Incentives to reduce pollution

The UK is considering a scheme to help remove diesel cars from the roads. This is after years of encouraging diesel fuelled cars by taxing it more favourably than petrol.

The reason for this scheme is that it is now considered that diesel fuel is more polluting than petrol. This is especially true of older diesel engines (mainly an ageing thing I think). The negative externalities of consumption associated with diesel are now thought to be more severe than previously thought (indeed it was thought diesel was better than petrol for the environment because less was needed to travel the same distance).

The proposal might be called a 'nudge' by behavioural economists, because they don't really understand subsidies! This scheme proposes to give a minimum payment, in excess of the market value of old diesel vehicles, to incentivise people to trade in their old vehicle for a brand new one. The new vehicles will emit less pollution and there is therefore a win for the environment as the market moves closer to allocative efficiency.

The scheme will effectively shift the demand curve for new vehicles to the right with the price difference between what the consumer is prepared to pay and the price they must pay covered by the government. Not everyone will trade in their diesel cars and vans, but some will and this will help efforts to reduce harmful pollution.

There is an interesting benefit for car and van manufacturers of course, they sell more new vehicles and so there will be a boost to Aggregate Demand and employment. The benefits will go to all manufacturers, not just those in the UK and so a Europe wide scheme would make the most sense.

The Daily Express covers the story here

This article has most relevance to IB who look at market failure in more detail than VCE. It is, however, a useful example of how governments can intervene in markets to improve resource allocation for everyone. Please note the Daily Express is not the only paper to cover this and I'd never recommend it as a serious newspaper generally, but I thought the Guardian and BBC deserved a rest.

Transfer pricing. Is it a crime?

A leading authority on corporate accounting has said that the Australian government might be loosing a billion dollars a year in lost tax due to the way multinational firms operate.

When firms operate in more than one country they can often decide where to report their profits by using transfer pricing. Not surprisingly when given this option firms decide to report their profit in the country with the lowest tax rate.

The example of Starbucks is well known. Starbucks sell coffee in many countries. However they report a lot of their profits in Switzerland. This is because the Swiss subsidiary of Starbucks sells the coffee to other Starbucks companies at a high price. The Starbucks in other countries therefore make very little profit on the coffee. 

Of course the coffee never really enters or leaves Switzerland. The Swiss company simply handles the processing of invoices. Starbucks benefit from the low Swiss profit tax and overall the Starbucks corporation gets to keep more of its profits.

George Rozvany goes further by saying the big four accounting firms assist multinational companies in this legal, but unethical practice. This is a different point, but the way the accounting firms operate is certainly open to criticism.

The implications for Australia is that they are losing tax revenue. With most governments running budget deficits that's a pressing issue. 

Is transfer pricing unethical? That's a good question. Many think it is, but if it was banned in Australia would this lead to lower overseas investment and so affect growth and employment adversely?

When talking about the benefits of free trade and the free movement of people and capital, we also have to consider some of the costs.

The ABC cover the story here

This story has direct relevance to Australian Budgetary policy, It also applies to International Trade and Fiscal policy for IB students.

Australian May Unemployment

With all the election hype the unemployment figures for May were released last week and little attention was paid to them. They show an interesting trend.

The full figures are given below in the link, but as can be seen employment is up (very slightly) and unemployment down, although the unemployment rate stayed at 5.7%.

What you should notice is that employment is rising at a slower rate. The figures are now clear, each month is seeing a smaller rise in employment. We can see confirmation of this in the number of job vacancies, which fell from 172,600 to 169,400. It might not seem much, but that is the worst fall since 2013. It means that fewer new job opportunities are arising.

So far this is not causing a huge crisis. This is because the participation rate is falling and decreased by 0.1 points to 64.8% last month. A lower participation rate has resulted in fewer job seekers per vacancy than there would have been. The number of unemployed people today per vacancy stands at 4.2, but if the participation rate had stayed at its November level that would now be 4.5 people per vacancy.

 

The moral of this story? The headline figures can look okay, but looking deeper allows us to see that the outlook is not as good as it was and there may yet be an unemployment problem for Australia around the corner.

The full ABS figures for May are here

The figures on Australian unemployment are of direct relevance to VCE students. However the relationship highlighted in this article between the participation rate, vacancy rate and unemployment rate is relevant for IB and VCE students. It shows how there are always more questions to ask about data.

Penalty rates. A story to watch.

The Productivity Commission in Australia are looking at a variety of work practise's and this includes whether penalty rates are set appropriately.

Penalty rates are generally called 'overtime rates' in the rest of the English speaking world. It refers to the 'bonus' paid to workers who work extra hours over their usual working week or work at anti-social times, such as weekends. In Australia these rates continue to be set on a national level and for particular industry's.

Some argue that the rates set are too high. In some industry's the rates can be 200% of normal wages. The graph below shows the rates for the hospitality industry.

The traditional argument on penalty rates is that they lead to lower employment. The higher the wage rate then the lower the demand for labour. The same argument can be applied to the minimum wage. The graph below shows the effect of a penalty rate, PR, set above the market wage rate W. The effect is to lower employment by N - Nd hours when penalty rates apply. Notice that Ns - Nd hours of work are offered by workers, but are not taken up (involuntary unemployment).

