Friday 31 March 2023

2023 Minimum Wage increases

I had a chat this afternoon with Newstalk on the 2023 minimum wage increases. 

A few notes I made in advance of that chat, not all of which I was able to get to:

  • The 2023 minimum wage increase of 7% was slightly above MBIE’s recommended increase of 6%, and slightly above forecast year-end March 2023 (6%)

  • Minimum wage now at about 76% of the (June 2022) median wage (will be lower when we have 2023 data), which is very very high in international context. MBIE estimates 223k workers affected and some 5k fewer jobs.

    • The 2021 OECD data had NZ’s minimum wage, as proportion of the median wage, lower than Colombia, Costa Rica, Chile and Turkey. On that measure, our minimum wage was 67.6% of the median. That was higher than France (60.9%), the UK (57.9%), Australia (51.5%, but be careful!), Canada (49.5%), the Netherlands (46.3%), and the US (Federal minimum 29% of median, but most states will have higher minimums).

  • Over the recent period, employers would have had a hard time filling vacancies at entry level offering only the minimum. So it isn’t a surprise that the latest survey of NZAE economists suggested that this year’s minimum wage increase might not have particularly large overall effects, currently.

    • In that survey, three quarters of economists agreed or strongly agreed that there would be little effect on overall current employment – though government-employed economists were more optimistic than economists in academia. More academic economists agreed or strongly agreed than disagreed, but a substantial portion of academics disagreed.

    • But overall effects can mask harms on specific cohorts. 61% of surveyed economists agreed or strongly agreed that the increase is likely to have potentially negative effects on employment of riskier workers; only 18% disagreed.

    • The real risks come in any coming downturn – and one is looking more likely. And there, government economists and academics had sharper disagreements. About 55% of academic economists agreed or strongly agreed that there would be more risk of harm in any coming downturn, with under 20% disagreeing. But 30% of government economists agreed, and about 40% disagreed or strongly disagreed.

    • Standard macroeconomic models hold that unemployment in downturns is worsened when it’s harder for employers to cut real wages. If nominal wages are rigid, and inflation drops, then the higher minimum wage puts more jobs at risk in the downturn.

  • Work by Motu in 2021 suggested that, overall, NZ minimum wage increases have done less harm to employment than a lot of economists had expected, but they’ve also not really done much good. They aren’t great as an anti-poverty programme, because a lot of minimum wage workers are second-earners or teen workers in higher-earning families. Not all, to be certain. But other benefit programmes are more strongly targeted toward the working poor. At the same time, the effects of these other benefit programmes undo some of the increase in the minimum wage. MBIE’s review, for this round of minimum wage increases, showed that a 7% increase in the minimum wage would turn into a 6.8% increase in take-home earnings for a single worker, but only a 1.33% increase for a sole parent receiving WFF and the accommodation supplement. Income-linked benefits claw back when minimum wages increase. And while that can sound fine, because employers are then paying a higher share of the take-home pay, it also means that the cost to employers is very high relative to what workers in those situations wind up receiving – and employment and disemployment in a downturn will depend on those costs facing employers.

  • It could be preferable to set the minimum wage to track a proportion of the median wage, so that it moves up and down with prevailing wages.


OECD: Real minimum wages (

NZAE survey Academic and government NZAE members divided on greed inflation (

MBIE Minimum Wage Review 2022 Minimum Wage Review 2022 (

Motu: Minimum Wages in New Zealand: Policy and practice in the 21st century | Motu


Everyone is stupid except me: Auckland harbour crossing edition

The Labour government has put up options for a second Auckland Harbour crossing. All of them look terribly expensive. None of them have any kind of business case, yet. Prior versions of similar options had costs well in excess of benefits.

National's critiques, as observed on Twitter, are that Labour's never been able to build anything so why trust them to build any of these. Of course, if none of them are worth building, then this isn't much of a critique. 

The Greens want any crossing to be climate-friendly, with a focus on mass-transit, and walking/cycling. Whether any of those options make more sense than building none of the options doesn't seem to have been checked. 

All of it is backward.

We don't know whether a second crossing is warranted, let alone how it should be configured. Parliament is incredibly poorly placed for figuring this out. 

