2.2 How is the indicator constructed?

The indicator compares the private costs associated with tertiary education with the private benefits of achieving a higher income throughout one’s working life. Specifically, it measures the income premium gained from completed tertiary education, relative to upper-secondary education. The OECD projects forward each cost and benefit based on a snapshot of earnings by qualification and age group, then sums the costs and benefits separately, before constructing the NPV and IRR from the resulting series. The original data in the latest OECD EAG 2011 is drawn from Statistics New Zealand’s (2007) Household Labour Force Survey (HLFS) and the Income Supplement to the survey.[8] NPVs reported by the OECD are in equivalent US dollars for the year of the analysis, and IRRs are expected percentage annual returns to investments for a qualification, projected over a working life-time.

HLFS, with the Income Supplement to the survey, is the appropriate data set, and a number of OECD countries incorporate similar data sets. However, as part of its standardisation, the OECD pools together earnings data on part-time and full-time workers in its returns to education calculations. In the case of New Zealand, these adjustments decrease the greater precision that the HLFS data set is capable of providing.

Qualifications which are classified as tertiary include diplomas (Type B qualifications) and bachelor's degrees and above (so-called Type-A qualifications). Upper-secondary qualifications refer to Year 12-13 qualifications or equivalent.[9]

2.2.1  Measured benefits

The benefits of tertiary study that are measured by the indicator are comprised of a number of components. The gross earnings benefit is the difference in income earned for people with a tertiary qualification relative to an upper secondary qualification. This benefit tends to increase over time for people with tertiary education, which makes choices of discount rate important. The OECD uses average annual before-tax earnings for all employed workers, including full-time and part-time workers, by age group and gender to estimate the gross earnings benefit.[10]

The benefits also include an adjustment for better employment outcomes as a result of tertiary education. Any grants made to assist tertiary students financially while studying are counted as a benefit. This does not include the New Zealand student loan scheme’s interest forgiveness provisions.[11]

2.2.2  Measured costs

Those benefits are compared against the costs. Direct costs are those directly associated with tertiary education, such as tuition fees, costs of textbooks and other course materials. In New Zealand two-thirds of these costs are borne by the government and those public costs are outside the scope of this study.

The foregone earnings, what a student could potentially earn working instead of studying, should also be considered. These will depend on the foregone wage and the length of study. The OECD, use a proxy measure based on the full-time equivalent minimum wage in each country.[12]

Increased future income taxes due to higher earnings as a result of tertiary education are a cost to the graduate. As well, increased future income also results in fewer social transfers payments targeted for lower incomes.

Social contributions are the counterpart of taxation for funding public social protection and private funded social insurance schemes. Private social contributions rise as incomes rise, although New Zealand is unusual in the OECD in not having a material level of social contributions deducted from incomes[13]