% of workforce employed by large firms across the OECD

It is claimed that New Zealand lacks large firms, that “New Zealand has one very large firm – Fonterra – and a long tale of large to mid-sized firms”. The percentage of the workforce employed by large firms in New Zealand is in the middle of the pack. It is not in any way an outlier.


Source: Entrepreneurship at a Glance 2015 – OECD 2015.

A hurdle to cross-national comparisons of firm size distribution is the number of small firms will fall and the number of large firms will rise with increases in real wages (Lucas 1978; Poschke 2013; Gollin 2008; Eeckhout and Jovanovic 2012). Nations that are more productive than New Zealand have higher wages because they have accumulated more capital per worker. One consequence of more capital per worker is real wages increase at a faster rate than profits (Gollin 2008; Eeckhout and Jovanovic 2012). For example, the rate of return on capital was stable over the 20th century while real wages increased many fold (Jones and Romer 2010).

Higher wages reduces the supply of entrepreneurs and increases the average size of firms because entrepreneurship becomes a less attractive occupational choice (Lucas 1978; Gollin 2008; Eeckhout and Jovanovic 2012). For example, in the mid-20th century, many graduates who were not teachers were self-employed professionals. With an expanding division of labour because of economic growth, many well-paid jobs and new occupations emerged for talented people in white-collar employment.

OECD countries richer than New Zealand should have less self-employment and more firms that are large because paid employment is an increasingly better-rewarded career option for their high skilled workers. The U.S. had the second lowest share of self-employed workers (7 percent) in the OECD in 2010 – the latest data – which is less than half the rate of New Zealand self-employment (16.5 percent) in 2011 (OECD 2013). The Australian self-employment rate was 11.6 per cent in 2010 (OECD 2013).

A companion reason for larger average firm sizes in countries richer than New Zealand is more capital-intensive production can prosper in larger corporate hierarchies than can labour-intensive production (Lucas 1978; Becker and Murphy 1992; Poschke 2011; Eeckhout and Jovanovic 2012).

The more able entrepreneurs can run larger firms with bigger spans of control in richer countries because their employees can profitably use more capital per worker with less supervision. The diseconomies of scale to management and entrepreneurship should rise at a faster rate in less technological advanced countries such as New Zealand because they are more labour intensive economies (Lucas 1978; Becker and Murphy 1992; Poschke 2011; Eeckhout and Jovanovic 2012).

Importantly, the more able entrepreneurs benefit most from introducing frontier technologies because they can deal more easily with their increased complexity and more uncertain prospects (Poschke 2011; Lazear 2005; Shultz 1975; 1980). Growing technological complexity reduces the supply of entrepreneurs because it takes longer to acquire the necessary balance of skills and experience needed to lead a firm (Lazear 2005; Otani 1996).

The more marginal entrepreneurs will switch to be employees as technology advances so the average size of firms will increase. The entrepreneurs that remain in business will be the most able, more skilled and more experienced entrepreneurs and will be more capable of running larger firms that pioneer complex, frontier technologies (Poschke 2011; Lazear 2005, Otani 1996; Lucas 1978). Countries more technologically advanced than New Zealand will have both larger firms and less self-employment because of growing technological complexity.

The greater is the exposure to foreign competition, the smaller is the fraction of self-employed and small firms in a country (Melitz 2003; Díez and Ozdagli 2012). More foreign competition increases wages because of lower prices, which makes self-employment less lucrative. More exporting favours larger firms both because of the fixed costs of entering export markets and because the stiffer competition will weed-out the lower ability entrepreneurs who run the smaller firms (Melitz 2003; Díez and Ozdagli 2012). Countries that export more than New Zealand also will have larger firms.

Average firm sizes are often larger is richer countries because of their high labour productivity and higher wages rather than labour productivity is low in New Zealand because average firm sizes are smaller. Other factors can countermand the effects that occupational choice, frontier technologies, exporting and capital intensity have to increase the average size of firms as real wages rise. This makes comparisons of firm size distributions are even more fraught with institutional complexities.

