Earnings advantage of the tertiary-educated

Skimming through the tweets of the chairman of the Productivity Commission –  who often includes interesting charts –  I spotted this picture.

returns to education

It is an interesting chart on a number of counts.  First, in every country shown, except the UK, the earnings advantage to tertiary educated workers is higher –  often materially so –  for older workers than for younger ones.  Second, all the countries at the far left of the chart are among the poorest of all those shown (the sample is OECD countries and “partner countries”).  And thirdly, of course, that New Zealand is over towards the far right of the chart, where the earnings advantage to tertiary educated workers is pretty low (and especially so for older workers).   The chart is drawn from this short OECD note.

Making sense of the numbers isn’t straightforward.    First, note that the chart isn’t claiming to illustrate returns to tertiary education, but the earnings margin of people who have had a tertiary education over those who haven’t.  The difference matters –  people who undertake tertiary education are different, in various dimensions, to people who don’t.    I’m in that older age group, and if I think back to my Auckland high school, only about 10 per cent of those who started in the third form made it to the seventh form.  Most of them probably did go on to university, and perhaps a few others did tertiary study later, but it was a cohort that was much more intellectually capable, on average, than the other group.   Since university was all but free to attend in those days, there weren’t even obvious financial barriers excluding capable people from poorer families.

These days, of course, a much larger share of young people undertake tertiary education.  But that probably means that the intellectual capability of the median tertiary qualifed person today is lower relative to that of the population as a whole than was the case 40 years ago.  It isn’t clear that is true if we compare the median of those with tertiary education and those without it (since the median of those without it is now likely to be quite a bit lower relative to that of the population as a whole).

Productivity performance in New Zealand has been poor for a long time, and we now start a long way behind the better-performing OECD countries.  If there were a lot of really good opportunities here then all else equal, and given how far behind we start, I might have expected the returns to enchanced skills (not, of course, the same as having a tertiary education) to be higher here than in many other countries.  The greater international mobility of people with better educational qualifications might have tended to work in the same direction.

But instead, those with tertiary educations aren’t doing well absolutely (low productivity country) or relative to those without.     And so you are left wondering quite why immigration policy is oriented towards recruiting lots of “skilled”  migrants –  particularly those with New Zealand tertiary education –  and why “education” policy is oriented towards encouraging yet larger proportions of people to undertake tertiary education.  None of which prevent’s Treasury’s living standards dashboard  – which we are told is going to help shape next year’s Budget – including the share of the population with a university degree of one of their “wellbeing indicators”.

(As far as I can tell, this particular chart also doesn’t taken of the fact that getting a tertiary education costs a lot of money –  directly (fees and living costs) and indirectly (foregone time in the labour force) and thus, if anything, probably overstates the advantage held by the tertiary educated.  There are other estimates of overall lifetime earnings advantages (or otherwise)).

10 thoughts on “Earnings advantage of the tertiary-educated

  1. Surely that age difference has more to do with the fact that earnings grow over time for the tertiary educated?

    A graduate job at a top law firm pays around 40k – probably less than a tradesman or even a slightly skilled construction labourer makes. But fast forward 25 or 30 years, and the grad is making well into the 6 figures while the labourer has only moved up a little bit.

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  2. No, I’m pretty sure they are comparing like with like: ie the earnings of 55-64 year olds with tertiary education and without, and the earnings of 25-34 years old with and without tertiary education.

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  3. only 2 percent of baby boomers have a degree. And older teachers from nz in Australia with years experience can’t practice because they don’t have a degree. Training college was what they went through.

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  4. Michael
    What about Eaqub’s book about NZ regional prosperity? It showed a strong coincidence between education and income.
    It seems that within NZ at least, more education does mean more income and job mobility.
    Tim

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    • I haven’t read that book, but from the sound of things there is nothing inconsistent with these results (and there are other OECD papers, and Treasury-commissioned NZIER research in response, confirming that returns to tertiary education are lower here than in most other advanced countries). As the chart shows, people with tertiary qualifications do tend to end up earning more than those without, and regionally(within NZ) Akld and Wgtn tend to have the highest incomes and the highest numbers with tertiary qualifications. But the margins may still be lower than those elsewhere – as I’ve shown in previous posts the margin by which Akld’s GDP per capita exceeds that of the rest of the country is v low by OECD standards. And it is also worth remembering the point that those with tertiary education are (on average) quite a lot smarter than those without, but were so when they left school – the degree didn’t make them smart, rather it validated some mix of intelligence and perseverance. (this is US economist Bryan Caplan’s point that much of education is signalling, not actual increments to human capital).

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  5. I did my Honours degree in 1999-2002, working minimum wage jobs all the while. Despite all my best efforts, all I could find was a $40k job in 2006 when I returned to NZ after my OE (spent paying off my student loan). In 2010 I studied full time for my Masters degree, which landed me a $50K government job in 2011. It took 4 years to pay off the opportunity cost. I was able to pay the tuition (which didn’t stop me from getting an interest-free loan – who in their right mind wouldn’t?). While now I’m earning well over the median wage, our household is still $10k under the median household income from all sources, as my spouse doesn’t work.

    Nearing 40, I’m still not sure what to advise my children to do when they’re old enough to make a choice about work, as I’d probably still be better off having left school at 18 and gone straight into a trade rather than faffing about with education for no purpose. BAs are nice, opening up the mind and all that, but they don’t pay. I’d probably own my own company by now and be actually contributing to the country, rather than sitting behind a desk and reading economics blogs

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    • My own experience in Accountancy. Arrived in NZ and started on $30k with Fletcher Building. 6 months later Fletcher Building gave me a car. By the end of the 12 months my pay went up to $38k plus car in line with inflation of 20% at the time plus a little extra for performance recognition. Left 2 years later for a small NZ Jewellery manufacturer with a import and export business on $50k plus car. Left 2 years later for Rockwell, a US multinational for $60k plus a 4 litre Ford. Over the 7 years, each year salary increases up to $80k plus a new 4 litre car every 3 years. Left Rockwell after 7 years for a NZX public listed company for $100k. Joined ABB, a Swede multinational for $110k after a year at NZX listed company. Currently with a medium sized company at $200k.

      16 years ago started purchasing investment property. Started investment portfolio with $250k equity in my own house after 1st wife took the other $250k on divorce settlement. Currently investments valued at $9 million with no losses to ring fence, 70% equity and 30% Debt. No spouse.

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      • Held a BCom from Australia with a Australian CPA and currently a Chartered Accountant of Australia and NZ. Completed a MCom at the University of Auckland with honours whilst in Rockwell, a required qualification for advancement in a US company.

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  6. First job in NZ in 1982 at $5.05/hr in labourer’s capacity. After about 3 months shifted to the South Island; salary approx. NZ 25K/year (in engineering). Made redundant from that job in 1990 at approx. 75K/year. Upskilled at own expense (in engineering, cost approx. NZ 28K), commenced next permanent job in 1994 at approx. NZ 75K/year. This increased to approx. 90K/year until pay cut in 1999 brought income down to approx. NZ 79K/year. Made redundant from that job in 2003. Next permanent employment commenced in 2004 at approx. AUD 150K/year, increasing to AUD 200+/year at present. The latter is a nominal amount as no longer working full time. Hold a Master’s degree however this is not (and has never been) required in my job and had no influence on income level.

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