Tuition fees, incentives, and 'ghost students'

When the New Zealand government introduced 'first-year fees free' in 2018, the universities expected a big uptick in student numbers. It didn't happen (as I discussed in this 2023 post). As the figure below (source) shows, the mild downward trend in domestic student numbers (equivalent full-time students, or EFTS) continued for at least a couple of years past 2018:

My colleagues were worried that we would see an increase in the number of students who enrol, and then do nothing at all (what we call 'ghost students'). My impression was that this didn't happen, but until now I never looked intentionally at the numbers. However, the figure below shows the proportion of each of my A Trimester ECON100 classes (up to 2017) or ECONS101 classes (for 2018 onwards) that were ghost students (I didn't teach the class in 2022, which is why there is no observation for that year). Here, I define a 'ghost student' as any student who didn't attempt any of the tests or exams (although they may have attended some classes during the trimester). In each trimester, the class had between 250-350 enrolments in total. [*]

As the figure shows, there was a big jump in 'ghost students' in 2021, but that is attributable to the COVID pandemic and the weirdness of that whole time period, rather than anything to do with fees-free. In most years, somewhere between three and five percent of students are 'ghosts'. In 2025, the government shifted from first-year fees free to final-year fees free. There's no evidence that change affected the proportion of 'ghost students' either. Or it's too early to tell - the proportion in 2025 was lower than either of the previous two years.

Why might we expect the changes in fees to affect the number of 'ghost students'? It comes down to incentives. As my ECONS101 students will hear next week, when the cost of something decreases, we tend to do more of it. First-year fees free decreased the cost of being a 'ghost student', so ceteris paribus (holding all else constant), we would expect to see more 'ghost students'. Final-year fees free (with first-year fees reintroduced) increased the cost of being a 'ghost student', so ceteris paribus, we would expect to see fewer 'ghost students'. The fact that didn't happen is interesting, and we'll come back to that a bit later.

To see why the New Zealand effect might be negligible, it helps to compare with a setting where student status comes with larger immediate benefits. To do that, I want to discuss this recent article by Johannes Berens (RH Köln), Leandro Henao, and Kerstin Schneider (both University of Wuppertal), published in the journal Labour Economics (ungated earlier version here). They look at the impact of the removal of tuition fees in North Rhine-Westphalia in Germany in 2011. Tuition fees were a very modest EUR500 per year (for every year of study), and Berens et al. essentially compare students who were more or less affected by the policy (depending on how many years they didn't have to pay fees for), looking at a range of academic outcomes including exam registrations and withdrawals, credit points earned, grades, and dropout probabilities, as well as the number of 'ghost students'.

Their data come from a single university, with over 11,000 students who first enrolled between 2008 and 2011. The students in the 2008 cohort would have graduated before the fees were removed, while those in the 2011 cohort would not have faced any fees at all. The other cohorts would have had fees in their later year/s, but not earlier year/s. Applying a difference-in-differences approach, Berens et al. find that:

...abolishing tuition fees significantly affected student behavior and academic outcomes. Active students reduced their academic performance by 1.7 credit points per semester (12 % relative to baseline), despite maintaining similar exam registration patterns... Additionally, the reform increased the prevalence of ghost students by 10 percentage points...

So, removing fees in this context substantially increased the proportion of 'ghost students' by 10 percentage points, from a baseline that was already over 10 percent (Berens et al. present the data by study semester, and the 'ghost student' proportion varies between 10 percent and 20-25 percent, depending on year and study semester).

What explains the high impact of removing fees in Germany? Berens et al. highlight the role of incentives, and in particular the generous nature of public assistance available to students. Specifically:

...student status confers substantial benefits, generally independent of academic performance... These benefits include subsidized health insurance (until age 25), state-wide public transport access (worth EUR 2900 annually), and parental child allowance (EUR 2450 annually). About 16 % of students also receive need-based grants averaging EUR 6800 annually...

