Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Why NZ's return to investment in tertiary education is so low

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Fewer than six out of 10 students who begin studies graduate. In Australia it is three out of four. Photo / Mark Mitchell
Fewer than six out of 10 students who begin studies graduate. In Australia it is three out of four. Photo / Mark Mitchell

Here's a puzzle: why are the returns to investment in tertiary education in New Zealand so low, relatively speaking?

The OECD's numbers on this are stark.

Both for the individual and for the taxpayer the money spent on a university education pays dividends. It is a good investment.

But much less good than in other developed countries.

The OECD measures this a couple of ways.

It compares the incomes of working people with an upper secondary education and a tertiary education. In New Zealand the difference is the second smallest among 34 developed countries for both men and women.

Tertiary graduates aged between 25 and 64 earn on average 18 per cent more than those with an upper secondary school education, compared with an average 87 per cent more across the OECD.

For those aged between 25 and 34 the premium is 12 per cent against 40 per cent in the OECD as a whole.

The OECD has also calculated a net present value (NPV) for the return on investment in tertiary eduction, both by the individuals concerned and by the state.

There are a lot of moving parts in a calculation like this.

For the return on private investment in education it takes the difference between earnings of university graduates and those with an upper secondary school education for each age group, adjusts for tax and transfer payments, and discounts the difference in lifetime earnings back to a present value, using the same discount rate (3 per cent real) for each country.

Then it nets off the present value of the cost to the individual, including earnings forgone during his or (more likely) her student years.

For New Zealand men the result is an NPV of US$66,000 and for women US$42,000. That compares with OECD averages of US$162,000 and US$114,000 respectively. Only Turkey has worse numbers, and only for men.

The comparative numbers for the return on the public investment in tertiary education aren't too flash either.

In this case the benefits side of the calculation consists largely of the higher tax take and lower transfer payments associated with higher earnings.

Student loans are not included in the calculations.

For New Zealand men the NPV of the state's investment in their tertiary education is US$38,000, compared with US$105,000 across the OECD. For women it is just US$7000, against US$57,000 for the OECD as a whole.

The puzzle is that none of the obvious explanations for these conspicuously poor results seems to hold water.

It is not as if New Zealand is some highly egalitarian society with a steeply progressive tax system that keeps the dispersion of incomes tight.

The standard measure of income inequality, the Gini co-efficient, is close to the OECD average both before and after tax and transfers.

Nor is it a case of any obvious under-spending on education.

In 2010 the government spent 2 per cent of gross domestic product on tertiary education, compared with 1.4 per cent across the OECD. Spending on all levels of education at 7.3 per cent of GDP was also above the OECD average of 6.3 per cent.

Spending per tertiary student is about the middle of the pack in US dollar terms.

Nor is it likely to be a case of students embarking on tertiary studies with a substandard secondary education behind them. New Zealand ranks highly in the international PISA league table which reflects standard tests of reading, mathematics and science among 15-year-olds.

The figures may be skewed by a high dropout rate.

Fewer than six out of 10 students who embark on a tertiary programme graduate. In Australia it is three out of four.

The OECD points to a particularly large difference - 34 percentage points - between full-time and part-time students in terms of completion rates.

Some mature students, its suggests, do not intend to graduate but rather choose to take a few courses as part of lifelong learning or upskilling.

Well, maybe.

It is not obvious why the drop-out rate should be significantly higher in New Zealand than across the OECD. One would hope the institutions concerned are looking at why it is so high.

Another potential explanation is the Kiwi diaspora.

Could it simply be graduates are earning the higher salaries and paying the higher taxes that you would expect, but overseas?

A survey of members of KEA, the expatriates' network, this year found them to be significantly better educated and better paid than folks at home.

About 63 per cent have a bachelor's degree or higher and another 21 per cent some other tertiary diploma or certificate.

And half of them earn more than $100,000 a year.

But the flow of migrants runs in both directions and is net positive most of the time.

The OECD numbers show the tertiary-educated as a share of the population, broken down by age group, to be at least as high as the OECD average.

As officials like to say, we have a brain exchange rather than a brain drain.

So where does this leave us?

With the suspicion that it is not about quantity but quality, or rather relevance to the needs of the labour market.

You could call it the "What on earth are media studies?" effect.

"A year after graduation, the median salaries of young adults in New Zealand who had majored in health and had graduated in 2010 ... were 58 per cent higher than the median salaries of graduates in creative arts fields," the OECD says.

For engineering graduates the difference was 45 per cent.

But clearly such differentials also apply in other countries.

And even if the differentials are wider elsewhere, they are unlikely to explain the unusually narrow gap in this country between the earnings of tertiary and secondary school graduates unless a very high proportion of students have been taking courses the market does not value.

- NZ Herald

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