2 Components of the OECD’s findings

This section dissects the OECD's findings to determine the main drivers of New Zealand's low rank.

2.1  Low comparative returns

The OECD produces two different indicators of private returns to education and New Zealand ranks towards the bottom of the OECD on both of them (see Figure 1).[3]

Figure 1 - Rate of return to investment in tertiary education

Source:  OECD

The two measures used by the OECD are net present value (NPV) of returns and internal rate of return (IRR) on investment. The NPV figure shows the discounted value of the net benefits of obtaining tertiary education in United States dollars adjusted for purchasing power parity.[4] The IRR shows the implicit percentage rate of return on investment in one's human capital by obtaining tertiary education.

The OECD prefers the NPV measure because it is a more appropriate indicator for assessing long-term investments such as education. Education tends to have high immediate costs, but benefits that peak over 20 years after finishing study. The nations that shine under an IRR measure are those with low initial costs and immediately higher earnings. Nations in which earnings continue to rise markedly over the 20-25 years following study will not feature so high in the rankings because they imply a low discount rate.

The NPV ranks investments differently from the IRR because of differences in the magnitude of cash flows, and how they are distributed over the lifetime of the investment. For some countries, the measure chosen noticeably affects relative OECD ranking but this is not the case for New Zealand: we rank 22^nd by NPV and 21^st by IRR.

The NPV measure also has the advantage of being straightforward to decompose easily into its component parts. Consequently, we use the NPV measure for the remainder of this report, since our investigations primarily consist of decompositions and substitutions. However, we also conducted decompositions with the IRR where possible and the results are included in Appendix B. That said, the OECD cautions against evaluating a single nation's tertiary system by its ranking because outliers may be transitory. High returns may be a function of short-term skill shortages and the indicator does not control for this or other transitory influences such as differences in business cycles between nations or differences between skill groups. Low returns can similarly be a function of the magnitude of swings and volatility in the business cycle and thus timing of when returns are measured.

However, New Zealand has had returns below average in every year since the 2008 EAG[5] and ranked below the median nation for tertiary returns. Our IRR ranking has dropped from twelfth out of eighteen in 2008 to 21^st out of 25 in 2011, which may not itself be significant but does indicate the persistence of below-average returns in recent years.[6] This view is reinforced by the other indicators of tertiary earnings premia that the OECD reports.[7] In this paper we consider a number of measurement or institutional factors that contribute to this positioning, including eleven measurement and country data comparability factors covered in Appendix A. We find that these omitted or standardised factors are in fact expected to under-estimate the New Zealand returns relative to the OECD average.