Wealth inequality

Radio NZ's Emile Donovan asked me for comment on the latest Rashbrooke wealth inequality paper on Wednesday last week. I'm not sure whether my reply's been of use there, but I'll copy it below.

Paper summary:

Rashbrooke et al use several waves of SoFIE data to look at inequality in asset holdings and mobility across net asset quintiles. They then provide several cross-tabulations of the data splitting things up by ethnicity, gender, and age. They show that there is greater mobility across quintiles over longer periods than over shorter periods, and that there is less movement from the top and bottom quintiles than from the middle ones. They also demonstrate that the bottom decile has net debt rather than net assets, and that net debt is dominated heavily for that cohort by student loan debt.

Commentary:

The paper does not tell us much that is not already known about wealth holdings. Statistics New Zealand regularly releases wealth inequality data, though that annual series is less detailed than that which can be obtained in the (now rather dated) SoFIE data, and that data is regularly well-canvassed. Credit Suisse similarly puts together annual estimates of household net asset holdings. Little prior work is cited in the paper, and little context is provided that would help in assessing whether the levels of wealth inequality and wealth mobility are higher or lower than in prior periods, or higher or lower than international benchmarks. What is the ‘right’ level of mobility or inequality? Rashbrooke appears to come at it from a perspective that existing levels are too high, but doesn’t provide any benchmark for assessing what the right level is. I tend to come at it from a more process-oriented perspective which suggests there is no particular ‘right’ level but rather right processes: if the mechanisms for generating wealth are fair, then the outcome is fair, but if wealth is generated through cronyism then resulting outcomes are unfair regardless of the percentage of wealth held by any particular cohort. But in either case, knowing whether wealth inequality in NZ is high or low in international context would be helpful. And the same for mobility.

If we start looking to international benchmarks:

1. Le, Gibson and Stillman found that inequality in household net worth in New Zealand is broadly similar to that in most other countries for which data is available.
2. Credit Suisse data suggests that wealth inequality is very low compared to other countries, but I note that there is a broad range of countries that have basically the same wealth inequality as New Zealand – I’ve attached that bit from their report [Table 3-1 here]. That Credit Suisse report echoed findings from Davies et al, NBER working paper 15508 (2009) showing that wealth inequality in NZ was lower than all but 19 countries in a dataset of 150 countries.
3. Stats NZ has had the wealth share of the top 10% in NZ as consistent with a 19-country OECD average, and the proportion owned by the top 1$ matching the OECD average.

More worryingly, parts of the analysis suggest that the authors have not fully come to grips with the data they’re presenting. At page 25, they note that the poorest decile has $1.8b in housing assets but $6.1 billion in mortgage debt. It doesn’t seem to have occurred to them that this is odd. It is odd because banks tend not to lend 339% of the value of a house to the poorest households. That is what is implied by owning $1.8b in housing but having $6.1b in housing debt. LVR restrictions alone mean they can’t lend more than 80% of the value of the house, never mind 300%. There is something wrong in that data series. And it’s not a particular secret either. I talked with StatsNZ about it when they released their latest round of wealth statistics last year, and I blogged on it, and I had an NBR column on it. One of the problems is that Stats data can be years out of date while its mortgage data is up-to-date: that means it’s easy to get mortgage debt reported well above housing assets in a rising market because the asset values are a lagged measure – but that can hardly be all of it because house prices have gone crazy, but not that crazy. We should be hesitant to draw conclusions from the series because of this problem alone, but the authors seem not to have even noticed that it’s a problem.

Further, the cross-tabulations don’t provide anywhere near the value that they could have. For example, it is well known that Pasifica and Maori communities are disproportionately younger than Europeans, and that older cohorts are far wealthier than younger cohorts. That means you need to age-standardise anything looking at ethnic differences so that you’re not confounding ethnicity effects with age effects. But, again, the authors seem not to have noticed that this is a problem. It’s bizarre. They go from showing the differences in wealth by age to the differences in age by ethnicity, and nothing seemed to click that the two might be related. A 30 second Google search gave me the StatsNZ page showing that median age (as of Census 2013) for Europeans is 41 years, but median age for Maori is 23.9 years and for Pacific peoples is 22.1 years.

Similarly, if the Maori and Pacifica groups are disproportionately much younger, they’re disproportionately not going to be moving out of the lowest wealth quintile because that doesn’t happen until you’re older. A better approach would have sorted by both ethnicity and age so that they’d be comparing all ethnic groups restricted to those aged, say, 30-35. Or 50-55. Pick a few and then show the differences by ethnicity within those age cohorts.

