Insights Issue 7/2014 - 7 March 2014

In this issue:
• Provocative performance pay! | Rose Patterson
• Tertiary education too economic? | Jenesa Jeram
• ‘B’ is for banking | The ABC of Economic Literacy
• All things considered ...
• On the record
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Provocative performance pay!
Rose Patterson | Research Fellow | rose.patterson@nzinitiative.org.nz
Teaching stars: transforming the education profession, our third education report, aroused suspicion, emotion and attention when we released it this week. We dared to say those two terrible words: performance pay. Yet, the argument is more nuanced than the emotive and provocative language would suggest.

This week, the New Zealand Post Primary Teachers' Association (PPTA) told this writer that teachers do not really care about money; it is not their main motivation. Indeed, New Zealand and international research shows that people are not attracted to teaching for the money, but rather to make a difference, because it is important for society, for the challenge, to share their passion for the subject, and to work with children and young people.

However, by the same token, research shows that money helps to retain people as teachers. A 22-year-old straight out of university with very little financial burden may be pure in their altruism. Yet a 42-year-old saddled with a mortgage who wants to provide a good life for a family may well be enticed out of teaching by a better-paid job. More so if the teacher is highly capable.

Currently, teachers start on a base salary and move up incrementally each year for eight years. The career model for teachers announced by the Prime Minister in January will shatter the glass ceiling at the top of the salary scale for classroom teachers. This should go a long way to retaining the best.

But it does not deal with another major problem. Virtually all teachers (99 per cent) move up a notch on the salary scale each year, which does reflect that, on average, the learning curve for teachers is steepest in those first eight years. However, a thought experiment may help illustrate why this does nothing to encourage excellence.

Imagine that you are learning the piano, and making a living as a pianist. You receive a fixed yearly salary. Every year, you compete in a recital and your placing in the competition determines the increase in your salary. However, it does not matter how much you have practiced, or how well you perform for your audience. Your placing in the competition is fixed. The only variable considered is how many years you have been playing. Pity for the audience.

And a final point: if money really is not important to teachers as the unions say, then why the kerfuffle when you dare whisper those two words?

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Tertiary education too economic?
Jenesa Jeram | Research Assistant | jenesa.jeram@nzinitiative.org.nz
This week, the Ministry of Education – in partnership with the Ministry of Business, Innovation and Employment – released their Tertiary Education Strategy for 2014-19. The overarching aim of the strategy is to create better linkages between education and employment, especially in ensuring the skills and competencies of graduates meet the changing demands of the labour market.

Most would agree that reconciling the current mismatch between jobseekers and employers could only be a good thing. However, the Green Party have criticised the strategy for having “a single minded focus on economic outcomes … out of step with the real issues facing New Zealand”.

But can government policy ever afford not to be economic? Given that tertiary education is currently subsidised by the government, aversion to waste should be a priority. And for tertiary education in particular, government funding is significant. In fact, the forecast government expenditure on tertiary education in 2014, with the inclusion of student support, is $4.15 billion.

The Tertiary Education Union has also criticised the strategy, as it “…sees tertiary education’s main role as simply providing a free, publicly trained workforce and free publicly funded research to private businesses.”

However, the accusation that only private businesses benefit from a skilled labour force ignores the extrinsic value to society, in the form of greater productivity, increased economic growth, and less dependence on the state. These gains are not just enjoyed by the employer, but can lift the wellbeing of the wider population.

And, of course, reconciling the supply of graduates with the demand of employers is not just economic. It also plays a role in addressing one of the most salient issues facing New Zealand today: that of income inequality and unemployment.

I have previously written on the importance of tertiary institutions fostering a skilled workforce, not only to meet the demands of employers, but to ensure all people are able to participate in the future labour force.

Higher education has long been considered a means of increasing social mobility and reducing income inequality. In fact, in a 2009 Statistics New Zealand study, the median earnings of bachelor's degree graduates were about 40 per cent higher than non-degree holders, three years after graduating. In the future, it is likely that the increased demand for skilled labour will only exacerbate inequality between skilled and unskilled workers.

Everyone should have the opportunity to develop their human capital, participate competitively in the workforce, and better their lot through higher education.

The relationship between tertiary education and the labour market is not simply a matter of economics. It is a matter of giving individuals a sense of pride, purpose, and self-worth through meaningful, well-paid employment.

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‘B’ is for banking (central)
The ABC of Economic Literacy | info@nzinitiative.org.nz
It is a wonderful convenience to be able to buy almost anything we want, offering nothing in exchange but flimsy paper or an electronic claim on our bank account. We experience this convenience every time we go to the supermarket and pay by cash, ATM or credit card.

