Save the date: September 7 – Policy Forum on Higher Education Funding

I am organising a policy conference on the above topic to be held at the RIA on Dawson Street from 9.30-12.30 on Thursday, September 7.

The main focus will be on the potential role of income-contingent student loans in HE funding.

The morning will begin with short presentations by five speakers, including Bruce Chapman (Australian National University), Lorraine Dearden (Institute for Fiscal Studies and University College London), Charles Larkin (Trinity College), Senator Aodhan O Riordain (to be confirmed) and myself. This will be followed by a 60-90 minute discussion session. The event will be chaired by Frances Ruane (ESRI).

I’ll post a detailed programme here when it’s finalized.

Update: Senator O Riordain has confirmed and the final programme is available here.

Recent Research on Income-Contingent Student Loans

(This is a joint post with Darragh Flannery of UL and Kevin Denny of UCD).

Income-contingent loans (ICLs) for students were one of the options proposed by the Cassells Report on Future Higher Education Funding when it was published last year (see here). The topic has been back in the news again in recent weeks because of the dissemination of a paper[1] by Shaen Corbet and Charles Larkin, which claims to show that an ICL could not work in Ireland.

Two of us (Doris and Flannery) have done research directly in the area of ICLs – indeed Doris’s research ended up being used by the Cassells Expert Group to provide illustrations of how an ICL might work in Ireland. We both found, using different data sets and different ICL parameters (income thresholds, repayment rates etc.) that the discounted value of loan repayments would be about 75% of the loan values, even when accounting for graduate emigration.[2] Under these repayment rates, there would be no problem operating an ICL in Ireland.

The third poster (Denny) has written papers on the determinants of participation in higher education (HE), the returns to education and related topics and so has a strong research interest in the effects of funding on access to HE.

We were all surprised by the reports of Larkin and Corbet’s results and so went off to read the paper. This had added interest as the research appears to be influencing policy makers.  Given this context and with apologies for the length of the post, we have decided to make our assessment of it public.

Continue reading “Recent Research on Income-Contingent Student Loans”

Future Funding of Higher Education Conference: Presentations Now Available

A conference on the Future Funding of Higher Education in Ireland was held in Maynooth University on Wednesday last. It was a very good day, with excellent speakers and great interaction between the audience and the speakers.

The presentations have now been posted online, and are available here.

Save the Date: September 30 Conference on Higher Education Funding in Maynooth

On Wednesday, September 30, we are holding a one-day conference on ‘Higher Education Funding: Drawing on the International Experience’ in Maynooth.

The context for this conference is the debate on how to fund higher education in Ireland. In 2014, the Minister for Education established an Expert Group on Future Funding for Higher Education, and the motivation for the conference is to inform the discussion about the choice of funding options available; we have a particular interest in the interaction between funding mechanisms and differential access to higher education along socioeconomic lines.

International speakers include Sara Goldrick-Rab of the University of Wisconsin-Madison, who has written extensively on the issue of higher education funding in the US; Claire Crawford of Warwick University and the IFS, who has written several detailed analyses of the UK system; and Bruce Chapman of the Australian National University, whose name is particularly associated with income-contingent student loans, both in terms of his academic research and his role as policy advisor to many governments.

Local speakers include Rory O’Donnell of NESC and Delma Byrne of Maynooth University.

The conference will be open to all. I’ll post further details here in the coming weeks.

Update: Full details are now available here.

Labour Markets During Crises Conference

The Labour Economics Group at NUI Maynooth is hosting a one-day conference on Labour Markets During Crises on Wednesday, July 2 in Maynooth.

Olive Sweetman will be presenting our ongoing work on how the crisis has affected the Irish labour market, and we’ve got a great line-up of external speakers too: Torben Andersen from the University of Aarhus, Pedro Martins from Queen Mary College, University of London, Mike Elsby from the University of Edinburgh and Ignacio Garcia Perez from Seville’s Universidade Pablo de Olavide. Full details are available here.

As it says on the flyer, registration is free, but you should email me if you plan to attend.

Wage Flexibility in Ireland

Donal O’Neill, Olive Sweetman and I have been working on the issue of wage flexibility in Ireland, and have put our initial results into a working paper. Here’s the abstract:

There is considerable debate about the role of wage rigidity in explaining unemployment. Despite a large body of empirical work, no consensus has emerged on the extent of wage rigidity. Previous attempts to empirically examine wage rigidity have been hampered by small samples and measurement error. In this paper we examine nominal wage flexibility in Ireland both in the build up to, and during the Great Recession. The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. Our main analysis is based on earnings data for the entire population of workers in Ireland taken from tax returns, which are free of reporting error. We find a substantial degree of downward wage flexibility in the pre-crisis period. We also observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than doubled and the proportion receiving wage freezes increased substantially. However, there is considerable heterogeneity in wage changes, with a significant proportion of workers continuing to receive pay rises at the same time as other were receiving pay cuts.

