New Zealand’s housing shortages reflect regulatory barriers to making land available, and lack of supporting infrastructure for new housing. Despite high housing demand, supply is inelastic. As a result, high demand inflates fixed housing stock prices without inducing more supply.
During 2020 the median New Zealand house price grew by 19.3%, up from growth of 12.3% in 2019. Lower mortgage interest rates have increased bidding competition and raised house prices even further. As prices surge buyers need to borrow more. This amplifies household indebtedness, much of it mediated through foreign-owned banks. As at June 2020 housing mortgage debt was $284B compared to 2020 GDP of $194B. This debt is of macroeconomic significance.
Covid-19 recovery has seen booming engagement in trades training in areas such as construction. This coincides with housing shortages that are devastating for many low income and younger people, and which are accelerating child poverty. These shortages inflate rents as well as housing prices. $1.7B was allocated to the Accommodation Supplement in 2019 and almost $2.4B in 2020. A further $2B was allocated to Vote: Housing in 2020 for housing programmes and services.
New Zealand’s housing crisis creates an opportunity to anchor a full employment strategy on housing and associated infrastructure development, as well as on other job-rich initiatives. To pursue such a strategy we need to understand how macroeconomic policies bear on employment, and how past policy settings are maladaptive to today’s realities.
The economic reforms from 1984 to the early 1990s aimed at macroeconomic stability and microeconomic flexibility. Reserve Bank inflation targeting and fiscal prudence gave stability, while a floating exchange rate and industry and labour market deregulation delivered flexibility.
Employment is a “good” in society, that is it determines per capita incomes, living standards and wider wellbeing. However, macroeconomics has treated employment as a “good” conditional on a balance between employment and inflation.
The Phillips curve is an inverse relationship between unemployment and inflation. The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is “the natural rate of unemployment”. “The NAIRU” and “natural rate” language implies that low inflation is more important than full employment. Unemployment is used instrumentally for inflation control, and this masks its devastating social impacts.
The international evidence now is that the Phillips curve and NAIRU are no longer meaningful. High employment and low inflation co-exist in advanced developed economies.
“Full employment” means everyone who wants a job has one, minus frictional unemployment as people move between jobs, study, homemaker roles and so forth.
The official unemployment rate measures those ready to work and actively seeking it. However, it excludes many young people not in education, employment or training, and people facing such barriers to employment as disabilities, lack of childcare or of transport. Furthermore, many unemployed become discouraged in their job search and give up trying, meaning they are not recorded as unemployed. Welfare to work settings may need to change to allow such people to join the workforce.
Full employment without excessive inflation is achievable when output can expand, that is the output gap can be closed without increased inflation. The output gap is a measure of an economy’s actual output compared to what it could produce.
Inflation occurs when the monetary base expands but output does not. This can be due to skill shortages, restrictive workplace practices, lack of enabling infrastructure, resources diverted into war (as with the stagflation during the Vietnam War), and regulatory barriers to supply, for example restrictions on land available for housing.
There is overwhelming evidence that the poorest, most marginalised people benefit most from a high employment economy. High unemployment leads to rising inequality, high employment is linked to equitable wage growth, and low paid workers benefit most from full employment. For these reasons, in America full employment policies and Federal job guarantees have over the years been supported by such leaders as Martin Luther King, Bernie Sanders and Alexandria Ocasio-Cortez, and by black American economists such as Sadie Alexander, Darrick Hamilton and Sandy Darity.
A sea change has occurred in American economic thinking favouring more government intervention. It has been spurred by Bernie Sanders, Elizabeth Warren and other Democrat politicians, by hard reality, and by leading economic thinkers such as Paul Krugman.
Cecilia Rouse chairs Joe Biden’s Council of Economic Advisers and Jared Bernstein is a member. Rouse’s work has focused on removing “supply side” barriers to full employment such as regulation and poor education. Bernstein takes a “demand side” approach, and advocates full employment as a macroeconomic goal.
