Friday, 12 September 2008

Closing the trans-Tasman income gap will take time (update x2)

A lot of time it seems if we don't change our economic policies. The National Business Review has an article which states
It will take 140 years for incomes in New Zealand to catch up with those in Australia if the economy here travels at the average rate it achieved the period 2000-2007.
This result comes from work done by Dr Trinh Le of the New Zealand Institute of Economic Research. Closing the gap in incomes between New Zealand and Australia looks to be a much bigger task than anyone has previously thought.

The NBR goes on to say
"Catching up with Australia is not impossible, but very unlikely without major changes to New Zealand's policy direction," the NZIER paper written by economist Trinh Le said.

In 1974 New Zealand's average income was slightly higher than Australia's. A little over 30 years later, in 2007, it was three-quarters of Australia's.

New Zealand's gross domestic product per capita is currently one-third lower than Australia's. Even Australia's poorest state, Tasmania, now has a 13 percent income advantage over New Zealand.

To close the income gap with Australia in the next five years New Zealand's GDP per capita would have to increase by 7.6 percent a year.
The NZIER along with the OECD and the Treasury have argued that the important issues for growth are freer markets, freer trade and a better regulatory environment.

Update: The paper referred to above is When will New Zealand catch up with Australia? (pdf) Public discussion document, NZIER working paper 2008/03, September 2008. The abstract reads,
New Zealand’s average income, defined as GDP per capita, is now three quarters that of Australia and even lower than in Australia’s poorest state, Tasmania.

Over the last seven years, New Zealand has grown slightly faster than Australia, but at these rates, it would still take 140 years to close the trans-Tasman income gap. To catch up with Australia in five to 10 years, New Zealand would need to grow at between 4.7% and 7.6% per year. This exceeds New Zealand’s highest average annual growth rate over a five-year period of 4.6%, in the early 1960s.

These calculations hold Australian growth rates constant at its annual average over 2000 to 2007. If Australia were to grow faster than its recent performance, the growth rates required of New Zealand to catch up with Australia would be even higher. While such growth rates are not impractical, New Zealand is not currently on track to achieve them, given its recent poor record on labour productivity.

Catching up with Australia is not impossible, but very unlikely without major changes to New Zealand’s policy directions. The challenge is for its policy makers to put forward sensible policies and to carry them through to fruition in the years to come.
Update 2: The NZ Herald says Money matters hard to pin down and We're just 140 years behind Aussies.


Matt Nolan said...

"New Zealand’s average income, defined as GDP per capita"

This is tenuous. It only makes sense as a comparison if the income distribution is the same between countries - which it is not.

Furthermore, the paper states that it is looking at the issue because the "wage gap" is so important - but there is a huge difference between household income and national income.

To work out "income gaps" they should have used an income measure instead of a production measure - such as median household income.

Paul Walker said...

As a first approximation GDP per capita seems a reasonable measure of average income. Clearly the distribution of income in each country is important but GDP per capita still give useful information. And most people would prefer a higher GDP per capita to a lower one.

Matt Nolan said...

"As a first approximation GDP per capita seems a reasonable measure of average income"

I'm not sure its the first measure I would go to when discussing wage gaps because of the compositional differences in the economy.

I would be more interested in looking at the professions where a "wedge" in wages exists - and trying to figure out why.

"And most people would prefer a higher GDP per capita to a lower one."

All other things equal, definitely.

However, GDP per capita assumes we are comparing like with like, which we are not.

Using a median at least gets rid of outliers - and gives us a better idea of how the "average" person is feeling.

Paul Walker said...

The point about the use of GDP per capita is that, while not the perfect measure, it signals to us there is a problem and realising that a problem exists is the first move in fixing it. The gap between GDP per capita in New Zealand and Australia says to me we are doing something wrong. More detailed work, along the lines you suggest, is need to work about exact what is wrong but such work will only be undertaken once people realise we are getting relatively poorer. This is the point emphasised by looking a measure such as GDP per capita.

Matt Nolan said...

"such work will only be undertaken once people realise we are getting relatively poorer"

Even if this was the question they were looking at I'm not sure that GDP per capita does the trick - unless we can account for the different resource endowments (and thereby the differing composition of the economies).

If one person is less skilled than another, we don't bemoan the fact they are getting paid less - why should we care in the case of entire nations? Part of this view may stem from my belief that government can do very little to actually improve economic outcomes :P

Furthermore, they justify the study as a way of looking at migrant outflows - GDP per capita is an incredibly misleading way of looking at that issue, median household salary would be a more appropriate measure (given that is what drives the decision).

Sure there is a relationship between GDP per capita and median household salary - but why use an inexact proxy when you have the actual figure of interest?

Paul Walker said...

I see this at root as a growth issue. We haven't been growing at the rate that Australia has been. GDP per capita is an standard measure in such circumstances.

Matt Nolan said...

"I see this at root as a growth issue"

Why are we interested in growth relative to Australia though - it makes as much sense as me concerning myself with my wage growth relative to the wage growth of a plumber (or some other unrelated discipline).

If we think it tells us that there is something we are doing wrong - if we believe that we can sustain the same rate of growth as the Aussie then fine. However, that is an assumption that should be justified.

The NZIER study said that it was interested in "average living standards" and "migration" - if that is the case then why don't they look at statistics that compare average living standards? GDP per capita is not the best measure of this - and the best measure are available, why didn't they use them?

Paul Walker said...

"Why are we interested in growth relative to Australia though"

We are looking for a counterfactual. We want to have a guide as to what our growth rate could have been if we had done things differently. Australia isn't the perfect counterfactual, for a number of reasons, but it is the most commonly used one. And it's not obvious what a better one would be. Ireland?