As expected

The NZME/Fairfax Court of Appeal judgement is out and contained few surprises.

The Court had been widely anticipated to rebuff the appeal against the Commerce Commission's refusal to authorise the proposed merger of NZME (the Herald, radio stations, and a herd of other North Island media businesses) and Fairfax (DomPost, Press, S-ST, herd of other media things nationwide). So it did. Rather, the interest was always going to be in what it said about the Commerce Act and how it is supposed to operate.

In particular, was the Commission allowed to count non-economic things in the balancing of benefits and detriments that goes on in a merger authorisation? In this case, the big non-economic detriment was the social loss of media plurality (a very large share of the take on the news would be in one pair of hands).

There was also a likely degradation of the quality of journalism (due to the merged entity laying off journalists) which was also treated as a non-economic detriment. That always seemed odd to me, as a loss of product quality is easily accommodated within the usual economic framework. But never mind: what did the Court say?

It said, count all benefits, count all detriments, whether occurring in the markets affected or not, and whether economic or not. Completely sensible. Key bits (footnotes omitted here and later):

[69] ... The High Court held that the Commission has jurisdiction to consider a loss of plurality resulting from the transaction. It accepted that out of market considerations may seldom arise and the Commission may be susceptible to challenge on the merits if it takes them into account, but as a matter of construction Parliament cannot have intended to exclude such considerations where a proposed transaction is likely to cause them. We agree generally with these conclusions ...

[71] ... Section 3A further presumes that efficiency gains may benefit the public and prescribes that regard must be had to them when assessing public benefit. But as a matter of construction the Act treats efficiency as a subset of public benefit; put another way, efficiency is a mandatory consideration but others are not excluded. To paraphrase AMPS-A (HC), efficiency matters but it does not exhaust society’s interest in the  transaction ...

 [73] ... the Act is not exclusively concerned with efficiency but rather allows it to be balanced alongside other public benefits that may include anything of importance to the community as a whole. Nothing in the legislation requires that public detriments be defined less comprehensively. The identification and weighting of public benefits, including efficiency gains, and detriments is left to the Commission’s judgement.

Perhaps sarcastically, along the way the Court said at [61] that the Commission must have been doing it wrong all these years when it had already been counting a whole bunch of non-economic consequences - "reduced pollution, health benefits of breastfeeding, safer handling of hazardous substances, reduced stigma for psychiatric patients, and social effects of plant closures".

There was one interesting thing in the part of the judgement dealing with balancing benefits and detriments. While it may be tempting, for the Commission or for the merger parties, to chuck in low probability outcomes with high impact - "cure for cancer", "world peace", "Armageddon", you get the idea - you can't do that. As the Appeal Court said (rapping the High Court's knuckles, though otherwise affirming where the High Court had got to):

[92] In our opinion the High Court erred to the extent that it took into account what it considered a remote risk that a single owner would exploit the merged entity for political purposes. We agree that even a remote risk of this kind is a matter of public concern. Post-transaction, NZME’s substantial presence in relevant markets would create a vulnerability that ought to worry policymakers. But unless the risk is thought “likely” it should not enter the balance ...

Had the Commission and the High Court got the facts wrong? No.

[134] We consider that quality and plurality detriments are very likely to result from the transaction. We have examined quality effects first ... We agree with the High Court that quality detriments are very likely and substantial. We consider that they are sufficient in themselves to outweigh the transaction’s benefits.

[135] Additional plurality losses are also very likely and substantial. We agree with the High Court and the Commission that plurality is a characteristic of media markets that is vitally important to the community. We also agree with the High Court that the loss of plurality attributable to the transaction would very likely be irreparable ...

[137] In the result, we find that detriments clearly outweigh benefits, and not by a small margin. It follows that authorisation was properly declined 

My overall take? The jurisprudence has landed in a good place. If a merger has a mix of good and bad stuff, it may get messy: as the judgement says at [80], "We accept that non-economic detriments may complicate merger analysis and introduce an additional element of unpredictability, which is undesirable". But that's the way it is: "Some measure of uncertainty is inherent in the legislative decision to permit authorisation on widely-defined public benefit grounds ... Parliament made efficiencies a mandatory consideration but it did not exclude others or say anything about the weight to be assigned to them".

So count them all (excluding the unlikely ones) best you can, and balance them. That aligns economics, the law, and common sense. Not a bad day's work by the Court at all.

We take the plunge...

