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How do private returns to tertiary education in New Zealand compare internationally? According to the latest OECD measures, the private rate of return for New Zealand is 8.9%, compared to an OECD average of 12.4%, placing New Zealand toward the bottom of the OECD ranking. The aim of this study is to better understand the reasons for that gap and determine whether the low returns could be considered as problems amenable to policy interventions. We identify a number of measurement issues with the OECD standardisation. We develop a decomposition approach and provide a series of decompositions of the New Zealand-OECD gap. Our analysis shows that about half of the gap in New Zealand’s private returns can be explained by the way OECD private tertiary returns are measured (eg, old tax rates, New Zealand’s higher employment rates, and compositional issues which have not been controlled for in the OECD analysis such as the mix of degrees and graduates in New Zealand) rather than a "real" gap. However, once those factors are taken into account there remains a gap between New Zealand and the OECD average. We identify a number of endowment, policy, and decision-related contributing factors, and identify directions for future research.
This paper was prepared at NZIER and the University of Auckland. It was quality approved by John Stephenson (NZIER). The assistance of Sarah Spring, Paul Gini, Julia Pearce, Roger Smyth, Sylvia Dixon, and all those who participated in discussions and provided comments on earlier drafts is gratefully acknowledged. We also wish to thank Xingang Wang for research assistance.
The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.
Table of Contents
- Executive Summary
- 1 Introduction
- 2 Components of the OECD’s findings
- 3 A framework for dissecting gross earnings
- 4 Empirical evidence on factors influencing the wage premium
- 5 Conclusions and Future Research
- Appendix A - Measurement issues
- Appendix B - Results from adjusting the OECD measure of private returns
- Appendix C - Literature search strategy
- Appendix D – References