Human capital effects for productivity and income : a New Zealand perspective : a thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Economics at Massey University, School of Economics and Finance, Massey University

Abstract

The overarching purpose of this dissertation is to identify factors crucial for improving the performance of the New Zealand economy and in turn, for raising standards of living. Within this overall aim, I investigate whether and/or how human capital affects the key growth driver of labour productivity, and flowing from this, worker income. The findings of my research suggest several policy measures to support existing government initiatives as well as identifying further avenues for research into the contribution of human capital to economic growth. In my first study I examine the effects of industry skill on labour productivity. I find gains in labour productivity from increases in capital intensity. Capital intensity is particularly effective for raising labour productivity in lower to medium-skilled industries, relative to lower-skilled. This result indicates possible skill-capital complementary effects. I also observe significant improvements in labour productivity from increases in total factor productivity. This result indicates the importance of technology adoption in New Zealand production. For input substitution effects, I observe a negative relationship between labour cost and capital intensity. This indicates that firms may reduce capital investment when managing labour cost increases. Additionally, low sensitivity is observed from increasing physical capital returns for capital investment. The latter two results are likely to be negative for productivity in the relatively labour-intensive New Zealand economy. In my second study I build on the established human capital measure of years of schooling, drilling down further to examine the impacts of the core cognitive skills of literacy, numeracy, and Information and Communications Technology (ICT) problem-solving on worker income. I find a positive relationship between proficiency in each of these three core skills and worker earnings. This result indicates demand in the New Zealand labour market for greater cognitive skill proficiency. A further important finding is that earnings are improved from greater use of ICT problem-solving skills in the workplace. This result indicates the importance of the continuing integration of technology into industries for lifting worker productivity and income. There are also significant earnings benefits from further adult education and training, after completion of foundation studies. For occupational effects, I observe a fall in the relative value of the skills of white-collar workers. However, this may be offset by greater use of numeracy skills, for each occupational skill level group. Further findings for the New Zealand labour market include that the peak level of earnings for New Zealand workers occurs for the 35 to 44-year age group and an expected negative gender earnings gap is observed for female workers. These findings indicate a loss of earnings potential for many workers, restricting the performance of the New Zealand labour market and economy. In my third study I evaluate similarities and differences in the impacts of the core cognitive skills on worker earnings internationally. I find a positive relationship between proficiency in numeracy skills in particular, and worker income. Increased usage of ICT problem-solving skills in the workplace is the most significant of the skill use variables for raising earnings internationally. This also indicates the earnings potential from greater development of this key infrastructure for economies. The results also show significant gains to worker earnings from investment in job-related adult education and training for countries with less developed programmes. I find that countries providing the strongest worker protection show the smallest range in earnings by occupational skill and by gender and age. In contrast, increasing numeracy skill improves earnings by occupational skill, with the greatest benefit for countries with more flexible labour markets. Similarly, increasing numeracy and ICT skill proficiency improves earnings for workers in the lower three age bands. This is found for numeracy proficiency in flexible labour markets. Rather than through regulation, earnings and living standards for individuals may instead be improved through greater cognitive skill proficiency in flexible labour markets.