Motu News - April 2017

Apr 21, 2017

From the Director

Tomorrow scientists and supporters in some 500 cities around the globe will march for Science ‘to defend the vital role science plays in our health, safety, economies, and governments.’ I have written previously about the crucial importance of research and evidence in support of public and private decision making, so I whole-heartedly support the goals of these marches. But I also feel significant discomfort.

It is true that science and research face multiple social and political challenges, including a loss of accepted authority in speaking about important issues such as climate change, and inadequacy of public funding. And, as the American comedian Tom Lehrer once said in another context, “people seem to be marching for their causes these days”. So perhaps a march makes sense. But I am not so sure.

The statistical analysis website FiveThirtyEight recently discussed an analysis of 24,398 collective-action events in the U.S., and concluded that the March for Science has much in common with 1970s protests by farmers unhappy with low commodity prices. Putting aside the mixed political success of the agricultural protests, I am troubled by scientists’ concerns being publicized in a way that seems analogous to those of other economic interest groups unhappy with the size of the flow of resources they receive.

Yes, it is true that we need more money for science, and in New Zealand a reasonable case can be made that many scientists are underpaid. But if these considerations are seen as the crux of the debate something very important is lost. Scientists and other researchers are not just another interest group clamouring for a bigger share of the pie. And this is not because science is valuable and important—after all, farmers produce food, which is certainly valuable and important.

From the perspective of economic analysis, the key difference between science and food is that science is what we call a ‘public good,’ while food, as important as it is, is not. The technical term ‘public good’ refers to the reality that a given bit of knowledge, once created, can be used over and over again without being consumed, while a given kiwifruit, no matter how delicious or nutritious can only be eaten once. And—leaving out the details here—the public good nature of science means that it generates sustainable public benefit that requires public support.

Unfortunately, this idea does not fit on a placard, and is more generally tricky to convey in public discourse. But if we don’t figure out effective ways to help the public and politicians understand it, then we are indistinguishable from everyone else asking for more. I worry that if we end up there we will not make progress, and both the science enterprise and the general public good will suffer as a result.

Adam Jaffe, Motu Director and Senior Fellow

New Staff

David3David Fleming Muñoz recently joined Motu as a Fellow. His research areas are applied microeconomics with emphasis on agricultural and resource economics. His interests also include regional and development economics, economic geography and behavioural economics. David gained his PhD in Applied Economics at Penn State University (USA) in 2012, moving there from his home country of Chile to specialise in agricultural and regional economic development and impact assessment. During his stay at Penn State he also worked for the Northeast Regional Centre for Rural Development (NERCRD) and interned in the Economic Research Service (ERS) of the United States Department of Agriculture. Before joining Motu, David was a senior economist with the CSIRO in Australia, where he produced research looking at the short and long-term socioeconomic impacts of resource extraction across Australia. David is a member of the editorial board of the journals Resources Policy and Land Use Policy. A list of his published papers can be found here.

Motu has recently welcomed several new Research Analysts: Sally Owen, Edmund Lou and Hannah Tuahine. Edmund is from Auckland via Hong Kong and has worked for Motu remotely part time for more than a year while finishing his Masters in Economics at the University of Auckland, we are very glad to have him on board full-time. Hannah Tuahine has moved to Wellington after completing her Masters in Economics and Finance from the University of Canterbury. Sally Owen is working part time while she completes the final steps of her Masters in Economics from Victoria University of Wellington. All three RAs are initially working with Suzi Kerr and David Fleming in the environmental and agricultural space.

Are qualifications or job choice more important for recent graduates?

Relative Prod Wages 6 yearsThere are ongoing debates about the right quantity and mix of science, technology, engineering and maths (STEM) skills, and about whether other skills deliver similar benefits to employers and the economy at large. A new paper by Motu researchers focuses on the early career employment and earnings dynamics of young graduates from both STEM and non-STEM disciplines. It also estimates how well their wages match their contribution to productivity over time.

All recent graduates tend to have jobs that begin paying more highly in the first year or two after graduation. They also tend to move into higher paying firms and industries and larger firms, as their careers progress. High-STEM graduates not only have the highest median earnings rate in the first year after graduation ($45,000), they also have a relatively high 49% growth in median earnings over their first six years post-graduation. STEM graduates with a Bachelor's degree or above change jobs less than other graduate groups, but are more likely to end up in high paying industries, high paying firms within industries, and larger firms. Among graduates with less than a Bachelor's degree, STEM and non-STEM graduates start at around $30,300 a year, but STEM graduates’ earnings grow more strongly.

When it comes to productivity, degree-qualified graduates become markedly more productive between the first three years after graduation and the subsequent three years. They also experience strong wage growth. Relative wages more than double for STEM graduates, and rise by around 50 percent for non-STEM graduates.The relative wage paid to high STEM graduates is around 25 percent higher than their contribution to productivity. In contrast, high non-STEM graduates are estimated to make a higher relative contribution to productivity, and their relative wage is lower than their relative productivity by around 34 to 41 percent.