There is a much simpler way.

  1. Set congestion charging. If you can end congestion across the crossing at a low price, you don't even need to start thinking about a second crossing. 
  2. Look at the price that clears congestion. It can help inform whether a second crossing could cover its own cost. 
  3. Let NZTA, or a new Auckland Harbour Second Crossing Board, or private investors, build whatever crossing they like if they think they can recoup the cost of the thing from charges on users of that crossing. Return to the kinds of revenue-bond financing that was used to build the first Auckland Harbour Bridge, financed over decades by charges on users of the bridge. 
Governments back white elephant projects with our money.

Investors are more careful about business cases and the likelihood of earning a return. They'll be less likely to be swayed by fashion, ideology, or wishful thinking about what the best mode for any crossing might be. And if they screw up and spend tens of billions on a project that doesn't wind up paying off, they lose their own money. True if it's investors putting in equity and owning the bridge; true if it's bondholders buying the debt that funds the bridge and expecting user fees to finance the payments over time. 


It was two years ago that the last round of cruddy business cases came through. And we're back at it again.

Get this stuff out of Parliament's hands. If a crossing can pay its own way through charges paid by its users over time, it should be built. If it can't, it shouldn't. That's it. 

And if it turns out that multiple projects actually could be viable and that they're mutually exclusive, set a bidding process for the right to build it. The one with the highest expected earnings over time will win, and that's the one that should be built. 

Wednesday 29 March 2023

Afternoon roundup

The clearing of the browser tabs...

Friday 17 March 2023

Fringe Benefit Follies

I like the Fringe Benefit Tax.

Other places wind up in all kinds of nonsense by putting tax-preference on things if they're employer provided. It's one reason health care is messier than it should be in the US.

And New Zealand also used to have a similar problem in the era of very high income tax rates and very nice tax-free employer-provided cars. 

Tax reforms in the 80s tidied all that up. If the employer provided you with something valuable, the employer would be liable for paying tax on it as though the employer had paid you salary. 

And what exceptions there have been, as best I'm aware, have been where things get just too messy. 

Employer-provided car parks can be messy.

Suppose you have a commercial office tower with a parking level. You lease out floors to different companies. Some of the leases come with car parks; some don't. Whether you work the price of the carpark directly into the lease charge or as a separate line-item doesn't much matter. Some tenants will put a lot more value on a space than other tenants; you might want to keep things a bit opaque just to be able to better bargain on those margins. 

If a company gives one of those parking spaces to an employee, what's its value for FBT purposes? Tough to say. If you require that the commercial building put separate line items for parking so that you can make it FBTable, all the tenants with car parks will want a higher rate for their floor space lease and a lowballed car park space. Sorting it out would not be simple. What would IRD do: force each commercial building to auction off the spaces among tenants each year? If it's a small building, you're likely to hit collusion issues. 

And what do you do about spaces in places where the market clearing price is plausibly zero? 

Anyway - not straightforward. You could do something like a deemed-value charge on it. It would be a bit messy because a space right in your building might be more valuable than one you'd have to walk some distance to access, but spaces in commercial buildings can also have a lot of disamenities that make them less valuable than others - they're spaces in buildings not designed to be parking garages and so they're even worse to navigate than commercial car parks. 

So far, it's all been in the too-hard basket. I generally expect that when IRD declines to tax something, it's because it's actually hard rather than because they don't like taking peoples' money. 

And at least in principle, the FBT-exemption for employer-provided car parks creates a distortion. Imagine someone who's close to indifferent between driving in to work and taking the bus. If they have to pay for the bus out of after-tax income, but get to pay for the parking spot out of before-tax income (through a bargain with the employer that they'll have a slightly lower salary than otherwise and have a car park), that worker might choose to drive rather than take the bus just because of the tax advantage provided to parking. 

It never seemed likely to be that big of a distortion. In places where parking isn't scarce, the cost of a carpark is so close to zero that it can't matter. In places where parking is scarce, are there really that many people who receive an employer-provided car park? Among those, are there many who would have forgone a company-provided car park if they had to take a bigger salary cut to get one? What's the real effect at the margin here?

