4 Empirical evidence on factors influencing the wage premium
In this section we describe empirical evidence on the factors affecting the gross earnings benefit. Where that is not possible we consider the earnings difference between skilled and unskilled labour as a proxy.
4.1 Endowment-related influences
4.1.1 Capital stock
Capital stock is likely to affect the earnings premium through its differential effect upon the marginal product of skilled and unskilled workers. Capital is generally considered a complement for skilled labour - increasing labour productivity of skilled labour and a substitute for unskilled labour.[19] Consequently, increased levels of capital utilisation in the economy can increase the productivity of skilled relative to unskilled labour, and widen the wage employment gaps, between skilled and unskilled labour.
A study by Krusell and Ohanian[20] estimated that the increase in the capital stock in the last 30 years explains 9% of the increase in the wage gap between skilled and unskilled workers in the United States. Hornstein and Krusell reached similar conclusions.[21]
The data on New Zealand's capital stock suggests that it may be low relative to comparable nations, although little research compares across the entire OECD, likely because of data limitations. Aggregate capital-to-labour ratios (Figure 5) suggest that New Zealand is about average.[22]
Prior research into the capital per hour worked has used 2002 data to show that New Zealand has low capital intensity relative to comparable, OECD nations.[23] The consistency of those results is striking and indicative of ‘capital shallowness'.
It is therefore possible that low capital intensity explains some of the gap in tertiary returns. However, caution should be used in interpreting these results since the effect on tertiary returns depends on the change in the composition of capital. The need for further investigation is confirmed by the fact that capital stock per person does not always play a key role in determining returns: for instance, countries with the lowest capital per worker, such as the United Kingdom and Portugal have some of the highest tertiary returns.[24]
Further research into the changing composition of New Zealand's capital stock would be required to confirm the importance of this link.
- Figure 5 – Capital-labour ratios
-
Note:
Source: Figure based on OECD data
(1) The capital is economy-wide capital stock volume; labour is employment.
(2) Countries where data is unavailable are not reported; Denmark and Sweden are excluded as outliers.
Notes
- [19]Krusell, Per, Lee E Ohanian, Jose-Victor Rios-Rull and Giovanni L Violante (2000), Capital-skill Complementarity and Inequality.
- [20]Krusell, Per and Lee E Ohanian (1997), Capital-skill Complimentary and Inequality: A MacroeconomicAnalysis.
- [21]Hornstein, Andreas, and Per Krusell (2003), Implications of the Capital-Embodiment Revolution for Directed R&D and Wage Inequality.
- [22]This measure includes residential housing and is not necessarily representative of the productive capital available to firms. However it is useful for triangulating results from other measures of capital inputs to production - all of which present difficult measurement issues requiring judgement and assumptions.
- [23]Dupuy, Max and James Beard (2008), Investment, Productivity and the Cost of Capital: Understanding New Zealand's ‘Capital Shallowness (TPRP 08/03) - The Treasury - New Zealand; Schreyer (2007), International Comparisons of Levels of Capital Input and Multi-Factor Productivity; Mason and Osborne (2007), Productivity, Capital-intensity and Labour Quality at Sector Level in New Zealand and the UK.
- [24]Research into the value of human capital stocks suggests that stocks of human capital are many orders of magnitude larger than the value of physical capital stocks. See eg, Le et al (2006). This, combined with the performance of other countries with low physical capital intensity suggests that capital intensity is not necessarily a central determinant of either economic performance or tertiary returns.
