of atorvastatin [the molecule in Lipitor] into the future rather than to hinder or deter others from competing in the atorvastatin market. At all relevant times, Pfizer well understood that any aspiration to hinder or deter the very substantial corporations which manufactured and supplied generic pharmaceuticals in Australia would have been pointless", as the Full Federal Court at [455] described the Federal Court's finding.

They couldn't have had the purpose, in short, because no-one in their right minds thought blockage or prevention or deterrence of new competition was remotely possible (if there had been an 'effects' test, Pfizer would have passed it, too). And indeed I found myself having some sympathy for Pfizer. The big pharmaceutical wholesalers were each vertically aligned with a generic manufacturer: Pfizer faced not only the loss of the Lipitor revenues but all the revenues in the new generic market, which would go to the wholesale-aligned manufacturers. So no wonder it was willing to scrap hard to get at least some share.

And, as the Federal Court said, in scrapping hard - which we want the Pfizers of this world to do - Pfizer did no more than what was par for the course in the very sharp-elbowed jostling that goes on when patents expire. As the Full Federal Court said at [559], Pfizer's cunning plan "was not atypical of the conduct which other pharmaceutical manufacturers had taken in the past and would take again in the launch phase of a new pharmaceutical. After all, the generics manufacturers were expected to, and did, in fact, vigorously compete with Pfizer by discounting their generic atorvastatin to 90% or 100% in order to gain traction in the post 18 May 2012 atorvastatin market".

And so the curtain very nearly falls on the "taking advantage...for the purpose" regime. The ACCC might yet appeal: whether the Full Federal Court has bomb-proofed the risk of being reversed with its 199-page, 609-paragraph, 29-months-in-the-making judgement remains to be seen.

Either way, the Aussies will soon ('soon' in the legal sense of 'not quite glacially') have seen the back of the artificiality of "taking advantage"; of the second-guessing of "purpose"; and of no role for actual effects. On this occasion, in Australia, it looks as if the old approach nonetheless found its way to the right answer, despite the rickety analytical mechanism. In New Zealand, unless the current government kicks on with its competition policy reforms, we're still stuck with what is effectively a lottery for both the Commission and the businesses caught up in section 36.

Monday, 28 May 2018

How're we doing?

"NZ slumps to worst ever competitiveness ranking", the NBR reported on Thursday about the latest results from the annual competitiveness analysis run by IMD, a business school in Switzerland. As indeed we have: here is the top half of the league table (you can find the full thing here). We've dropped from 16th to 23rd (we got leapfrogged by Qatar, China, the UK, Australia, Israel, Malaysia and Austria).


That said, the exact placing doesn't always mean a great deal when the absolute numbers are all close together and a small change in your score can easily send you up or down half a dozen places.

There are various exercises like this around - The World Economic Forum does one very like the IMD's though with a lot more countries (137, we came 13th last time) - and I like them (I covered aspects of previous WEF ones here and here). You can quibble about some of the details and indeed some of the causation logic: are we low productivity because we're uncompetitive or uncompetitive because we're low productivity? But I suspect that if you put the data through some more formal kind of econometric sausage machine - principal components, say - you'd probably get the same clusters of themes emerging.

In any event the overall picture that emerges from the IMD analysis certainly lines up with common sense. Bottom of this year's heap, for example, was Venezuela, and the bottom dozen included a fair range of the usual suspects. The head table included a bunch of the high income economies, with the Nordic countries in particular well represented.

While the rankings make interesting reading, their most important use is as a decent diagnostic tool. Nobody has ever come up with a knock-out diagnosis of our 'productivity paradox' - great institutions, well-meaning people, low productivity - and maybe they never will. But things like this IMD tool give suggestive pointers. Here for example is how we score on the various sub-components of competitiveness, showing our relative position out of the 63 countries surveyed (there's a link to the New Zealand case study in the NBR article).