The government passed legislation this week exempting a pile of driving-substitutes from FBT. Employer-provided transit passes, e-scooters, scooters, bikes and e-bikes will all be FBT-exempt.

That feels like a fairly substantial inframarginal transfer. How many people use transit to get to work as compared to having an employer-provided car-park in places where car parks are scarce? How many people who walk to work would like to have an e-bike or e-scooter for recreational purposes and will claim that it's for getting to work? 

Remember that the higher-end e-bikes and e-scooters aren't cheap. An employer-provided one will come at a hefty tax discount for higher-earners. And where employer-provided parking is naturally limited by the number of spaces that can be found in a crowded downtown, pretty much anyone on a higher salary who'd be keen on an e-bike could enjoy the discount. 

Suppose you're on the 39% tax rate. An $11,500 e-bike contains $1,500 in GST. You have to purchase it out of after-tax income. So you have to earn an extra $18,850, at the margin, to get the $11,500 to pay for the e-bike. But your employer could give you the same e-bike for $10,000, assuming that the employer can wipe the GST as a business expense (while charging GST on the firm's final output). 

The legislation has provision for setting maximum allowable costs or for setting requirements on the FBT-exempt vehicles. Depending on how this gets set, I'd expect a whole lot of recreational e-bikes purchased for higher-earning employees rather than cash raises - regardless of whether the things get used in commuting. Who's going to monitor? 

And remember that the distortion is greatest for those on the highest incomes. They'll have strongest incentive to request e-bikes out of before-tax earnings. 

It all has me wondering whether it's better to use some deemed rate for employer provided parking, and ditch the new subsidies for employer-provided bikes. 

Or maybe we should get FBT-exemptions for shoes for those who walk to work. I've worn out a hell of a lot of shoes going up and down the Kaiwharawhara bridle path to make the trek into town. 

Thursday 16 March 2023

Richard Meade on banking and competition

Prudential regulation requires banks to hold more capital than they would otherwise like to, so that there's less risk of default and less risk that the bank imposes bailout risk. 

New Zealand does not have deposit insurance, but some are of the view that there's an implicit guarantee of at least some sort - that the government would not let depositors be too badly hurt. The open-banking resolution mechanism would impose haircuts on depositors if there were still a shortfall after unsecured creditors and equity were burned through, and I don't think anybody really knows how big a haircut might prove politically intolerable. In that view, deposit insurance then just winds up requiring up-front payment for the insurance they're probably already getting for free. 

In any case, high capital requirements mean that banks have to hold a lot of capital; they have to compete for that capital against other potential uses of it. So you'll wind up with high nominal reported profits. And politicians will then point to high profit levels as reason for windfall taxes and the like, while ignoring return on equity. 

Those big numbers generate political demand to do things. And so it seems near-certain that the Minister of Commerce is going to ask ComCom to run a market study on the banks.

Over at The Conversation, Richard Meade raises a few points that need to be kept in mind:

  • The OCR sets a coordination point for pricing that could be considered price-fixing in other sectors; 
  • RBNZ's cheap wholesale funding during the worst part of Covid reduced the risk of meltdowns while preserving bank profitability;
  • RBNZ restrictions on entry, aimed at ensuring financial stability, also prevent competition.
He concludes with a few questions:
First, are growing bank profits due to banks acting anti-competitively, the Reserve Bank fighting inflation and preserving financial stability, or both?

Second, if bank profits are indeed excessive and due to anti-competitive behaviour, are there measures the commission could recommend and practically implement that would improve outcomes?

Finally, if bank profits are excessive, and at least partly due to the Reserve Bank doing its job, would interventions by the commission to improve competition worsen financial stability or frustrate the fight against inflation?

Answering these questions will need both the commission and the Reserve Bank to have serious conversations about how competition policy and banking regulation can be made to work together to achieve better outcomes for both bank customers and the wider economy. Little would be gained by improving bank competition if that reduces financial stability or worsens inflation.

I still think that a market study focused on barriers to entry, including account portability, could do some good. 

And I still think that that will not be what the Minister of Commerce asks for. I expect instead that the Minister wants show-trials of bank executives during the election campaign, during which they can be harangued just as the supermarket CEs were during that market study, with any report coming after the election. That kind of market study would focus on interest rate margins, mortgage interest rates and the like. 

