Indicators Live: Education at a Glance 2009, Results for New Zealand

6. How do returns to education in New Zealand compare?

Various indicators in Education at a Glance seek to measure the benefits, both private and public, from higher levels of education (and the costs to individuals of lower levels of education). These costs and benefits can take the form of different earning and employment prospects.

6.1 Employment

6.1.1 Proportion of the youth population is not in education and unemployed (2007)

Young people are the principal source of new skills in the labour market and those with low skills are often penalised (OECD 2009). Therefore, it is important that young people are engaging in education or are in employment. This OECD indicator examines the proportion of people aged 15-19 years, 20-24 years and 25-29 years who are not in education and are unemployed.

The percentage of the younger population that is not in education and unemployed in New Zealand in 2007 was lower than in Australia, and lower than the OECD average in each of the three age cohorts. Figure 21 presents the percentage of each cohort not in education and unemployed in 2007 for selected countries. The graph shows that about 2.6 percent of people aged 15-19 years were not in education and unemployed; likewise were 3.2 percent of the 20-24 year olds, and 2.5 percent of the 25-29 year olds. In Australia, 3.3 percent of 15 to 19 year olds were not in education and unemployed, as were 3.3 percent of 20-24 year olds and 3 percent of 25-29 year olds. Across the OECD an average of 2.8 percent of 15-19 year olds, 6.6 percent of 20-24 year olds and 5.9 percent of 25-29 year olds were not in education and unemployed.

Figure 21: Percentage of the cohort population not in education and unemployed by age group 2007

Source: OECD (2009), Education at a Glance, Table C3.3

This positive result for New Zealand partly reflects the historically low unemployment levels being experienced in 2007. Since then, there has been a marked rise in youth unemployment in New Zealand as the country has moved into recession.

6.1.2 Impact of education on the likelihood of employment

With its very low unemployment, New Zealand has enjoyed reasonable results on the OECD’s employment indicators. However, as much of the recent growth in employment in New Zealand has been among those with low or no qualifications, the level of qualifications held is a less powerful predictor of employment in this country than in some others. This particular employment indicator examines the employment rate of the population aged 25 to 64 years, by level of education qualification. Because women have a lower level of engagement with the labour market, the analysis examines the employment rate for men and women separately.

In New Zealand, the association of higher employment rate with higher education qualifications is not as strong as exhibited by Australia, or by the OECD average. Figure 22 contains the unemployment rates by gender and tertiary education level in 2007 for selected countries. In New Zealand, men with a lower secondary qualification have an employment rate of 78 percent. This compares with an employment rate of 92 percent for men with an upper secondary qualification, 92 percent for post-secondary non tertiary qualification and 91 percent for both tertiary type B and tertiary-type A qualifications. The associated figures for New Zealand women are 60 percent, 76 percent, 75 percent, 77 percent and 79 percent, respectively.

For both genders, there is only a small or little difference in the rate of employment between upper secondary to tertiary-type A qualifications, especially for men. In other countries, there is a clearer positive association between the employment rate and level of educational qualification. For example, the chances of employment for males are four percentage points higher for tertiary-type A in Australia, compared with upper secondary (twelve percentage points for women). This compares with a figure of six percentage points for men in the OECD on average (13 percentage points for women).

Figure 22: Employment rate by gender and tertiary education level 2007

Source: OECD (2009), Education at a Glance, Table A6.1.a

Although there is not much difference in the likelihood of employment between upper secondary and tertiary level qualifications, 2007 was at a time of historically low unemployment. Trend data suggests that one of the main advantages of higher education qualifications, especially in New Zealand, is that they insulate people from the impact of the economic cycle.

Figure 23 shows the employment rate at various levels of education in 1997, 2002 and 2007. The economy in New Zealand was relatively weaker in 1997 than in 2007. Figure 23 shows that in New Zealand, people with below upper secondary or upper secondary post-secondary non-tertiary education exhibited rises in their employment rate between 1997 and 2007. For example, in 1997, the employment rate for people with below upper secondary qualifications was 64 percent. By 2007, the employment rate for this group had risen to 71 percent. This compares with people with a tertiary education, where their employment rate remained relatively stable at around 82 and 84 percent in 1997 and 2007, respectively. The difference in employment rates is minimised during times of strong economic growth, but in times of weaker economic performance it is those with lower education qualifications that are affected the most, in terms of a lower chance of employment.