You’d similarly want age-correction on the mobility statistics. The typical life-cycle has people starting with net debt, then building wealth, then dis-saving during retirement. So you get mobility upwards until retirement, then mobility downwards as assets get consumed. Nothing that the paper puts up tells us how much of the mobility they find is natural age progression stuff. Again, you’d want to age-stratify the cohorts so people are measured in each wave against their position in the life-cycle changes. This likely drives some of their findings of bunching in the top and bottom quartiles, but it’s impossible to tell how much without going in and redoing it myself.

What else. The authors correctly note that student loan debt muddies things. They don’t explicitly state why. If you buy a house and have a 100% mortgage on it, then that’s a net zero contribution to wealth: asset matches debt. If you take out a student loan and have higher expected future earnings, all of the debt counts against you but the expected future earnings don’t. Trinh Le’s work, cited earlier, finds that those with university degrees are three times wealthier than those without university degrees.

Finally, if we’re thinking about international comparisons, countries like NZ will look more unequal than they really are as compared to countries with private pension systems. The wealth inequality stats would count retirement savings. A lot of retirement savings in NZ is done through the state and NZ Super. The claim that everyone has on NZ Super is a substantial asset, equally owned across everybody (albeit with adjustment for differences in life expectancy). Leaving that out makes wealth in NZ look less equal than it really is.

Tobacco tax, CPI, and living costs at the bottom

Stats NZ has been putting together new price indices that track the prices of the bundles of goods commonly bought by people in different income and expenditure cohorts: Household Living-Costs Price Indexes. The basic method and background's here. 

The latest release found that higher cigarette and tobacco costs are hitting beneficiary households. The Stats NZ release makes it pretty obvious.

Beneficiaries experienced the highest inflation in the March 2017 quarter, Stats NZ said today. Their overall costs rose 1.4 percent, almost three times the rate of inflation experienced by the biggest spenders group (up 0.5 percent).

"Higher costs for cigarettes and tobacco had a greater effect on beneficiaries. About 5 percent of their spending went up in smoke, proportionally more than most other types of households spent," consumer prices acting manager Nicola Growden said.

Higher rents, which make up one-third of their total spending, also had a greater effect on beneficiaries.

Government's been hiking tobacco taxes. That it would be highly regressive is no surprise. Government restrictions on new building drive housing affordability problems too. Government transfers a lot of money to the poor, but also makes things pretty expensive for that cohort.

I rather like the chart we had in Jenesa's report, Health of the State.

Update: Reader mailbag brings me this rather nice chart from the Stats release. Happy coincidence as the email came in two minutes prior to this morning's 7am queued post.

Informed Reader's conclusion was similar to mine:

The most interesting are beneficiaries. The reason they have higher inflation is:

• Cigarettes and tobacco that is mostly because of the tax regime

• Rents whose cost is mostly covered by accommodation supplement and Temporary Additional Support (despite the name it is generally not temporary)

• Energy that is high because of the policy to subsidise aluminium smelting.

Most of the real difference is down to government. This makes sense if you think about the economics. People with a tighter budget constraint are going to be more price inelastic, so the only place you would see prices rise more for the poor are where prices are not determined by a market.
 Income quintile 1 is more complicated, not least because it includes many people who have income that statistics New Zealand surveys don’t pick up e.g. people starting a business who have “no income”. If you look at Bryan Perry’s work on incomes, you will find he explicitly warns against using lowest decile data. But even here, if you take out the ones for beneficiaries, you are left with property rates from local government and interest which you could reasonably suspect is being paid by those who lenders are prepared to lend money to (e.g. people starting a business who have “no income”...)

Good points on pay equity

Today's reader mailbag brings a few excellent points on the government's pay equity deal for homecare workers.

I think your discussion of pay equity (at least the bit you quote in the blog) does not clearly distinguish between two very different questions: (i) is there an equity issue (ie evidence of discrimination against women)? (ii) is government intervention likely to create more distortions than it solves. One of the reasons I think Hayek is very powerful (cf the "Constitution of Liberty" on anti-trust legislation) by being happy to allow there will be many distortions where real world markets do not deliver efficient outcomes. The force of his argument is that the justification for government intervention has to show how the intervention improves on than outcomes after intervention.