The point would be to make it easier for the government to blame the banks, rather than bad government policy, for poor outcomes during the election - while trusting that ComCom wouldn't issue any final report until after the election. 

And the risk would be a whipping up of appetites for very bad policy and rash promises during an election campaign. The draft supermarkets report was poorly done, and created an anchor point for populist expectations - and for legislation.

If I'm right, I hope that ComCom is able to push back on any weak terms of reference and propose something that could add value rather than do harm. 

And for a bit more on New Zealand's monetary policy mess, Bryce Wilkinson's report, out today, is a must-read. 

Wednesday 15 March 2023

Failing to clear

Every quarter, the government auctions off a batch of ETS carbon credits. Every tonne emitted in the covered sector has to be covered by an ETS credit. 

This quarter's auction failed to sell any units as the confidential reserve price was not reached. They'll roll this quarter's volume into next quarter's auction. 

We don't know what the confidential reserve price is, but spot NZUs last traded on the secondary market at $67.50. Futures contracts have prices increasing to $86 by April 2027. 

Carbon prices dropped considerably this year; they had reliably been running between $80 and $85/tonne for the second half of last year.

So what's up, other than that the bid that would have cleared the market was obviously below the reserve?

Candidate explanations:

  1. The market is no longer credible and that's why nobody's buying any. I've seen that one advanced on twitter. But if that story were true, the spot price wouldn't be at $67.50. 
  2. Large traders were trying to game the market and thought the confidential reserve price was lower than it actually was. It's potentially possible. I note that the spot price rose from $67.50 to $68.00 while I was typing (and the April 2027 price jumped to $88.95 from $86). Could be that some traders who were disappointed at the government auction have emissions that they need to cover. 
  3. Overall government policy becoming less credible. Government has abandoned a pile of really dumb policies in the climate space, but it's also done other dumb stuff like respond to a petrol excise increase with a very long-lasting subsidy for road use. That, in combination with maintaining a low price ceiling for the cost-containment reserve, might have people wondering about overall commitment to net zero. Which would have to reduce willingness to pay. But futures prices still looking a lot higher than current prices. 
  4. Price floor set back when carbon prices were in the $80+ range, and not adjusted down with the drop in carbon prices. 
Perhaps some combination of 2, 3 and 4? In that case we should expect spot prices to lift as those without sufficient reserves and who'd been banking on getting NZU at auction this quarter scramble for units to meet surrender obligations that fall before the next quarter?

I still think National and Labour should agree on the quantum of unbacked NZU that the government should be allowed to auction or allocate between now and 2050. Set that in stone, and write into future NZU contracts so that if government issues more unbacked credits than that amount, holders of existing units can sue. 

Set a carbon dividend out of ETS revenues to make higher prices more politically credible.

Then ditch the current price cap. Replace it with a price cap that follows the volume-weighted average price of carbon in carbon markets that the Climate Change Commission considers credible.

When and if the price cap is triggered, if no better way of backing units at that cap is available, government should buy and retire credits from the cheapest credible international market. It would make money on the deal - they're selling at the weighted average price and buying at cheapest price. Take the difference and stick it into the carbon dividend. Along with any excess dividends the government earns from its stake in the gentailers if high carbon prices feed through into high power prices. 

Problem solved really. And especially if you make sure that the ETS recognises credible CCS and direct air capture solutions as they come though. 

However, the pressure of necessity will be low at this auction. 

Those who have to settle emissions must file accounts in March and hand over NZUs in May. 

It is unlikely any liable parties would have left themselves exposed at this point and probably have a stockpile already. Many would also have taken forward cover fearing higher prices and will be sitting on a loss-making position now. 

As a result, traders may be willing to take a risk and test the market and the confidential reserve price at this week’s auction and even the following, even if just to push the price lower.  

However, they could be unlikely to do so for the entire year. 

In the longer term, the Ministry for the Environment’s recent forecasts of NZU supply predict a decreasing supply and an increasing demand over the coming years.

Afternoon roundup

It's been a while since last posting. The tabs...