4.3 Decision-related influences

4.3.1  Industry structure

Since the earnings of an employee are largely determined by their marginal product, the value of the goods produced in their industry has a large influence on their earnings. Both the field of study and the industry in which a graduate is employed affect the earnings benefit of their tertiary education.

The empirical literature shows that students of agriculture, humanities and the arts have the lowest returns, while students of engineering and medicine have the highest.[42]Studies for Greece, Slovenia, the United Kingdom[43], Australia[44], and the United States[45] found that studying agriculture or humanities leads to returns between 40% and 90% lower than average. In contrast, engineering and medicine are associated with 10% to 60% higher returns.

In New Zealand, literature is scarce on how returns or the earning premium varies by industry; however, Scott calculated an earnings profile for graduates with a tertiary qualification.[46] Benchmarking against the returns to a humanities graduate, health graduates earn the most: 1.62 times more than a humanities graduate does in the first year following graduation and 1.25 times higher in the third year. Consistent with the international findings, creative arts graduates have the lowest earnings. Since the field of study is significantly influenced by the industry in which people intend to work, we have conflated these two effects but the distinction is not overly important for our purposes.

It is not surprising that returns vary across industries and fields of study. This variation in returns across industries may be a reflection of the skill requirements associated with the knowledge and technology density of each industry.[47] Technology-intensive industries are more likely to employ skilled workers who are more able to manage capital with higher technology content, and in turn demand higher pay. These skilled workers are required to have correspondingly greater human capital and stronger signals in the labour market, hence their high tertiary qualifications. The gap in the returns across industries can also be a result of the uneven impact of technological development on productivity.[48]

It is also possible that the average returns to subjects such as engineering and medicine are higher simply because there is a clearer career path in those vocational subjects. That is to say, vocational subjects with a clear line of progression into a high-paying industry may see higher average returns than non-vocational subjects with a broad range of returns in varying industries.

Clear lines of progression may also make these kinds of occupations more attractive to people with considerable ability (endowments) as it reduces a range of earnings risks associated with subject choice.[49]

Ultimately, this is likely to be a compositional factor affecting aggregate returns. It suggests that returns need to be examined at an industry level for conclusions to be drawn about the efficacy of New Zealand's tertiary education. Simply observing that returns vary across industries does not help to understand whether the international, intra-industry returns vary, which would point to potentially important differences. The composition of industries in New Zealand is a topic outside the scope of this research, but is likely to be closely related to the nation's endowments.