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Putting Productivity First - TPRP 08/01

A broad approach to skills

Success in education really pays off. Completing an extra year at the end of secondary school appears to boost a person's lifetime income by around 10 per cent.[33] These individual gains from education appear to be a genuine pay-off for higher skills; they are not just part of a "zero sum game" where people use qualifications to compete for the best jobs without actually increasing their productivity. Some major long-term studies are now showing similar large pay-offs from quality early childhood education and other measures to improve early childhood development, especially for disadvantaged children.[34] Recent evidence is pointing to a much stronger role for differences in educational quality and people's skills in explaining differences in countries' long-term growth performance.

New Zealand’s skills performance

Good performance in secondary and tertiary education is lifting the average qualification level…

The education level of New Zealand’s workforce is above the OECD median and improving. At secondary school, the mean performance of 15 year olds in scientific, mathematical and reading literacy is near the top of the OECD.[35] At tertiary level, New Zealand is producing graduates at a rate that is amongst the highest in the OECD.[36] Significant increases in participation rates are now being reflected in overall working age qualifications: the percentage of the adult population with a bachelor’s degree as their highest qualification is above the OECD average.[37]

…but not everyone is benefiting

However, there is a large group of poorer performers. New Zealand has a large variance in student achievement and some groups, including Maori and Pasifika, perform well below the national average. While New Zealand is near the top of the OECD tables for average achievement at age 15, approximately 40 per cent of students leave school without gaining a Level 2 qualification or better, and New Zealand has amongst the lowest rates of participation in education and training for those aged 15-20.[38] The growing international evidence on the value of completing school and continuing in education suggests that having so many young people disengaging from education at this age will be detrimental to New Zealand’s long-term skills and productivity.

Educational improvement is needed for both those currently in education and for the stock of workers who have left formal education, emphasising the importance of a package of interventions rather than just targeting one age group.

Figure 3 - Educational Attainment of the Adult Population (2005)
Figure 3 - Educational Attainment of the Adult Population (2005).
Source: Education at a Glance 2007, OECD

Policy considerations

Education and skills accumulate over the course of a lifetime

Human capital and skill formation is a cumulative process over the life course. There is increasingly strong evidence that the greatest gains over the long term will come from improving the quality of education in the early years, and from targeting support to disadvantaged and at-risk children.[39] This needs to be followed up by ongoing engagement in quality education and training in school, in the workforce and in the critical transition point between the two.

Early education is growing rapidly

New Zealand has high rates of participation in early childhood education both by international comparison and compared to historic levels within New Zealand. The sector is seeing rapid growth both in hours of participation and in quality standards. An important challenge at present is to ensure that the strains of this broad growth, such as capacity constraints and teacher supply shortages, do not fall disproportionately on children from disadvantaged backgrounds.

Figure 4 - Enrolment rates of 15 to 19 year olds 2004
Figure 4 - Enrolment rates of 15 to 19 year olds 2004.
Source: Education at a Glance 2007, OECD
At secondary school, improvements in retention rates are important

Improving retention and achievement in secondary schools, and ensuring more young people remain engaged in education and training as they make the transition to work, is a priority for New Zealand’s future skills base. This is likely to require greater flexibility and responsiveness in senior secondary schools, and efforts to share best-practice and strengthen accountability for retention. There is wide variation in secondary schools’ retention rates, even accounting for differences such as the socio-economic status of the area and school type.

The quality of tertiary is high but completion rates need to be improved

Tertiary education is important and has close links to innovation and already has an extensive agenda of policy change underway. Overall quality and participation is relatively strong in New Zealand, but poor completion rates andthe relevance of some programmes to firms' skills needs are ongoing concerns. Improving the match between tertiary provision and firms' skills demands, and more effective allocation of the resources invested in the sector, are key issues.

Tax affects the incentives to acquire higher level skills

Taxes can alter the incentives for skills acquisition, particularly higher level skills; marginal and average tax rates affect decisions to both participate in the labour market and accumulate skills by altering the net return from either working more or undertaking higher and further education. The progressivity of the tax system can exacerbate this impact as increased earnings resulting from skill acquisition are reduced through taxation. Further investigation is required in order to understand the exact nature in which tax affects skill acquisition.

The relative importance of mechanisms by which education may affect productivity is the subject of debate. Given New Zealand’s distance from the technology frontier, it may be that skills that support imitation of technologies in other countries are relatively more important than higher level skills that enable new innovations for some firms or industries. However, some studies find positive productivity spillovers from high skills but not from lower level skills. It is likely that skills requirements will vary by sector and increasing New Zealand’s skills performance will require improvements both in advanced skills linked to research, innovation and entrepreneurship and broader workforce skills.

International connections and the quality of institutions are important for skill utilisation and development. Evidence suggests that the effect of educational quality on economic growth increases with the quality of economic institutions and a country’s openness to international trade. International labour mobility provides a critical opportunity to enhance New Zealand’s skills and to improve international connections, while also posing a threat if New Zealand is not an attractive enough location to retain the skills of domestically educated individuals.


  • [33]Orepopoulos, Philip. "Do Dropouts Drop Out Too Soon? Wealth, Health and Happiness from Compulsory Schooling" Journal of Public Economics 2007.
  • [34]Heckman, James and Dimitriy Masterov. “The Productivity Argument for Investing in Young Children” NBER Working Paper #13016, April 2007.
  • [35]OECD, Learning for Tomorrow’s World.
  • [36]OECD, Education at a Glance 2006.
  • [37]Ibid.
  • [38]Education at a Glance OECD Indicators 2007 indicator C1.3.
  • [39]For example, James Heckman and Dimitriy Masterov: “The Productivity Argument for Investing In Young Children” NBER Working Paper 13016, April 2007.
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