EC-112Current Issues in Economics

Economics of Education

Economics of EducationThere is now a large measure of agreement amongst Economists that there is relatively little that governments can do to influence the underlying growth rate of the economy through macroeconomic policy changes

http://www.bbc.co.uk/news/10613201

Emphasis has changed towards supply-side measures aimed at improving underlying growth rate – particularly favoured policies are in the area of education and training

Policies in UK focused on:• Low staying-on rates• Limited training opportunities• Poor access to higher education

In recent elections education high on political agendas Recent policy efforts have concentrated on

broadening the range of post-16 courses available to young people.

The comprehensive system of national vocational qualifications NVQ is aimed, amongst other things, at providing a clear progression into higher education.

Higher Education

In a period of perceived limits on public expenditure Governments have increased the numbers of students in higher education by:

•Reducing average costs•Placing a higher proportion of costs on to the student

The latter could be justified due to the high financial rewards of gaining a degree. In 1988 the DES (CM520) advocated the use of top-up loans.

Why have so few young people decided to go on to higher education?

•Supply side – not enough places•Demand side – low probability of reaching and

graduating from a university

On supply side, number of places increased

On demand side for 16 year-olds there is a significant cost of deferred income and risk in that they may fail to get A-levels or grades to go on to higher education

Smithers and Robinson (1989) found failure rates of approximately 30% at A-level. Applications to student places at universities have been of the order of 2:1

Social class remains an overwhelmingly important factor in staying-on decisions

Weighting the perceived risks and costs individuals may be making a perfectly rational decision to leave school at 16

The policy response has been to:•Broaden post school curriculum beyond that of traditional A-levels

•Reduce risk of failing to secure place in higher education by increasing places

In 2004 education maintenance allowance was introduced (scrapped in England in 2011)

This scheme offered payments of up to £30 per week (means tested) to continue in education beyond the age of 16

Higher Education ExpansionIn the 1960s approximately 6% of the 18-21 aged cohort stayed on to enter higher education (today the figure is around 45%)

Students received maintenance grants, there were no fees and the higher education sector was funded through general taxation

In 1963 Lord Robbins recommended that the higher education sector should be expanded with the number of places doubled in the following 20 years

Rather than being elite institutions, universities should be open to all who have the potential to benefit

Improvements in secondary school education the labour market benefits of a university education resulted in around a third of the 18-21 aged cohort entering higher education by the mid-1990s.

We also see the end of the ‘binary divide’ with polytechnics becoming universities.

However, state investment in higher education did not keep pace with the increase in student numbers and between 1989 and 1997 expenditure per student fell by 36% (Higher Education Funding Council 2010)

The need to review the methods and level of government funding of higher education resulted in the government setting the National Committee of Inquiry into Higher Education in 1997, The Dearing Commission which recommended the ending of universal free higher education in regard to tuition fees.

It concluded:

“There is widespread recognition of the need for new sources of funding for higher education. The costs of higher education should be shared among those who benefit from it. We have concluded that those with higher education qualifications are the main beneficiaries through improved employment prospects and pay. As a consequence, we suggest that graduates in work should make a greater contribution to the costs of higher education in future”

Since the 1960s generally successive governments have increased expectations that families and students should be involved in financing the living costs of students

Parents have not found living up to this expectation easy. A government survey carried out in the 1980s found that over a third of students did not receive the expected contribution

In periods of perceived limits on public expenditure governments have had a tendency to increase the number of places in higher education by reducing the average cost of a university place or put a greater share of the cost onto students

It began initially by replacing a system of grants with student loans resulting in an increasing cost of higher education for students.

Reducing the average cost of supplying higher education places, it was argued, led the government to be able to finance an increase in student places

Second, the government claimed that the financial reward to individuals who graduated was large enough to enable students to pay more towards the costs of their education without it leading to a reduced demand for higher education

A number of studies had shown that the private rates of return to higher education were relatively large

Report 7 of the Dearing Report finds

http://www.leeds.ac.uk/educol/ncihe/• Large earnings premium for graduates • Graduate earnings premium larger for females than

males• Graduates less likely to be unemployed• Returns to a degree differs substantially by subject

One of the simplest measures of the contribution that graduates make to the economy lies in the high salaries which on average tend to be received by graduates compared to non-graduates which it is argued reflects the value added which firms put on skills which graduates bring to the job

The earning advantage of graduates increases with age

Earning patterns for young female graduates is broadly in line with males. However, it tends to diverge after 30 with earnings increasing less rapidly reflecting increased likelihood of part-time employment and consequences of time out of the labour market related mainly to child-rearing activities

Differences in earnings between employed graduates and those employed where highest qualification is two or more ‘A’ levels is only part of the story, graduates are also more likely to be in employment

Higher Unemployment of Low Skilled

• Unemployment rates much higher for the least skilled. In 2009/10 unemployment rates in the UK were (Blanchflower and Bell, 2010):

3.9% for those with a degree9.8% for those with ‘O’ levels/GCSE14.9% for those with no qualifications

• The position amongst 16 and 17 year olds who have left school is particularly bad with almost 1 in 3 being unemployed (25.5% in 2008)

• Unemployment is also high amongst those aged 18-24 at 17.4% (12.9% in 2008)

How much of the difference in pay reflect differences in education? Education is only one of several factors influencing earnings

Innate capabilities and family background also play an important role. Graduates are likely to be more able on average

So part of the graduate pay premium will reflect factors other than education

NCDS Data Set

To enable the expansion of the higher education system Dearing recommended that students pay a deferred contribution towards tuition fees. The cost of this would be recovered by income contingent loans which would be repaid once a graduate entered employment

The government in 1997, however, implement a scheme where students paid £1,000 per year (indexed by the inflation rate) towards the cost of course fees. These fees were up front rather than income contingent loans.