The full paper is linked here.

Edit on December 17: link changed to working link

The Costs of Working in Ireland Again

(This is a joint post with Donal O’Neill (NUIM) and Frank Walsh (UCD))

Because of the media storm last week about the Tol et al. paper on working costs, myself and a few colleagues (separately) decided to read the paper to see what all the fuss was about. We are all labour economists, used to using data on individuals, households and firms to address questions relevant to public policy issues. Our assessment of the paper is below.

The basic approach of the paper is as follows: it uses Household Budget Survey (HBS) data to examine the consumption patterns of different types of households. HBS data is collected at the household, rather than the individual level so the analysis distinguishes between households whose chief earner is employed and those whose chief earner is not employed. In particular, it examines the consumption patterns of these two household types under four headings: transport, childcare, heat & light, and takeaway food. To the extent that the amount spent by these households differ, the difference is designated a cost of working.

Continue reading “The Costs of Working in Ireland Again”

Tax Breaks for Job Creators

Stephen Collins reports that ‘project champions’ and their teams will be given large tax breaks to incentivize them to come to Ireland to set up projects that entail ‘new product development’.

Is this a good idea? Anyone know of any empirical evidence on the effectiveness of these types of tax breaks (assuming that they exist elsewhere)?

Denis Conniffe, RIP

For those who haven’t heard the sad news, Denis died on January 20. He worked for many years in the ESRI and then, in his ‘retirement’, in NUI Maynooth and UCD. He was a brilliant statistician and a real giant of the Irish Economics world. He was always generous in sharing his knowledge with colleagues, particularly the PhD students with whom he worked. He was also encyclopaedic on local and military history, and an avid hill-walker. He will be greatly missed.

Distribution of Pain

In a comment on another post, Declan Fallon raises some interesting issues about the distribution of forthcoming pain. I thought it might be interesting to tease this out a bit more.

Most of the debate about the incidence of the fiscal adjustment has focussed on the public/private sector divide and, to a (regrettably) lesser extent on the insider/outsider (i.e. employed vs. unemployed) divide. However, there is certainly a demographic aspect to this. For example, after the medical card debacle, pensioners seem to be guaranteed immunity from the adjustment – one of the reasons for implementing the public sector pay cut as a pension levy rather than a pay cut was to protect the pensions of current pensioners; and, as Philip Lane mentioned at Monday’s conference, this protection is likely to extend to the budget. But it seems certain that child benefits will be further cut. Does this make sense?

As Declan emphasizes, children are not pure consumption goods; if they were, then the only argument against cutting payments in respect of children would be the particular necessity of keeping children out of poverty, in which case cutting child benefit – at least to the middle classes – would make perfect sense. But children are effectively investments too; they have long term economic value. It is in the public interest for citizens to produce children. So if putting the burden of the adjustment on parents has the effect of reducing fertility, the long-run negative effects may cause us to regret it. Continue reading “Distribution of Pain”

Where are the Wage Cuts?

Q1 Earnings data were published by the CSO ten days ago, and I’ve only just got around to having a look at them. The data refer only to Industry (Manufacturing, Mining & Utilities) and Financial Intermediation; the new Earnings, Hours and Employment Costs Survey on which these data are based also collects for Construction and Distribution and Business Services, but data on these sectors haven’t been published yet, so the most up to date figures for these refer to December 08.

I went to look at the data because I had a hunch that earnings cuts were being driven by flat hourly pay and falling hours.

I was concerned about this as it seems to me that hourly earnings are more important than weekly earnings for competitiveness – where hours of work have been cut, and earnings have fallen only for this reason, we should see this being reversed if and when demand picks up again, so this won’t result in a long term improvement. (It is possible that the recession has allowed employers to reduce overmanning/featherbedding and that this will be a permanent effect on productivity, but I doubt if that’s the main story.) 

In any case, I was wrong: the flat pay just doesn’t seem to be there. In fact, the short answer to the question in the title is: in Financial Intermediation and Mining. Everywhere else, there are wage rises.

For industrial workers, average hourly earnings rose by 5.9% from Q108 to Q109. This figure includes bonuses and overtime payments. Weekly hours fell by 2.4%, though, so the increase in average weekly earnings was just 3.4%. Within industrial workers, weekly earnings of those in Mining fell by 8.1%, but this was entirely due to a fall in hours of work, with hourly wages actually rising by 1.5%.

