4.2 Policy-related influences

The government has a large role in the tertiary education system: it funds the majority of tertiary education, certifies the qualifications, and in the recent years determines the total amount of funding available. That gives it a significant influence upon the skill set of the labour force through the incentives it provides to students. It also affects the skill set of the labour force through immigration. While individuals make the decision to under-take higher education or migrate to New Zealand, policy control over the supply side of the labour market gives the government a significant indirect influence on the earnings premium.

4.2.1 Mix of tertiary qualifications, and decomposition of the effects

The government affects the mix of qualifications and skills in the labour market through the different subsidy rates for different courses; caps on levels of funding at each level of tertiary education, the mix of qualifications that it certifies, and the qualifications it requires for entry into various professions.

In New Zealand, the policy settings have resulted in a large number of lower tertiary (Type B) qualifications in the labour market (Figure 6).[25] It is worth noting that the high stock of Type B graduates is not likely to be a consequence of current policies, but rather historical policies. Thus, it cannot be interpreted with respect to the current policies of the government.

Bachelor or higher tertiary (Type A) qualifications are associated with greater gross earnings benefits than lower tertiary (Type B) qualifications.[26] Consequently, a country with a relatively high proportion of Type B tertiary graduates is likely to have relatively low average returns to tertiary qualifications when Type A and Type B graduates are aggregated as in the OECD measures. Indeed, it could be the case that a country has better than average returns to each Type and yet has lower than average returns overall due to a high proportion of Type B graduates.

Figure 6 - Share of tertiary qualifications that are Type-B

Source:  Figure based on OECD data

Diplomas are generally associated with lower earnings premiums across the OECD, and lower private returns. The OECD provide gross earnings ratios by type of degree, but they produce only aggregated tertiary NPV and IRR private return indices across both Type A and Type B degree types.

To quantify the impact of the mix of qualifications on New Zealand's returns, we adjusted the indicator by re-calculating it using the OECD average shares of Type A and B qualifications instead of the New Zealand shares. To the best of our knowledge this is the first study of its type in the decomposition approach developed in dissecting the country-specific gaps in returns to education compared to the OECD average. The method we have used lends itself to similar dissections and comparison across other countries.

Our results (Figure 7) show that the mix of qualifications explains 14% of the difference between New Zealand's earnings and the OECD average for males, and 40% of the difference for females. The much greater effect of type of degree in explaining the gap for females reflects the greater prevalence of shorter diplomas among females in New Zealand as compared to the OECD average. This disaggregation highlights the importance of considering returns to tertiary degrees by type of degree completion.

Figure 7 - Contribution of qualifications mix to the difference between New Zealand's returns and the OECD average

Source:  Authors calculations, using OECD data

The type of degree effect for New Zealand reflects both the compositional effect of our greater share of Type B degrees, but also the lower earnings for Type B degrees relative to upper secondary qualifications in New Zealand. We expect that the earnings effect by degree Type partly reflects a wider range of shorter or older diplomas included in New Zealand's Type B degrees in the translation of NCEA and certificate pathways to the ISCED categories.