In a recent column on Why NZ’s return to investment in tertiary education is so low  columnist Brian Fallow quotes an OECD study (440 pages) but actually gets his analysis mostly wrong.

This is a big problem in mainstream media today where presumably because of deadlines and lack of qualified staff the columnist has gone for a few sound bites and not looked at whether the OECD report makes any real sense.

OECD-Education_at_a_Glance-2013.pdf   is a copy of the full report.

For anyone in New Zealand involved in the education sector – ( disclosure: I work part time for a tertiary education organisation) part of the motivation for all of the investment  is the idea that graduates will do better in the real world than those without the same training or skills.

It costs time and money to study for 3 or more years and the first thing any student wants to do is to pay for that education by increasing their earning power and then some.

If as this study seems to suggest that in New Zealand all that extra study only adds 12-18% of extra pay depending on which group of graduates you look at then our tertiary education sector is a serious waste of time.

But only if the numbers are correct – which they are not.

Mr Fallow looks at some of the factors that might explain the NZ results but none of those are very satisfactory and he concludes with suggesting that maybe there are too many students studying subjects that “the market doesn’t value”.

I had a look at the report and In my view there are at least 4 other factors that make much more sense as a way to look at the NZ variances. Fallows column came out on Nov 21, 2013 but well before that (in July 2013) the NZ Treasury had already looked at the OECD report and pinpointed some issues with measurement.

There are a whole range of background factors than influence earnings that are covered in the full report (440 pages) For example on page 33 they note that in Australia, Canada, Ireland and NZ the proportion of women with tertiary qualifications is higher than for the other countries.

We know that there is a gender equity pay gap between men and women in many countries and so that would skew results but it needs a separate analysis which perhaps one of you readers could do?

1. Are the numbers correct? A working paper analysis by the NZ Treasury of the OECD report says no. The Treasury analysis was written up in July 2013 and so should have been at least mentioned by Fallow who is writing some four months later.

“According to the latest OECD measures, the private rate of return for New Zealand is 8.9%, compared to an OECD average of 12.4%, placing New Zealand toward the bottom of the OECD ranking. The aim of this study is to better understand the reasons for that gap and determine whether the low returns could be considered as problems amenable to policy interventions.

We identify a number of measurement issues with the OECD standardisation. We develop a decomposition approach and provide a series of decompositions of the New Zealand-OECD gap. Our analysis shows that about half of the gap in New Zealand’s private returns can be explained by the way OECD private tertiary returns are measured (eg, old tax rates, New Zealand’s higher employment rates, and compositional issues which have not been controlled for in the OECD analysis such as the mix of degrees and graduates in New Zealand) rather than a “real” gap.”

As Homer Simpson says. Doh. How does an economist ( or economics jounalist?) writing for a major newspaper miss such a thing?

A key point from the treasury working paper is that Low returns relative to the OECD average are mainly due to a lower relative wage premium

New Zealand has a significantly higher proportion of Type B degrees than the OECD average. Combining the earnings of the two Types of degrees, as the OECD does, significantly reduces their reported returns to tertiary education for New Zealand.

Translation. NZ has lots of graduates who have Type B degrees ( A type B is below bachelors) This lowers the overall earnings lift that comes from mostly Type A degrees in other countries.

2. Do they make any sense in the wider economy ? What would be a a good reality check? For example lets compare one of the OECD countries where they are paid much more for their qualifications but if that is Spain where youth unemployment is 3 times higher than in NZ then that is a bogus result. Yes those Spanish graduates with qualifications are being paid much more than NZ graduates when compared to non-grads but that doesn’t tell the full story. Employment rates in NZ are actually quite low compared to many other countries.

My point matches the “NZ’s higher employment rates” in the treasury report.

3. All tertiary qualifications are not the same and do not have the same payback potential.

This is an obvious point and in it would be useful to know the relative composition of the graduate pool by country. For example a country where most graduates are engineers or medical doctors the expectation would be that they have a higher earnings differential compared to non graduates or “arts graduates”.

This is a double edged sword though because in the case of New Zealand medical studies take longer and cost more than almost all other degree studies. Those med students mostly all leave NZ as quickly as they can because they can indeed earn more almost anywhere in the world. And as they likely have bigger loans to pay off who can blame them. NZ then ends up with a majority of medical staff who have been trained somewhere else in the world – not necessarily in an OECD country.

My GP was trained in Bangladesh. Compared to 90% of the population of Bangladesh he earns a kings ransom in New Zealand but in the public health system of NZ he earns less than he would in the U.S, UK, Australia or many other OECD countries.

Fallow hints at the effect that so may qualified New Zealanders might have on the economy but I believe he underestimates the net effect. There are something like one million plus expat New Zealanders living outside of NZ. That is conservatively 20% of the total population. If we factor in that this diaspora is made up of a higher percentage of highly qualified graduates than in the general NZ population then this is a major earnings leak for NZ.