...and in the interests of scientific inquiry our household has a go at changing electricity retailers.

Time, in short, to stop being the competition equivalent of an unmarried marriage counsellor, and actually use the tools available to increase competition in electricity retailing.

We haven't been averse to switching in the past, but I'd got disillusioned by the first wave of retail competition. The phone would go - it was usually telephone marketing then - and we'd get an offer. Of sorts: a lower fixed daily rate but a higher cents per unit usage rate, or a lower cents per unit usage rate and a higher fixed daily rate. No offer at that time was unambiguously better than your incumbent's tariff, with lower fixed and lower usage rates. You were reduced to getting out a calculator and figuring out whether you'd actually be better off.

So we ended up in the large number of people who didn't switch - somewhere between 400,000 to 750,000 households, according to our recent Electricity Price Review - and helped provide a captive base for the retailers to exploit. As this graph from the Review shows, the gap between the best and worst price plan, and the gap between the best plan and the incumbent's in a a particular area, have been widening, suggesting (Review, p38) that "those consumers who don’t or can’t easily shop around are paying more and more than they need to".

It's been a bit of a mystery - in the UK, in Australia, here - why consumers just sit there and apparently let themselves be exploited. You can't - and shouldn't - ever rule out the possibility that their decisions are entirely rational: when a lot of people do something, there tends to be a reason. But equally the conventional wisdom is more down the lines of low switching reflecting some form of problem in the switching market.

So I set out, with our sample of one, to see if I could figure out what it might be.

I went for Consumer's Powerswitch though I could as easily have used the Electricity Authority's What's My Number. It went easily enough, though I discovered two little wrinkles.

One was that our incumbent - who I'll call Oldco - didn't make it obvious what pricing plan we were currently on (unlike our broadband or mobile suppliers, who do). I figured it out from the wording of the charge for unit usage, and by matching our charges (after grossing up for GST) with those shown (GST inclusive) in the drop-down menu of Oldco pricing plans that appears on Powerswitch.

The other was that Oldco didn't show annual electricity consumption, which you need to get the best plan for you. Powerswitch says that your retailer will tell you if you ask, but it isn't volunteered (or not anywhere I could find on the bill or using Oldco's online app). You can however add up your last twelve months' bills manually, so I did (a little over 9,000 kWh).

Powerswitch came up with a wide range of competitive alternatives, with annual savings of around $500 to $600, or roughly 20%. Well worth having, so I pressed the 'Switch' button and signed up with Newco.

And it's at that point that I unearthed at least one of the reasons for consumer reluctance to switch. Putting aside the associated free and frank discussion on lack of intra-household consultation, what most concerned my better half was, "what if something goes wrong?"  (in our case enlivened by recollection of a previous attempt to change broadband supplier, which had gone phut). This is (I gather from para 9.210 on p504 of the UK electricity review) quite a common fear, though higher among those who haven't switched than among those who've actually given it a go:

We agree with the views expressed by some parties that the perception of problems by those who had not attempted to switch appears to be somewhat greater than the experience of problems by those who had. In contrast to the experience of those who shopped around or switched, 66% of those who did not shop around or switch in the last three years agreed that ‘switching is a hassle I do not have time for’ (compared with 40% of those who had shopped around or switched in the last three years) and 57% agreed ‘I worry things will go wrong if I switch’ (compared with 37% of those who had shopped around or switched in the last three years).

In the end the spirit of pro-competitive market discipline prevailed over fears of a cock-up, and Newco got the tick.

When Newco contacted us, they said that "During this process you may get a call from the previous power company", and rather disarmingly added, "that’s what we’d do". And Oldco indeed e-mailed us, offering a cash rebate, a bigger prompt payment discount, a two-year price guarantee (which was also part of the Newco offer), and - belatedly - the offer of a better pricing plan (with an element of lock-in for two years).

No deal. We're gone to Newco. Some critical mass of people need to follow through on switching, or the system won't work. And - accepting that our own inertia let them get away with it - we're not feeling especially charitable to Oldco. A short term profit focus may well lead the Oldcos of this world to offer poor default plans, anticipating (often correctly) that you won't jib. But if I were in a corner suite at Oldco and thinking strategically about longer-term customer goodwill and regulatory risks, I think I'd be questioning the wisdom of the old way of running the whelk stall.

