A version of this blog appeared as a perspectives article in the New Zealand Herald on Tuesday, September 21, 2010.
Should our school teachers be paid more? I think so. Because at current salaries we will have a very hard time attracting high quality individuals to that profession. Only those motivated by a desire to serve society at some level might step forth but possibly not too many of them.
At the University of Auckland, I teach a course called “Understanding the Global Economy” which is designed for students who are studying disciplines other than business and economics. The course usually has upwards of 500 students in the class and attracts students from all over the university. These are the best and brightest students in our community. Every year I ask them what they are planning to do after they graduate. Doctors? A multitude of hands. Engineers? Another array of hands. School teachers? And a strange hush falls over the lecture theatre.
Why? The answer is simple. The salaries are abysmal.
But how can we afford to pay them more, critics ask? The right question to ask, I think, is how can we not? Teaching students at our schools is fundamental to our long-term well-being. This is where our children are spending their formative years and it is imperative that they be taught by people who are enthusiastic, inspiring and visionary. Do we get them currently? I doubt very many.
The answer is easy to understand. Consider two job candidates. I will call them Harry and Sally. Sally is a dynamite young person; full of ideas and getting ready to change the world. Harry is a bit of a plodder with limited ambitions. Sally has decided that after she graduates she will only accept jobs that pay her $50,000 or more while Harry is content with $30,000.
Along comes a multinational company which offers $55,000 and a primary school offering $35,000. Which job do you think Sally will take? Maybe Sally is an altruist and does take the job in the primary school. But then one day Sally will meet Harry, fall in love and start a family. She will realize that if she is to give her children the best opportunities in life then she cannot afford to be a school teacher anymore. Sally will start looking for another job that pays more.
Now think of this from the employer’ perspective. Will paying more attract better qualified applicants? This is not guaranteed but certainly improves the odds. Why? Suppose you are recruiting for the primary school. Harry and Sally both look like impressive young people; clean-cut, well-dressed, well- spoken. But you know that there is one-half chance that one of them is more qualified than the other. What you do not know is whether it is Harry or Sally who is the better candidate.
The problem is that you cannot quite make out from the interview which of the two is more dynamic. What salary do you offer them? If you offer anything less than $50,000 then it is guaranteed that Sally will not accept the job and only Harry will. This in turn implies that offering less than the minimum Sally – the more dynamic candidate – is willing to accept is a certain recipe for ending up with the less qualified candidate. But what if you offered $50,000? Will that guarantee you get Sally. No. But it certainly improves your chances of recruiting Sally. Offering the higher salary radically improves your chances of hiring the better candidate because you will now be attracting a better pool of candidates – Sally and many others like her.
Can we afford to pay our teachers more? I do not know. But what I do know for sure is that if we keep paying these low salaries then our children will not be taught by inspiring and visionary teachers. Are will really willing to take that gamble with our children and the future of our nation?
Tuesday, September 21, 2010
Tuesday, August 10, 2010
Is New Zealand a rip-off?
(This blog is co-authored with my colleague Dr Debashis Bandyopadhyay. A version of this blog appeared as a perspectives article in the New Zealand Herald, Page A13, August 11, 2010)
In recent days there has been a lot of discussion about whether New Zealand is a “rip-off” following comments – no doubt well-meaning ones - made by a British columnist, later supported among others by our very own Justin Marshall. However, it is important to understand that there are actually two separate questions implicit in this one simple phrase.
First, is New Zealand a rip-off in the sense that our prices for day-to-day goods are higher than other countries even after you make the necessary corrections for differences in exchange rates? Second, and probably more importantly in the current context, are those prices high because of deliberate over-charging by producers? I would submit that the answer to the first question is most likely yes and the answer to the second is most likely no.
Let us start with the second question first. It is important to remember that the extent to which a producer has power over the price he charges depends on how competitive the market is. A producer can only charge high prices if there are no competitors available to undercut his price and lure customers away from him or if he can somehow or the other collude with his competitors in over-charging his customers. Because if a particular producer is making large profits, then it is most likely that another producer can come into the market, undercut his prices and still make enough profit to make such price cutting worthwhile.
