Motu News May 2016

May 25, 2016

Adam Jaffe landscapeMotu participates with researchers from several universities in Te Punaha Matatini—a Centre of Research Excellence devoted to modelling and understanding complex systems. TPM director Shaun Hendy has just published an important book Silencing Science (BWB Texts, $14.99). Shaun notes that most scientists in New Zealand—whether employed by universities, Crown Research Institutes, or non-profit organizations like Motu—are funded by taxpayer dollars, either directly or indirectly. Given this, we have an obligation to contribute our expertise to help the public understand what is known (and what is not known) about the natural and social science issues that underlie important policy debates. But Shaun documents in his book that research organizations, perhaps fearful that controversy is not helpful to securing research funding, put many obstacles in the way of comment by their scientists on issues of public scientific controversy. And many scientists are reluctant to participate in public debates, partially because of these barriers, and partially out of a more general fear that participating in public debates somehow undermines their credibility as serious scientists.

Motu is committed to undertaking serious, careful research on economic and social systems as they relate to public policy issues, AND to communicating the results of this research to the public. We have an inviolable policy that the results of every research project we undertake are published for all to see. Further, we structure the job descriptions and compensation for our senior researchers such that they are expected to spend about 60% of their time carrying out specific research projects. The remainder of their time is explicitly made available for public speaking and meeting with interested parties to present and discuss policy issues and research results (as well as developing new research projects and other professional activities). These policies are crucial to our carrying out our mission of providing a solid economic foundation for informed public debate on important public issues.

Adam B. Jaffe

Productivity in the construction sector

The construction industry contributes a large and growing share of the New Zealand economy, with total employment rising to almost 10% and value added (GDP contribution) rising to about 9% by 2012.

A recent working paper from Motu’s Adam Jaffe, Trinh Le and Nathan Chappell looked at the productivity of construction firms using approximately 2.3 million yearly observations of 487,000 firms. This included 358,000 observations of 78,000 construction firms in the Longitudinal Business Database across the twelve years that were examined.

Labour productivity in construction firms tends to be lower than in other industries, likely due to lower average skill and lower capital intensity in construction compared to other industries. There is also significant dispersion in labour productivity, meaning that firms with the same number of workers vary widely in their “value added” (revenue minus cost of inputs other than labour and capital).

Interestingly, this ratio is actually smaller in the construction sector than in other industries, e.g. the corresponding ratio is 5.4 for manufacturing and 3.7 for primary. There is therefore no evidence to support a conjecture that relatively poor average productivity performance in construction is due to a greater proportion of firms that significantly lag behind the best performers. Indeed, while construction has similar lower quartile labour productivity to that of most other industries, its median and upper quartile are much lower. This means that the lower overall average labour productivity in construction is associated with a relative absence of star performers, rather than with an over-abundance of productivity underperformers.

Several firm characteristics are strongly linked to labour productivity, which is

  • Higher in entrants than continuing firms.
  • Negatively correlated with firm’s age in the construction industries and ‘machinery and other equipment manufacturing’.
  • 19–36 percent higher for firms that contract out (due to lower labour input).
  • Significantly lower in firms that have no employees other than the working proprietors.
  • 0–41 percent higher for firms that belong to business groups than firms that do not.
  • Higher for firms located in Auckland.

Age, entry status, Auckland location and employing status also have similar associations with multifactor productivity (MFP). However, business group membership and contracting status are less strongly linked to MFP than to labour productivity. Interestingly, exiters have lower MFP in the construction and manufacturing industries. It is, however, important to remember that these correlations do not establish causality.

The findings that new entrants are the most productive and that age is negatively correlated to productivity are surprising. It seems that, on average, new firms either have new, productive ideas, or their proprietors work extra hard initially. Since we cannot capture the effects of innovation or effort in our explicit input measures, their effect on measured output would, instead, be captured as an increase in average productivity for newer firms.

Entering and Exiting Firm Output2

The largest positive contributors to MFP growth in the overall construction industry were growth within continuers and reallocation from low-productivity to high-productivity firms in ‘construction services’ and turnover in ‘heavy and civil engineering construction’, while the major drags were productivity slow-down by continuers in ‘building construction’ and ‘heavy and civil engineering construction’.

As in other industries, there is a considerable gap within the industry between the productivity of the best and worst performing firms. This gap is largest for the large number of firms that have no workers other than a worker-proprietor. We find no evidence, however, that the ‘problem’ of a significant tail of low-performing firms is worse in construction than in other sectors. Indeed, although comparisons of this sort across very different industries are somewhat hard to interpret, the construction sector appears to have less dispersion than other large sectors.

For more information on this topic, check out the working paper: Productivity distribution and drivers of productivity growth in the construction industry.

Statistics NZ Motu Programme for PhD Research

Motu and Statistics NZ are working together to provide a PhD student with office space and remote access to Statistics NZ data to aid them in their research for a minimum of four months. Students enrolled in any accredited PhD programme in economics or allied fields may apply to this Programme to undertake an empirical research project using the microeconomic data on firms*, households and individuals housed at Statistics NZ (the IDI and LBD). More...