The analysis suggests the level of qualification tells us more about graduate outcomes than the field of study. However, there is almost certainly considerable variation within each group. The non-STEM group includes high-paid fields such as accountancy and law, as well as lower paid fields such as creative arts.

“Unfortunately our analysis can’t observe students who train overseas, the career outcomes of New Zealand graduates who travel overseas, or graduates who are self-employed or work in the informal sector,” said Dr Dave Maré co-author on the report. “And because we’re looking at productivity variation within industries, our estimates may not reflect the impact that the changing supply of skilled workers has on the growth of innovative and knowledge-intensive sectors.”

The independent report Productivity and the allocation of skills by David C Maré, Trinh Le, Richard Fabling and Nathan Chappell was funded by the Productivity Hub (a partnership between the Productivity Commission, the Ministry of Business, Innovation and Employment, Statistics New Zealand and the Treasury, which aims to improve how policy can contribute to the productivity performance of the New Zealand economy and the wellbeing of New Zealanders).

More native forest can help firms manage emissions obligations

Unsplash kaka2Companies with high greenhouse gas emissions face the risk of high costs in a carbon market where prices could soar as high as US$190 per unit. Researchers at Motu have an environmentally and economically attractive option to hedge this risk by establishing more native forest.
Eight percent of the forest land registered in the Emissions Trading Scheme (ETS) is native. Since 2008, however, only 500 Ha of new native forest has been established and registered. If New Zealand established another 10,000 Ha of land in native forest, this would sequester 65,000 tonnes of greenhouse gases annually, which would be eligible to earn 65,000 NZUs per year under the ETS.
Firms with obligations in the ETS, or with high emissions that they cannot rapidly reduce, all need to plan ahead in case the unit price goes substantially higher than its current $17 per NZU.
Recently the International Energy Agency predicted that the international carbon unit price could go as high as US$190. If that happens, the more native forest we have established, the more we will celebrate. As well as the benefits for NZ firms who need to meet their future ETS commitments, there is strong interest among a variety of stakeholders, including community groups and iwi, to plant more native trees for biodiversity, plantation forestry diversity, cultural and aesthetic reasons, and for erosion control.
The research also mentions increased certainty around New Zealand’s global commitments with the Paris Agreement as impetus for using native forest to offset carbon emissions, and the fact that there are other payments for planting native forestry available.
The researchers also looked into other options for offsets, including soil carbon, marine carbon and carbon capture and storage. They found that these more alternative options are not yet strongly enough supported by scientific evidence to include in regulation. They may offer possibilities in the future.
A recent academic paper by Suzi Kerr and Tom Carver outlines this issue in more depth: “Facilitating Carbon Offsets from Native Forests” is now available on the Motu website. A note about the alternative options for offsetting emissions written by Veronika Meduna is also available. Both of these publications were commissioned and funded by Air New Zealand with the help of the Aotearoa Foundation and the Tindall Foundation.

Arthur Grimes expands his influence

Motu is thrilled that Senior Fellow Arthur Grimes has been appointed as the inaugural Chair of Wellbeing and Public Policy at the School of Government at Victoria University of Wellington.

Arthur will continue his Motu research and his role as Motu Senior Fellow.

New publications 

Forthcoming from Motu
This is a new biannual email listing some of the publications Motu hopes to release over the next six months. It is designed to inform policy analysts and researchers of upcoming research and analysis. If you would like to receive this information (twice a year), please subscribe to the ‘Forthcoming from Motu’ email here

2016 Annual Report
Motu's Annual Report for 1 July 2015 to 30 June 2016 is now available on our website. If you wish to receive a hard copy of the Annual Report, please email us and we will send this to you shortly.

Motu News

NZ is a richer country than many of us believe - but we're one of the most unequal too - Wellbeing research in Sunday Star Times

Researchers are from Mars, policymakers are from Venus: How can we bridge the divide?: Suzi Kerr writes in Policy Forum

Health benefits of insulation 'massive' - RNZ Nine to Noon

Suzi Kerr on BBC World Business Matters

Broadband subsidies for education: Are they worth the cost? TechPolicy Daily

Productivity in NZ’s urban areas: IRANZ Newsletter

New Motu Publications

"Migration and Gender: Who Gains and in Which Ways?" Working Paper 17-08 by Kate Preston and Arthur Grimes. 
Empirical studies have consistently documented that while married men tend to lead more prosperous careers after moving than before, migration tends to be disruptive for the careers of married women. However, there has been little exploration of the interaction of non-economic outcomes of migration by gender and relationship-status. We explore whether migration is followed by a change in subjective wellbeing (SWB), and how this experience differs by individuals of different gender and relationship-status. These results are compared to wage differences following migration. We further analyse how outcomes differ according to the motivation for moving, including motivations for moving of both partners in a couple relationship.  Our empirical estimates use longitudinal data on internal migrants in the Australian HILDA dataset. We show that females have a stronger tendency than males to reach higher levels of SWB after moving, while males have a stronger tendency than females to increase their earnings. These gender differences are mostly not significant for single individuals, but become quite pronounced for couples. Differences tend to narrow, but do not disappear, once we account for motivations for moving of individuals and, where relevant, of their partner. In particular, those who move for work-related reasons experience higher wage incomes after moving, regardless of gender or relationship-status.

