Are New Zealand’s universities the most elitist in the developed world?

I’ve just come across this graph about who gets to go onto higher education in developed world countries – and it seems to make pretty damning reading for New Zealand.

Basically, it suggests that if you have highly educated parents, in this country you are nearly 10 times more likely to be in higher education – university, polytechnic or ‘college’ in American-speak – than someone whose parents are not highly educated. That’s the worst ratio in the developed world, by a long chalk.

(A brief word on how the ratio is calculated. In New Zealand, there are twice as many tertiary students with highly educated parents than you would expect based on how many highly educated parents there are in the population. In contrast, there are only one-fifth as many students with poorly educated parents as you would expect. If you divide two by one-fifth, you get 10 – and that’s the ratio.)

Data can be flawed, of course, and we have to ask ourselves, does this seem likely? It is true that the data for New Zealand doesn’t include some qualifications that probably attract more students with poorly educated parents, making our ratio seem worse than it really is. But that is also true for the United States, Canada and Australia, and they all seem to be doing far better than us on this data.

It seems hard to believe that we could have a worse record than the United States, where tertiary education is so expensive. But they do compensate for that with scholarship schemes far more extensive than those here. (Not that I’m necessarily recommending scholarships as the way to counteract socio-economic disadvantage.) So it’s still plausible.

Assuming the data are correct, then, how is the influence transmitted from parents to children? Probably not through tertiary education as such. The advantage will be gained because the children of better educated parents will have a better start in life, and thus do better at primary and secondary school, setting them up for later educational success.

And we know that 70-80% of children’s attainment at school can be explained by their socio-economic background, with just 20-30% influenced by what happens within schools. So this data looks like further evidence for doing something about poverty in New Zealand.

UPDATE: The Ministry of Education has responded with the following information, from Claire Douglas, head of graduate achievement, vocation and careers:

Education is central to inter-generational mobility. Unfortunately this data doesn’t present an accurate picture of the role tertiary education plays in New Zealand.

The graph does not compare apples with apples, with the result that New Zealand’s inter-generational mobility is underplayed.

The graph originally comes from the 2012 OECD publication Education at a Glance. The results for most of the countries came from a survey run by the OECD.  But for some countries – New Zealand, Canada and the US – the results came from a separate survey,  the Adult Literacy and Lifeskills (ALL) survey in 2006.

In most countries, the question asked if university graduates’ parents had attended university.  However for the ALL survey used to generate results for NZ, Canada and the US, the questions asked if the university graduates’ parents had had tertiary education of any kind. This included those with trade qualifications and diplomas. That meant for these three countries, a wider group of parents were counted as having a tertiary qualification. That in turn diminishes the pool of university students counted as coming from households without qualified parents, and thus a lower OECD ranking for mobility.

That difference in the survey used means that inter-generational mobility for NZ, Canada and the US shows as much lower than it would had they participated in the main OECD survey.

The results particularly skewed New Zealand’s rankings because we have had, over the years, the highest proportion of our population who had non-university tertiary education.

Which are all reasonable points, and were acknowledged in the original post to some extent. The question is how much difference does the nature of the survey make? The ministry is saying it shows mobility “much” lower than it really is, but the OECD obviously doesn’t think it makes a material difference. In addition, as noted above, the other countries also affected by this bias still have far, far higher mobility rates than us, so the problem remains.

Next step after MPs’ salaries: pay ratios?

Yesterday’s announcement by John Key that, in future, salaries for MPs will rise only in line with salaries for ordinary public sector workers is a big deal for two reasons.

First, it provides more evidence that the public is very concerned about inequality in general, and high salaries in particular. Key has made noises about dealing with the MPs’ salary issue before, but never acted. That he is doing so this time shows the growing scale of public disquiet on the issue.

Of course, MPs’ salaries (at around the $150,000 mark), though large, are nowhere near as big as those of private sector chief executives, say, who in New Zealand can earn $3 million-$4 million. Since CEO productivity is about as hard to gauge as that of MPs, and their remuneration therefore equally difficult to justify, you have to wonder when more attention will turn to the private sector. Still, a focus on the public sector is fine for the moment.

The other interesting thing about the Key announcement is that it implicitly endorses an important concept for reducing inequality: pay ratios. The idea behind pay ratios is that the pay of an organisation’s highest earner should be no more than, say, 12 times that of the lowest paid earner.

Key’s announcement will fix MPs salaries at roughly, I would guess, five times that of the lowest paid public sector worker (assuming they are currently on the minimum wage of approximately $30,000), and his own $430,000 salary at approximately 15 times that of the lowest paid worker. (What is an appropriate ratio is of course up for debate. A future government might legislate to reduce that ratio to, say, 12 to 1, so that the PM doesn’t earn more in a month than anyone in the public sector, or elsewhere, does in a year.)