We've scrubbed up well

Last week MBIE published the first report of the Electricity Price Review - you can find it and its supporting documents here. If it's all new to you, you might want to start with the 'at a glance' summary. If you'd like an eminently sensible media think piece on the review, try Pattrick Smellie's 'Electricity review a smoking pop-gun'. And if you'd like a pot pourri of select items of interest, read on.

First of all, full marks for plain English. The review said (p3) that "The panel was very conscious of the need to ensure this first report was succinct and easily understood by the public", and it shows. The review team credits Peter Riordan of THINKWRITE - well done, that man. Economics, regulation, public policy analysis in general - all can, and should, be made more lucid than they usually are.

On substance, I especially liked this bit of analysis prepared for the review by Concept Consulting.

The logic here, from p32 of the review, is that

Contract prices that were above costs on a sustained basis would suggest weak competition among generators, and that the entry, or threatened entry, of new generators was not restraining prices. On the other hand, prices that were well below costs on a sustained basis would suggest looming problems with reliability of supply because new investment would not be able to keep pace with demand. The comparison suggests competition has been effective in restraining prices. Figure 14 shows how wholesale prices have moved broadly in line with the cost of adding more capacity. Importantly, there is no evidence contract prices have been above costs on a sustained basis in recent years.

That's good to know, because an alternative analysis in the review (pp45-6, with more detail on pp7-8 of the Technical Paper) which attempted to gauge whether the gentailers are earning excessive profits was not convincing. Granted, there were data issues for the review in trying to figure it out. In the end it used a proxy for profits - net cash from operations, ex tax ex interest, adjusted for inflation and the amount of electricity generated -  which showed little change in recent years.

But even if you accept that the proxy is okay, the exercise doesn't answer the 'excessive profits' question at all. Steady net cash flows could mean excessive profits, or, equally, inadequate profits, all the way through. The important question is, what are the profits relative to some measure of the capital employed in the business? That went unanswered.

Something else left a bit up in the air in the review was exactly why the distribution lines businesses went from overcharging business customers to (somewhat) overcharging residential customers for their shares of the distribution costs. There's no arguing about what went on: as the review says (p21), "Shifting costs from businesses to householders was the biggest factor in residential price increases between 1990 and 2018 (a development that began in the early 1980s). During this period, distribution charges for householders rose 548 per cent, while those for commercial and some industrial businesses fell 58 per cent", and here's the graph if you prefer graphs. But, why?

Maybe everyone in the electricity game already knows that the re-apportionment of costs was actually a move from a rort on businesses to something more rational (even if it has now overshot a bit the other way). As MBIE's 'Chronology of New Zealand electricity reform' says (p2), "In 1985 local distribution and supply were the responsibility of sixty-one electricity supply authorities (ESAs) - (there were ninety-three [!] in 1945). These were electorally oriented, statutory monopolies. Inefficiency, lack of customer choice and cross-subsidies resulted". But this may no longer be obvious to the reader in the street, and the review could usefully have given a bit more of the historical context against which this subsequent reallocation has occurred.

Before the review came out, I'd speculated that "there's a good chance that we may have made a better go of publicising and facilitating switching [by retail electricity customers from one supplier to another] than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber". In the end the review wasn't able to come to a conclusive answer (partly because it got a big data dump very late in the piece), but it's still possible we're making a better fist of it than others are (p39):

Overall, some stakeholders consider retail competition is stronger here than in Australia and the United Kingdom, based on measures such as switching rates and savings available from switching. However, some stakeholders consider that, like Australia and the United Kingdom, a two-tier retail market is developing, in which those who actively shop around enjoy the benefits of competition, and those who don’t pay higher prices.

There's heaps more interesting stuff in the review, which broadly comes to the conclusion that we're not too shabby at all when it comes to organising our electricity affairs. There are certainly things to work on - make a decision on transmission pricing methodology, figure out how to incorporate more renewables and accommodate all the new solar cell and battery technologies, do something about raising the lines businesses' efficiency, get a better grip on what's behind consumer switching inertia, and dig into why retailers' costs seem to be unusually high - but by international standards we're pretty hot stuff.

You might perhaps feel otherwise if you focussed on the 'energy hardship' issues for poorer households that made the headlines. But to my mind, that's got a lot less to do with allegedly excessive power prices - "New Zealand’s average residential price was in the lower half of all OECD countries in 2016" (review, p23) - and a good deal more to do with our internationally challenged level of absolute income, and with its distribution. The answers to energy hardship - and food, housing, clothing, medical, and educational hardship - lie more in the realm of raising national productivity and operating a more effective tax and welfare system.