Simple translation. If your NZ degree can earn you much more in the U.S, UK or Australia why wouldn’t you leave NZ. We then import graduates from non- OECD countries and other places to cover the gap.

NZ prides itself on lifestyle but increasingly living here is expensive – especially in the big cities and when the total population of the country is a shade over 4m then the attraction of larger populations (and markets) is obvious.

Which brings us to the final factor and possibly the most concerning one for NZ’s long tern economic well being.

4. The NZ economy earns 71% of its GDP from services and much of that from the tourism sector.

That is a very raw number but at the very least suggests the very structure of the NZ economy is skewed towards lower earnings – regardless of what your academic qualification is.

To put it bluntly – in New Zealand there are too many graduates working as barristas in cafes. Yes we have some of the best coffee in the world but no one needs a university degree to make coffee.

I personally know of science PHD’s working outside their subject field because there are no jobs in NZ for them. That is absolutely shocking. A PHD is a major commitment of time and other resources and we in NZ should do all we can to employ these graduates on projects where they can earn a premium for their companies and themselves.

See the chart below: Entry rates into advanced research programmes and average age of new entrants (2011). NZ has just over 1% of students in Advanced research programmes like PHD but a high number of overseas students at that level.

On a brighter note – included in that 71% of services based GDP is the IT sector ( and 74% of the population is employed in the services sector. NZ earns more than $7b each year from the IT sector and that is a growth area. We need that group to be a much larger contributor to the NZ economy as earnings per person are much higher than the average.

If you are a NZ politician or a voter reading this you have heard most of these ideas before.

If we want an education system that lifts individual earnings and transforms the structure of the economy we need to create more value. I love the great coffee here but it is so frustrating to have a mainstream media and a government that is asleep at the wheel.

I have previously mentioned the Callaghan talk Sir Paul Callaghan — StrategyNZ: Mapping our Future – March 2011 before.

Back in 2011, the late Sir Paul Callaghan says that we in NZ choose to be poor and to earn less than we should. A tourism job earns about 80,000 per job but those are mostly unskilled jobs. Our friends at the cafe again..

The dairy industry earns more than $350k per job which is why even though that sector is only 4.7% of GDP but the profitability is much much higher. However the dairy sector has pretty much reached its environmental limits and even $350k per job is not good enough. Brian Fallow: Dilemma of dairy income or environment so we can’t expect that sector to bail us out.

We know all of this but why don’t we fix it? The cynical view is that our politicians and leaders don’t really care about any of this. And New Zealand is not the only country with this problem.

Technology didn’t kill middle class jobs, public policy did

The story about graduates in NZ earning much less than graduates in other countries is a red herring.

This is a global trend and other public policy factors are at work here and in the OECD countries generally. Dean Barker wrote about the UK policy framework back in November and I hope we in NZ can learn from what has happened there and elsewhere. Note: (Dean Baker is co-director of the Centre for Economic and Policy Research

“Since 2000, the increase in employment has occurred almost entirely in low-wage occupations. There has been a decline in relative employment for both workers in middle wage and high wage occupations. If this “occupational shift story” explained trends in wages we should expect to see sharply rising wages for retail clerks, custodians and other workers employed in low-paying occupations.

Of course, we see the opposite.”

….. And continuing from the same article. As Selwyn Pellet says we need to create more jobs in the productive economy and we need to be careful about the growing inequality in our countries.

We have also seen big changes that contributed to growth of income at the top. The highlights in this category would be deregulation in the financial sector and the changes in corporate governance that pretty much allow top management to write their own pay checks.

The big difference between the items listed above and the occupational shift story is that this is a list of items that involve policy changes. If this list (which could be extended) explains the growth in inequality over the last three decades then, it means that inequality was a result of policy. It was not something that just happened; it was something that we did or was done to us.

That presents a very different policy agenda for addressing inequality.

No one would quarrel with the idea that our children should get a better education, but if a lack of skills was not the cause of inequality, more skills will not be the solution.

Rather, we might look at an agenda that would rein in finance and CEO pay, restore the strength of labor unions, and include a more balanced trade policy.

This agenda wouldn’t just mean empathy from those on top, but also lead to them losing some of their gains from the last three decades. Therefore we are likely to keep hearing stories about technology destroying middle wage jobs for some time, even if the evidence doesn’t back up the stories.

In summary NZ tertiary education is not a waste of time* but we do need to do much better at all levels and to create an overall economy that pays better than tourism or one of the other services sector jobs we have too many of. Better skills via education is only part of the story – we also need policy changes and leadership from the top.

* There are serious questions about value for money and what we do know is that University fees in most Western economies are rising. At the same time MOOC style (online alternatives) are coming on stream and in some sectors such as software development you may be better off just skipping the conventional university degree and going straight to a specialist boot camp on coding.

These long term trends won’t go away and they need to be addressed especially in NZ, Au and the U.K.