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. 

Wednesday, 9 May 2018

Mind the gap

We've been lucky, over the past year, to see two top-notch, data-heavy analyses of the gender pay gap appear in New Zealand. One, from March last year, is by AUT's Gail Pacheco, 'Empirical evidence of the gender pay gap in New Zealand', and was done for the Ministry for Women. The other, also last year, was by Motu Research's Isabelle Sin, Steven Stillman and Richard Fabling, 'What drives the gender wage gap? Examining the roles of sorting, productivity differences, and discrimination', and saw the light of day thanks to the Marsden Fund (and which I posted about in 'Competition is good for women's pay').

Gail reprised her research last night at the latest Auckland Law and Economics Association of New Zealand seminar, and if you're interested in the topic and you're based in Wellington, get along to Isabelle Sin's LEANZ seminar on Tuesday 22nd at 5.30pm (free registration here).

As it happens, and though they used different lines of attack, they both came out with much the same headline result, a gap against women of around 12-12.7% (Gail) or 16% (Isabelle et al). Gail used a battery of factors that might explain the gap - for example the industries people work in (if women were concentrated in low paying sectors, there might not be any gender difference in pay rates at all, even though there was a headline gap), or their levels of education. Here's how the battery of factors helped explain what is going on.

As you add more and more factors that might explain pay gaps, the amount of the gap that you can 'explain' goes up, but at the end of the day it remains remarkably small. When you try to adjust for the observable differences between men and women that might account for the overall 12.7% gap, you end up explaining only 2.1%, and not knowing where the other 10.6% came from. We're not unusual in that, by the way: as Gail mentions in her paper, there are sizeable pay gaps and sizeable proportions unexplained in many countries overseas, too.

It's the not knowing that Gail regards as significant. If you knew exactly what was going on, it's possible you mightn't be worried. Perhaps there's some extra factor, like the cost of potential interruptions to women's career paths to have children, that employers might be putting into the equation (no correspondence please, that's just a guess, not an endorsement). And if you were still worried (kinda reminded me of the old L V Martin line, "it's the putting right that counts"), you wouldn't know the right policies to fix it until you knew exactly how the problem arises. Motu, though, were less reticent about what's at play: "we blame sexism", as they put it in their executive summary haiku.

We may well get a better understanding from new work that Gail and Isabelle have in the pipeline, which looks at things like the impact of pregnancy career breaks, and which Gail said will be coming out at the end of this month.

It's possible, of course, that a bigger or different or finer set of explanatory variables might throw more light on the unexplained proportion. Gail suggested last night that degree subjects might matter, rather than just having a degree of any kind, and that's highly plausible. And there's also evidence that the more exactly you define comparable jobs, the smaller the pay gap gets.

Here, for example, are the key results of a very interesting global survey carried out in 2016 by Korn Ferry Hay, the recruitment people, based on a huge (8.7 million jobs) data base, which has info on exactly how 'big' each job is.

"Aha!", you might think, "there's no discrimination! Measure the nature of the job right, and gaps disappear!".  In New Zealand's case, a headline gap of 22.8% becomes almost nothing (0.9%) if the comparisons between the jobs held by men and women are as precise as possible.

But of course this raises a whole new issue: as Korn Ferry Hay put it, it's true that "men and women doing the same job, in the same function and company, get paid almost exactly the same". But then why the headline gap? "That’s because they still aren’t getting to the highest-paying jobs, functions, and industries, while men thrive in all three", and the question shifts to why they get (say) the Head of HR role rather than CIO or CFO or COO.

In any event, another excellent thought-provoking LEANZ seminar. Well done to Gail, to Richard Meade who organises the Auckland ones, to Andreas Heuser for organising the upcoming Wellington equivalent, and especial thanks to Bell Gully for hosting and sluicing both events. Without corporate support, they wouldn't happen. Though members' subs help too: here's the LEANZ subscription page.

Friday, 4 May 2018

Unemployment doesn't strike evenly...

Yesterday's labour force data for the March quarter came out much as expected: forecasters had been expecting a 0.6% increase in employment, and they got it, and they also got their predicted 4.4% unemployment rate, down from 4.5% in the December '17 quarter.

Even if there were no immediate dramas in the data, it's still worth picking out one aspect - a reminder of how unemployment rates vary by ethnicity.

The European and Asian rates are very much lower than those for Maori and Pacific people, and if you knew nothing else about New Zealand than what this graph showed you, you'd diagnose that we have some serious social issues to grapple with, and you'd rightly be looking very hard at our education and training systems and our active (or inactive) labour market policies.

But another interesting aspect is the very different cyclical behaviour of the ethnic unemployment rates. When bad times strike, groups that find it harder even in good times to find a job are disproportionately affected. That's the pessimistic read: the optimistic read is that a prolonged period of decent GDP growth will bring even the higher ethnic unemployment rates down.

The Maori/Pacific rates, which got as high as 14-15% in the aftermath of the GFC, are down to 8-9% - still too high, but a hell of a sight better than they were. And the gap with European/Asian rates will keep on narrowing as long as GDP keeps trucking along at a decent rate. Exactly the same happens in countries overseas: I gave a US example a while back ('Rising tides lift all boats').

