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


It is well established that improvements in education are associated with long-term improvements in economic performance. There are three broad theories about how education influences economic performance:

  • The basic human capital approach is that education improves the overall skills and abilities of the workforce, leading to greater productivity and improved ability to use existing technology, and thus contributing to economic growth. 
  • The innovation approach links education to improving the capacity of the economy to develop of new ideas and technologies.
  • An extension of this is the knowledge transfer approach, which sees education as a means of spreading the knowledge needed to apply new ideas and make use of new technologies (OECD, 2010a).

However, there is an important question as whether there is a causal link between education and economic performance, and if so, in what direction. It may be that the two are associated, but not causally linked. It also could be that better economic performance leads to an increase in educational participation and achievement. Or it could be that having more people with education leads to improved economic performance.

In general, education and economic performance are likely to be interlinked. Having a more educated workforce enables firms to take advantage of new economic opportunities, leading to improved performance. Also, economic growth can lead to greater national and personal wealth, which increases the resources available and opportunities for education.

Economic analysis shows that on the whole, improvements in school-level education lead to improvements in economic performance, and more so than the other way around. Analyses using international cognitive tests have shown that it is improvements in cognitive skills, rather than years of schooling, which have a strong influence on economic growth. The amount of schooling undertaken is not related to growth, unless it also results in improved cognitive skills.  Therefore, the quality of education is very important (OECD, 2010a).

The evidence about the relationship between tertiary education and economic performance is less clear. Long-run analysis of the New Zealand economy has shown that increased tertiary education is related to economic performance. Razzak and Timmins (2010) showed that increases in the proportion of employees with bachelors degrees and above are highly correlated to increases in the average gross domestic product per person. However, it is not clear if the growing economy attracted more degree-qualified workers or the increase in degree-qualified workers stimulated economic growth, or a combination of both.