This implies that in markets with vigorous competition and many small firms, it would be difficult to keep over-charging customers because there are enough other producers around who can and will undercut prices if it makes money to do so. And if there are a whole lot of competitors, colluding with all of them is a difficult proposition. This in turn most likely implies that – given the profusion of cafes around the city – we are most likely not paying too much for our daily dose of flat-white and those prices truly reflect the underlying costs with not much of a margin. A similar argument is probably applicable to hotel prices in popular tourist resorts.
How about fine dining? These markets are certainly not competitive and the issues here are somewhat different. Is $28 for an entrée in a restaurant in the Viaduct Harbour too much? There is no clear answer to this question. For those who are going there and enjoying the food along with the ambience and the view of the water, it most likely is not. Someone who is not willing to pay that price is surely not going to eat there. What the restaurant is clearly exploiting is their monopoly power arising out of their prime location. But the point here is that the restaurant is not primarily interested in the price it charges but rather in the profit it makes. It is most likely that the restaurant calculates that they can get away with charging $28 for an entrée and still enough people will line up to make it worth their while. Because if their profits would go up by charging lower prices they would surely do so!
Given that restaurants in the Viaduct Harbour or on top of the Skytower clearly enjoy the advantages of being in a premier location they are charging the prices that maximize their profit and it is difficult to see how one can increase competition in this regard in an attempt to lower those prices. So if the view and the setting are not worth that much to you then you should probably not patronize these establishments. It is also probably worthwhile to remember that these people also pay a premium on the rent for these locations.
Okay, so are there any situations where producers are deliberately over-charging? Yes, it is most likely that we are paying too much for our meat and produce at the local supermarket. It is one thing if we have to pay through the nose for exotic foreign goods that are shipped from a long distance away. But that does not explain why we pay top prices for locally grown meat, fruits and vegetables.
In the absence of hard data, one can make conjectures as to why this might be the case. In Auckland, the supermarkets are owned by one of two companies Woolworths and Foodstuffs. The extreme lack of competition in this market pretty much guarantees that the supermarkets can get away by charging high prices. It is also not unlikely that there is some amount of implicit collusion among these two companies.
However, before we condemn the supermarkets, there is one other issue that needs to be remembered. It is possible that our supermarkets also experience higher costs than would be true of supermarkets in other countries. We all know the price a producer charges is related to the underlying costs. For large supermarkets there are large fixed or set-up costs. It costs money to build and operate one of these stores. This cost is fixed in the sense that if you decide to build a large supermarket then you have to incur some of these costs in terms of building costs, the cost of air-conditioning etc. which is independent of the amount of goods that you sell.
Now the more you sell the less your costs become on average because this large fixed cost gets distributed over a larger volume of goods making each item less expensive to produce and sell on average. But the extent to which these average costs decrease depends on the volume of your sales. Here is the problem. Auckland – and New Zealand - is a very small market. And therefore it is possible that the sales volumes are just not large enough to give the producers adequate cost savings. So which view is correct? Are costs too high? Or are they deliberately over-charging given the lack of competition? Probably a bit of both. This is an open research question.
So, what is the average consumer to do? Well, it depends. How important to you is the convenience of buying everything under the same roof in air-conditioned comfort? How pressed are you for time? If you can spare the time, then drive to the nearest Chinese supermarket or farmers’ market. But this might mean having to make multiple stops for all the things you need during the week.
And how about romantic dinners? Summer is just around the corner. Pack a chilly-bin, grab a beach-mat, get in the car and drive to a scenic spot. We are lucky to live in a country where there are plenty of these in close proximity and they are all free!
In recent days there has been a lot of discussion about whether New Zealand is a “rip-off” following comments – no doubt well-meaning ones - made by a British columnist, later supported among others by our very own Justin Marshall. However, it is important to understand that there are actually two separate questions implicit in this one simple phrase.
First, is New Zealand a rip-off in the sense that our prices for day-to-day goods are higher than other countries even after you make the necessary corrections for differences in exchange rates? Second, and probably more importantly in the current context, are those prices high because of deliberate over-charging by producers? I would submit that the answer to the first question is most likely yes and the answer to the second is most likely no.