The argument is that full employment drives higher wages and this spurs productivity growth. The Economic Policy Institute (EPI) reports evidence of wage-led productivity growth in American macroeconomic data. Specifically, at the aggregate level a rise in the wage share of corporate-sector income is associated with a rise in average productivity growth in subsequent years.
A full employment productivity multiplier seems to exist. In a slack labour market with surplus labour, productivity stagnates. However, in a tight labour market businesses need to pay more for labour. As its price rises they have incentives to train and to adopt more labour-augmenting technology that lifts workplace productivity.
Full employment is a key Biden administration policy goal. It will be delivered through a suite of initiatives such as a $2 trillion infrastructure package. This includes massive upgrading of electrical, digital, social as well as transport infrastructure. The initiatives also address climate change, sustainable energy, electric vehicles, R&D, manufacturing technology, and advanced skills for the future.
These bold initiatives will in the short run be funded through government debt which in 2020 reached 100% of GDP – well over twice New Zealand’s. American taxes will rise, however in the long run Biden’s initiatives will pay for themselves.
A full employment strategy for New Zealand could combine monetary policy that favours job growth, and fiscal policy that invests in job-rich areas with high social returns. Social returns include such psychosocial benefits from full employment as reduced stress, family stability, and giving people more and better choices in life. Making housing development integral to a full employment strategy would see housing stocks increase, and this would lead to reduced expenditure on accommodation supplements and on emergency housing.
Government must deliver an enhanced regulatory environment facilitative of new housing developments. It also needs to be an active investor in housing and infrastructure development. Government-facilitated housing development must be of sufficient scale to make a difference in people’s lives. This means some property values will fall, potentially triggering homeowner opposition to government’s actions.
However, rising property values come with a downside for existing owners as well as for those aspiring to home ownership. Many New Zealanders spend their working lives paying off their home, and then they sell out and buy a cheaper house, with the cash difference funding a comfortable retirement. However, booming property prices even for modest properties in hitherto low-cost regions erode this option.
Furthermore, many homeowners feel obliged to assist their children or grandchildren into home ownership. As such they feel the indirect downside of inflated housing prices.
New Zealanders may be overly besotted with home ownership as a wealth store rather than for the functionality it provides. Some wealthy countries such as Germany have modest home ownership rates but high quality and secure rental accommodation.
New government-funded housing developments do not have to focus specifically on social housing or entry-level housing for first homeowners. So long as the total housing stock grows in the right locations, the benefits cascade down through socio-economic levels. That is, those buying new houses free up lower quality housing for those lower on the housing rung.
Housing developments alone will not deliver full employment, however there are many other job-rich opportunities. Climate change response requires heavy investment in sustainable, green energy systems, and much of this will be in rural and provincial areas.
Markets undersupply some socio-economic goods that deliver benefits wider than what can be captured in market transactions. These benefits may not be privately appropriable, or they may endure longer than private investment horizons. Examples include amenity assets, ecological restoration, and “human infrastructure” projects such as playgrounds and urban gardens.
Making full employment New Zealand’s paramount economic goal could lift productivity and real incomes without excessive inflation, and help rebalance the economy in growth-enhancing ways. In addition to regulatory change it would likely require higher debt-funded government expenditure in the short to medium term.
New Zealand is well-placed to deliver this public expenditure. Its net core Crown debt is forecast to be 46.9% of GDP by the end of the 2024-25 forecast period. This compares with the average net debt of prosperous OECD economies sitting at around 80% of GDP. Rising public debt in New Zealand would be offset by declining private mortgage debt and by dramatically reduced social welfare expenditure.
An invocatory call for a full employment policy at the core of a much more ambitious green climate change transition and socio-economic development strategy might sound naïve or even tipsy euphoric for a small island group with just five million people. However, it looks eerily like a miniature version of what President Biden is embarking on with gusto, and history tells us to never bet against the United States.
Bernstein, J; Baker, D. 2003: The Benefits of Full Employment. April 2003 EPI Book.
Bivens, J. 2019: Looking for evidence of wage-led productivity growth. EPI Macroeconomics Newsletter.