Tax and regulatory policies appear to reduce the average size of firms in many EU member states to levels that are similar to New Zealand. A nuance in international comparisons of firm size distributions is the EU is less likely to have large firms in its labour intensive sectors. Employment protection laws, product market and land use regulation and in particular, high taxes stifled the growth of labour intensive services sectors in the continental EU (Bertrand and Kramatz 2002; Bassanini, Nunziata and Venn 2009; Rogerson 2008).

EU firms are a biased sample. Their firms are more capital intensive with fewer employees than otherwise because labour is so expensive to hire in the EU. Small and medium sized firms can struggle to grow in much of the EU because of regulatory burdens that phase in with firm size (Garicano, Lelarge and Van Reenen 2012; Hobijn and Sahin 2013; Rubini, Desmet, Piguillem and Crespo 2012). Average firm sizes are 40 percent smaller in Spain and Italy than in Germany. Obstacles to firm growth originate in product, labour, technology and financial and the binding constraints differ from one EU member state to another (Rubini, Desmet, Piguillem and Crespo 2012).

Bartelsman, Haltiwanger, and Scarpetta (2009) found that the USA had a very high proportion of above-average sized firms. Western Europe had smaller firms in most industries with one of the exceptions in low-tech UK industries. Apart from the USA, they could not map differences in firm size against the overall size of the country, the technology levels of an industry, or its degree of maturity.

Another confounding factor is the average number of employees in firms with 500 or more employees in France and New Zealand is similar: 1667 and 1593 respectively (Mills and Timmins 2004; Hobijn and Sahin forthcoming). Preferring the UK over France as the benchmark for very large firms calls for a detailed analysis of Anglo-French institutional differences. This defeats the very purpose of the simple statistical comparisons undertaken to date. These simple cross-national statistical comparisons presuppose relatively common economic drivers and institutional backgrounds. If that is not so, a detailed institutional analysis is required before cross-national comparisons are possible. Bartelsman, Haltiwanger, and Scarpetta (2009) suggest that cross-national comparisons of firm dynamics and firm size distribution are subject to substantial definitional and measurement problems and no one measure will capture properly the many institutional and regulatory differences.

Average firm sizes in the USA and UK may be larger because of fewer tax and regulatory policies that limit business growth. Bartelsman, Scarpetta and Schivardi (2005) found that new entrants in the U.S. started on a smaller scale than in Europe but grew at a much higher rate. This willingness to experiment on a smaller scale was worth the risk because the payoff was much larger in terms of growth in the more flexible U.S. markets.


Milton Friedman explains the public choice error

Adam Smith on picking winners


Adam Smith on export promotion @stevenljoyce


Chinese birth and death rates and the Chinese population since 1950


Did the New Zealand film industry just eat our lunch? By Jason Potts

James Cameron is going to film the next three instalments of the Avatar franchise in New Zealand. He promises to spend at least NZ$500 million, employ thousands of Kiwis, host at least one red-carpet event, include a NZ promotional featurette in the Avatar DVDs, and will personally serve on a bunch of Film NZ committees, and probably even bring scones, all in return for a 25% rebate on any spending he and his team do in the country (up from a 20% baseline to international film-makers) that is being offered by the New Zealand Government.

The implication that many media reports are running with is that this is a loss to the Australian film industry, that we should be fighting angry, and that we should hit back at this brilliantly cunning move by the Kiwi’s by increasing our film industry rebates, which currently are about 16.5% (these include the producer and location offsets, and the post, digital and visual effects offset) to at very least 30%. These rebates cost tax-payers A$204 million in 2012, which hardly even buys you a car industry these days.

So what are the economics of this sort of industry assistance? Is this something we should be doing a whole lot more of? Was the NZ move to up the rebate especially brilliant? First, note that James Cameron has substantial property interests in New Zealand already, so this probably wasn’t as up for grabs as we might think. But if that’s how the New Zealand taxpayers want to spend their money, that’s up to them. The issue is should we follow suit?

