The economic argument for higher education

12 December 2014
Professor Sholeh Maani
Professor Sholeh Maani

Improving access to university education has become one of the leading policy tools worldwide for boosting personal prosperity, business productivity and economic growth, says Professor Sholeh Maani of the Business School's Graduate School of Management.

Professor Maani, who is a pioneer in the study of labour economics and higher education policy, says this is due to the increasing importance of skills in national economies.

"The sectors that are showing the highest growth at this time, and will continue to be important for countries, are those that require skills. And that includes technology, innovation and high-skilled services."

She says that university participation rates of more than 50% for a single age cohort have now become the benchmark for OECD countries.

It is largely as a result of this shift to skills-based economies that the world average GDP per capita grew from US$1,261 in 1900 to US$7,714 by 2008. For Western Europe the change was even more dramatic – from US$2,815 to US$21,672 over the same period. New Zealand experienced a less spectacular four-fold increase to US$18,653.

"Skills and economic performance are related in many different ways. One of the major effects of the skills-based economy that started in the 20th Century is that a middle class was created, and that has changed the structure of income distribution in countries around the world, forever."

She identifies three other fundamental relationships that have evolved:

  • The link between skills and lifetime earnings. Studies around the world show that earning levels of two times or three times higher over the lifetime are common for university or higher education, compared to completion of secondary education.
  • The link between skills and employment opportunities. University graduates worldwide typically have employment rates 30-40% higher than high school graduates or those without any educational qualifications. Though this changes across business cycles in many countries, the differences are prominent and become more pronounced during recessions.
  • The link between skills, productivity and growth. Countries that have invested in skills over recent decades are experiencing much higher economic growth.

Professor Maani says education – and, in particular, higher education – is also the most effective tool for lifting the standard of living of disadvantaged groups in society.

"It takes longer – sometimes the results become fully manifest in 20-25 years – and for this reason as a policy tool it may not sometimes get the attention that it deserves."

She says that skills have become fundamentally important to economies and, for that reason, the demand for higher education will continue to be strong. Increasingly, this demand will come from Asia, which is home to more than two thirds of the world's 15 to 29-year-olds, and where the middle class is growing significantly. Education will also become increasingly global, and graduates will be working in a much more global economy. It will also prompt institutions to form partnerships with other global partners. Finally, higher education of high quality will continue to have the highest financial return for graduates.

"The lesson for New Zealand is that skills will continue to be important in the world economy, and both the provision of higher education and work in the skilled sectors of economies will become much more global and competitive. So, for New Zealand it is important to be mindful of opportunities that exist and challenges that we may face in maintaining our leading position in having a skills-based economy and also as a provider of high-skilled education."

Professor Maani discussed the economic returns to education in her October 2014 inaugural professorial lecture at the Business School.

Watch Professor Sholeh Maani's video on the rise of a skills-based economy (6:47)