We tend, in New Zealand, to do a lot of finger-pointing at the government. On this analysis, though, we'd do better to look in two other directions. One is private sector business performance, and helpfully the IMD exercise unpacks that very poor 'productivity and efficiency' business score (49th out of 63) to show us exactly where we struggle most. Oligoplistic industry structures and overpriced support services top the list.


The other priority area would look to be the state of our international linkages - how well we are (or in our case mostly aren't) plugged into the wider world economy. TPP apart, we usually make a bit of a song and dance about how committed we are to free trade - all good in itself, and we're heading further down that track with the European Union - but we don't actually make a great fist of the opportunities it offers. As I mentioned the other day, for example, the Budget forecasts for our export performance over the next couple of years don't even match the likely growth in world trade over the period, so our share of what's available will dwindle a bit more again.

We're also not very good at other aspects of international linkage. We're at best ambivalent about foreign investment: without looking too hard for examples, off the top of my head in recent years we've blocked foreign investment in Auckland Airport and foreign ownership of houses, restricted access to agricultural land, and had the ludicrous spectacle of Fletcher Building (nominally 'foreign') having to get Overseas Investment Office approval to redevelop a golf course for housing. We haven't made any serious effort to attract foreign investment since Jim Anderton was a Minister. 

In the meantime a country like Ireland (12th to our 23rd) has made attracting foreign investment one of the core policy plans of its modernisation. And don't give me the "they're in the middle of a high income trading bloc and we're on the edge of the world" response. We haven't even made the effort to attract whatever investment might nonetheless find a good home here.

But let's finish on something a bit more positive. Most of the IMD analysis is based on hard data, but there's also a qualitative element based in a poll of business executives. Here are the things they identified as the key attractive factors of our economy. The 'productivity paradox' comes through again - good institutions, give-it-a-go people, but globally competitive businesses? Not so much. Virtually nobody thinks we've got a cost competitive base to work from, and having just spent $5 on an avocado and $10 on 500g of supermarket mince, I think they're absolutely right.

Wednesday, 23 May 2018

How competition benefits women's pay

Last year the folks at Motu came up with a great piece of research which, among other things, showed that wage discrimination against women in New Zealand was less when firms faced greater competition.

The logic is simple: you might try to discriminate if you could get away with it without repercussions, but you'd pay dearly for indulging in your sexist preferences when there are plenty of firms competing with you who'll scoop up the qualified women and do better than you. Ditto, sexism will cost you when the labour market is tight, since you can't afford to be unfairly picky when staff are harder to find than usual.

Here's the guts of the results, from my blog post at the time. The impacts of more competition and tighter labour markets are very large indeed:
That already large pay difference [19.2% against women] is doubled - doubled! - if there's lots less competition among businesses in the sector. However the large difference goes away completely - to be consistent, completely! - if there's lots more business competition. It also goes away completely if a tight labour market is holding employers' feet to the fire and forcing them to make gender-blind hiring decisions, which is what you'd expect.
There hasn't been a ton of research elsewhere in the world along the same lines, but thanks to a lucky accident another bunch of researchers have also shown how increased competition between businesses works to women's advantage.

The lucky accident happened in Portugal, where, as 'Product market competition and gender discrimination' shows, a new programme got rolled out which made it hugely easier to set up a new company. It increased the level of competition against established firms from new companies who had previously been kept out of the game by an expensive and lengthy company registration rigmarole. The authors show, for example, that rolling out the programme resulted in more firms being set up and in industries being less concentrated in a few hands.

The especially lucky part of the exercise was that the new "On The Spot Firm" initiative got rolled out in different places at different times. And that enabled the researchers to measure the difference in outcomes between places that had already rolled it out and those that hadn't yet. It also helped that Portugal has a huge linked employer-employee dataset (like the one in our own Integrated Data Infrastructure) so they could analyse what went on in very considerable detail.

