2.5 Which components are responsible for New Zealand’s low returns?
To determine further which components are most responsible for the difference between New Zealand's returns and the OECD's average returns, we decompose the difference in returns between New Zealand and the OECD average into the effect of each component of the index. For this decomposition we successively substitute OECD and New Zealand contributing factors. This allows us to quantify the relative contribution of each component to the gap between New Zealand and the OECD average.
Figure 3 shows the percentage of the gap accounted for by each of the components of the index.
- Figure 3 - Contribution of components to the New Zealand-OECD gap
- Source: Authors decompositions, using OECD data
The results show that the lower gross earnings benefit is the main factor in explaining the gap. In addition, New Zealand's comparatively high employment rates for non-tertiary qualified people reduce returns related to higher likelihood of employment[15]. New Zealand's public subsidy for tertiary education results in a slightly smaller direct cost to individuals compared to the OECD average, that helps to narrow the gap in returns, but the lower value of student grants cancels that effect.
Lower average wages in New Zealand also narrow the gap through lower lifetime tax costs and social contributions made, but these gains are not sufficiently large relative to the earnings differential to close the gap.Social contributions in these calculations are the employees' direct contributions to social security funds. These payments are the counterpart of taxation and earmarked for funding public social protection and private funded social insurance schemes.
Notes
- [15]This observation is not independent of low returns to education. For example, it may be that higher rates of employment for non-tertiary qualified people are a function of a comparatively high and growing number of people in tertiary education which reduces the labour supply. This means high rates of employment for non-tertiary graduates may be reflective of dynamics which are driving down returns at one end of the qualification scale while driving up returns at the other (low or no qualification) end of the scale. Further, policy has (over the period covered by this data) increasingly encouraged people at the margin of the labour market to constrain working hours eg, “working for families”. This could have the effect of reducing unemployment rates for non-tertiary qualified people by lowering labour force participation.