Let us start with the second question first. It is important to remember that the extent to which a producer has power over the price he charges depends on how competitive the market is. A producer can only charge high prices if there are no competitors available to undercut his price and lure customers away from him or if he can somehow or the other collude with his competitors in over-charging his customers. Because if a particular producer is making large profits, then it is most likely that another producer can come into the market, undercut his prices and still make enough profit to make such price cutting worthwhile.
This implies that in markets with vigorous competition and many small firms, it would be difficult to keep over-charging customers because there are enough other producers around who can and will undercut prices if it makes money to do so. And if there are a whole lot of competitors, colluding with all of them is a difficult proposition. This in turn most likely implies that – given the profusion of cafes around the city – we are most likely not paying too much for our daily dose of flat-white and those prices truly reflect the underlying costs with not much of a margin. A similar argument is probably applicable to hotel prices in popular tourist resorts.
How about fine dining? These markets are certainly not competitive and the issues here are somewhat different. Is $28 for an entrée in a restaurant in the Viaduct Harbour too much? There is no clear answer to this question. For those who are going there and enjoying the food along with the ambience and the view of the water, it most likely is not. Someone who is not willing to pay that price is surely not going to eat there. What the restaurant is clearly exploiting is their monopoly power arising out of their prime location. But the point here is that the restaurant is not primarily interested in the price it charges but rather in the profit it makes. It is most likely that the restaurant calculates that they can get away with charging $28 for an entrée and still enough people will line up to make it worth their while. Because if their profits would go up by charging lower prices they would surely do so!
Given that restaurants in the Viaduct Harbour or on top of the Skytower clearly enjoy the advantages of being in a premier location they are charging the prices that maximize their profit and it is difficult to see how one can increase competition in this regard in an attempt to lower those prices. So if the view and the setting are not worth that much to you then you should probably not patronize these establishments. It is also probably worthwhile to remember that these people also pay a premium on the rent for these locations.
Okay, so are there any situations where producers are deliberately over-charging? Yes, it is most likely that we are paying too much for our meat and produce at the local supermarket. It is one thing if we have to pay through the nose for exotic foreign goods that are shipped from a long distance away. But that does not explain why we pay top prices for locally grown meat, fruits and vegetables.
In the absence of hard data, one can make conjectures as to why this might be the case. In Auckland, the supermarkets are owned by one of two companies Woolworths and Foodstuffs. The extreme lack of competition in this market pretty much guarantees that the supermarkets can get away by charging high prices. It is also not unlikely that there is some amount of implicit collusion among these two companies.
However, before we condemn the supermarkets, there is one other issue that needs to be remembered. It is possible that our supermarkets also experience higher costs than would be true of supermarkets in other countries. We all know the price a producer charges is related to the underlying costs. For large supermarkets there are large fixed or set-up costs. It costs money to build and operate one of these stores. This cost is fixed in the sense that if you decide to build a large supermarket then you have to incur some of these costs in terms of building costs, the cost of air-conditioning etc. which is independent of the amount of goods that you sell.
Now the more you sell the less your costs become on average because this large fixed cost gets distributed over a larger volume of goods making each item less expensive to produce and sell on average. But the extent to which these average costs decrease depends on the volume of your sales. Here is the problem. Auckland – and New Zealand - is a very small market. And therefore it is possible that the sales volumes are just not large enough to give the producers adequate cost savings. So which view is correct? Are costs too high? Or are they deliberately over-charging given the lack of competition? Probably a bit of both. This is an open research question.
So, what is the average consumer to do? Well, it depends. How important to you is the convenience of buying everything under the same roof in air-conditioned comfort? How pressed are you for time? If you can spare the time, then drive to the nearest Chinese supermarket or farmers’ market. But this might mean having to make multiple stops for all the things you need during the week.
And how about romantic dinners? Summer is just around the corner. Pack a chilly-bin, grab a beach-mat, get in the car and drive to a scenic spot. We are lucky to live in a country where there are plenty of these in close proximity and they are all free!
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