How can tertiary education deliver better value to the economy?

Publication Details

This paper asks how tertiary education can deliver better value to the economy. It is based on a presentation given at the New Zealand conference of the Association of Tertiary Education Management in Auckland in July 2010.

Author(s): David Earle, Tertiary Sector Performance Analysis and Reporting Division [Ministry of Education]

Date Published: December 2010

Understanding productivity

A key to understanding the economic value of skills in the workforce is understanding productivity. In proceeding with this discussion, some clarity around what productivity is is useful.  It is a deceptively simple statistic, with a lot of information packed into it.

Productivity is not a measure of production. It is a measure of efficiency. It measures the volume of what is produced per unit of input. Inputs are capital investment, labour, and the interaction between both.

Labour productivity measures how much is produced per unit of labour. Capital productivity measures how much is produced per unit of capital. Multi-factor productivity measures changes that are not directly attributed to either capital or labour, which can be ascribed to changes such as the application of technology to improve production, as well as measurement error. None of these measures are “pure” in themselves. For example, labour productivity may change due to how well capital assets and technology are utilised, without any change in the effort or capability of workers (Statistics New Zealand, 2010b).

Output volumes for productivity calculation are measured using a constant-price approach to
 GDP. This method fixes the price of the output at a base year, so that changes in volume can be tracked independent of fluctuations in market price. However, if the composition of the outputs changes towards higher or lower value products, this may be reflected in the productivity measure.  That is, a change from low value-add products to high value-add products could result in increased productivity if the inputs required to produce them remain the same.

Productivity matters because it can drive growth in the quantity and value of national production. This can lead to improved incomes and economic wellbeing and improved international competitive advantage.

However, productivity is not what firms and employees focus on most. For firms, the key measure is profitability and for employees it is wages.  Changes in productivity may or may not influence these directly, or even at all. For example, firms can raise their profits by taking on more, less productive workers, in order to meet growing demand. This results in a drop in productivity, while increasing profitability. Wages broadly reflect the productive value placed on workers. However, changes in wages do not necessarily match changes in the value of what workers produce.