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Briefing to the Incoming Minister of Finance 2008: Medium-term Economic Challenges

Improving skills performance provides a significant opportunity to improve long-run productivity

A highly skilled labour force is critical to economic growth and results in higher incomes for individuals. Skills increase the productivity of individuals, and those they work with. They can also raise the output of other firm inputs, and enable firms to be innovative and move to higher value-added production. A wide range of policy settings affect skills. For example, tax settings and the business environment can affect the incentives to acquire and use skills, and the education and training systems influence supply.

Skill levels will need to rise if New Zealand is to outperform other countries in terms of productivity growth

Demand and competition for skills is increasing world-wide, and we expect demand for skills in New Zealand to follow a similar trend. Our high levels of people flows mean New Zealand is particularly exposed to the impacts of increasing competition. Other countries are investing in lifting the skills of their people, and our skills performance will need to be above average by international standards if New Zealand firms are to compete successfully.

There are two distinct aspects to the challenge of raising skills performance. We need to lift the supply and quality of our skill base, and ensure that we are using those skills effectively. Over the long term, the biggest returns on investment may come from improving the quality of the “flow” of skills into the labour market. In the short term, however, we will need to improve and make better use of the current stock of skills. To achieve a significant increase in the contribution of skills to productivity, action will be needed across all of the different parts of the skills system. We will need to:

  • lift both cognitive and non-cognitive or “soft” skills
  • lift the skills of the current workforce
  • improve the skill levels of those moving through the formal education and training system
  • make better use of more of our skills through higher labour market participation and more effective utilisation in firms.

The performance of our skills system

Our skills system currently performs comparatively well on average, giving us a strong foundation to build on, but we will need to make the most of opportunities to do better. The following are areas where significant improvement is needed.

The performance of the skills system and characteristics of our labour market suggest where policy effort should be focused

There is lower participation in early childhood education for children who go on to low-decile schools

Previous Participation in ECE of Year 1 students
Previous Participation in ECE of Year 1 students.
Source: Ministry of Education

Participation is increasing over time in early childhood education (ECE), but there are persistent concerns about lower rates of participation in ECE by children from disadvantaged backgrounds and Māori and Pasifika children. This is a particular concern given the importance of ECE participation in developing non-cognitive skills, such as communication and social skills. Learning experiences in early childhood can establish or limit lifetime opportunities and learning potential, and therefore potential productivity.

Average school performance is relatively good, but there is considerable room to improve the retention of school students beyond age 16 and improve the qualifications of school leavers

PISA Science Performance (Mean Score) at Age 15 and Enrolment Rates at Age 17
PISA Science Performance (Mean Score) at Age 15 and Enrolment Rates at Age 17.
Sources: OECD Education at a Glance 2008

Note: Low outliers Mexico and Turkey are not shown. Excluded: Japan and USA (missing enrolment data)

School leavers with University Entrance standard qualifications
School leavers with University Entrance standard qualifications.
Source: Ministry of Education

In terms of school-age education, New Zealand has a wide spread in achievement and comparatively low participation rates of 15- to 19-year-olds in education. Staying in school matters for productivity - completing an additional year of secondary school is associated with an increase in lifetime income of around 10%.

Across the spectrum of policies there is scope to improve outcomes and the cost-effectiveness of our investment

Performance is mixed in the tertiary education sector. Almost all the growth in tertiary education participation has been in sub-degree certificates and diplomas. There has been little growth in degrees which have better labour market returns. New Zealand also has comparatively low completion rates, which reduces the value of investment for both the student and the Government and reduces the contribution these people might otherwise make.

We should move towards more degree completions in tertiary education in future

Tertiary qualification completion - trends and future direction
Tertiary qualification completion - trends and future direction.
Source: Ministry of Education

Our adult skills profile shows considerable room for more improvement. The proportion of the population with a tertiary qualification is growing, but we are likely to need more people with degree-level qualifications in future. Higher-level qualifications have higher public and private returns, indicating higher levels of productivity. A significant proportion of the workforce has low foundation skills, limiting their ability to increase their productivity. It is particularly challenging to improve foundation skills because there is a lack of evidence on cost-effective approaches.

New Zealand's labour participation is above average, but international comparisons indicate participation rates are low for some groups, such as parents of pre-school children and older workers. There may also be potential to make better use of the skills of individuals already participating in the workforce.

Opportunities for further gains from our investment

Opportunities exist to achieve a significant increase in the contribution skills make to productivity and improve the effectiveness of investment. Over time, we will need to develop a comprehensive approach that addresses the size of the challenge we face. In the short term, we can start by:

  • targeting resources towards improving the accessibility of quality early years education for disadvantaged children and Māori and Pasifika children, with the aim of realising the potential for ECE to establish learning foundations and improve the effectiveness of later investments
  • shifting investment in the compulsory sector from high-cost/low-impact strategies (such as lower student-teacher ratios) to high-impact strategies (such as improving accountability for student achievement and embedding professional development strategies that improve teaching practice). These initial steps are aimed at raising achievement overall and reducing the current wide disparities in outcomes
  • shifting expenditure in the tertiary sector towards courses with better labour market outcomes and above average completion rates, with a view to shifting provision in the medium-term towards degree-level qualifications
  • taking an experimental approach to improving foundation skills in the workforce, carefully evaluating results and adjusting our strategy as we learn more, so that we become better placed to meet the challenge of raising the skills of the existing workforce
  • supporting labour force participation of parents (such as by prioritising access to ECE over further quality improvements), and older workers (such as by considering ongoing skill development needs and financial incentives to work and investigating health barriers).
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