The policy lesson from this is worth repeating. There are people who have concerns about the impact or value of ongoing economic growth: environmental damage, for example, would be high on many people's lists. The lesson is, don't imagine that restraining growth will be socially costless: as the data here and overseas clearly show, the people that will be hit worst are those on the outer. Find smart ways to contain or prevent the concerns that worry you, but otherwise push GDP along as fast as you can: it's the ticket to a better livelihood for the people you likely worry most about.

Thursday, 3 May 2018

Patrolling the petrol market

BP's been getting it in the neck about that leaked pricing memo from 2017, which proposed to fix its little local difficulty on the Kapiti Coast. BP Otaki had been bleeding volume because of its regionally high pricing, and the idea was to raise prices at BP Levin and BP Paraparaumu up to the BP Otaki level, and hope that the other petrol companies followed suit rather than leave all three BP outlets high and dry with out-of-the-market prices. BP had grounds to believe the others might well follow: the memo said that Z Paraparaumu had already followed the first 5 cents hike.

Cue for hysteria all over the place, carpetings by The Minister, and calls for boycotts and bonkers policies (eg national uniform petrol pricing).

While BP is perfectly capable of fighting its own corner - 'BP defends petrol pricing strategy' - it might be helpful to step back and look at the wider picture.

Yes, it's not good for consumers if the petrol industry starts running a leader-follower model and the leader is taking prices higher (we'd have much less of a problem if the leader was driving prices down). And the petrol companies are getting away with higher margins in parts of the country than they would if they faced more competition.

But to be fair to BP, it's not systematically a higher-price leader, though it used to be. Have a look at this graph, from MBIE's petrol study last year (I originally covered it here).

The bottom panel shows that over the period 2008-10 BP had virtually always led prices up, and had almost never led them down: if there was a time to rip into it, it was back then. Shell was the mirror opposite, always the leader down and never the leader up. 

But after Shell was bought in 2010 by the NZ Super Fund and Infratil and later renamed Z, the pattern changed markedly. Over 2010-15 Z was now the most likely to be first to raise, ahead of Caltex, though BP still did a bit of it. And the pattern changed on the down side, too: Z was still most likely to cut prices first, but BP was also a pretty active first mover. Strategies may have changed again since 2015, but BP isn't obviously the "let's take prices higher" coordinator it's been painted.

It's also not odd, by the way, for companies to be experimenting with all sorts of price changes, up and down. Here for example is a graph of what Air New Zealand was charging for a one-way flight from Auckland to Wellington, no bag, for travel on Wednesday May 3 or Thursday May 4.

The airlines, as memorably satirised in 'If airlines sold paint', are at one extreme of price differentiation: they've got more scope for it than the petrol companies because one flight is often not a perfect substitute for another, whereas a litre of 91 is a litre of 91. But it's also not unusual, even in workably competitive markets, to find companies selling much the same product at different prices in different circumstances. It's certainly not a strong basis for blowing a gasket and reaching for regulation.

And let's also recall that price discrimination isn't necessarily bad for consumers, either. The high price that an airline charges for the inelastic business passenger demand at the start and end of the business day helps fund those cheapo offerings for the budget end of the market. If there was uniform pricing, the budget traveller wouldn't get a look in at all.

It's also not at all clear that the petrol companies are collectively gouging everyone. It's true that their margins have been going up a bit recently as this chart shows (it comes from MBIE here). 

But short-term trends aren't a great guide to the longer-run state of profitability. As MBIE's longer-run and inflation-adjusted series shows below, margins aren't unusually high at the moment. They were higher in the mid 1990s, for example, and a good deal less than they were in the cushy days of the over-regulated industry of the 1980s.

All of this isn't to say that the petrol industry is problem-free from a competition point of view, as hapless buyers of petrol in the bottom of the North Island and the whole of the South Island know. Here are the petrol companies' margins, split out by North and Sound Island (again from last year's petrol market study).

The difference, of course, is the absence of Gull from the South Island: where it operates, Gull acts as an effective competitive discipline on the other companies' pricing. It's no coincidence where this latest brouhaha blew up: Gull is in Levin (its second most southerly outlet). The first best solution to keeping the petrol companies honest would be for Gull, or some other discount operator, to expand nationwide. 

Competitors rolling out their own infrastructure will always be the consumer's best friend. How hard would it be, for example, to get Whenuapai up and running as an effective competitor to Auckland Airport? And how much better would it be to have genuine traveller choice, and the lower prices that would come with it, than any regulate-the-one-supplier approach?

Whether a new or expanded competitor in the petrol game is realistic or not, I don't know. What I do know is that the ACCC's studies of the markets for petrol in the big Australian cities have shown that you need a reasonably large number of operators to get prices to sharp competitive levels. As I wrote in 'How many is 'enough'?', even though Brisbane has quite a decent range of operators (more than we have here in New Zealand), prices are 3.0-3.5 Aussie cents a litre higher than they are in the even more competitive Sydney market.

And I'm still not convinced that the Commerce Commission got it right when it let Z buy Chevron: Chevron and its Caltex stations had not been a strongly independent price-setter, but under different management it might have become one. Loss of that option may well prove costly, if nobody else is going to step up to the plate and expand a Gull-like pricing challenge.