With this principle established, it could be extended elsewhere: to public sector chief executives, for example, some of whom earn over $600,000. And, as above, the real issues with higher pay are in the private sector. So we might see some of our biggest companies adopting pay ratios – or being encouraged to do so by activist shareholders. Now that would be a step in restoring fairness to the economy.

ANZ says ‘addressing inequality’ key issue for NZ in 2015

One of the things that banks like to do is send out research notes about what they think the “key themes” of the future will be. The ANZ research note issued earlier this month is typical of the genre, with a lot of phrases like “change is the new normal” and “the trend is your friend”.

But, fascinatingly, the final one of its six key themes is “addressing income inequality”. The bank says:

A degree of inequality can be expected (and is necessary) in any market economy. However, rising income inequality dampens economic mobility, reduces education standards, and makes an economy less flexible. Rising social tensions can also lead to political instability. There are good economic reasons for addressing inequality. New Zealand looks to be pushing a number of the correct buttons but has a way to go. Job creation, raising educational achievement, and encouraging flexibility across the education sector need to be at the epicentre of a multi-pronged strategy.

One could quibble with much of the analysis, of course. The focus on education, while not completely without merit, is in many ways a distraction, an attempt to shift the debate to social mobility, as opposed to directly addressing inequality. We have to remember that it’s the actual size of our income gaps that are the problem, and you don’t change them by making it easier for people to move up and down the ladder.

Nonetheless, the research note is a striking demonstration of how central inequality has become to our public debate.

In fact, the note points very much to what we will see this year, and the ones after: lots of people talking about inequality, but many of them trying to divert the debate into related, but less important areas.

Damage to New Zealand’s economy makes inequality hard to ignore

For years now, one of the main reasons given for dismissing inequality as an issue has been about economics: you need income gaps to generate growth. Without a wide gap between rich and poor, who would have the incentive to work harder and do the things that generate income for everyone?

That argument, which had already looked flimsy, was dealt what looks like a final blow with the report out yesterday from the OECD, which found unequivocally that growing income gaps are bad for the economy.

New Zealand, which had the developed world’s biggest increase in inequality from the mid-1980s to the mid-2000s, has seen more economic damage than most. According to the OECD’s calculations, our economy grew about 30% in the last two decades – but it would have grown by 45%, or half as much again, if inequality had stayed at 1980s levels.

So the defences for inequality are falling rapidly. As the OECD report points out, the ‘trickle-down theory’ has already been pretty thoroughly discredited; the evidence of the last 30 years is that the income generated at the top tends to stay there, under the current settings. The OECD also rejects another argument in favour of inequality – that the standard remedy of tax and spending would hurt the economy – by saying explicitly that redistribution is good for the economy, if done well.

The OECD report could, of course, be challenged, and some economists were already asking last night where the detailed calculations were to back up its findings. But the report is hardly the first to make these points (though the most high-profile, and the most emphatic); and that makes it harder to ignore. Earlier this year, IMF researchers argued exactly the same thing, providing detailed evidence that more equal countries have better economic growth.

It’s not even a very counter-intuitive idea. After all – and this is broadly the point the OECD makes – if you have a society in which a large chunk of the population is starved of the resources it needs, the economic contribution of those people is unlikely to be huge.

When families lack the income they need to pay doctors’ fees and keep healthy, or to fix their car so they can travel to a new job, or to give their kids the equipment and clothes they need to succeed at school, it’s obvious that economic growth will suffer. You could argue that these are problems of poverty, not inequality, but really the two are inseparable; the reason some people have so little is that the fruits of economic growth are going largely to our richer citizens.

Of course, inequality matters for reasons that are far greater than economic growth. But the economy is paramount in the minds of many who still need to be convinced that growing income gaps are a problem. So this report – demolishing a key argument against inequality, backing redistribution, and pointing out New Zealand as the country worst affected – is a landmark one, and may represent the moment when inequality really became too big to ignore.

Bill English on housing and inequality

Bill English is quoted in the Herald today as saying, a propos of rising house prices and low house-building numbers:

It’s clear that the lowest-income households have been the most affected so our planning processes have probably done more to increase income inequality in New Zealand than most other policies and it does remain a challenge to make progress.

But while it is true that housing does have an impact on inequality, I’m not sure there’s evidence to justify that claim.

Rising housing costs are affecting people on low incomes, certainly. The international standard is that no one should spend more than 30% of their income on housing costs, otherwise there just isn’t enough left for other things. But the percentage of New Zealanders spending more than that on housing has risen from 11% in the 1980s to 27% now. Most of these will be the poorest New Zealanders.

So when you look at the figures on inequality produced every year by the Ministry of Social Development, it’s clear that housing costs do make inequality worse. But – and this is the real problem for English’s argument – inequality is already very high, and has risen hugely since the 1980s, even before housing costs are taken into account. It’s not at all the case that, if you took housing out of the equation, everything would be hunky-dory. In fact, the gaps caused by other things swamp the gaps caused by housing.

