5.2  Relative labour quality

In order to explore the impact of labour quality differences on relative productivity performance, estimates of relative skill levels have been derived on the basis of educational attainments and mean wage levels analysed by qualifications category in the UK and New Zealand for the period 1995 to 2004.  This is an experimental approach building on current work at NIESR which seeks to develop labour quality measures that are more closely related to worker productivity than standard measures of educational inputs such as average years of schooling.

Using data from the UK Labour Force Survey, we group UK qualifications into the following four categories in order to obtain estimates of mean wages by qualifications category at sector level:

1. First / Bachelor degrees and above
2. Other NVQ4 plus NVQ3 or equivalent, eg A levels (academic qualifications for 17-18 year old school-leavers and technician- and craft-level vocational qualifications  (NVQ = National Vocational Qualifications)
3. NVQ2 and NVQ1 or equivalent (relatively low-level qualifications associated with semi-skilled employment)
4. No qualifications

For New Zealand we use NZ Income Survey data to group New Zealand  qualifications into three categories in order to obtain similar estimates of mean wages by qualifications category:

1. Bachelor degrees and above
2. Post-secondary school qualifications below Bachelor level (for example, Trade certificates, Advanced trade certificates, NZ certificates or diplomas and local polytech diplomas)
3. No post-school qualifications

Since there is no obvious way to match qualification groups below graduate level between the two countries, we follow the approach outlined in Mason, et al (2006) of benchmarking on graduate-level qualifications (where comparability across countries is at its strongest), and then using ratios of mean wages in non-graduate categories to mean graduate wages in each country as indicators of labour quality differences between the respective categories.

In more detail, we create an indicator of relative quality-adjusted labour input L^q in industry i for two countries  j and k as follows, denoting the benchmark category of degree holders as h and the remainder of the workforce as o:

(7)    

where

(8)         and similarly for k,

and S_ih(j,k) is the average share of labour compensation paid to group h in industry i across the two countries; S_io(j,k)is the average of (1- S_ih) across the two countries; L_ih represents graduate-level labour input (hours worked) and L^*_io represents quality-adjusted non-graduate labour input where hours are weighted by the relative wage of non-graduate skill groups (w_p) to that of graduates (w_h). In this way, all non-graduate hours worked are calculated as ‘effective units of labour’ with a graduate base.

This is a relatively general model which has the advantage of allowing the relative marginal products across different qualification categories to vary across countries (as they may very well do in practice).

Two obvious underlying assumptions in this approach are (1) a broad similarity between countries in graduate-level productivity; and (2) that mean wage differentials between qualification categories reflect differences in the average productivity levels of persons classified to each qualification category. With regard to assumption (1), we argue that graduates are notably more mobile across national borders than those in other qualification groups and there is widespread acceptance by employers in New Zealand and the UK from overseas. Assumption (2) is consistent with the standard growth accounting assumption of perfectly competitive markets (in which a firm hires an additional hour of labour up to the point where that person’s marginal productivity equals his/her marginal cost). However, it makes no allowance for cross-country differences in labour market institutions such as minimum wage legislation and the role of trade unions in wage-setting. In spite of this shortcoming, we hope that the resulting measure of relative labour quality goes some way towards capturing variations in relative marginal products across different sub-graduate qualification categories in each country.

New Zealand-UK differences in the distribution of qualifications and in wage differentials in 2002 are shown in Table 8. Three things stand out in particular: (1) the higher graduate share of employment in the UK, 15% compared to 11% in New Zealand; (2) the smaller (38%) proportion of the New Zealand workforce with post-secondary school qualifications compared to 72% in the UK; (3) the relatively narrow wage differentials attached to holding degree-level qualifications rather than sub-degree qualifications or no post-school qualifications in New Zealand. This latter point could reflect relatively low returns to university study as compared to the UK or it could reflect relatively high returns to post-school work experience and (uncertified) training or a combination of both factors. Some part of the relatively high returns to ‘No post-school qualifications’ may also be due to the fact that this category includes academic qualifications attained by 17-18 year old school-leavers when they are the highest qualification attained by the individuals concerned whereas equivalent UK school-leaving qualifications such as A levels are included in the NVQ3 category in the UK.

Using this information on employment shares by qualification group and qualification-related wage differentials, we derive a measure of relative labour quality which shows New Zealand to be approximately 7% higher than the UK across total market sectors in 2002 but on a declining trend from a 10% lead in 1998 to only 2% in 2004 (Table 9). This progressive decline in the estimated labour quality differential reflects a continued reduction in the employment share of workers lacking formal qualifications in the UK coupled with a decline towards the end of the period in sub-graduate pay differentials in New Zealand (see Appendix Section A3).

 

Table 8 - Employment shares and relative wage ratios, aggregate market sectors, New Zealand and UK, 2002

	Employment shares (%)		Ratio of mean wages to mean graduate wages
	UK	NZ	UK	NZ
Graduates	15	11	1.00	1.00
NVQ 3-4 (UK)	37		0.66
Post-secondary school qualifications below Bachelor level (NZ)		38		0.72
NVQ 1-2 (UK)	35		0.53
No post-school qualifications (NZ)		51		0.59
No qualifications (UK)	12		0.46
TOTAL	100	100

Sources: Derived from UK Labour Force Survey and the NZ Income Survey. See notes to Table 11 for further details. 

However, a caveat needs to be entered about the estimates of qualification shares of employment in New Zealand which have been derived from the NZ Income Survey (NZIS).  Data from the NZ Census of Population and Dwellings for 2001 point to the following, rather different employment shares in aggregate market sectors: Graduates 11%, Post-school qualifications below Bachelor level 22%; No post-school qualifications 67%. If these Census employment shares were applied to the NZIS wage data, then the estimated New Zealand lead in average labour quality in 2002 would be approximately halved and by 2004 it would disappear.