A similar pattern is exhibited in Australia, although the average result in OECD countries does not illustrate the same gains in employment rates for those with lower education qualifications between 1997 and 2007.

Figure 23: Employment rate by level of qualification and year

Source: OECD (2009), Education at a Glance, Table A6.2a

The trend in unemployment rates over the past decade and its association with levels of education is even more striking. In New Zealand unemployment has fallen most for those with the least education (below upper secondary level) as shown in Figure 24. Across the OECD, unemployment levels have varied over time, but those with higher qualifications (tertiary education) have maintained a relatively constant margin over the least qualified in terms of reduced unemployment (refer to Figure 25).

Figure 24: Unemployment rate by level of qualification and year: New Zealand

Source: OECD (2009), Education at a Glance, Tables A6.4a

Figure 25: Unemployment rate by level of qualification and year: OECD average

Source: OECD (2009), Education at a Glance, Tables A6.4a

6.2 Earnings/benefits of education

6.2.1 Private and public returns from tertiary education

Since 2007, the OECD has been calculating rates of return on tertiary education. This entails estimating the costs to government and to an individual student of undertaking a tertiary qualification, compared to the benefits in the form of additional tax receipts for the government and extra earnings for the individual over the expected life of a graduate.

This is a complex calculation that depends on the quality of the data used by the OECD analysts to make the necessary estimates, and on them making a number of assumptions. The calculation is narrowly focussed on economic returns – it makes no provision for the non-financial benefits, to individuals and to society, which research shows come from investing in tertiary education.

Despite these limitations, this rate of return analysis is useful as a contribution to our understanding of the value we get from our investments in tertiary education.

The OECD analysis looks at:

• differences in the returns for men and women
• the returns for degree-level study, as opposed to post-secondary non-tertiary study and completion of secondary school
• the private net present value – that is, the benefits that individuals get from their investment in tertiary education, and
• the public net present value – that is, the benefits to the government.

The methodology used by the OECD generates the net present value (NPV) of attaining higher levels of education. An NPV is generated by discounting future cash flows against the costs of attaining higher levels of education. This provides us with a figure to compare returns from alternative education investments. The analysis includes costs such as the foregone income from studying a qualification when deriving the NPV.

The OECD uses a five percent discount rate for future cash flows, equivalent to potential interest earnings in relatively low-risk government bonds. The OECD then uses purchasing power parities to covert the various national currencies into US dollars for comparison

The OECD NPV calculations assume that the person is single and childless, and that the foregone earnings from engaging in education are set at the minimum wage in each country.

A positive NPV indicates that the financial returns from attaining the next level of education will provide a greater return than investing in government bonds. A negative NPV indicates the individual would achieve a higher return if they invested in government bonds rather than education.

First, looking at the private returns from an individual attaining an upper secondary non-tertiary level qualification, Figure 26 and Figure 27 show that there is a positive net present value for attaining this level of education in New Zealand. The NPV for men is around US$31,000 and around US$11,500 for women. The large discrepancy between men and women is mostly a result of a loss of transfer payments⁷ for women as they move to this higher level of education. The NPV in Australia, and the OECD average, are higher for both men and women than in New Zealand. For example, the NPV for men in Australia is around US$49,500 and for women US$25,800. This result reflects New Zealand’s lower than average income levels, but also the fairly compressed wage differentials in its labour market.

Figure 26: Private and public net present value for upper secondary non-tertiary⁸ education level (2005)

Source: OECD (2009), Education at a Glance, Tables A8.1-A8.4

There are also positive public NPVs from attaining an upper secondary non tertiary qualification. The NPV in New Zealand is around US$11,200 for men and around US$24,100 for women. The result for men is slightly below that of Australia (around US$11,750) and the OECD average (around US$14,050). However, the public NPV for women in New Zealand (around US$24,100) is higher than in Australia (around US$18,430) and the OECD average (around US$10,560). The reason for this higher return in New Zealand relates to the reduction in transfer payments to women as a result of them attaining this level of qualification.

