5 Conclusions and Future Research
The first finding from our research is that about half of the measured gap in New Zealand's private returns to tertiary education can be explained by the way returns are measured rather than a “real” gap. The remainder of the gap in tertiary returns is closely related to factors that are usually identified as reasons for generally poor economic performance such as low rates of innovation, low capital intensity and distance to markets. Unfortunately, research directly linking the drivers of economic performance to tertiary returns in New Zealand is lacking.
5.1 Low returns relative to the OECD average are mainly due to a lower relative wage premium
New Zealand's low returns to tertiary education are primarily due to comparatively small increases in earnings from gaining a tertiary qualification (the gross earnings premium) relative to the OECD. Therefore, while earnings for a tertiary degree are significantly higher than a secondary degree in New Zealand, the wage premium is lower in comparison to the OECD average. Other components are far less important in determining the overall difference in private returns relative to the OECD average.
The difference in gross earnings is partially offset by our lower direct costs of tertiary education, and the lower tax and social contributions burden on graduates relative to non-tertiary graduates. The latter is itself a consequence of the low gross earnings premium.
Our analyses show that individuals with Type A (University) degrees have significantly higher earnings growth over the life cycle (similar to the OECD average), compared to Type B (below Bachelor) qualifications in New Zealand. New Zealand has a significantly higher proportion of Type B degrees than the OECD average. Combining the earnings of the two Types of degrees, as the OECD does, significantly reduces their reported returns to tertiary education for New Zealand. It is important to recognise this difference in these cross-country comparisons, and in interpreting returns to higher education when combining private returns across different types of degrees. In addition, it is useful to separate estimates of returns to higher education by Type A and Type B degrees.
5.2 Measurement issues explain around half of the private returns gap
There are a number of measurement issues with the OECD indicator, which suggest that New Zealand's tertiary returns to individuals are being underestimated relative to the OECD average. Unless adjusted, the current OECD standardisation and measurement issues we have identified in this paper would continue to systematically under-estimate New Zealand's returns to tertiary education and its ranking relative to the OECD average.
5.3 Other Factors
Once the measurement issues are taken into account there remains a gap between New Zealand and the OECD average.
The evidence reviewed indicates that the private rate of return to higher education in New Zealand, as mainly influenced by the wage premium, is also influenced by other endowment, policy or decision factors that affect New Zealand's productivity and innovation.
5.4 Future research
Our findings highlight the need for better analysis of potential problems. Future work should be targeted towards estimating the impact of the factors on returns in New Zealand: for many of the factors, we have had to rely on overseas research from economies different from ours, or proxies for the return to education such as aggregated earnings for full-time and part-time workers for consistency with OECD calculations.
Highest priorities for further research
There is a significant difference between the private rates of return to Type A and Type B degrees in New Zealand. The separate measurement of private returns to higher education, and earnings growth over the life cycle, by type of degree is recommended.
The earnings of immigrants are economically significant and a factor in the OECD index. A first step in understanding the issue is to review the prior research in New Zealand on immigrants and their experiences in the economy.
This research focused on comparing New Zealand to the OECD average for one time period. Further analyses across time in New Zealand, and panel data analysis across the OECD countries is recommended to identify the impact of some of the drivers. This approach can investigate the impact, and stability of factors over time in determining New Zealand's relative performance.
New Zealand has relatively low wage growth, in part due to low rates of investment and innovation. This low wage growth disproportionately affects skilled workers and returns to education relative to the OECD. We recommend future research on life-cycle earnings growth patterns across skill group and industry.
Research at a more disaggregated level for industry and type of degree with New Zealand panel data would further identify the relative importance of some factors and investigate their interactions. Some of the factors affecting returns are expected to work interactively in determining the returns to tertiary education through earnings effects. For example, type-of-degree effects are potentially more prominent in certain industries and they may interact with some other factors, such as capital intensity and innovation.
The relationship between firm size (the lack of large firms in New Zealand) and lower overall returns to tertiary education is worthy of further investigation.
Finally, mismatches between employment and field of study and/or qualification level are often cited as a possible driver of low returns. There is little evidence that observed mismatches are in fact mismatches at all. However, if persistent mismatching is going on due to policy or market failures, this could be having a significant impact on returns. Whether that is the case or not is an open question.