Key results (bits in square brackets are my explanatory glosses):
We find the entry deregulation reduced the gender pay gap for medium- and high-skilled workers in affected municipalities [i.e. where On The Spot Firm had been rolled out]. The differential effect of the reform on women workers' pay is positive and statistically significant. Our estimates imply that for workers in high-skill jobs, while male wages increased by 1.5 percent, females' increased by 2.9% as a result of the deregulation, thus reducing the gender pay gap [by 1.4%]. Overall pay of medium-skilled males decreased by 0.6% in treatment municipalities [those with On The Spot], while those of females in the same skill category increased by 0.4% [a 1.0% narrowing of the gap] (p20)
We also find that the share of females in managerial positions increased following the deregulation, suggesting that discriminating employers kept women in lower positions than implied by their skills, and competition induced them to upgrade their occupational status (p20)
Deregulation and increased business competition wasn't a complete panacea:
these effects are not found for those in the lowest skill jobs or for CEOs. The labour market for the top executive still especially favours men and increased competition does not improve relative women's pay [in the CEO role] (p20)
But even so I was impressed by the size of the effect, given that these new firms would hardly be expected to be total giant-killers day one when they first started to go up against longer-established incumbents. Just making it easier to set up a business closed the wage gap by 1.0-1.4% for medium and high skilled women, and got them promotions they should have had before. That's a remarkably big pay-off.

Increased competition in the business marketplace is one of those ideas that neatly hit both equity and efficiency objectives. The equity outcome is obvious: the efficiency payback is that output rises as the previously underutilised female workforce gets to pull its proper weight. And what's true of women is very likely also true of other groups that would otherwise face relatively uphill going in the labour market.

People concerned with some of today's big social or environmental issues tend to be wary of markets, and rather inclined to see them as part of (or all of) the problem. What these New Zealand and Portuguese results show is that vigorously competitive markets can deliver more desirable social outcomes - provided firms aren't allowed the sheltered luxury of bias and slack.

Roll up! Roll up!

For everyone in the competition and regulation game, you have to come along to the Competition Policy Institute of New Zealand annual workshop. It's in Wellington, August 10-11. The programme is here. As you'll see, the conference covers all the bases - mergers, cartels, Commission processes, consumer law (on the hot topic of privacy and data use), market studies, telco regulation, economic methods, and a think piece on unfinished business in competition and regulation policy.

It's headed by a keynote presentation from the Wharton School's Professor Joseph Harrington on 'Collusion without the Smoke-Filled Room: From Public Statements by Wetware to Algorithmic Pricing by Software'. You may well know Harrington's body of work already, but if his name rings only a vague bell, have a look on your bookshelf where you've likely got everyone's go-to textbook, Economics of Regulation and Antitrust, which he coauthored with Kip Viscusi and John Vernon.

Plus it's been confirmed that the Minister of Commerce Chris Faafoi will be the guest speaker at the workshop dinner. He's made an active start to his competition portfolio - reviving cartel criminalisation, giving the green light to Commission-initiated competition studies - so it'll be interesting to hear where he's going next, and why.

The early bird registration cut-off date is June 10, so head to the registration page and save $125  by attending and joining CLPINZ at the same time (which gives you access to the papers from previous workshops).

I can't definitively promise sausage rolls, but I live in hope...


Tuesday, 22 May 2018

We've got one of them

We may only be a small economy on the edge of the world, but - at least in the fields of competition and regulation - we can end up wrestling with exactly the same leading edge issues that bother the big guys. And sure enough we've just had a prime example, involving all the hot topics overseas: technology, social media, big data, vertical integration. You name it, it's got it.

It's Trade Me's proposed acquisition of Motorcentral (strictly speaking, acquisition of Limelight Software, who operate Motorcentral). The Commerce Commission turned it down on March 9. While it took forever (well past the Commission's own performance target) to publish the written reasons, they finally appeared last Friday, and they've been worth waiting for.

The reasons run to 111 pages (maybe I should cut some slack on how long they took to see the light of day) but relax - I've saved you the bother of reading the whole thing, and boiled it down into this reasonably self-explanatory picture showing the 600-pound gorillas and the minnows in the two markets involved, plus a lurking 800 pound gorilla (insofar as 800 pound gorillas can lurk).



There were three issues involved.