In this context, there is nothing inherent to the way markets operate that will deliver equity and if consumer (or government funding) preferences are racist and sexist, so will the outcomes be. You can demonstrate (as Becker did in the late 1950s) that people make themselves materially worse off by acting in this way, but this is just one of many examples of people trading material welfare to maximise utility (the other obvious ones are giving to charity, voting to pay higher taxes and paying to reduce risk).

But that is not enough to justify government intervention. To justify intervention, it needs to be shown that the outcomes are "better" after the intervention. For instance, if the care industry responds to additional funding by investing in human and physical capital that means many people currently employed in the industry lose their jobs, the outcome may be fairer in the sense of having removed gender inequity for those who are qualified, but have done so by punishing those unable to get qualifications and/or younger people. In fact, you will find in health and social care that occupational licensing has tended to do precisely this, but with a twist that many of the people on lower pay are simply reclassified. So nurses used to do a wide of range tasks. It is no longer worth employing a fully trained nurse to do the lower skilled tasks so "trainees" do some of them and others are done by people explicitly labelled for those lower skilled tasks (e.g. "cleaners").

Therefore my prediction of the impact of the legislation is this:

• After the initial redistribution there will be a joint effort by health unions and employers to increase the training barriers to be eligible for the higher pay;

• This will include an extended training period when younger people will be paid at a lower rate because they are "training". Much of the on-the-job component of training will be doing many of the lower skilled tasks previously done by everyone;

• There will be a plethora of new job titles created, where all will have lower certification requirements than "fully qualified" carers and therefore have lower pay.

• Most of the people in the lower qualified jobs will be women, earning slightly less than they would previously have earned. They will be disproportionately from poor backgrounds, more likely to be Maori and PI, and will find most practical means of promotion blocked because of the new licensing requirements...

I am not sure that counts as equitable...?

I agree with my correspondent that Becker models under-emphasise that the path to equilibrium can be slow. Taste-based discrimination only really holds up where the customers have a preference for discrimination (unlikely in the homecare case) or where there's a severe lack of competition - and that's the dominant funder problem that MBIE's RIS talked about.  

I fear that my correspondent is right about what comes next. I hope that what comes next is the DHBs shifting to allow more people to hire their carers through MyCare. It's better for the homecare clients and better for the workers and cheaper for the health system. But I'm a bit pessimistic there too - it would require back-end changes that DHBs seem to like throwing into a too-hard basket. 

Smokin'

I just can't get over the employment figures.

Migration is running hot: huge numbers of incoming workers. Incoming workers take time to find work. At the same time, the government's been pushing pretty hard on work-testing for beneficiaries - and that would have people responding to a labour force survey saying that they're looking for work even if they're not looking all that hard.

And yet, and yet... just look at this. Here's Household Labour Force data going back to 1987, annual March figures. I'm using HLF230AA for anyone wanting to check things in Infoshare.

The top green line is the working age population (age 15-64). That's had a reasonable recent rise mostly due to migration. If there were a lump of labour problem, we'd either have an increase in the number reporting not being in the labour force, or reporting being unemployed.

But that sure hasn't happened. Instead, we've had huge employment growth and actual declines in the number of people reporting being unemployed.

Just look at it. In 1995, there were 700,000 fewer working-aged people in New Zealand than there are in 2017. But there are over 5,000 fewer people reporting being unemployed in 2017.

Or compare it to the overheated mid-2000s. When unemployment was at its lowest ebb, in 2008, there were just under 80,000 unemployed people, 624,000 not in the labour force, and a working-age population of just under 2.8 million.

The 2017 figures have just over 280,000 more working-aged people than 2009 but a total labour force that's almost 300,000 people larger: 18,600 fewer people report not being in the labour force. 248,000 more people in employment. There are just under 51,000 more people reporting being unemployed now than there were then, but the labour force participation rate is 2.6 percentage points higher and the employment rate is 1.3 percentage points higher.

The employment rate among people aged 15-64 is 76.1%. There is no year, going back to 1987, that had it that high. The labour force participation rate for that age group is 80.3% - also the highest in the data going back 30 years. Only minor caveat is that hours worked are growing less quickly, although that wouldn't be surprising either if some shifting into the labour force are picking up part-time rather than full-time work.

We should be shouting from the rooftops about how superbly the New Zealand economy has grown to match the growth in those wanting to be employed here. Whatever your concerns about immigration, dey terk yer jerb shouldn't be one of them.