Visual Abstract2Wages, Wellbeing and Location: Slaving Away in Sydney or Cruising on the Gold Coast.” Working Paper 17-07 by Arthur Grimes, Judd Ormsby and Kate Preston. 
We analyse the relationships between subjective wellbeing (SWB), wages and internal migration. Our study addresses whether people make (revealed preference) location decisions based on SWB and/or wage prospects. We present both a theoretical intertemporal location choice model and empirical analyses using the Australian longitudinal HILDA dataset. Our theory predicts considerable heterogeneity in location choices for individuals at different life stages depending on their individual characteristics, including their rate of time preference. We find a significant and sustained uplift in SWB for migrants, which holds across a range of sub-samples. By contrast, wage responses are muted albeit with heterogeneity across groups. Our theory and results show that migration decisions are considered within a life-cycle context. The estimated pronounced upturn in SWB for migrants substantiates the usefulness of SWB both as a concept for policy-makers to target and for researchers to incorporate in their studies.

Evolution of the New Zealand Emissions Trading Scheme: Linking.” Working Paper 17-06 by Catherine Leining, Judd Ormsby and Suzi Kerr. 
The New Zealand Emissions Trading Scheme (NZ ETS) was conceived as New Zealand’s gateway to the international carbon market with two objectives: assisting New Zealand to meet its international climate change obligations, and reducing domestic net emissions below business-as-usual levels. Underlying these objectives was the principle of least-cost compliance for both the New Zealand government and NZ ETS participants. Uniquely among ETS to date, from 2008 through mid-2015 the NZ ETS operated with buy-and-sell linkages to the Kyoto market that did not constrain domestic emissions and were used to set the domestic price. As international Kyoto unit prices plunged from 2011 onward, so did New Zealanders’ incentives to invest in higher-cost domestic mitigation. Instead, NZ ETS participants complied by purchasing large numbers of Kyoto units. In November 2012, the government announced it would take its post-2012 commitment under the UNFCCC, not the Kyoto Protocol. NZ ETS participants responded by surrendering low-cost Kyoto units and banking NZUs which were expected to remain usable in the longer term. In mid-2015, the NZ ETS delinked from the Kyoto market. Although the New Zealand government has explored bilateral ETS linkages, none has come to fruition to date. As of 2017, the NZ ETS operates as a stand-alone system with a substantial participant-held NZU bank as the legacy of past linking. The government now faces important decisions about the future of unit supply in the NZ ETS and linkages to international markets. This paper examines New Zealand’s experience with linking and de-linking its ETS to capture lessons that could be of value to policy makers in New Zealand and other countries. It finds that the considerable opportunities to a small ETS market from linking can be negated if the environmental, economic and political risks are not managed strategically. It also highlights some of the technical and political challenges of negotiating bilateral linking agreements. New Zealand’s future policy on ETS linking, and more generally support for international mitigation as part of our global contribution, should ensure the integrity of New Zealand’s contribution to global mitigation and support strategic domestic decarbonisation in the longer term.  

"Evolution of the NZ ETS: Sectoral Coverage and Points of Obligation.” Working Paper 17-05 by Catherine Leining, Corey Allan and Suzi Kerr. 
When it was launched in 2008, the New Zealand Emissions Trading Scheme (NZ ETS) pioneered the design concept of implementing an emissions trading scheme (ETS) across all sectors of the economy (e.g. stationary energy, transport, industrial processes, forestry, waste and biological emissions from agriculture) and all six major greenhouse gases (GHGs). This reflected New Zealand’s relatively unique emission profile among industrialised countries (with heavy renewable generation, nearly half of emissions from agriculture, and a large land area suitable for forestry) and its interest in finding effective, efficient, and equitable solutions to the challenge of meeting its international emission reduction targets. Further innovations at the time – influenced in part by the government’s previous efforts to implement a carbon tax in the energy and industry sectors – were the selection of predominantly upstream points of obligation in the energy sector, with the potential for some major downstream energy users to opt in voluntarily, and the selection of a default processor-level obligation in the agriculture sector, with the option to shift to a farmer-level obligation. As of 2017, the entry of biological emissions from agriculture has been deferred indefinitely. Otherwise, the proof of concept on both broad sectoral coverage and upstream points of obligation has been demonstrated through practical experience. To help inform future ETS policy making in New Zealand and internationally, this paper provides a conceptual foundation for design decisions on ETS coverage and points of obligation, and explores the history of and rationale for the specific design choices that have been made in this regard in New Zealand. 