And it's not just this review taking an upbeat view of how we're travelling. It went under my radar when it came out first, but the International Energy Agency has been trekking its way through the energy policies of its member countries, and here are some quotes from the executive summary of its 2017 New Zealand review:

New Zealand has an effective energy-only market. It is a world leading example of a well-functioning electricity market [I think they mean the wholesale generation market here], which continues to work effectively ... New Zealand has the highest penetration of geothermal energy and a significant contribution from hydro. Without any direct subsidies or public support, their share in electricity and heat supply has grown in recent years ... This [renewables] performance is a world-class success story among IEA member countries ... To date, New Zealand’s market design and operation of an energy-constrained system offer a high degree of operational variability, and the system has managed peak and seasonal demand variability successfully for decades. The transmission system operator Transpower is experienced and adept at managing supply and demand adequacy, and the power system demonstrates considerable flexibility and resilience. Other IEA member countries could learn from this experience

We've got a well-established knock-em-down commentariat in New Zealand, and I've done a bit of it myself. So for a change it's nice to be able to say we're doing things a good deal better than your average bear.

Regulation done right

From overseas I've caught up with the news that the Telecommunications Commissioner Dr Stephen Gale has decided not to deregulate the market for national mobile roaming.

The current regime (summarising a bit) is that the incumbent mobile network operators (Spark, Vodafone, 2degrees) have to provide wholesale network access to any serious new entrants. That way the new entrant is able to offer a national service from day one: offering patchy network coverage would otherwise be a big turnoff to potential customers and realistically would all but nobble a new entrant's prospects.

National roaming is a 'specified' service, which in telco regulatory jargon means that it must be made available, but on commercial terms struck between an incumbent and an entrant. A more stringent form of regulation would be a 'designated' service, at a price set by the Telecommunications Commissioner.

I liked this decision from at least five perspectives.

One, it was correct.

Two, it was short (38 paragraphs). Maybe that was inherent in the relative simplicity of the issue under consideration. But in any event it was mercifully concise: well done.

Three, plain English, or at least as plain as as you can be when grappling with telco acronyms.

Four, an appropriate bit of "behave yourselves or else" ("We remain of the view that 2degrees’ commercial roaming arrangements with Vodafone were only secured against the threat of regulation. We consider that similar difficulties could potentially arise for a new entrant as have affected 2degrees"). Effective outcomes without actually reaching for bigger sticks: good one.

Five - and this is down to the overall design of the telco regulatory regime - there is a working mechanism where the Telco Commissioner has to regularly check whether regulation of 'specified' or 'designated' services is still needed. They have to be revisited no later than five years after they've been regulated. An excellent idea that stops the sector being littered with redundant rules.

Though you are immediately left with the thought: why isn't this done with regulation more generally?

Case in point - on the latest episode of The Block (no, I don't watch either) apparently two contestants "won't be able to market their property as a four-bedroom house for sale (or rent), because it  contravenes the Government's Housing Improvement Regulations 1947".

That makes regulatory sense. Let's face it, not much has changed since 1947.

Now you see it

Markets need institutions to help them work properly - things like a practically enforceable rule of law, well defined property rights, and the likes of our Fair Trading Act and 'weights and measures' provisions to prevent misrepresentation and deceit and to foster trust in commercial exchange.

All that orthodoxy said, the Fair Trading Act and its companions, worthy though they are, have never greatly floated my boat, and I'm relieved that it's someone else pinging (for example) the back-of-a-truck ratbags selling overpriced tat to poor people.

But during the week I came across an interesting new piece that raised my opinion of the impact Fair Trading enforcement can have. It's from the States, and it looks at the impact of making the airlines disclose the full price of tickets, including all taxes.

By way of background, we don't have rules that require all-inclusive pricing. Back in 2012 when consumer law was being updated, the Commerce Commission argued for all-inclusive pricing to be mandatory, as it is in Australia. MBIE however didn't see an issue, so the Commission's proposal died the death. A pity: I have a lot of sympathy for Consumer New Zealand and its "sneaky fees" campaign. As they say here,

our research shows the problem is real and, with the rise of online trading, looks set to get worse. When goods and services are bought online, we’ve found extra fees may only be revealed near the end of the purchase process.

Not only does the practice mislead consumers, it also makes it difficult to compare prices and gives the retailer an unfair advantage over companies that are upfront about costs. All-inclusive pricing rules would ensure consumers can easily identify the price of a product.