Within Industry, a breakdown by occupational category is also given. Managers & professionals’ hourly pay rose by 3.5%, and their weekly pay by 2.9%; Production workers’ hourly pay rose by 5.2%, weekly by 1.2%; only Clerical workers’ pay has fallen – the hourly figure is down by 0.9%, and the weekly is down by 1.2%. Interestingly, the reason the headline figure – the +5.9% I mentioned above – is higher than any of these occupational category components is because of a pretty big shift in the composition of workers –  the number of Production workers has fallen by 12.3% whereas the number of Managers has risen by 2.1% and the number of clerical workers by 1.9%. So the proportion of chiefs has risen.

For Financial Intermediation, average earnings have fallen, and all the action is in bonuses. Hourly base wages have actually risen by 5.4%, but bonuses fell by 65% between Q108 and Q109. The average bonus was 30.6% of base salary in Q108 but ‘only’ 10.1% in Q109. Because of the collapse of bonuses (relatively speaking – the average industrial worker got a bonus of 7.4% of base pay in Q109), average total hourly earnings fell by 11.1% and average weekly earnings fell by 12.7%.

As I mentioned, CSO hasn’t published the Q109 figures for Construction or Services yet. But the figures for Q408 compared to Q407 showed that while average weekly pay in Construction was down 2.4%, average hourly pay was up 2.3%; and in Services, weekly earnings were up 3.1% between December 07 and December 08. No hourly figures are given.

It all seems a far cry from the heady days of April, when very large nominal pay cuts in the private sector were being discussed in the media. In a post on this blog, Colm McCarthy tentatively concluded, on the basis of some private surveys, that “[B]earing in mind the different periods covered, it looks as if the private sector pay cut overall, allowing for the small number paying increases and the larger number of freezers, has already reached 6 or 7%”. I was sceptical, but thought that 3% was quite likely.

Is it the case that Industry alone is escaping pay cuts and that when the Q1 figures come out for Construction and Services, the numbers will add up to substantial nominal cuts? Or were we just dreaming? Did we just want to believe that Irish workers were proving very amenable to the kind of cuts needed to improve competitiveness? Or is there some other detail of the data that I’m not appreciating that’s masking the truth?

Incentive Effects of Taxing High Earners

In a recent post, Patrick Honohan raised the issue of what a sustainable tax system would look like, and in a follow up to that post, discussed whether a goal of keeping low income workers out of the tax net implied, with the current tax revenue requirement, tax rates on other earners that were so high as to have serious disincentive effects. In the ensuing discussion, John McHale suggested that I was being too sanguine about the incentive effects at the top of the distribution and helpfully pointed me towards a literature that I wasn’t familiar with, on the tax rate elasticity of taxable income, and particularly to a paper by Gruber and Saez (J.Pub.Econ., 2002), which finds an average elasticity of 0.4, with higher elasticities for high earners.

There are two reasons why we should be worried if income elasticities for this group are so high. First, a pragmatic one: it suggests that revenue will rise relatively little if we increase tax rates on this group. Second, a more worrying one: this group contains the job creators; if they’re discouraged from taking the risks and reduce their labour market effort, then there are far bigger knock-on effects in jobs that would have been created with lower tax rates, but now won’t be. The latter concern dominates much of the discussion on this matter – see, for example, Greg Connor’s comment here 

And so, an elasticity of 0.4 would indeed have to cause a rethink on my part. So I went off to read the paper.  

The paper is fascinating. It does indeed find an elasticity of taxable income to marginal tax rates of 0.4, with an even higher elasticity of 0.57 for high earners. (Note to explain the counter-intuitive sign: this is actually an elasticity wrt the net-of-tax rate, i.e. if the marginal rate goes up by 1%, so that the net-of-tax rate goes down by 1%, this causes a 40% decrease in income). But the elasticity of ‘broad’ income – income before tax exemptions are taken out – is much lower; it is 0.12 on average, and 0.17 for high earners. The bulk of the difference between these two elasticities is due to changes in what the authors call ‘itemization behaviour’ – in other words, tax avoidance. This point is reinforced by several other analyses in the paper.

One of the two policy conclusions drawn is that 

“[t]he large elasticities that we observe are driven by ‘holes’ in the tax base that allow taxpayers, particularly at higher income levels, to reduce their tax burdens. With a broader tax base we would distort behavior less and could therefore raise revenues more efficiently.” 

[The second is that concern about the distorting impact of high implicit tax rates in the $10k-$50k income range due to changes in effort (hours) “…may be overblown”, and that attention should instead be paid to incentives that reward participation rather than marginal increments to hours worked.]

So the paper’s message is (i) that the effect on (potentially job-creating) effort by high fliers of increasing tax rates is not zero, but is not high and (ii) that getting rid of tax write-offs should be a priority, particularly if marginal rates on high earners are to be raised.