Executive Summary
Skills are an important part of any economy. They can act as a driver for higher living standards through their strong connection to increased personal and social wellbeing, as well as through increased earnings, tax revenue and productivity. Skills are seen as a significant contributor to economic growth in several ways:
- Directly through positive effects on labour utilisation, labour productivity and earnings.
- Indirectly as skills are complementary inputs to innovation, capital investment and entrepreneurship, and contribute to labour market adjustment, international connectedness, and social mobility. Skills also have spill over effects at firm, industry and regional level.
As well as other goals, one factor which may drive an individual to become more highly skilled is that they will likely be rewarded through a higher wage than they could otherwise have commanded had they not undertaken further education. An economy which does not reward its more highly skilled workers with higher wages may have issues in relation to supply of and demand for skills. For example:
- Skill demand - there may be excess demand for highly skilled workers. This can be broken in to two elements:
- skill development - people may not undertake tertiary education, because they expect little or no value from a higher qualification, therefore there is excess demand and/or
- skill retention - people tend to migrate to economies where their skills are rewarded with higher pay, therefore there are not enough skilled people to keep up with demand.
- Skill supply - an economy may have an over-supply of highly skilled people which acts to drive down the monetary value of skills,
These effects can have serious consequences for the skill levels available to the economy as a whole, and are likely to hinder economic productivity and innovation.
Although New Zealand has low private returns to tertiary education compared to other OECD countries, the returns to an individual in New Zealand with a tertiary qualification are still significantly greater than those without tertiary qualifications. For example, analysis by the Ministry of Education shows that 2008 median earnings for an individual with a Bachelor's degree or higher were around $500 per week better off than an individual with no qualification.
The aim of this research is to explore at a deeper level which factors may be influencing New Zealand's seemingly poor financial recognition of tertiary qualifications compared to other economies. A deeper understanding of the factors which influence private returns to tertiary education is intended to position and inform government policy around participation in tertiary education, skill supply and attracting/retaining highly skilled people in New Zealand. We see this study as a first step towards further work in this area.
The first finding from this research is that about half of the measured gap in New Zealand's private returns to tertiary education can be explained by the way returns are measured rather than a “real” gap. The remainder of the gap in tertiary returns is closely related to New Zealand's low returns to tertiary education are strongly linked to the comparatively small increases in earnings from gaining a tertiary qualification (the gross earnings premium) relative to the OECD, which are, in turn, influenced by New Zealand's high levels of graduates with Type B qualifications (below Bachelor level). In addition, factors that are usually identified as reasons for generally poor economic performance such as low rates of innovation, low capital intensity and distance to markets also contribute to New Zealand's low wage premium.
Unfortunately, research directly linking the drivers of economic performance to tertiary returns in New Zealand is lacking meaning there is a significant need for better analysis of potential problems. Future work should be targeted towards estimating the impact of the factors identified in this report.
