| Abstract: |
This analytical note is part of a suite of papers by the Treasury to support
its strategic advice on policy priorities for lifting human capital. Human
capital is defined as the productive wealth embodied in people in the form of
the knowledge, skills and abilities that enable them to participate fully in
work and society more broadly. The most recent estimates placed the real
economic value of New Zealand’s human capital at around $1.9 trillion in 2018,
with a real value that grew at around 2.6% per year since 1986. This note
examines high-level trends in contributions to human capital in New Zealand
over the past two decades. It also presents a decomposition of the aggregate
growth of human capital stock since 1986 to understand the contributions that
selected components have made over time. Other papers in this series have
developed an overall approach to analysing human capital that is suited to the
New Zealand context (see Schaer, 2025) and analysed scenarios around the
future of New Zealand’s human capital (see Ng, 2025). The analysis highlights
key opportunities and challenges to New Zealand’s human capital now and in the
future. The availability of human capital will become a key challenge over the
long term as the age composition of the population changes. New Zealand is
youthful compared to most high-income countries but is expected to undergo
major shifts towards a greater proportion of older people as natural birth
rates fall and a greater proportion of people age out of the workforce. Fewer
entrances into the labour market by younger people relative to the number of
people retiring each year is expected to reduce the working age population and
may reduce labour force participation over time. Some trends indicate that New
Zealand’s human capital is both high and improving. Broad-based employment
growth over the past 20 years has been a key source of income growth relative
to other OECD countries (Galt, 2023). This has been driven in large part by a
greater share of people entering and remaining in the workforce, particularly
women, older people, and overseas migrants. Women’s contribution to human
capital growth was $135 billion in excess of the national average growth rate
between 1986 and 2018, partly reflecting their strong rise in workforce
participation. Employment and labour force participation rates have performed
well historically, though unpacking the aggregate trends reveals persistent
ethnic and gender disparities in the form of chronic underutilisation and
lower wages. Migration has made a net positive contribution to population and
employment growth since the early 1990s and has become the main driver of
population growth as natural birth rates fall. International migrants are on
average younger and more likely to hold advanced qualifications compared to
New Zealand-born residents. With highly educated New Zealanders emigrating at
high rates for employment opportunities overseas, inward migration will play
an increasingly important role in meeting the demand for jobs and skills in
the labour market, unless wages and other pull factors can become more
competitive to improve the retention of skilled labour. High quality education
is a long-term investment into people’s human capital. New Zealand has
benefitted from rapidly improving skill levels in the adult population over
the past two decades, bolstered by more advanced qualifications in the
resident population and the migration of educated people. Between 1986 and
2018, bachelor’s degrees contributed an additional $168 billion to the value
of human capital over and above the national average growth rate. Postgraduate
degrees have contributed an additional $200 billion over the same period. At
the aggregate level, a well-educated workforce is a key factor in achieving
greater aggregate productivity, innovation and long-term economic growth. At
the individual level, increasing knowledge and skills plays a large role in
labour market outcomes and higher average lifetime earnings. However, these
educational gains have not translated into as high an increase in relative
wages in New Zealand compared to other OECD countries. Trends suggest a
potential future decline in skill levels. In keeping with international
trends, New Zealand’s school level achievement, as measured by the Programme
for International Student Assessment (PISA), is declining. Performance in
literacy, numeracy and science has dropped to the lowest scores since records
began. Additionally, the skill profile of temporary migrants has declined in
recent years, owing to a larger share of temporary work visa approvals for
migrants in lower skill categories. If these trends continue, a deteriorating
skills base in the population will weaken New Zealand’s productive capacity
over the medium to longer term. Between 1986 and 2018, New Zealand’s human
capital growth was driven by increasing contributions from postgraduates,
women and Māori. Contributions specific to women were supported by increases
in labour market participation and a growing share of bachelor’s and
postgraduate degree attainment. Māori contributions, while still behind
non-Māori in overall human capital value, show positive trends driven by a
younger workforce, a declining share of unskilled workers, and rising
qualification attainment, particularly at the non-degree and mid-skill levels.
Overall, the trends point to a mix of opportunities and challenges for New
Zealand’s human capital in the future. The structural ageing effect will
shrink the growth of the working age population, and with arguably limited
scope for further increases in participation and hours worked by older people,
mitigation options may fall to some mix of reducing chronic underutilisation,
reducing differences in employment and participation gaps, and increasing
inward migration. There are opportunities to support wage growth and skill
premiums through higher productivity, which could help to retain and attract
skilled workers. Lastly, addressing the significant potential productivity
losses from declining school level educational attainment will be important to
safeguard New Zealand’s human capital over the longer term. |