The implementation of income contingent loans outlined in the Dearing Report in 1997 were not introduced until the Higher Education Act of 2004 and came into effect for students entering higher education in 2006.

Fees were capped at £3,000 (indexed over time)

In 2009 the then Labour Government asked Lord Browne to undertake a further review of higher education to ensure HE is:

•Sustainably financed•Quality is world class•Accessible to anyone who has potential to succeed

Browne-report: Securing a Sustainable Future for Higher Education (2010)http://webarchive.nationalarchives.gov.uk/+/hereview.independent.gov.uk/hereview/report/

Higher education matters•Creates knowledge•Underpins a civilised society•Leads to innovation•Inspires creativity

Higher education matters because it transforms lives of individuals

•Higher wages•Higher levels of job satisfaction•More likely to be employed•Greater ease of job mobility•Substantial health benefits

Less likely to smokeLower incidence of obesityLower incidence of depression

•Less likely to be involved in crime•More likely to be involved in education of children

Higher Education and the Economy

•Drives innovation and economic transform•Drives economic growth leading to greater prosperity

Greenaway and Haynes (2000) find OECD countries with faster growing higher education had faster economic growth

Griffith et al. (2004), firms with relatively high levels of graduate unemployment make more effective use of technologies

Council for Industry and Education (2007), firms employing high levels of graduates are more successful

DTI (2006) actively innovative enterprises have twice the shares of graduates than those firms not involved in innovation

Brown (2010) “over the course of a working life the average graduate earns comfortably over £100,000 more in today’s valuation and net of tax, than someone with ‘A’ levels who does not go to university”

Source: Independent Review of Higher Education Funding & Student Finance

The Principles

Source: Independent Review of Higher Education Funding & Student Finance

Source: Independent Review of Higher Education Funding & Student Finance

Following Brown the block grant given by the government will be reduced but the amount universities receive in tuition loans from students is increased to a maximum of £9,000 (BIS Higher Education: Students at the Heart of the System, June 2011).

The system is more generous in terms of support for living costs and students are required to repay 9% of income above £21,000 rather than £15,000.

Wyness (2011) Fees and Loathing

http://cep.lse.ac.uk/pubs/download/cp343.pdf

Find recent research shows tuition fees bring small impact on participation, the major fact is education attainment (UCAS points) where economic background is important. “Only 3% of young people from the poorest backgrounds achieve 301 or more UCAS points in 2004 compared with 25% of young people from the richest backgrounds”.

Degree Subject Choice

Student choice of subject is influenced by many factors:•Expected remuneration•Subject interest•Future employment choice•Available places

In 1988 it was the government’s view that, “subject choice should continue to be a matter of individual preference, but that preference needs to be informed by a better educated understanding of the needs of the employment market, and the future rewards associated with particular lines of study and professional preparation. A system of support which requires no contribution by the student undermines the realism from its economic implications that is in the interests neither of the student nor of the economy”

A ten-year study of 18,000 graduates showed enormous variations in earning power, with some subjects leading to salary levels twice as high as others

Blackaby, Murphy and O’Leary (1999). Graduate Earnings in Great Britain: a matter of degree?

http://dx.doi.org/10.1080/135048599353302

Using Labour Force Survey provides evidence as to which degree courses render the greatest pecuniary benefits to graduates in the labour market

Table 1 calculates the relative mark-up of different degrees of educational attainment

Males Females

Higher degree 101 132

First degree 89 113

Other degree level qualifications 79 99

Diploma in higher education 45 80

A-level 50 49

O-level 25 25

Table 1Returns to Education LFS 1993-1995 (%mark-up)

Note: figures relative to individuals with no qualifications

Males FemalesEconomics, Accountancy, Law & Management

41 49

Engineering & Technology 29 53Maths, Physics & Computers 34 49Other Social Sciences 16 30Education & Nursing 10 44Arts 9 35Biological Sciences & Chemistry 20 43Languages 22 42Medical 67 74Earth Sciences 20 44

Table 2Returns to Degree Subjects 1993-1995 (% mark-up)

Note: figures relative to individuals with at least one ‘A’ level who didn’t go to university

Walker and Zhu (2010). Differences by Degree: Evidence of the Net Financial Rates of Return to Undergraduate Study for England and Wales.

http://www.lums.lancs.ac.uk/publications/viewpdf/006856/

They use Labour Force Survey data from 1994 to 2009. They “find very large economic returns to Economics, Management and Law but not for other subjects – we even find small negative returns in Arts, Humanities and other Social Sciences”.

“Degree class has large effects in all subjects suggesting the possibility of large returns to effort. Postgraduate study has large effects, independently of first degree class.”

“A large rise in tuition fees across all subjects has only a modest impact on relative rates of return suggesting that little substitution across subjects would occur.”

They find for those studying Economics, Management and Law the premium for getting a IIi or IIii is 25% for men and 15% for women at median earnings. The premium for gaining good degrees are much greater in Economics, Management and Law than in other areas such as STEM (Science, Technology, Engineering and Maths) subjects.

They find a strong return to effort – “although we are unable to say how much effort is required to generate such a better result.”

Strinebricker and Strinebricker (2009) also find for the US that effort has a large effect on US degree scores – Grade Point Average.

The implications are that degree subject taken and overall degree classification can have dramatic implications for life time earnings.