What I didn't know, before I read this American research, was how big the impact of fully disclosing the total price might be.

The paper, published last month, is 'Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure', and was published in the discussion paper series of the Fed. I came across it, by the way, thanks to the very useful Brookings Briefs which trawl for interesting papers across a variety of issues. Here's what happened.

From early 2012, the US Department of Transportation brought in "full fare advertising rules", or FFAR, which required airlines to show the ticket price including various flight-specific taxes that had previously not been shown until you went to pay. Finding out what those taxes were, by the way, was very difficult in the pre-FFAR regime, assuming you even knew that there were extra taxes and that they varied quite a bit from flight to flight.

On the very large database of  international flights the two authors looked at, the average price was US$750 and the taxes were a sizeable $100, with quite a lot of variation (standard deviation of $45). As the authors show (on pp7-8 and in Table 1) it would have been very easy to pick a flight that looked cheap on a pre-tax basis, but which turned out to be an expensive option on a full-disclosure basis.

And what happened when buyers could see the full price?

First of all, consumers ended up wearing much less of the taxes, and the airlines absorbing much more of them. This is the bit of tax economics known as "incidence", which looks at who actually ends up paying taxes (or receiving subsidies), as opposed to who formally pays them - they can be quite different. You might think, for example, that subsidies to first home buyers will go to the formal home buyer beneficiaries: typically, they won't, and will actually be trousered by housebuilders.

In this case, pre-disclosure, the airlines correctly reasoned that what you can't see or can't be bothered about, we'll dump entirely in your lap. Post-disclosure, consumers were more sensitised, and to keep their custom airlines had to sharpen their pencils and cut their base fares. Or as the paper says (p21)

Three-quarters of every dollar in ticket taxes are thus borne by the airlines in the post-FFAR period, in marked contrast to the pre-FFAR period when  consumers bore the entire tax.

The researchers also found, by the way, that the pattern of pass-through varied with how competitive the route was. If there were lots of competitors (as measured by a lowish HHI index) pass-through by the airlines was higher, which is what theory predicts (low profit margins in a competitive market don't leave much room for sellers to absorb costs in base prices). And it was lower in low-competition markets: "Following the adoption of tax-inclusive pricing ... pass-through rates for unit taxes are shown to drop most sharply in more highly concentrated (i.e. "duopoly") markets" (p28).

Consumers also wised up. Before FFAR, they could see base fares (disclosed), non-tax charges (disclosed) but not ticket taxes (undisclosed). They reacted as you'd expect to the first two (buying less when the cost went up), but paid little or no attention to the taxes, which, as noted, they consequently ended up wearing. Post FFAR, they became sensitised to all elements of the cost:

Adoption of FFAR, however, is associated with significant de-biasing [i.e. responding to all components of costs the same way], such that when base fares, unit taxes, and non-tax charges are all included in total fares in an equally salient [transparent] manner, consumers respond to each equally - consistent with the standard theory of (attentive) consumer behavior (p23, square brackets are my explanation of some of the terminology)

The airlines got hit in a couple of ways. They had to cut base fares to accommodate their new share of the taxes, and were faced by more price-sensitive customers. All up, it made quite a big difference:

The combined impact of reduced ticket tax pass-through and reduced passenger demand (in relation to the portion of the tax still born by consumers) together imply that a $5 increase in unit taxes is furthermore associated with a 2.4% reduction in airline ticket revenue (p30)

As the authors say, "These represent large potential losses in ticket revenue ... and lend strong justification for the U.S. airline industry's intense and persistent efforts to reverse FFAR through lobbying and public relations campaigns" (p26). Best I can tell, a Bill which includes a provision to reverse FFAR has got through the US House of Representatives, but hasn't yet got through the Senate. In Trump's America, though, if you're an airline CEO, you've got to fancy its chances of going all the way.

Maybe the airlines weren't hit as badly as they looked: "it is also possible that carriers may have compensated for lower base fares and ticket revenue through increased reliance on product unbundling and the use of less heavily regulated add-on fees, such as baggage and check-in fees, seat upgrades, in-flight meals and service, etc., whose costs to consumers we do not observe in the ticket data" (p26).

If so, mandating FFAR (and full price disclosure more generally) in New Zealand "should be tempered by the possibility of fostering unintended consequences" (p30) like extra fees for this, that and the other. Me? I'd go for it. These are big bucks being transferred from consumers to producers solely because of off-the-radar treatment. Looks to me as if efficiency and equity point the same way.