One was horizontal aggregation in the online car ad trade, where the Commission found there'd be no competition issue, albeit for the brutal reason that Trade Me is so dominant that losing Need-a-Car made no difference.

The second was horizontal aggregation in the dealer software ('DMS') market, where the Commission found that there would be a substantial loss of competition, since, absent the acquisition, Trade Me would likely have improved its DealerBase DMS to compete more effectively. Trade Me appears to have disputed that, but all the interesting corporate strategy documents on that and other issues are (necessarily) redacted so we'll have to assume the Commission read that right.

The most interesting issue, though, was vertical integration in the context of  big data. Even before big data became a thing, vertical integration could always facilitate anti-competitive strategies like foreclosure or predation. But the permutations and combinations have become even more complicated when there is big data at one or (as here) both levels of a vertical tie-up.

Because lurking in the background is Facebook. It already has one side of a two-sided ad platform (eyeballs in New Zealand),  and in the States it is already getting the other side (the car listings) by partnering with DMSs. So it likely would do the same here: "While it is possible that there are other ways of entering the advertising market, the recent instances of entry that we have observed occurred through the new entrant listings platform entering into a relationship with DMSs holding large amounts of listings data" (para 462 of the decision).

But the Commission found that a Trade Me / Motorcentral combo could and likely would stymie Facebook's efforts to get at the only DMS that really matters by - on some sliding scale of foreclosure insidiousness - making it more difficult or expensive to get at the car listing data. Even as big a bruiser as Facebook could be seen off: "We have not found any evidence to suggest that a potential new entrant such as Facebook would, in circumstances where access to listings data in Motorcentral is restricted, incur the cost and risk of changing the entry model that it has employed overseas to enter the relatively small New Zealand advertising market" (para 465).

No doubt there are some who would be just as happy to see the already ginormous Facebooks and Googles seen off. And there are probably some who may be thinking that if a market like online car ads is going to 'tip' in any event into one big site where all the cars and buyers are clustered, it might as well be a Kiwi one.

But, as always, it's competition we care about, not competitors. There's been a trend overseas where well-entrenched incumbents have bought out what might have been the foundation for a competitor: ironically in our context, people have pointed to Facebook's purchases of WhatsApp and Instagram as possible examples. The important thing - as the Commission has done here - is to keep the options open for new entrants to have a crack at the tough nut.

Which, incidentally is why I still have a soft spot for the minority dissent in the Commission's clearance of Z to buy Chevron. Chevron and its Caltex stations might have been a complete waste of space as a vigorous competitor, but in different hands who knows what competitive discipline it might have brought to the petrol trade.

In any event, the lasting significance of this decision - and one that I think we'll see overseas authorities citing - is that it sets a good precedent for being protective of potentially subversive competitors to the status quo in markets with big data and technological innovation.

Not that's not always going to be easy to identify them: who can really look at a start-up and accurately tell that it's maybe the germ of the next Google? And there are going to be companies who will sincerely argue that there's nothing to see here folks, move on. All that's happened is that a start-up has built a better mousetrap than their own - Motorcentral's DMS really does have far more bells and whistles than Trade Me's DealerBase - and they're buying it to improve their users' experience. With the redactions, I can't tell, but I'd guess Trade Me made that case or something like it this time round.

So it's going to take a good deal of commercial savvy to make the right analytical and factual calls in dynamic markets like technology. How'd we go in this one? This acquisition was going to fall over anyway because of the horizontal aggregation in the DMS market, but if the whole thing had hinged solely on the vertical integration issues, I reckon the Commission got it right in protecting the only viable way for a new entrant to get into the game in a meaningful way.

Finally, if you're interested in the big data aspects, a while back the Commission's Reuben Irvine, Greg Houston of Houston Kemp, and I put together a short reading list you'll likely find useful (we were talking about it as a panel at the Asia Pacific Industrial Organisation conference). And if that's not enough for your inner nerd, the Trade Me decision also pointed me to this very useful OECD resource, 'Rethinking Antitrust Tools for Multi-Sided Platforms'.