Charting a course toward New Zealand’s low-emission future

When Captain Cook set out to observe the Transit of Venus in the South Pacific, it was a part of Earth so poorly explored by westerners that European mapmakers couldn’t agree if he would find a giant continent there or not. Cook steered across miles of open ocean, fighting storms and scurvy to reach Tahiti. These days there’s similar trepidation awaiting those who try to map the future landscape of climate change solutions.

zero net emission vision2

Over the last two years, Motu Economic and Public Policy Research has convened the Low-Emission Future Dialogue, engaging a group of cross-sector stakeholders in their personal capacities to explore options for a successful zero-net-emission economy in New Zealand. There are countless courses we could chart in our efforts to achieve the vision for a successful zero-net-emission economy, but our dialogue group identified a basic framework that could underpin this future. More...

Motu News

Lifting the Patent Barrier to New Drugs and Energy Sources: Adam Jaffe interviewed in New York Times

The great climate change rort: NZ Listener article

Arthur Grimes discussing land taxes on TVNZ's Q&A

Researcher weighs in on carbon trading tool: NZ Herald

Two countries, 16 cities - but only one housing market? - NZ Herald article

Better businesses, healthier lives will flow from a low carbon economy - Rod Oram in Sunday Star Times

Adam Jaffe is welcoming a new government big data project to allow richer measurements in the future

Motu research analysts on why Middle America should be angry, saving the EU, middle class housing projects, the TPPA, the animated Panama Papers & more

New Motu Publications

Productivity distribution and drivers of productivity growth in the construction industry - Working Paper 16-08
Using firm-level data, this study finds that over the period 2001–2012, labour productivity of the average firm in the construction industry grew by 1.7 percent annually and MFP by 0.5 percent annually, compared with 0.5 and 0.1 percent annually respectively for the overall measured sector. High-productivity firms tend to be younger, more likely to be a new start-up, to belong to a business group, and to locate in Auckland than low-productivity firms.

Labour market dynamics following a regional disaster - Working Paper 16-07
This paper examines the effect of the two major Canterbury earthquakes on jobs and accumulated earnings for workers. In addition, we examine concurrent decisions about employment location, including job-to-job transitions and regional migration.

Lessons learned from the New Zealand Emissions Trading Scheme - Working Paper 16-06
The New Zealand Emissions Trading Scheme (NZ ETS) is the New Zealand government’s cornerstone policy instrument for meeting New Zealand’s climate change responsibilities. The New Zealand system was designed based on strong linkages to international carbon markets. Understanding how these have affected the New Zealand market is critical both for policymakers in New Zealand and designers of international emissions trading schemes who are considering linkages.

Subjective wellbeing impacts of national and subnational fiscal policies - Working Paper 16-05
We study the association between fiscal policy and subjective wellbeing using fiscal data on 35 countries and 130 country-years, combined with over 170,000 people’s subjective wellbeing scores. While past research has found that ‘distortionary taxes’ (e.g. income taxes) are associated with slow growth relative to ‘non-distortionary’ taxes (GST/VAT), we find that distortionary taxes are associated with higher levels of subjective wellbeing than non-distortionary taxes. This relationship holds when we control for macro-economic variables and country fixed effects.

Two Countries, Sixteen Cities, Five Thousand Kilometres: How Many Housing Markets? - Working Paper 16-04
This paper by Ryan Greenaway-McGrevy, Arthur Grimes and Mark J Holmes examines whether the major cities in Australasia make up a single housing market. If there is a single housing market across both countries, then Kiwi and Aussie house prices are primarily being driven by the same forces, rather than by local factors. In addition, a single housing market would imply that macroeconomic policies in the two countries are either run on similar lines or are incapable of independently controlling real house prices, despite both countries running independent monetary and fiscal policies.

Time-travelling on the New Zealand Emissions Trading Scheme - Motu Note #22
Motu has compiled an interactive timeline for the development and implementation of the NZ ETS from 2005 to 2015. It is intended as an information resource for policy makers, NZ ETS participants, researchers, and ETS practitioners from other countries who wish to learn from New Zealand’s experience.

New Zealand's Low Emission Future: Transformational Pathways - Motu Note #23
Between 2014 and 2016, Motu convened a group of about 20 cross-sector stakeholders to explore pathways to achieving zero net greenhouse gas (GHG) emissions in New Zealand. The group’s work suggests that a successful zero-net-emission economy lies within New Zealand’s reach, and any number of pathways could take us there. This document presents a synthesis of ideas that emerged during the course of nine meetings.

Idea Bank of Pathway Milestones for New Zealand’s Low-Emission Future
Any number of pathways could deliver a zero-net-emission future for New Zealand. The more detailed ideas that emerged from the Low-Emission Future Dialogue are captured in this "idea bank" document, which is offered in the spirit of sparking discussion that might help with achieving the sectoral visions for stationary energy, land transport and agriculture. These are ideas for discussion, not recommendations.