As a final thought, it was great to see empirical methods being applied to an issue like all-inclusive pricing. It's all very well running in-principle arguments before Select Committees, but facts are trumps. Big data got by, for example, 'scraping' online prices (as in this paper), are increasingly going to inform what otherwise would be semi-philosophical debates. About time, too.

A different view of productivity

New Zealand's biggest economic problem is our low productivity by international standards. Here, for example, is a chart from an excellent paper by the Productivity Commission's Paul Conway, 'Can the Kiwi Fly? Achieving Productivity Lift-off in New Zealand'.

In the better-off parts of the OECD people can produce 100 widgets an hour (and in the US, more like 105). Australians can produce 90. We can only produce 65.

As Paul says on page 41 of his paper , "This is unusual within the OECD, given that lagging economies have, in principle, greater scope for improving productivity more quickly than leading economies. New Zealand's lack of productivity catch-up is even more perplexing given that its economic policies are often regarded as fit for purpose".

The more I've been thinking about this, the more I'm convinced that we should recast the problem in a slightly different way. What if we put it like this?

In the better-off parts of the OECD people take an hour to produce 100 widgets (and in the US, more like 57 minutes). Australians take 67 minutes. We take 83 minutes.

Exactly the same data, but when put in terms of how slow or fast we are, it suggests some different lines of inquiry about what's going on and what some remedies might look like.

As a thought starter, think about infrastructure planners. Say they've got a budget of a billion a year, and they've got five equal sized $1 billion projects in mind.

One choice is to start the five projects at once, spending $200 million a year on each one, and therefore (because of the budget constraint) necessarily doing them slowly over five years, using 1,000 people with shovels on each one. Five low-productivity projects.

The other choice is do project 1 quickly, using only 200 men and lots of productive (but expensive) heavy equipment, and spend the whole annual $1 billion budget on it. Then do Project 2 in year 2, again in a concentrated burst, and so on. Five high-productivity projects.

In New Zealand's culture, though, which choice do you think will be made?

Quite. And never mind that doing it the high-productivity, short-time way will actually deliver 10 years of benefits from the projects by the end of year 5, whereas going the slow-delivery route will have generated no benefits at all till the completion of all five slow-moving projects.

Not that it's wholly to be laid at the door of the commissioning planners. I'd suggest that spinning out five years of 1,000 men with shovels suits the bidders just fine, too. They keep the band together, and they take out the risk (if they do the $1 billion quick job) of being left high and dry with a lot of idle heavy equipment if they don't pick up a job in year 2. In an economy where lumpy projects don't necessarily appear like clockwork, that's a rational fear, and I'm not the first to observe that one productivity-enhancing policy might be a pre-announced big-project timetable.

Or another example. In public procurement of commercial construction, we are, apparently, extremely tough on cost over-runs. You go over budget, you wear it - too bad, as Fletcher Building has painfully experienced. But does completion time get anything like a decent look-in compared with the focus on cost? If a public buyer had to choose between the bidder who says, "It'll cost a bit more but I'll have it done by Christmas, no dramas" and the bidder who says, "Cheap as, but it'll be next Lammas Eve twelvemonth, probably", I wonder which way they'd go?

Not that I wonder a lot, as I suspect I know the answer.

And it's not just big construction projects or public buyers that are dragging the chain. I've worked in a variety of in-house and external consultancy environments: some have been on the ball, with quick turnaround times, some have been, shall we say, rather more relaxed. No doubt you've experienced the same in your career.

Thinking of low productivity as slow pace also puts a different spin on how prospective solutions might work. Many people (including the Productivity Commission, and me) think greater competition is part of the answer. Too many dozy producers are enjoying the quiet, low-activity life because there aren't enough people snapping at their heels to make them do any better. Typically, we think of competition as forcing out inefficient levels of costs, or pushing prices down to 'normal profit' levels. Maybe we should think about how it could also be harnessed to improve response and delivery times? 

Viewing our productivity problem as a low-speed issue isn't a panacea. There's still a lot of mileage to be got from the more usual low-production view. But at a minimum it's a useful complementary viewpoint. I'm quietly convinced that digging into the incentives to do things slower or faster could provide some extra answers to our productivity conundrum. 

A little light on a mystery

There's been something quite odd happening for quite a while. Employers are saying they are having a lot of difficulty finding staff, as this graph from the latest Monetary Policy Statement shows.

