Migration won’t ‘solve’ ageing (and it definitely won’t solve it everywhere)

Every so often, someone wheels out the claim that migration is the obvious solution to population ageing. My previous research with Natalie Jackson (ungated version here) showed this for New Zealand overall, and for subnational (territorial authority) areas within New Zealand.

However, things are not straightforward at the subnational level. Local labour markets differ, as do the housing markets, educational and other institutions, local amenities, and job opportunities. All of these things will affect the age distribution of migrants, both into and out of a particular place. Some places attract retirees. Other places attract tertiary students, or young families. Some places do a bit of both. Other places just seem to be places that people want to flee.

In a new working paper with Courtenay Baker, we look at what’s happened to New Zealand’s working-age population (15–64) over the last quarter century (from 1998 to 2023), broken down across 66 territorial authorities and 21 Auckland local boards (TALBs), and five-year time periods. The key idea is simple: if the working-age population changes, where did that change come from?

Specifically, we disaggregate changes in the working age population into three components. The first component is 'cohort turnover', which is the the number of people ageing into the working-age population (basically, those aged 15-19 years) minus the number ageing out of the working-age population (basically, those aged 65-69 years). The second component is deaths among the working-age population. The third component is net migration at working ages, which we measures a a residual, because it can't easily be measured directly (and it is basically the change in the working age population, adjusted for deaths and cohort turnover).

Nationally, the working-age population grew in every five-year period we look at (see the table below). But the reason for that growth changes dramatically over time. In 1998-2003, the working-age population (WAP) grew 6.6 percent, and most of that change came from cohort turnover (5.5 percentage points). Migration helped (+2.1 percentage points), and deaths nudged things down a bit (-1.0 percentage points). However, by 2018-2023, the working-age population grew 5.1%, and net migration contributed 4.6 percentage points of that change. Cohort turnover only contributed 1.3 percentage points (and deaths contributed -0.8 percentage points).

So yes, the working age population is growing at the national level. And yes, migration is contributing a bigger proportion of that change over time. However, the real story here is the decline in cohort turnover as the population ages, as well as how this is playing out at the subnational level. For many TALBs, negative cohort turnover has become a reality. There were no TALBs with negative cohort turnover in the 1998-2003 period, but there were 30 TALBs that had negative cohort turnover in the 2018-2023 period. In other words, more than one-third of all areas are experiencing more people ageing out of the working-age population than the number of people entering the working-age population at young ages. This overall shift towards more negative (and less positive) cohort turnover is demonstrated in the leftward shift of points between Figure 1 (on the left, showing 1998-2003) and Figure 2 (on the right, showing 2018-2023) from the paper:

A natural response might be to say, "Those places should just try to attract more migrants." And sometimes they do! Across TALBs, cohort turnover and net migration tend to move in opposite directions (there is a moderately strong negative correlation between cohort turnover and net migration). Notice that in the two figures above, there is a downward-sloping trend line in each of them (and in each of the other five-year periods as well).

But 'sometimes' and 'tend to' are not a reliable policy prescription. When we look specifically at places with negative cohort turnover, most places do indeed offset it with positive migration, but not universally, and not consistently. In 2018-2023, two areas only partially offset negative cohort turnover (Kaikōura District and Dunedin City), and two had migration that actually made things worse (Waitematā local board and Chatham Islands Territory).

The takeaway is, again, that migration cannot be relied on to solve population ageing (or cohort turnover, in this case). Our decomposition basically shows that some places are increasingly reliant on migration to keep their working-age population from shrinking, and migration is highly unstable and cannot be relied on. In particular, migration is sensitive to policy changes at the national level, as well as sensitive to business cycle changes (and international migration, in particular, is sensitive to changes in Australia). These are things that local policy makers and planners have little control over.

To be clear, this doesn't mean that TALBs should be fatalistic about changes in the working-age population. But they need to be realistic. Not every area is Hamilton, with a young population and a growing university, attracting busloads of young people and maintaining a relatively young age structure and a growing working-age population. Not every area can aspire to have those features.

A realistic approach to planning for population ageing and a declining working-age population involves treating cohort turnover as a sort of 'warning light', and recognising that migration may not be a realistic solution. The good news is that our 'migration won’t save us' result isn’t a dead end for local areas that have declining working-age populations. It's an opportunity to improve their planning. They should treat negative cohort turnover as an early warning sign, work on realistic migration scenarios, and stress-test the basics, such as workforce needs, housing, infrastructure, and local services. Migration is a bonus when it arrives, but resilience is what they need to design for.

Distillers don't need tax relief in order to promote their goods internationally - they already have it

Earlier this week, the NBR reported (paywalled):

Kiwi distillers are calling on the Government to introduce an excise tax rebate scheme, arguing the current system is stifling an industry that could follow wine's path from obscurity to international recognition...