University reciprocity

Imagine that you and your high school buddy make a deal when you both start restaurants. He and his family can eat for free at your restaurant forever, and vice versa. Fast forward ten years. Your restaurant's better than his, and you're serving his family more than twice as many meals as he's serving yours. Fair deal?

More Kiwis study in Australia than vice-versa, so it shouldn't be surprising that Oz has been getting a bit annoyed with the reciprocal treatment deal. Here's Universities NZ (HT: Dave Guerin):

Universities New Zealand is disappointed by proposed changes by the Australian government that would see New Zealand citizens studying at an Australian university being charged the full-fee rate.

This would break the longstanding reciprocal arrangement between the two countries where students can study in each other’s universities at the domestic fee rate.

We oppose any move that would create a barrier to Australians and New Zealanders studying in each other’s countries.

Currently about 4600 Australian citizens are studying in New Zealand, including 1860 in universities, and over 10,000 New Zealand citizens study in Australian universities.

Australian universities are bigger and have a broader range of offerings, especially once you start getting into graduate studies. The equal-treatment deal would always be pretty likely then to have Australian taxpayers shelling out more to cover Kiwi students than vice-versa.

Rather than get into a huff about unequal treatment and threatening to do things to Australian students studying here, the government might consider offering to just pay the Australians. The government spends thousands of dollars per domestic student studying in New Zealand. Count the number of NZ university students in Australian, net from that the number of Oz university students in NZ, then offer to cut Australia a cheque for something like the NZ domestic tuition subsidy multiplied by the net number of NZ students in Australia.

Update: I've been viewing this entirely in the context of "NZ student moves to Oz for study, and vice-versa". If Oz is instead wanting to impose international student fees on kids who grew up in Oz to NZ parents, and whose parents pay tax in Oz, that's really not on. 

Pay and equity

I went through the government's proposed pay equity legislation in last week's NBR and in The Initiative's Insights newsletter. Some snippets:

The bill would ultimately have the authority decide on allowed wages – the price of labour – if employees brought a claim that they were underpaid.

It requires that remuneration in female-dominated occupations be no less than remuneration in male-dominated occupations with substantially similar skills responsibilities and services, where work is undertaken under substantially similar conditions, and where substantially similar degrees of effort are involved.

But that gets the workings of prices in competitive markets completely backward.

Value and price do not derive simply from the skill involved in some type of labour, or from the working conditions, or from inherent responsibilities. What matters instead is how much consumers value another bit of the final product or service, and how many people are willing to provide the labour to supply it.

If two jobs have, as far as an employment tribunal can tell, equivalent skills, equivalent working conditions and equivalent responsibilities, and one pays far more than the other, that price difference is important.

It says there is a surplus of workers in lower-paid jobs, relative to demand for their services – and a relative shortage in the higher-paid jobs.

For example, translation between Maori and English, or between French and English, may require equivalent skill, training and working conditions but no tribunal could improve on existing market prices to tell you which job should pay more in New Zealand.

I went on to talk a bit about the pay equity mess in Ontario in the 1980s. I hit that part more directly in the Insights column:

The Ontario Tribunal that had to decide on pay equity claims had to choose which professions provided the most appropriate comparison for the group that claimed to be underpaid. The result, as one evaluation later put it, was a “litigation nightmare.”

New Zealand will face similar and substantial problems in assessing which occupations have similar skills and responsibilities, similar working conditions, and require similar levels of effort. While Treasury made the job somewhat easier by providing a hierarchy for selecting appropriate comparators, it would be surprising if New Zealand did not face litigation nightmares of its own.

In short, New Zealand learned little from Ontario’s experience. Neither Tribunals nor Authorities are well placed to set pay relativities between different occupations.

In this coming Friday's Insights column, I'll cover a better way for better pay. If you haven't subscribed already, the sign-up link is at the bottom of the column.

I noted in the column an OIA request of Treasury on their advice regarding pay equity and whether they provided any warnings about the mess that Ontario encountered. Doesn't look like Ontario came up. Here's the first reply, and the rest of the documentation.

Police and Local Alcohol Policy: I Am The Law edition

Radio New Zealand reports today on the Police and Medical Officer of Health's shenanigans in Wellington alcohol licensing. Here's my piece from last week on it.

None of this is new. Wellington Council last year warned the Police about overstepping the mark. The cops were then also trying to impose one-way door policies by hassling publicans at licence renewals.

I'll be hitting this a bit more in this week's column at the National Business Review. It's getting to be time that the Police Minister has a word with Police about their behaviour.