So it seems unlikely that New Zealand’s planning processes have “probably done more” to increase inequality than any other policies. Far more important factors, in my opinion, would include reduced taxes on top earners, lower benefits, weaker union bargaining power and the influence of globalisation and technology.

And, even if you think housing is driving inequality, it’s not clear that planning processes and councils are to blame. Well over 90% of resource consents are processed without any notification or anything else to slow them down. And council development charges make up a fraction of housing costs. The bigger problems are likely to be the fact that we have almost no firms that build more than 100 houses a year, so hardly anyone can get economies of scale to drive down prices; and local opposition (as I see locally in, say, Johnsonville) to building more in urban centres.

Wealth inequality

As a final note, English’s argument ironically points to facts that his opponents, notably Labour’s David Parker, want to stress.

One of the big things that has probably happened in the last decade is a major increase in wealth inequality, in terms of the assets that people own.

Fewer and fewer people own their own home; those who do have seen the value of those homes increase sharply. Since half of all our assets are held in the form of housing, this (along with other things) means that wealth inequality has almost certainly been increasing (although we haven’t been measuring, so it’s hard to be sure).

Anyway, this is the point that Parker makes every time English claims that inequality isn’t getting worse. Inequality of income may have been relatively flat in the last few years, but inequality of wealth probably hasn’t.

In other words, talking about housing as a contributor to inequality may not help English as much as he thinks it does.

New Zealand conforms to Piketty thesis, set for rising inequality

New Zealand is likely to face increased concentrations of wealth, inequality and power in the twenty-first century, according to newly assembled data.

Economist Geoff Bertram, in a lecture to the Institute for Governance and Policy Studies, where he is a senior associate, said data he had assembled showed New Zealand fitted the pattern of other countries set out in Thomas Piketty’s groundbreaking work Capital in the Twenty-First Century.

Noting that concentrated wealth and power among elites was the norm for non-capitalist societies, Bertram said Piketty’s work asked the question, ‘Are capitalist societies different?’ Piketty’s answer was an “essentially pessimistic” one, predicting the emergence and entrenchment of a wealthy capitalist elite across the major developed countries, though he did not present data for New Zealand.

Some wealth holders might originally have been entrepreneurs, but as their wealth accumulated, they rapidly became “rentiers”, earning profits simply by virtue of owning assets.

Piketty also showed that the level of wealth in a society, measured as a multiple of the income generated by that society in a given year, was determined by the economy’s savings rate divided by its growth rate.

This implied that the share of national income going to the wealthy was not determined by its “productive contribution” but was essentially fixed as a result of other variables.

Neo-classical economists had justified returns on assets by arguing that wealth contributed to productivity and economic growth, but Piketty’s data showed that wealth levels fluctuated hugely during the twentieth century without any apparent connection to growth rates. “The entire body of neo-classical growth theory has simply been parked out of the way,” Bertram said.

Piketty’s key insight was that standard savings and growth rates would tend to drive the level of wealth towards an equilibrium with a “very high” level of inequality. If the savings rate could be assumed to be 12% a year, and growth 2%, the level of wealth would stabilise at six times a country’s annual income – a figure similar to that seen in nineteenth-century Europe.

One key driver of this widening inequality was the fact that the rate of return on wealth was – with the exception of the mid-twentieth century – generally much higher than the growth of wages and salaries.

Neo-classical economists had argued that this effect would taper off, because as more wealth was amassed, the abundance of it would drive down its returns. However, this was not true if, as Piketty argued, accumulated wealth could displace labour “out of productive employment”, taking “a larger and larger piece of the action”.

And because so much wealth was held by “a subset of the population”, this would in turn drive widening income inequalities.

In New Zealand, income inequality had been relatively stable in the last decade, but this masked growing wealth inequality of the kind Piketty had identified, Bertram said.

A very large rise in income inequality from the mid-1980s to the early 2000s had translated into a concentration of wealth at the top, and Statistics New Zealand research showed poor households borrowed large amounts while wealthier households saved, exacerbating existing inequalities.

Data assembled by Bertram showed New Zealand’s stock of wealth following a similar pattern to the countries in Piketty’s work. In particular, it had risen sharply in the 2000s, as households had taken “a decade or so” after the sudden rise in income inequality to watch their balance sheets either improve or decline.

New Zealand’s wealth concentration was converging to the same level as those of the major world economies covered by Piketty, Bertram said. This was not surprising given that New Zealand’s economy was “as open as you can get” to foreign wealth, individuals and ideas. Also, the factors determining wealth inequality – such as the savings and growth rates – tended to become equalised in a globalised world.

This implied that local policymakers who had contributed to New Zealand’s increased inequality – including politicians such as Roger Douglas and Ruth Richardson – were merely “riding the wave” of growing world inequality. “[Local] institutions and policies matter, but they are countervailing forces, not the prime drivers.”