Figure 27: Private and public net present value for tertiary education level (2005)

Source: OECD (2009), Education at a Glance, Tables A8.1-A8.4

Overall, the OECD statistics suggest that there are positive financial returns to both individuals and the public from people attaining upper secondary non-tertiary qualifications.

For New Zealanders who attain a tertiary qualification, the OECD calculation also shows a positive NPV. The private NPV for attaining this level of education is around US$40,000 for men and around US$33,570 for women. Although positive, the private NPVs for both men and women in New Zealand are below that of Australia and the OECD average.

The public NPV for people attaining a tertiary education is positive for both men and women in New Zealand. The public NPV is around US$28,200 for men and around US$13,700 for women. These public NPVs are lower than in Australia and the OECD average for both men and women.

6.2.2 Social outcomes from attaining higher education qualifications

In addition to the positive financial returns gained from attaining higher levels of education, better social outcomes (OECD 2009) can also be associated with them. The OECD has used survey information to measure the association between levels of education and social outcomes. For New Zealand two social outcomes are measured: interest in politics and the level of interpersonal trust.

To generate estimates of association between education and social outcomes, the OECD uses statistical modelling to control for other factors that may influence participation, such as age and income. This isolates the impact of education on these social outcomes.

The New Zealand data in this indicator is sourced from the 2004 International Social Survey Programme. For most other OECD countries, the estimates are derived from the European Social Survey (2004 and 2006) or the Adult Literacy and Lifeskills Survey (2003).

The measure presented in Figure 28 and Figure 29 is the predicted percentage of people who are at least ‘fairly interested’ in politics. Because interest in politics increases with age, the predicted percentages at age 30, 45 and 60 years are presented for different levels of education, while holding income constant at the country average. The results show that the likelihood of interest in politics in New Zealand increases as the level of education rises at each of the three ages displayed in Figure 28.

The marginal effect, that is, how much interest in politics rises as the level of education increases, is lower in New Zealand compared with the average OECD increase. However, as can be seen in Figure 28, the OECD average is much lower at each age, being derived from an overall much lower base.

Figure 28: Estimated percentage of individuals expressing political interest by level of education and age

Note: NZ data refers to 2004. The OECD country average is for 21 countries

Source: OECD (2009), Education at a Glance, Table A9.6

A similar trend is also observed at different levels of income when holding other factors, such as age, constant. This shows a greater interest in politics as education qualifications increase in each income group.

Figure 29: Estimated percentage of individuals expressing political interest by level of education and income levels

Note: NZ data refers to 2004. The OECD country average is for 21 countries

Source: OECD (2009) ,Education at a Glance ,Table A9.7

The association between higher levels of education and interpersonal trust are illustrated in Figure 30 and Figure 31. This shows the predicted percentage of the population who believe that, at the very least, most people do not try to take advantage of others. The results show that a higher level of education is associated with higher levels of interpersonal trust. Figure 30 shows the estimated percentages of interpersonal trust in people at three representative ages in varying educational categories.

Figure 30: Estimated percentage of individuals expressing interpersonal trust by level of education and age

Note: NZ data refers to 2004. The OECD country average is for 21 countries

Source: OECD (2009), Education at a Glance, Table A9.7

In New Zealand, the marginal effect from attaining higher qualifications is less than that indicated by the OECD average. However, once again, the OECD average is derived from a much lower base than the New Zealand data.

Similar results are reported for those people at different levels of income (see Figure 31). Overall, higher education is associated with a greater level of interpersonal trust.

Figure 31: Estimated percentage of individuals expressing interpersonal trust by level of education and income level

Note: NZ data refers to 2004. The OECD country average is for 21 countries

Source: OECD (2009), Education at a Glance, Table A9.7

The OECD findings of positive social outcomes being associated with higher levels of education complements the findings of the New Zealand Census-Mortality Study, which found that higher levels of education were associated with lower mortality rates.⁹ The findings also complement the results from a social measurement tool developed by the Ministry of Social Development, the Economic Living Standards Index (ELSI), which consolidates large amounts of information about different aspects of economic wellbeing into a single score.¹⁰ The effects of education on the ELSI index clearly illustrate its association with improved living standards.