Much has been made (and rightly so) of the decline in the output of our internationally competing industries (the so-called tradable sector) since around 2005, while non-tradables output grew strongly.

Obvious causes include the loss of international competitiveness associated with increasing regulatory burdens and the huge increase in public spending resulting from the policies of the last government.

This chart taken from a 2010 Treasury report to the minister of finance released under the Official Information Act tells the same story by looking at employment growth in the same period.


The chart shows that employment growth since 2004 has been concentrated in the non-tradable sector, including industries such as health care and social assistance (+26%), public administration and safety (+21%) and construction (+20%), while tradable sector employment (defined here as the primary and manufacturing sectors) has been weak (-8%).

This is not a picture of a healthy economy.  It highlights the economic imbalances the government talks about and underlines the need to shift resources, including labour, from the non-tradables sector (especially the public sector) into our internationally competing industries.


I’ve often thought that our tax legislation should allow people to make voluntary payments to the Inland Revenue Department.  In other words, it should allow IRD to accept payments in excess of the taxpayer’s statutory obligation to pay tax computed in accordance with the tax law.

At present if you overpay tax the system will generally refund it automatically.

I was reminded of this issue when reading this 5 April New Zealand Herald editorial which continued the paper’s campaign for increasing tax to pay for the Canterbury earthquake.

The government has resisted this idea on the grounds that it would hit an already weak economy.  A far better approach would be to cut wasteful and poorly targeted government spending.  A huge amount of government spending falls into these categories.

The Herald reports a poll that found 40% of respondents favour a temporary tax.

Whenever I see people saying they would be happy to pay more tax, I think they should be able to go ahead and do so voluntarily. In fact I would go one step further and allow voluntary payers to indicate the broad area to which they want their money applied, eg police, welfare.

It would be fascinating to see how much additional revenue IRD would receive.  I suspect not a lot.

First, my guess is that if people want to donate money for welfare purposes, most would give it to private charitable organisations in the belief that they are often more effective than the government in such roles.

Second, I suspect that many people who tell pollsters that they favour raising taxes want them raised on other people, not themselves. 

Anyway, if the law was changed to allow voluntary payments to IRD in excess of tax assessments we would soon find out how many people (like the Herald’s editorial writer) put their money where their mouth is.  The IRD could report aggregate payments in the same way that it reports other tax revenue.  What could be the objection to such a law change?


On 5 April employment lawyer Peter Cullen had an article in the Dominion Post on the employment law changes that came into effect on 1 April.

These included the extension of the 90-day trial period for new employees to all firms.

The article concluded: “The changes generally represent a shift of power to employers.”

In fact they represent no such thing.  The comment reflects the old ‘imbalance in bargaining power’ idea with its Marxist origins.

It’s not hard to see the fallacy.

Start with a world without any statutory provisions about so-called ‘unfair’ dismissals.  Then bring in such a rule.  What will happen?

Clearly something will change, because employers now face the risks and costs of being found to have unjustifiably dismissed an employee.  In the first instance the costs will fall on them.  But clearly they will have to shift them – in competitive markets they have no alternative if they are to maintain normal profits.  The costs will be shifted primarily to employees (or possibly consumers through higher prices).  In other words, employees will largely bear the ultimate costs of the provision through wages (or other benefits) that will be lower than otherwise, or unemployment will rise if the costs are not passed on.

This is just basic economics.  It is explained more fully in this study by US labour academic Charles Baird, ‘The Employment Contracts Act and Unjustifiable Dismissal: The economics of an unjust employment tax’, published by the Business Roundtable.

Baird estimates that, extrapolating from US data, the imposition of unjustifiable dismissal restrictions (which did not apply to around half the workforce prior to the ECA) worsened income inequality, lowered real wages by over 7 percent, and reduced employment by 1.5-3%.

Given these results, it is no surprise that where employees have the option of bargaining voluntarily for unfair dismissal procedures in contracts, few opt to take it up.

As in other markets, bargaining power varies at times in the labour market depending on whether labour is in short or plentiful supply.  That helps labour markets to clear.  But employers have no systematic bargaining power, and recent law changes have done nothing to increase it.


Here is a graph (hat tip: Mark Perry) from a 2009 NBER working paper “Parametric Estimations of the World Distribution of Income,” by Maxim Pinkovskiy and Xavier Sala-i-Martin (Columbia University):

Abstract: We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006 (see chart above). The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions.

Mark Perry noted on his blog that if these estimates are accurate, the 80% reduction in poverty between 1970 and 2006 has to be the greatest reduction in world poverty in such a short time span in the history of the world, and the 97% reduction in East Asia has to be the most significant improvement in regional standard of living in history as well.  The reasons for the record reduction in world poverty might be globalisation, market-based reforms, liberalisation, information age technology, productivity gains in agriculture and the collapse of central planning in China and India.  Even the trend for Africa is encouraging.