The basic economics of this sort of give-away is the concept of a multiplier “”), which is the theory that an initial amount of exogenous spending becomes someone else’s income, which then gets spent again, creating more income, and so on, creating jobs and exports and all sorts of “economic benefits” along the way.

People who believe in the efficacy of Keynesian fiscal stimulus also believe in the existence of (>1) multipliers. Consultancy-based “economic impact” reports do their magic by assuming greater-than-one multipliers (or equivalently, a high marginal propensity to consume coupled with lots of dense sectoral linkages). With a multiplier greater than one, all government spending is magically transformed into “investment in Australian jobs”.

So the real question is: are multipliers actually greater-than-one? That’s an empirical question, and the answer is mostly no. (And if you don’t believe my neoliberal bluster, the progressive stylings of Ben Eltham over at Crikey more or less make the same point.)

But to get this you have to do the economics properly, and not just count the positive multipliers, but also account for the loss of investment in other sectors that didn’t take place because it was artificially re-directed into the film sector, which no commissioned impact study ever does.

This is why economists have a very low opinion of economic impact studies, which are to economics what astrology is to physics.

What does make for a good domestic film industry then? Look again at New Zealand, and look beyond the great Weta Studios in Wellington, for Australia and Canada both have world-class production studios and post-production facilities. Look beyond New Zealand’s natural scenery, for Vancouver is an easy match for New Zealand and Australia pretty much defines spectacular.

No, the simple comparison is that New Zealand is about 20% cheaper than Australia and 30% cheaper than Canada. New Zealand has lower taxes, easy employment conditions and relatively light regulations (particularly around insurance and health and safety). It’s just easier to get things done there.

If Australia really wants to boost its film industry, it might look more closely at labour market restrictions (including minimum wages) and regulatory burden and worry less about picking taxpayer pockets and bribing foreigners.

This article was originally published on The Conversation in December 2013. Read the original article. Republished under the a Creative Commons Attribution No Derivatives licence.

Chinese and Hong Kong fertility since the one child policy was adopted

Did government pick the Internet as a winner? @stevenljoyce @dpfdpf

@NZGreens @TransportBlog cars rule in Auckland! Auckland commuting times by transport mode

I am not surprised only 7% of Auckland’s take public transport to work considering it takes much longer than any other form of commuting.


Source: New Zealand Household Travel Survey: Travel to work, by main urban area results (3-year moving average).

The average commute by public transport is 40 minutes as compared to less than 25 in a car. 74% of Aucklanders drive to work and another 9% are a passenger in a car.


Source: New Zealand Household Travel Survey: Travel to work, by main urban area results (3-year moving average).

No information was available on those who bike to work because only 1% of Aucklanders bike to work. Only 2% of all New Zealanders take a bike to work. The sample size was therefore too small. Yet another reason to ban bikes at night. Few commute on this mode of transport in Auckland.

The near identical commuting distances irrespective of the mode of transport except walking is further evidence that people are quite discerning in balancing commuting times and job selection as per the theory of compensating differentials. Indeed, average commuting times in Auckland are much the same as the average commuting time in America.

The Auckland transport data showing people commute much the same distance by any mode of transport bar walking also validates Anthony Downs’ theory of triple convergence.

Improving the commuting times in one mode of transport will mean people simply take the mode of peak hour transport that is suddenly become less congested while others who were not going to commute at peak times or start commuting at peak times as Anthony Downs explains:

If that expressway’s capacity were doubled overnight, the next day’s traffic would flow rapidly because the same number of drivers would have twice as much road space.

But soon word would spread that this particular highway was no longer congested. Drivers who had once used that road before and after the peak hour to avoid congestion would shift back into the peak period. Other drivers who had been using alternative routes would shift onto this more convenient expressway. Even some commuters who had been using the subway or trains would start driving on this road during peak periods.

Within a short time, this triple convergence onto the expanded road during peak hours would make the road as congested as it was before its expansion.