So, being classified as a student can be quite lucrative in Germany, even if the student is a 'ghost'. That might also explain the lack of effect of first-year fees free in New Zealand. While the fees are higher in New Zealand than in Germany, being a student in New Zealand is hardly a pathway to great riches (at least, not during the time spent as a student - see this post, and the links at the end of it). The student allowance is not very generous, and while there are some other perks to being a student, cheap movie tickets and public transport are not exactly worth a lot of money. So, it shouldn't be much surprise that the impact in Germany was much larger than for a similar policy change in New Zealand.

Another reason that the impact was not apparent in New Zealand could be that many students do not pay their tuition fees immediately. Instead, many (perhaps most) students' tuition fees are paid by student loans. 'Student Greg' is probably quite content to say that the student loan is 'Graduated Greg's' problem, and not worry about it today. So, from the perspective of 'Student Greg', first-year fees free doesn't really impact the decision to become a student or not. It doesn't change the costs of being a student for 'Student Greg', because they don't consider paying back the student loan as part of the costs of studying today. [**] And that might explain why there was no incentive effect of first-year fees free in New Zealand (also, fees-free papers are not free if students fail them, as I noted in this 2023 post).

The incentives in Germany and New Zealand, when the tuition fees were changes, resulted in quite different impacts. In Germany, where the benefits of being a student were higher, lower costs of being a 'ghost student' induced many people to enrol, whereas in New Zealand, where the benefits of being a student are lower, and the costs of tuition are typically deferred to the future, lower costs of being a 'ghost student' appear to have made no difference.

The nature of incentives, and the costs and benefits around the decision, definitely matter. The policy takeaway from this is that tinkering with fees alone may induce more (or less) 'ghost students', so the other immediate benefits and costs associated with student status also need to be considered. 

*****

[*] The data are for only one paper, but ECON100 and ECONS101 have been, for the most part, compulsory papers for business students. In a couple of years, some students could avoid the paper by taking all of the other first-year business papers. However, unless 'ghost student' status was more likely for students who did not take first-year economics, these results should be broadly representative.

[**] Essentially, 'Student Greg' is heavily discounting the future. In my ECONS102 class, we say that 'Student Greg' exhibits present bias, and is therefore only quasi-rational, not purely rational. Of course, not all students will have acted like 'Student Greg', but if enough of them did, that would explain the lack of incentive effects of the changes in first-year fees.

Book review: Economics (Ben Mathew)

I just finished reading Ben Mathew's 2013 book, imaginatively titled Economics. The subtitle is more descriptive though: "The remarkable story of how the economy works". The subtitle is also an accurate statement, as how the economy works does make for a remarkable story. Unfortunately, Mathew only provides a narrow (and biased) part of the story.

Don't get me wrong. This book is beautifully written, and will be easy for most non-economists to follow. I really enjoyed large parts of it. It is also quite humorous in parts. Consider this bit, which is both quite true and quite funny:

A Scottish philosopher by the name of Adam Smith figured out the answer and wrote it down in a book called An Inquiry into the Nature and Causes of the Wealth of Nations. The massive tome was published in 1776 and invented modern economics. All economists have a copy on their shelf, and some have even read parts of it.

Guilty as charged: I have a copy of The Wealth of Nations in my bookshelves, and I have even read parts of it (but not the whole book).

What lets this book down is the single-minded market fundamentalist approach. This book is everything that critics of 'neoliberal economics' love to hate. Mathew puts capitalism, the market, and prices at the centre of the 'remarkable story', which is sensible. However, he bats away or ignores critical problems with markets, such as externalities, information asymmetries, and monopoly or market power. Public goods do get a mention, but not until the last five pages of the book. Aside from public goods, the only market failures that are discussed are those caused by government intervention: price controls and taxes.

This uneven treatment isn't going to convince many readers, and those who area already skeptical of markets and economists will have cause to double-down on their skepticism. The market fundamental approach is understandable coming from Mathew, who was trained at the University of Chicago, the epicentre of 'price theory'. However, given how wonderfully Mathew writes, I feel like this was a real missed opportunity to have a book that truly describes the remarkable story of how the economy works, not based on a market-centred idealist view, but in all of its messy glory. Perhaps readers should read this book alongside Michael Sandel's What Money Can't Buy (which I reviewed here), and take the average of the two?

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?

*****

[*] 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.