But at the same time there are large numbers of people telling the Household Labour Force Survey (HLFS) that they are currently part-timers but are available, and want, to work more hours. So how can we have employers tearing their hair out that they can't get people, and yet a whole bunch of people are saying "Pick me! Pick me!"?

Quite apart from being a mystery that it would be nice to unpick, it's also a reasonably important macroeconomic issue. If there really is a reserve army of people ready to take up jobs, or at the very least more hours in their current jobs, then the labour market mightn't really be as strong as it looks. Big wage increases wouldn't look terribly likely either if there are lots of people standing ready to take jobs at the current prevailing rates of pay. Conversely, if this reserve army isn't really there, then maybe employers' concerns are the thing to watch as an indicator of likely pay increases down the track, as employers bid against each other for the limited staff availability.

The regular HLFS tables don't shed a lot on these 'underemployed' people. We know from Table 12 of the HLFS that they are disproportionately women: of the 117,000 (seasonally adjusted) who were recorded as 'underemployed' in June, two-thirds (78,000) were female, compared to the roughly 50:50 male:female split of employment. And we know from Table 13 that of the 112,800 underemployed (not seasonally adjusted this time) in June, some 48,000 of them are not 'actively seeking' work.

That might suggest that they're not, actually, awfully interested in taking on full-time jobs, and maybe the employers' view is more descriptive of reality. But I'm not sure about that. I don't think it's the right thing to do, in these days of online job ads, to say that someone is not actively seeking work if all they've done is read the ads. But that's how Stats views things: you have to do more than scan Seek (or wherever) to be counted as 'actively seeking'. Not how I see today's world, but there we go.

Other than those little nuggets, though,we know nothing from the headline HLFS about these underemployed folk. So I asked Stats if they could break out the underemployed by industry or by occupation. And the ever-helpful people at Stats came up with the goods. Here are the answers. Stats would like me to say "Source: Statistics New Zealand, customised report and licensed by Statistics NZ for re-use under the Creative Commons Attribution 3.0 New Zealand licence", so there it is.

I'd love to say, Aha! Solved it! But the data, interesting and useful though they are, don't crack the puzzle.

You'd wonder, for example, when the housebuilding industry is desperate for anyone who can carry a hod, how 21,400 labourers say they can't get as many hours as they'd like.  That kinda points in the "yes, there's slack available" direction.

On the other hand the highish number of underemployed represented by retail trade and accommodation points another way. No matter how strongly business picks up at the motel, the motelier is very likely not going to add another full-time person: more likely, it'll be another person to do the 8.00am to 2.00pm shift to clean up the 10 extra units being occupied. The economy can pick up all it wants and won't make a blind bit of difference to motel cleaner-uppers (or peak-time sales assistants) who'd like longer hours.

And then you start asking yourself, why don't the motel and shop people move to other lines of business where there might well be a full week's work on offer? Is it because they have low level skills that aren't in demand? Unlikely, since demand for unskilled and low skilled staff is actually stronger than it is for skilled or highly skilled, as MBIE's latest online vacancies survey shows. Plus you look at the 7,400 managers (who you'd think have transferable generic skills) and the 17,000 professionals (a fair proportion ditto, you'd guess), and wonder why they don't move.

Still at least as many questions as answers, I'm afraid, but at least we've now got more data to be ignorant about.

You're welcome.

Workshop takeaways

Last weekend was the latest annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ). Wellington turned on its loveliest weather, all the speakers and discussants performed well, there were sausage rolls at the meal breaks, and during my absence in Wellington the Warriors broke their home game hoodoo and took the two points. An excellent week-end all round, and special thanks to Chapman Tripp for providing the excellent facilities.

Many of the usual suspects were at the workshop, but if you're in the game and had to miss it, head over to the CLPINZ website, sign up as a member, and you'll get access to the papers (they're not up yet, but will be). You'll also get access to previous years' presentations.

The papers speak for themselves: here are some personal thoughts I took away.