Thursday, 17 May 2018

Surprises are over-rated

It’s generally best, in fiscal and monetary policy, to make your plans clear and stick to them: Finance Ministers and central bank governors are better off leaving the rabbits in the hats. So the first good thing to say is that this government made its plans reasonably clear early on with its “100 Days” initiatives last year and in the pre-Budget positioning over the past few weeks, and the Budget itself was mercifully rabbit-free.

Everyone expected this to be a Budget that would deliver a large boost to spending on core government services like health and education, and it was. Of the extra $11.4 billion in operating expenditure that the government plans to spend over the five years to 2021-22, for example, $6.5 billion goes under the heading of “rebuilding critical public services”: health gets $3.25 billion of it, and education $1.6 billion.

Everyone also expected the Budget to stick to a “fiscally responsible” script, and it did. There will, for example, be fiscal surpluses every year from here,  building up to a forecast $7.3 billion surplus in the year to June ‘22, which would be a reasonably sizeable 2% of so of total GDP. The likelihood of the New Zealand political process actually leaving $7.3 billion unspent on the table is extremely low, but at least for now the intention is there to run ever larger surpluses and get net public debt down to below 20% of GDP.

The Budget’s also one of the big forecasting set pieces, and once again there were no huge surprises in the expected economic outlook – ongoing growth in the next few years at about 3% a year, enough to get unemployment down to 4.1% by the middle of 2020. There are two big uncertainties (apart from the ever present risk of international instabilities). One is whether housebuilding has the capacity to grow at the rate Treasury expects: not much in the coming year to June ‘19 (+1.4%) but quite substantially in the two years after that (+5.0% and +5.5%). That’s a big ask for a sector widely suspected of capacity constraints. The other is net immigration: the Treasury thinks it will gradually drop off to a net gain of about 25,000 people a year, but the reality is, it’s anyone’s guess, as you can see from these different forecasts (a graph included in the Budget Economic and Fiscal Update).



A key aspect of the Budget is whether fiscal policy boosts or brakes the overall economy. Here’s the answer, acknowledging that the calculations are down the iffier end of the spectrum of economic analyses. Fiscal policy gives the economy a decent boost of about 1% of GDP in the current year to June ‘18, and much the same again in the year to June ‘19, before the brakes go on in later years. Again, I’ll be surprised if the political process actually allows those brakes to be applied, but again the effort is currently there to keep fiscal policy on prudent lines.


And policy – particularly in small open economies on earthquake plates – needs to keep a reasonably conservative grip to leave us lots of room to cope with external or domestic shocks. We can’t flag away a “rainy day” approach, particularly as our forecast fiscal surpluses are reliant on us continuing to benefit from high world prices for the things we sell. Here’s a somewhat worrying picture: it shows our forecast fiscal surplus track, adjusted for the cyclical state of the economy, compared with what the picture would be if our terms of trade were at their 30-year average, and not well above it. Answer: if the world became very difficult for the likes of our dairy farmers, there would be no surpluses, not now, not in future.


All that said, and accepting it’s a balancing act, you’d wonder if the Budget wasn’t almost too conservative. These are, for example, exceptionally good times to be be spending even more again on infrastructure: the accumulated shortfall is huge, and financing costs are still very low, even if we’ve somewhat missed the boat on raising money at the exceptionally low financing costs of 2016 and 2017. I’m not sure I’d agree with the claim in the Budget speech that new transport spending in Auckland, large as it is, will in fact be enough to “free up our biggest city”.

Whether it got the balance right between social policy and economic development is also debatable. The Budget will be putting a rather smaller $2.8 billion of operating spending into “Promoting economic development and supporting the regions”, compared to the $6.5 billion on public services. And there’s a lot under that label that is a stretch to call a contribution to economic development, including the big $1.1 billion expansion to our “international presence” and the Provincial Growth Fund boondoggle.

To be fair, there is one productivity initiative which could be significant. The Budget expects the government to spend over $1 billion if businesses take up the R&D tax credit to the degree it expects (12.5 cents back for every dollar spent, for companies spending at least $100K a year on R&D).