Best 2 Minimum Wage Cartoons

Over-qualification rates in jobs in the USA, UK and Canada

In the UK, foreign-born are much more likely to be over qualified than native born highly educated not in education with less difference between men and women. More men than women are overqualified for their jobs in the UK. Over qualification is less of a problem in the UK than in the USA and Canada.


Source: OECD (2015) Indicators of Immigrant Integration 2015: Settling In.

In the USA and Canada, there are few differences between native and foreign born men in over-qualification rates. Foreign-born women tend to be more over-qualified than native born women in the USA  and more so in Canada. Many more workers are overqualified for their jobs in the USA and Canada as compared to the UK.

There are large differences in the percentage of people with tertiary degrees and the education premium between these three countries that are outside the scope of this blog post. These trends may explain differences in the degree of educational mismatch.

It goes without saying that the concept of over-qualification and over-education based mismatch in the labour market is ambiguous, if not misleading and a false construct.

To begin with, under human capital theories of labour market and job matching, what appears to be over-schooling substitutes for other components of human capital, such as training, experience and innate ability. Not surprisingly,  over-schooling is more prominent among younger workers because they substitute schooling for on-the-job training. A younger worker of greater ability may start in a job below his ability level  because he or she  expects a higher probability to be promoted because of greater natural abilities. Sicherman and Galor (1990) found that:

overeducated workers are more likely to move to a higher-level occupation than workers with the required level of schooling

Investment in education is a form of signalling. Workers invest so much education that they appear to be overqualified  in the eyes of officious bureaucrats. The reason for this apparent overinvestment  is signalling superior quality as a candidate. Signalling seems to be an efficient way of sorting and sifting among candidates of different ability. The fact that signalling survives in market competition suggests that alternative measure ways of measuring candidate quality  that a more reliable net of costs are yet to be discovered.

Highly educated workers, like any other worker, must search for suitable job matches. Not surprisingly, the first 5 to 10 years in the workforce are spent in half a dozen jobs as people seek out the most suitable match in terms of occupation, industry and employer. Some of these job seekers who are highly educated will take less suitable jobs while they search on-the-job for better matches. Nothing is free or instantly available in life including a good job match.

A more obvious reason for over qualification is some people like attending university and other forms of education for the sheer pleasure of it.

Anyone who encounters the words over-qualified and over-educated should immediately recall concepts such as the pretence to knowledge, the fatal conceit, and bureaucratic busybodies. As Edwin Leuven and Hessel Oosterbeek said recently:

The over-education/mismatch literature has for too long led a separate life of modern labour economics and the economics of education.

We conclude that the conceptional measurement of over-education has not been resolved, omitted variable bias and measurement error are too serious to be ignored, and that substantive economic questions have not been rigorously addressed.

On the inefficiency of fuel efficiency standards

If Someone Replaced Your Car with a Prius, Would You Drive More?

Pope Francis Needs a Better Role Model for Economic Policy

International Liberty

What’s the greatest economic tragedy in modern history?

The obvious answer is communism, which produced tens of millions of needless deaths and untold misery for ordinary people. Just compare living standards in North Korea and South Korea, or Chile and Cuba.

But if there was a second-place prize for the world’s biggest economic failure, Argentina would be a strong contender.

Here’s one fact that tells you everything you need to know. In 1946, when Juan Perón came to power, Argentina was one of the 10-richest nations in the world. Economic policy certainly wasn’t perfect, but government wasn’t overly large are markets generally were allowed to function. Combined with an abundance of natural resources, that enabled considerable prosperity.

But Perón decided to conduct an experiment in statism.

Here’s how Wikipedia describes his economic policy.

Campaigning among workers with promises of land, higher wages, and social security, he won…

View original post 630 more words

Analysing environmental benefits from driving electric vehicles

  • The benefit is large and positive in many places in the west because the western electricity grid is relatively clean – primarily a mix of hydro, nuclear, and natural gas.
  • The benefit is large and negative in many places in the east because the eastern electricity grid primarily relies more heavily on coal and natural gas.

via Economist’s View.

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