The entire system depends on the seller’s confidence that the means of payment being offered is of real value. Counterfeit cash, or fraudulent ATM or credit card transactions potentially undermine every honest person’s ability to transact.

For most of human history, confidence has been greatest in coins made of gold and silver. Ancient rulers who secretly debased their coins cheated their people and eroded that confidence.

Today, we transact in a world of monopoly government paper money, backed only by trust in government. Like the rulers of old, today’s governments can cheat their people by creating unanticipated inflation through issuing too much paper money.

The diverse interest rates paid on borrowings by banks and governments illustrate how confidence varies in the value of each issuer’s promise to pay future interest and principal. Higher interest rates mean higher risk.

The modern government-controlled central bank is banker to the major commercial banks. It accepts their deposits (which count as banking system reserves) and may lend them money or buy some of their assets when they need more cash. The perceived soundness of a commercial bank depends, in part, on its perceived central bank support.

The soundness of a commercial bank also depends on the quality of its loans, the degree to which it matches deposit and lending risks, the level and quality of its reserves, and the financial strength of its major shareholders.

In contrast, the soundness of a central bank is dominated by the government’s ability to inject more taxpayer money into it when needed.

Governments may oblige central banks to lend unwisely, perhaps by forcing them to fund government deficits, or perhaps to support institutions that have made bad loans in a politically ‘worthy’ cause, such as housing loans to uncreditworthy borrowers.

Such situations can easily induce booms and crashes, banking crises and prolonged unemployment.

These roles and pressures place heavy responsibilities on central bankers. They stand at the apex of the confidence pyramid and play a pivotal role, for better or for worse, during any general banking crisis.

Central banking has mystique, but no magic wand. It cannot insulate the public from the consequences of collective fiscal and financial follies.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘C’ for Competition.

All things considered ...
• Graph of the week: population data can be very one-dimensional, but thanks to creative visualisation techniques the demographics of the US are more interesting than ever.
• Who wants to be the ‘Lucky Country’ when you can be the ‘Plucky Country?’ Australia, eat your heart out.
• A US reporter, who spoke out against Russia’s military action in the Ukraine on a Kremlin-backed TV channel, has been sent to cover the Crimean crisis. Who says her employers don’t have a sense of humour?
• Genderbend your mind to this reality.
• Parents rejoice. US judge, Peter Bogaard, declared himself the final line of defence against the horde of mindlessly entitled teenagers with his court ruling.
• This correspondent will always regard Jeremy Clarkson as a bit of a buffoon, except when he is showcasing the Kiwi-design Quadski. Then he is an alright bloke with great taste iningenious machinery.
• Is this art imitating life, or life imitating art? Either way, we suggest these kids get some extra lessons on the drawing front.
• If the Global Competitiveness Index hasn’t convinced you that Australia’s labour market has gone utterly cuckoo, this news item should do the trick.
• Bravo Agony Aunt Amy Dickinson for handling this thorny question from a reader withabsolute aplomb.
• Idine Menzel will be forever immortalised as Adele Dazeem thanks to John Travolta’s introduction at the most recent Academy Awards. Now, thanks to the internet, he can mangleyour name.
On the record
• Global Perspectives: New Zealand’s Path to Transforming the Teaching Profession,Center on International Education Benchmarking, 6 March 2014.
• Europe's para-democratic madness, Dr Oliver Hartwich, Business Spectator, 6 March 2014.
• Mike Hosking: New Zealand Initiative report makes good sense, Newstalk ZB, 6 March 2014.
• New report advises performance pay for teachers, One News, 5 March 2014.
• More pay for teachers: NZ Initiative, Radio NZ, 5 March 2014.
• Train teachers in schools, not universities, Kiwiblog, 5 March 2014.
• Reward teachers according to achievements - report, NewstalkZB, 5 March 2014.
• Reforms proposed for the teaching profession in a new report, Nine To Noon, 5 March 2014.
• Train teachers in schools: report, The New Zealand Herald, 5 March 2014.
• Performance pay report sparks row over author, Stuff.co.nz, 5 March 2014.
• Teaching stars: transforming the education profession, John Morris and Rose Patterson,The New Zealand Initiative, 5 March 2014.
• Now for a generational change in education, Colin James, 4 March 2014.
• Degrees no longer a 'golden ticket', Jenesa Jeram, Stuff.c

Ends

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