But has enough overall been done to facilitate a decent lift in our productive potential? If you take the view that we need a step lift to our game, the forecasts don’t suggest it’s in our near-term cards. The IMF, for example, thinks word trade will grow by 5.1% this year and by 4.7% in 2019: the Budget forecasts don’t see our exports of goods and services keeping up with world trade growth in general.

One Budget, obviously,  isn’t going to transform our low productivity overnight, and even a  succession of Budgets strongly friendly to facilitating productivity may only go part of the way. But this time next year I think I’d like to see rather more focus on closing the gap with the kinds of income the higher-performing economies in the OECD are capable of generating for their citizens.

Friday, 11 May 2018

Selective unemployment (yet again)

In response to my post yesterday about unemployment by educational level, a reader who knows their way around Stats' Infoshare database better than I do pointed me to a now discontinued series (it stopped at March '16). Thanks for that, mate: as the series goes all the way back to March '86, we can see how unemployment behaved through a couple of recessions. Here's the answer.


And it is indeed exactly as you might have surmised. In the worst episode - the combination of the costs of Rogernomic restructuring, the very tight monetary policy of the early days of the Reserve Bank Act, and the overseas 'Anglo-Saxon recession' of 1990-91 - everyone got battered, but those with no qualifications got battered most, with their unemployment rate peaking around 17%.

Conversely the good times of the pre-GFC 2000s rolled long enough to bring unemployment rates even for the less qualified down very significantly. By 2007-08 the unemployment rate for people leaving school with a qualification had got down to only 4% - lower than our overall unemployment rate today (4.4% in March). Sustained expansions do wonders for getting even the harder-to-place people into jobs.

The policy lessons stand. Sometimes - if you've let inflation get out of hand, if you've run big fiscal deficits for too long - you may find yourself in austerity mode. Best not go there in the first place, of course, but if you have, you'd better do something to alleviate the impact on the more marginalised groups in society, because they end up wearing the worst of the downturn. More positively, if you can contrive to keep an expansion going long enough, a good deal of social angst goes away as a progressively tighter labour market puts pay packets into far more people's hands.

Thursday, 10 May 2018

Unemployment strikes selectively (revisited)

A reader looked at the cyclical pattern of unemployment by ethnicity which I posted about the other day ('Unemployment doesn't strike evenly') - Maori and Pacific people fare unusually badly in downturns and require a long spell of labour market strength before their unemployment rates get back down closer to those for European and and Asian people - and asked me if the same pattern applied by education level.

You'd think the same pattern would apply for less qualified people compared to more qualified people, but off the top of my head I couldn't recall whether our labour market data included educational qualifications. The good news is yes, they do, but the bad news is that they don't go very far back in time (they start in the middle of 2013).

Here's what's available. To keep it manageable I've just picked out three levels of qualification: post-grad, the better end of a secondary school qualification, and no qualification at all. If you're interested in more detail, head for Infoshare and have a fossick: go to 'Work, income and spending', then 'Household Labour Force Survey', and then 'Labour force status by highest qualification'.


Unfortunately there isn't a big enough cycle going on over this time period to see what happens to the less qualified in recessions: all we know (which anyone would have guessed beforehand) is that those with the highest qualifications have the lowest unemployment rate.

In the US, though, we can see a longer picture of cyclical history: here's what's happened to those at the top of the educational ladder (adults with a PhD) and those at the bottom (adults with less than one year of high school). The shaded areas are recessions. Again you can get more detail for yourself from the excellent (and free) FRED database.


You do indeed get the same pattern happening as for ethnicity. Those who find it hardest to get work in good times also get hit far worse in bad times, but if the labour market stays strong enough for long enough, even those with no formal qualifications at all will start finding jobs. Remarkably, the unemployment rate in the US for those with no qualifications is now down to under 5% - but it's taken the longest peacetime expansion on record to get it down to those levels.

Policy lesson: no matter how you cut it, the groups with less going for them suffer disproportionately when the economy turns down.