Another way of looking at this is that penalty rates will cause firms costs to be higher. This leads to market prices being pushed up and so output, and so employment, in an affected industry is lower. The diagram below shows this with the industry or firm supply curve SPR reflecting the higher costs of penalty rates compared to no penalty rates, SNR.

There is some doubt about this analysis. When firms have a great deal of power relative to their employees, as they do in retail and hospitality, they might be able to force wage rates below market rates (W). This means that penalty rates protect workers from profit maximising employers. 

There is also not much evidence to suggest firms close down, or don't operate, when penalty rates apply. 

Below are some articles that look at this issue. The Productivity Commission will give its final report around July, it is worth being ready for it.

The ABC looks at Commission proposals here

Q&A fact check claims on penalty rates here

This is good analytical practice for IB and VCE economists. It might be a fruitful area for IA's or EE's for IB students.

Quantatative Easing in Europe

Australian monetary policy remains 'conventional'. The RBA adjusts the cash rate to influence interest rates throughout the economy. Those changes (although there have been none since  2013) work through the various monetary transmission mechanisms to affect Aggregate Demand (AD) and so inflation.

However when AD is very low and economic growth is really weak there is a limit to the amount conventional monetary policy can do. This occurs where interest rates approach zero. There are no more interest rate cuts possible to boost consumption and investment spending.

In the Eurozone the European Central Bank has set a cash rate of 0.05%. While some countries have set small negative rates (Switzerland for example) it is thought that changes at the rate at this level makes little difference to economic behaviour (Keynes talked of a liquidity trap at low interest rates which might be applicable here).

So the solution adopted in the US, the UK and Japan has been to print money to boost economic activity. This is called Quantitative Easing. The money is used to buy 'bonds' and this drives the price of those bonds up, meaning that they pay holders a lower real rate of interest. This helps by making borrowing cheaper in the economy and also boosting the money supply.

While some might worry about inflation when money is printed in this way they are missing the point. The aim is to inflate the economy, boosting AD and raising the level of economic activity leading to higher GDP and employment. The Eurozone badly needs this stimulus, as do all the countries that trade with Europe. 

The BBC page explains the plan and how QE works. Why is this important for VCE? The same monetary transmission mechanisms work in Australia as work in Europe. It is essential you understand them for Unit 4.

The BBC article is here

Unemployment figures good and bad news

Apologies this post got stuck in drafts!

The latest employment figures show both unemployment and employment up. This seems strange.

The number of employed people rose 47,300 with full time employment up by 80,500 (there was a fall in part time employment which accounts for the difference).

This is really good news. Expectations was for around 10,000 new jobs, so this is well ahead of expectations. Although there has been good news recently, such as the retail sales data and trade balance, unemployment is usually a 'lagging indicator'. This means that when there is an upturn in the economy it is usually months before employment rises and it takes a while for unemployment to rise in a downturn.

However unemployment also rose by 9,800, and stands at 6% of the workforce. How can that come about?

The reason that both employment and unemployment rose is that the workforce itself increased. This often happens in Australia due to the relatively high net migration. 

There was also a rise in the participation rate by 0.2% to 64.8%. The participation rate tends to fall when people become discouraged from looking from work and so give up their search. When people are optimistic the participation rate rises as people are encouraged by the success of others to find work. Overall the rise in the participation rate is another good sign.

 

Unemployment steady but discouraged workers on the rise

The latest figures for unemployment in Australia were released today. This is one of the sets of data you must follow and understand.

While the most important thing is to recognise trends - see our earlier post - the detail of the figures is also important.

A brief overview.
* Unemployment in Australia remained steady at 5.8%.
* Around 31,600 fewer full time jobs were available.
* This was offset by 9,000 part time jobs.
* Around 8,000 were added to the officially unemployed.

 The graphs show that total employment in the last year has peaked and is declining slowly. There is sufficient data here to suggest that the upward trend in employment changed around May 2013 to broadly static employment. It would be too early to declare a falling trend, but that is what we are looking to confirm or deny in the next six months.

The trend in unemployment is clearly upwards. If this trend continues then it does present a cause for concern and policy makers would be expected to act.

A puzzle

Unemployment up by 8,000, part time work up by 9,000, but jobs lost 31,600. What about the other 14,600? What are they doing?

Of course the people who have recently lost their jobs are looking for another one and are counted as unemployed. But the difference in the figures quoted suggests that some people have given up looking for work.

To be counted as unemployed you must be actively looking for work. When you give up looking, because you think there is no hope of finding a job, you have ceased to participate in the labour market.

This is shown in the participation rate. The percentage of working age adults who are either in work or actively seeking work. This is another statistic you must follow.

The 14,600 figure can be accounted for by a fall in the participation rate from 64.8% to 64.6%. Often when unemployment is high and some people have been unemployed for a long time they become discouraged workers and stop looking for a job. This appears to be happening in Australia.

The ABC reports the figures here