Cartels - the cause célèbre du jour is the Lodge case. This is the one where a whole bunch of real estate agencies pleaded guilty to price-fixing, but for the eponymous hold-out in Hamilton, who went to trial and to widespread surprise beat the rap in the High Court. At the time I wrote about the fines for those who had pleaded guilty and said that "in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end". Having listened to the cartels session, and to the session on coming to a negotiated settlement with the Commission, I'm more of that view now. I never thought I'd feel that way, but as David Blacktop's presentation said, there can often be some "precipitating event" that causes otherwise well-meaning, normally competitive businesses to lapse into a concerted (rather than independent) response to the event - in this case to Trade Me's attempted jack-up of real estate listing fees. No, they shouldn't collude on a response, and in principle it doesn't matter that they would have come to the same decisions independently, but all the same they got backed into a corner and were anything but the cartoon cartelists in the proverbial smoke-filled room. Time for more understanding, in my view, of the reality they found themselves in. The goss, by the way, is that the Commission stands a good chance of having Lodge overturned in the Court of Appeal, but stranger things have happened. And while we're on the topic...

The law - okay, I'm an economist, and anyone who gets their legal advice from an economist deserves what happens to them, but I've got some questions. Is there anyone on the look-out for where Australian and New Zealand competition law might be diverging? We don't want, for example, the situation John Land described, where the legal approaches to price fixing may be going down different roads. Is there any kind of trans-Tasman body that keeps a weather eye out and acts to harmonise on best practice? And speaking of harmonising on best practice, it seems from what Minister Faafoi said at the workshop dinner that reform of s36 - anti-competitive abuse of market power - will be back on the agenda next year. Good: the Aussies have fixed their equivalent, and we should get in behind. I've also got some disquiet (partly stemming from Lodge but also more generally) whether behaviour at the lower end of culpability will be prosecuted under the forthcoming criminalisation regime, rather than the 'hard core' cartels that should be its target.

Regulation - I found myself in strong agreement with Ross Patterson's response to Sasha Daniel's paper on 'The future shape of telecommunications regulation'. Ross argued that there is no lack of competition in access to fast broadband and hence no case for regulation, especially when you're regulating one technology (fibre) but not another (fixed wireless) and with a - I think he said 'clunky', but if he didn't I am - a clunky form of 'building block' price cap regulation.

The internet - our new digital economy is going to be a minefield from both competition and consumer law perspectives, and I suspect we'll be making both Type 1 and Type 2 errors for some time before we get it right, if we ever do. That was my overall impression from the keynote 'Collusion without the smoke-filled room: from public statements by wetware to algorithmic pricing by software' from Professor Joseph Harrington and 'Consumer Analytica: NZ consumer law application to international developments in privacy and use of data' from Sarah Keene. I suspect there's likely to be behaviour that is anticompetitive or unfair/misleading that will not be pinged, and behaviour that's legit that risks being rapped. Joe Harrington is surely right that we likely need jurisprudence and new guidelines to distinguish between the two, but we're still a long way from being able (for example) to "develop rules for how a platform can intervene in the setting of prices" or to "define the class of prohibited pricing algorithms".

Market studies - the papers presented at the session I chaired were absolutely on the money. If you're thinking about how the Commission should use the powers it's (more than likely) going to get, you've got to read the excellent presentations from Mike Tilley and Richard Meade. They've both had first-hand experience of doing these studies, and it showed. Market studies are a great idea, but there are more process issues to think through than you (or I) might have imagined. I'll just chuck in one final thought for MBIE's consideration: I suggest that any company that attempts to invoke our 'anti-dumping' provisions should automatically trigger a market study into its industry.

Quantification - James Mellsop and his NERA colleague Kevin Counsell gave a very good presentation on 'Mergers: exploring the economic tool box', and walked the attendees through unilateral effects in auction markets (using a pathology merger example), vertical arithmetic (a version of critical loss analysis) using the AT&T/Time Warner example, and then some Cournot modelling of a wool scouring merger (using made-up data, by the way, if anyone involved in any of those cases is wondering). Good stuff, and they got it across in a user-friendly way that - my keyboard nearly inserted 'even' - lawyers could understand. My feeling is that we are, finally, on the brink of a new more data-driven and more quantitative approach to competition analysis, after a long period when the tide had gone out a very long way indeed on playing with the numbers. As I've said a few times before (eg here or here) there's far more empirical data becoming available, and better (and often more robust) ways of interrogating it. The Commission's Reuben Irvine said that some of these quantitative techniques, like the auction and vertical arithmetic tools James and Kevin mentioned, are already in use, if somewhat behind the scenes, at the Commission, and about time, too. In my stint there, applicants and opponents very rarely reached for even the more basic econometric methods (regression, differences-in-differences), and you could go years without tripping over a correlation coefficient. We've become an immensely data-rich world: time to start using it, rather than making anecdotal guesses about (for instance) the degree to which products are or are not in the same market.