The proposal requests an excise duty remission of up to $350,000 annually for each distillery, which would free up funds that could be put towards employment, expansion, and export growth.

In order to be eligible for the DSA proposed scheme, distillers would need to hold a license to manufacture distilled beverages, produce at least 70% of its alcohol content (by volume) within New Zealand, be independent, and be a member of DSA.

The proposal is modelled on Australia's excise remission scheme, which allows domestic distilleries to claim up to A$400,000 ($469,600) a year...

On the outskirts of Auckland, Pōkeno Whisky's Johns estimates about 35% of his company's domestic revenue goes toward tax. He says he holds four roles at New Zealand's largest single malt distillery – running sales, marketing, operations, and general business – but doesn't pay himself. He has halved distillation over the past 18 months because times are tough, and is investing what he can into sales and marketing in an attempt to buck the trend.

"At the end of the day, we're not selling Pōkeno Whisky overseas. We're selling brand New Zealand."

Bluff Distillery's Nash says while a spirits tax made sense historically, the system was overweighted and out of date. He says a lot of distillers that could have explored international markets haven't been able to because the lion's share of returns go toward excise.

The first thing to note is that the excise tax paid by domestic distillers is not a big money-spinner for the government. The article reports that domestic distillers pay about $23 million in excise each year. That is small relative to the overall $800 million in total alcohol excise tax collected each year (see here). The purpose of an alcohol excise tax is to reduce the consumption of a good that has negative externalities - it is an example of a Pigovian tax. Reducing excise tax would lower the price that consumers pay for alcohol, increasing consumption, and increasing the negative externalities associated with alcohol consumption. That is not a proposal that should receive broad support.

Now, I was thinking about this and I had a better idea that would give some excise tax relief for distillers, without increasing alcohol-related harm in New Zealand: zero-rate the excise tax for exports. In other words, distillers would pay excise tax only on products that they sell domestically, and not on exports. If the argument by the distillers (as noted by Matt Johns of Pōkeno Whisky in the quote above, is that they want to explore international markets, then this proposal lets them do so, and on a more level playing field with distillers overseas. The distillers will pay tax on their profits. The government doesn't really need to tax them twice. And, since by definition exports are not sold domestically, there is no increase in negative externalities from removing the excise on those exports, and there may even be a decrease [*].

It turns out my proposal already happens - there is an 'excise duty drawback' that allows distillers to claim back the excise tax paid on any goods that they export. So, the distillers are already free to 'sell brand New Zealand' to their heart's content. They don't need to have their excise on New Zealand sales reduced in order to achieve that goal. Is there a real problem here? Or is this just another case of an industry with its hand out for government support?

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[*] Interestingly, the zero-rating of excise tax on exports may produce a further benefit in terms of reducing alcohol consumption (and negative externalities) in New Zealand. If it becomes more profitable to produce and export distilled products, then they may choose to sell less in New Zealand. That would actually increase prices in New Zealand, reducing alcohol sales and consumption.

To see how this works, consider a distiller who could sell overseas at a price P1, receiving the price P0 after paying an excise to the government on all of their production (sold overseas, or sold locally). Call the difference in those two prices T (the excise tax), so P1 - T = P0. It makes sense for the distiller to also sell its products at the price P1 in New Zealand (if they could receive a higher price overseas, they would sell there instead), also receiving P0 after paying the excise tax. Now, what happens when the excise tax is removed for exports? Instead of receiving P0 from exports, the distiller receives P1 (since they no longer have to pay the excise tax T). They won't want to sell their products in New Zealand and receive less than P1. That only happens if they raise the price from P1 to P1 + T (which leaves the distiller with P1 after they pay the excise tax T). So, we would expect the price on distilled products to increase in New Zealand, if the excise tax were removed from exports. In other words, the 'excise duty drawback' scheme likely increases prices on distilled products in New Zealand, although in reality the 'pass-through' of tax to retail prices is likely to be somewhat less than the full amount of T.

This week in research #114

Here's what caught my eye in research over the past week (a slow week, it seems!):

• van der Sanden et al. find that 'store within a store' vape retailers in Auckland are much more prevalent in areas of high socioeconomic deprivation
• Henrekson and Persson (open access) review the state of competition in European football, and argue that technological change (especially global broadcasting) and labour laws that have strengthened player mobility, have led to a small number of superstars capturing a disproportionate share of the surplus generated in the football market, and worsened competitive balance

Also new from the Waikato working papers series:

• McNamara looks at pass-through of fuel taxes to retail fuel prices, using the introduction and repeal of the 10c-per-litre Auckland regional fuel tax as a natural experiment, finding that fuel prices increased by 10.8 cents per litre following the tax introduction and fell by 11.6 cents per litre after its repeal, indicating near-complete and symmetric pass-through on average, while local competition determined the extent of pass-through for particular retailers
• My latest working paper, co-authored with Courtenay Baker, looks at the contributions of demographic change (cohort turnover and migration) to changes in the working age population at the subnational level in New Zealand from 1998-2023, finding that cohort turnover (the difference between number of people aged 60-64 exiting the working age population, and the number of people aged 10-14 entering the working age population) is having a decreasing effect over time, meaning that local labour supply is increasingly contingent on highly variable migration flows (I'll talk more about this research in a post next week)