On the advice of Statistics NZ (discussed further in Appendix Section A3), we regard the NZIS data as more reliable but clearly the discrepancy between the two sources adds to the uncertainty attached to our estimates of labour quality. In addition to the data uncertainties, it is also of concern that mean annual pay for New Zealand graduates in 2002, converted to US dollars at GDP PPP exchange rates, was roughly a third below mean graduate pay in the UK. Clearly, a detailed analysis of graduate salaries in the two countries is beyond the scope of this report; however, if New Zealand graduates are typically low paid by international standards, this could contribute to relatively narrow pay differentials between graduates and non-graduates in New Zealand, thus artificially raising New Zealand labour quality according to the measure we have adopted. We therefore continue to use this measure in this report with some reservations.

Table 9 suggests considerable variation between sectors in measured labour quality with the New Zealand skills index ranging from 95% of the UK level in mining up to 14-15% above the UK level in textiles and clothing, wholesale, transport and communications. Since Mason et al (2006) found the UK to be lagging behind the US, France and Germany by 2-5 pp on a similar measure of relative labour quality, we conclude that, on this measure at least, average labour quality in New Zealand compares favourably with the other three countries (see Appendix Table A6).

In summary, the measured labour quality gap between New Zealand and the UK represents the net outcome of two main phenomena noted above, that is, the higher employment shares of persons holding certified qualifications in the UK and the relatively high returns to sub-graduate qualifications and uncertified experience and training in New Zealand. In spite of our reservations, our labour quality measure does seem to capture potentially interesting contrasts in skills formation between the two countries which are worthy of further investigation.

Table 9 - Relative labour quality worked in market sectors, New Zealand/UK, 1995-2004 (Index numbers: UK=1.00)

 

SIC	Sector	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004
SIC	Sector	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004
AA, AB, AC	Agriculture, forestry and fishing	1.18	1.18	1.18	1.18	1.14	1.14	1.15	1.11	1.08	1.07
BA	Mining	1.05	1.06	1.03	1.04	1.00	1.00	0.97	0.95	0.90	0.93
CA	Food, beverage and tobacco manufacturing	1.20	1.18	1.21	1.18	1.07	1.07	1.09	1.11	1.14	1.13
CB	Textile and apparel manufacturing	1.24	1.21	1.26	1.25	1.10	1.10	1.10	1.15	1.16	1.14
CC	Wood and paper product manufacturing	1.21	1.18	1.22	1.18	1.10	1.10	1.09	1.13	1.15	1.14
CD	Printing, publishing and recorded media	1.13	1.12	1.13	1.12	1.01	1.01	1.00	1.04	1.08	1.07
CE	Petroleum, chemical, plastic and rubber product manufacturing	1.14	1.13	1.16	1.13	1.02	1.02	1.02	1.04	1.08	1.07
CF	Non-metallic mineral product manufacturing	1.18	1.18	1.21	1.20	1.08	1.08	1.10	1.11	1.15	1.14
CG	Metal product manufacturing	1.19	1.17	1.20	1.19	1.07	1.07	1.06	1.09	1.14	1.12
CH	Machinery and equipment manufacturing	1.16	1.14	1.17	1.15	1.04	1.04	1.03	1.06	1.11	1.10
CI	Furniture and other manufacturing	1.19	1.19	1.22	1.18	1.08	1.08	1.07	1.13	1.15	1.14
DA	Electricity, gas and water supply	1.13	1.12	1.10	1.11	1.11	1.11	1.13	1.12	1.07	1.06
EA	Construction	1.11	1.10	1.10	1.10	1.10	1.10	1.11	1.09	1.06	1.03
FA	Wholesale trade	1.15	1.15	1.14	1.14	1.13	1.13	1.15	1.14	1.11	1.06
GA	Retail trade	1.14	1.15	1.14	1.14	1.15	1.15	1.16	1.13	1.09	1.06
HA	Accommodation, restaurants and bars	1.18	1.17	1.16	1.16	1.17	1.17	1.17	1.15	1.11	1.07
IA	Transport and storage	1.14	1.15	1.15	1.15	1.15	1.15	1.16	1.14	1.11	1.08
JA	Communication services	1.16	1.15	1.15	1.14	1.14	1.14	1.15	1.14	1.11	1.08
KA	Finance and insurance	1.09	1.10	1.08	1.06	1.07	1.07	1.09	1.07	1.04	1.02
LC	Business services	1.08	1.07	1.05	1.05	1.04	1.04	1.06	1.05	1.03	1.03
PA	Cultural and recreational services	1.11	1.12	1.12	1.12	1.10	1.10	1.11	1.10	1.07	1.05
	Total market sectors	1.10	1.10	1.11	1.10	1.08	1.08	1.08	1.07	1.04	1.02

Notes:   All estimates are for calendar years. UK estimates are derived from Labour Force Surveys 1995-2004. NZ estimates of employment shares by qualification group at sector level are derived from NZ Income Survey data at a relatively high level of sectoral aggregation with more disaggregated sectoral estimates based on NZ Census data for 1996 and 2001. Since NZIS data were only available for 1997-2004, the estimated series was then backdated to 1995 on the basis of rates of change between 1997-99. Estimates of qualification-related wage differentials for full-time workers were derived for aggregate manufacturing and aggregate market services in each country and then used to weight employment shares by qualification group in relevant sectors; for agriculture, mining, utilities and construction, employment shares were weighted by the wage differentials for aggregate market sectors.  See Appendix Section A3 for further details.