How does investment in tertiary education improve outcomes for New Zealanders?

• Author: Nair, Bhaskaran

Abstract

Recent research conducted by the Ministry of Education implies that the level of tertiary study has a bigger impact on people's earnings than the completion of a qualification. However, controlling for level of study, qualification completion does have a significant impact on earnings. Using data drawn from the integrated dataset on Student Loan Scheme borrowers, this study uses generalised logistic regression and other techniques to analyse the association between individuals' post-study earnings and demographic factors, study-related variables and industry of employment to isolate the earnings premium from qualification completion. It also examines the extent to which that premium endures over time. The study finds that while the main determinants of the level of earnings are factors such as industry of employment, qualification level, the type of tertiary education provider and the field of study, those who complete a qualification do have a substantial earnings margin over those who study at that level without completing. The paper also surveys evidence of the non-economic benefits of tertiary education in an effort to get a sense of breadth of the returns to society from its spending on tertiary education.

INTRODUCTION

New Zealand invests heavily in tertiary education. In 2005/2006, the total government expenditure in tertiary education was $4.3 billion (2)--of which 47% went on tuition subsidies and 6% to training for designated groups (Ministry of Education 2006). Individuals and their families also invest substantial amounts in their tertiary education. In the public tertiary institutions alone, $634 million was spent on domestic tuition fees in 2005, while businesses paid about $56 million in cash (and also made substantial non-cash contributions) to subsidise industry training (Ministry of Education 2006). The purpose of this investment--both the private and the government components--is to lift economic and social outcomes for individuals, and hence, for New Zealand.

This paper looks at evidence for the returns on that investment, by examining evidence for the influence of tertiary education on the formation of human capital--principally by examining the incomes paid to holders of tertiary qualifications in the labour market. It concludes:

* Attainment of tertiary qualifications is associated with a higher likelihood of employment--especially during times of economic recession.

* Those with tertiary qualifications earn more than those without.

* The successful completion of a tertiary qualification results in a premium on earnings over those who do not complete.

* There are better health and lifestyle outcomes for those who attain tertiary qualifications.

HUMAN CAPITAL

Human capital has been defined as "the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being" (OECD 2001). There is great interest in the concept of human capital because a country's prosperity is widely considered to be dependent on its stocks of human capital (Le et al. 2005).

The measurement of human capital is complex. In their review of the literature on the measurement of human capital for the New Zealand Treasury, Le et al. (2005) identify three broad approaches to measuring human capital:

* initial attempts to measure human capital concentrated on the costs of raising and educating a person, that is, the costs incurred in the acquisition of skills and competencies

* secondly, human capital was estimated by looking at the level of educational qualifications in the population, with qualifications being treated as a proxy for skills

* thirdly, human capital has been measured by looking at people's earnings in the labour market.

Earnings are an important index of human capital because a rational employer pays an employee such that the marginal return from the investment made in that employee is positive. In crude terms, if the cost of employing a worker--principally wages--exceeds the value created by the worker, the employer has an incentive to reduce that worker's wages or else to dispense with their services. Thus, income reflects the value a worker creates and, by implication, the skills he or she brings to the workplace. The use of income as a measure of human capital also recognises the acquisition of skills in the workforce, following the completion of formal education.

The use of people's labour market earnings in the quantification of human capital stocks is complex. However, for the purposes of this paper, what matters is that there is a relationship between human capital and earnings--the higher the lifetime earnings of an individual the higher that person's level of human capital, all other things being equal.

This paper explores the connection between tertiary education and human capital through examining the influence of tertiary education on employment and earnings.

LABOUR MARKET OUTCOMES OF TERTIARY EDUCATION

Unemployment

Unemployment data from Statistics New Zealand's Household Labour Force Survey shows that those who hold a tertiary qualification have lower unemployment rates compared with those who do not. Figure 1 presents unemployment rates by highest qualification and age group in 2006. Overall, for those aged 15-64 there is a clear relationship between holding tertiary qualifications and lower unemployment. The unemployment rate for those with a bachelor's degree or higher qualification (3) is 2.1% and for those with an "other tertiary" qualification (4) 3.0%. This compares with an unemployment rate for those with school qualifications (5) of 4.1% and no qualifications 5.4%.

[FIGURE 1 OMITTED]

However, this level of aggregation masks an underlying relationship between age, highest qualification and likelihood of employment in the 2006 data. To show this, Figure 1 also presents the unemployment rate by highest qualification in the 15-24, 25-39 and 40-64 age groups. The data shows that the unemployment rate of those aged 40-64 with school qualifications (1.8%) is actually slightly lower than those with tertiary qualifications (2.5% for bachelor's degree or higher and 2% for "other tertiary" qualifications). Even for those with no qualifications in that age group, there is little difference in their unemployment rate compared to those with tertiary qualifications.

The greatest employment advantage in holding tertiary qualifications is in the 15-24 age group, where a bachelor's degree or higher qualification provides an easier initial entry into the labour market. The unemployment rate of a person in this age group with a bachelor's degree or higher qualification was 2.9%, "other tertiary" qualification 8.6%, school qualification 8.4% and no qualification 13.8%.

There are a number of potential reasons for these outcomes. The work experience of older workers may help to reduce the disparity in unemployment rate. In addition, the current tight nature of the New Zealand labour market may reduce the advantage that tertiary qualifications bring to the likelihood of employment in the older age groups.

To illustrate the impact of the business cycle on unemployment, Figure 1 also displays the unemployment rates in the various age groups for 1998, this being the last year that the New Zealand economy was in a sizeable recession. The unemployment data in that year presents a different pattern to that observed in the 2006 data. In 1998, the advantage that holding tertiary qualifications had on employment likelihood was maintained across all the age groups. In the 40-64 age group for example, the unemployment rate of those with a bachelor's degree or higher qualification was 2.8%, compared with 4.6% for those with school qualifications and 8.4% for those with no qualifications.

This would imply that a key advantage of holding tertiary qualifications is that employment levels are sustained during a recession, whereas, those with school or no qualifications are more likely to have their likelihood of employment reduced.

Income

Data from Statistics New Zealand's Income Survey shows a strong association between the attainment of tertiary qualifications and higher incomes. Figure 2 displays the premium on median hourly earnings by age group and highest qualification, compared with a person with no qualifications. The 2006 data shows that in the 15-64 age group, those holding a bachelor's degree or higher qualifications had hourly earnings that were 64% higher than those with no qualifications. The figures were 29% higher for those with "other tertiary" qualifications and 6% higher for those with school qualifications. In the 40-64 age group, the premiums were 67%, 30% and 20%, respectively. Therefore, the premium on higher qualifications would appear to persist across all of the age groups.

[FIGURE 2 OMITTED]

The 1998 premiums on median income are also displayed in Figure 2...