What Thomas Malthus's death can teach us about how economic ideas shape government policy

Do economic ideas shape government policy? The answer seems obvious. After all, many people complain that economists have a strong influence on governments (for example, see here). But if there is a shift in prevailing economic ideas, does that flow through to government policy? It is an interesting question that is difficult to answer, so I was intrigued to read this job market paper by Eric Robertson (University of Virginia).

Robertson looks at the effect of the death of Thomas Malthus in 1834 on the decisions of British bureaucrats in colonial India. Specifically, he exploits:

...a unique historical experiment in a nineteenth-century British bureaucracy, focusing on an argument that Malthusian population theory and its associated ideas discouraged policymakers from intervening in response to agricultural distress and famine... Central to my approach is a bureaucrat training college, Haileybury, where civil servants studied prior to their careers in British India... Thomas Malthus taught economics at Haileybury for nearly three decades, from 1805 until his abrupt death in 1834, after which he was replaced by a contemporary critic, Richard Jones. I examine how the relative differences in exposure of bureaucrats to economic ideas under each instructor at Haileybury influenced their subsequent policy decisions, as well as their alignment with government directives...

Malthus and Jones had quite different views on the causes of poverty and famine, and their ideas suggested quite different policy responses. Malthus believed that it was diminishing productivity of agriculture as a result of overpopulation that caused poverty and famine, while Jones believed that capital investment and technological growth could offset diminishing agricultural productivity. So, in response to famine, bureaucrats trained by Jones would be more likely to respond with measures to supplement incomes than those trained by Malthus, with the latter believing that assistance was unnecessary in response to a natural mechanism that would ultimately lead to better living standards (because there would be fewer people after the famine).

Robertson constructs a dataset of bureaucrats ('district collectors') in colonial India and their policy decisions in response to droughts ('rainfall shortages'). Bureaucrats who wanted to actively respond to a drought had many means to do so, including:

...writing off taxes on agricultural land, opening public works to provide employment opportunities and raise wage income, distributing cash or food aid, importing food for subsidized sale, and providing loans or advances to the agricultural class...

Robertson looks separately at each of those policy responses. This 'natural experiment' is a useful way of establishing the causal impact of economics ideas on policy decisions, because the exact timing of Malthus's death was unrelated to the traits of the bureaucrats being trained. That means the bureaucrats trained just before Malthus's death, and those trained just after Malthus's death, are unlikely to be systematically different in ways related to policy decisions (other than through the way they were trained).

Robertson finds that:

...compared to their Jones-trained (Jonesian) counterparts, Malthus-trained (Malthusian) bureaucrats were less likely to provide relief across all of these common government interventions. I show that tax write-offs during drought were roughly thirty percent lower under Malthusian collectors than under Jonesians and I find evidence that expenditures on public works may have been up to twenty percent lower...

...a back-of-the-envelope calculation suggests that, if Malthusian collectors had implemented policies comparable to Jonesians, the increased aid would have translated into enough calories to support two million more person-days of subsistence during each episode of drought.

Robertson concludes that:

This research offers evidence that the exposure of bureaucrats to different types of economic ideas alters the types of policies they choose to implement.

So, the good news is that economic ideas do shape government policy (or, at the least, they did in the 19th Century). The bad news is also that economic ideas do shape government policy. Because not all economists agree. In this example, Malthus and Jones disagreed on the appropriate policy response to droughts. The Indian people were far better off (in terms of poverty relief, and probably welfare) during a drought when the bureaucrats were trained by Jones than when they were trained by Malthus. Millions of Indians died in famines in the 19th Century (see here). [*] Getting policy right has high stakes.

This research shows that what economics students are taught at university really does matter. That is both gratifying (to know that students will take on board what they learn and use it later) and a little scary (because what if they take on board the 'wrong' lessons, from the 'wrong' economics?). We could easily take a negative impression away from this, but there is a more hopeful lesson here. Economics classes, books, and arguments can make the world better, and sometimes dramatically so. That’s a pretty good reason to keep doing more of what we are doing, but also ensuring that students are equipped to take a critical view of what economics can really deliver through policy changes.

[HT: Marginal Revolution, both last year and this year]

*****

[*] Robertson reports no statistically significant impact of Malthusian training on famine or mortality, but those analyses lack the same extensive data available for the other analyses. It seems credible that the absence of assistance under Malthusian bureaucrats would have led to at least some negative impacts in the form of greater famine and/or mortality.