How much poorer is New Zealand than Australia?
Posted September 18, 2008on:
In the paper, NZIER states that:
the average living standards of New Zealanders in 2007 were 24% lower than those of Australians (or equivalently, relative to living standards in New Zealand, Australia’s were
However, I am not convinced – not yet anyway. Here’s why:
GDP per capita and average income
The NZIER report relies on the result that average income is the same as GDP per capita. However, in order to make such a claim you have to be clear about what you are stating.
In the case of GDP per capita, we are effectively looking at a “mean” income in the economy as the average.
However, I would have thought that, when looking at average living standards, we would want to look at how the average person fares in each country – which is not what the mean really tells us in this case. Given outliers, and the fact that the distribution of income in the two countries will be quite different, we should be looking at medians.
Furthermore, as we are interested in living standards, shouldn’t we be comparing the actual living standards of individuals, rather than the volume of measured activity in the economy? At best, these two results should not differ – however, why use an imprecise measure when the actual measure is available?
I haven’t got the numbers on me, but I am sure I’ve read that the average person in NZ is better off than from Tasmania (potentially on the Standard – nope on Kiwiblogblog, I commented here as there results were using incomparable data series) – which is why I am so suspicious of this result.
But income is lower
Yes, I do not doubt that for a second. But why should our average incomes be the same as those in Australia. They have different resources, and an economy that has a very different composition – is there any actual reason why we should expect the “average wage” to be the same between the two countries.
We do not bemoan the fact that skilled labour is paid more than unskilled labour – why are we complaining if a country with greater resources per person has a higher GDP per person than a country with a smaller endowment? Ultimately, given the composition of the economies, labour should move around until wage rates are equalised, and any difference will just be a result of the different specialisations associated with different nations.
But the paper also justifies looking at the issue because of migration
When we framed the idea of using GDP per capita appropriatly it became obvious how inappropriate this measure of income growth is in a large number of circumstances (Note: I wonder why they did not use MEDIAN HOUSEHOLD income, which helps account for outliers and the demographic issues). It is especially inappropriate in in the case that the paper uses to justify looking into the income growth, the case of rising “outward migration”.
In such a case, the people we want to specifically look at are the people that are at risk of leaving – the ones who can get a significantly larger wage in Australia as compared to New Zealand. We are not even interested in national income in this case – we are interested in how the compensation of employees (especially in the industries with a large wage gap) differs between these regions – and why.
If we had to look at an aggregate figure, we should look at the MEDIAN average weekly wage instead of GDP per capita – as that allows us to remove “outliers”, thereby giving us a better representation of average earnings from working in either NZ or Aussie.
If we want to pose useful policy recommendations surrounding this issue we should look at these specific industries and try to understand why labour productivity, and therefore wage growth lags in these areas. The question then should be – how does the regulatory environment influence productivity and in these industries and in what ways.
Instead NZIER, after looking at aggregate evidence that does not illustrate the central issue they are discussing, blankly states that if we increased labour productivity we could increase GDP per capita – this is the policy recommendation equivalent telling people that if we add 2 and 2 we get 4. They also tell us that “freer markets” and “better regulation” would help – a bit fuzzy for my liking, given that they haven’t justified any area for these policy to be implemented in?
In my opinion the paper not only doesn’t add value on the discussion about Trans-Tasman migration, it frames the issue in such a way that it appears to exaggerate the problem. I’m disappointed.
You might tell me that they only did this in order to illustrate that there was an issue. I would buy that if they had used AVERAGE household income instead – which is freely available!
But we need to catch up or people will keep leaving – it is as simple as that!
Really, is it as simple as that? I have a few questions here:
- If it is in the individuals interest to move away, what is the problem – it will always be in someones interest to move away, we don’t have to be scared of migration,
- Could the difference be the rest of ACTUAL fundamental differences between our two economies – if Australia has more resources/capital per person then a outflow of NZers will actually solve this “difference”,
- Isn’t the real goal to maximise social “happiness” – as long as we are doing the best we can with what we have what is the issue? Migration numbers are not the ultimate goal of policy are they?
Cross-country comparisons of GDP per capita are notoriously useless – which is why the OECD, IMF, and the World Bank do so many of them 😉 . The reason these organisations use GDP per cap is because of the unavailability of better statistics in many of the countries they want to compare. However, in the NZ-Aus case there is piles of FREE information available.
I am sure that many, many, people will venomously disagree with me – so lets hear it 🙂
Note: I am not defending government policy – however, I don’t see the provision of misleading statistics as a good way to start a debate on policy.
Update: There is something else I forgot to mention. A small open economy that experiences a increase in their terms of trade would see real GDP underestimate the countries income. Why? Higher prices for exports do not increase GDP (they increase the GDP deflator), however they should see an increase in consumption. Now if we buy a big chunk of our consumption goods overseas, then the increase in the terms of trade will see us increase consumption and increase imports. GDP=Consumption+I+G+Exports-Imports. In the extreme case a terms of trade increase will lead to no extra GDP.
Now, an increase in the terms of trade and the corresponding increase in consumption from imports is an increase in real household income (and consumption). The more export oriented the market, the greater this impact will be, and as a result GDP per capita will tend to underestimate incomes in the case where there has been a big increase in the terms of trade – which is what we have experienced. This is because the “income” of our country has risen, even though the volume of production has not changed (it is a price effect after all).
This is another way that GDP per capita is misleading for a country like NZ 😉