Productivity and the Allocation of Skills.” Working Paper 17-04 by David C Maré, Trinh Le, Richard Fabling and Nathan Chappell. 
We use linked employer-employee data from 2004–2012, combined with individual qualifications data from 1994–2012, to study how graduates with different skills fare in the labour market in the six years after studying. We find that graduates experience improvements in earnings, and that they systematically move between jobs, industries and locations in a pattern that is consistent with their securing better job matches, particularly for high level STEM graduates. We then estimate joint production function and wage equations to see how the skill composition of a firm’s employees correlates with productivity, and compare this with how the skill composition correlates with its wage bill. Our results suggest that degree graduates make a growing positive contribution to production in the six years after graduation, with associated wage growth. There is variation in relative productivity and wages across groups of graduates that differ by field of study and level of qualification.

Visual Abstract3The Effect of Fibre Broadband on Student Learning.” Working Paper 17-03 by Arthur Grimes, and Wilbur Townsend. 
We estimate the impact of ultra-fast broadband on schools’ academic performance using a difference-in-difference study of a new fibre broadband network. We show that fibre broadband increases primary schools’ passing rates in standardised assessments by roughly one percentage point. Estimates are robust to alternative specifications, such as controlling for time-varying covariates. We find no evidence that gender, ethnic minorities or students enrolled in remote schools benefit disproportionately. However, we find some evidence of a larger benefit within schools that have a greater proportion of students from lower socio-economic backgrounds.

More pensioners, less income inequality?” Working Paper 17-02 by Omoniyi Alimi, David C Maré and Jacques Poot. 
As is the case in most developed countries, the population of New Zealand is ageing numerically and structurally. Population ageing can have important effects on the distribution of personal income within and between urban areas. The age structure of the population may affect the distribution of income through the life-cycle profile of earnings but also through the spatial-temporal distribution of income within the various age groups. By decomposing New Zealand census data from 1986 to 2013 by age and urban area, this chapter examines the effects of population ageing on spatial-temporal changes in the distribution of personal income to better understand urban area-level income inequality (measured by the Mean Log Deviation index). We focus explicitly on differences between metropolitan and non-metropolitan urban areas. New Zealand has experienced a significant increase in income inequality over the last few decades, but population ageing has slightly dampened this trend. Because metropolitan areas are ageing slower, the inequality-reducing effect of ageing has been less in these areas. However, this urban-size differential-ageing effect on inequality growth has been relatively small compared with the faster growth in intra-age group inequality in the metropolitan areas.

Visual Abstract4Facilitating Carbon Offsets from Native Forests.” Working Paper 17-01 by Thomas Carver, and Suzi Kerr. 
This note aims to help firms looking to offset their Greenhouse Gas (GHG) emissions. Emissions reductions from native forestry sequestration are already recognised in the New Zealand Emissions Trading Scheme (ETS) and it is ‘shovel ready’ to generate native forest offsets. 10,000 Ha of post-1989 native forest land would sequester 65,000 tonnes of CO2-e annually on average over 50 years, and would be eligible to earn 65,000 NZUs per year under the ETS. Native forestry also has a wide range of associated environmental, cultural, social and economic co-benefits. It is certainly possible for more native afforestation to occur at present, and within the existing policy framework; however, challenges do still exist. These include: a lack of awareness; limited access to capital; the complexity of the ETS; policy uncertainty; and some specific policy settings. The New Zealand business community can play an important role in solving these problems. Businesses can help influence government policy and have the capital and capacity to play a facilitating role in the market.

Picking up speed: Does ultrafast broadband increase firm productivity? - Working Paper 16-22 by Richard Fabling and Arthur Grimes
We estimate whether there are productivity gains from ultrafast broadband (UFB) adoption and whether any gains are higher when firms undertake complementary organisational investments. Using an IV strategy based on proximity to schools (that were targeted in the UFB roll-out), we find that the average effect of UFB adoption on employment and (labour and multifactor) productivity is insignificantly different from zero, even for firms in industries where we might expect the returns to UFB to be relatively high. Conversely, we find that firms making concurrent investments in organisational capital specifically for the purpose of getting more from their ICTs appear to experience higher productivity growth, at least in first-difference specifications. Firms making these joint (UFB-organisational) investment decisions are significantly more likely to report other positive outcomes from their ICT investments, consistent with the identified relationship with productivity being causal.

Are qualifications or job choice more important for recent graduates?