Economics of education 04.11.11(3)


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Economics of education 04.11.11(3)

  1. 1. EC-112Current Issues in EconomicsEconomics of Education
  2. 2. Economics of EducationThere is now a large measure of agreement amongstEconomists that there is relatively little that governmentscan do to influence the underlying growth rate of theeconomy through macroeconomic policy changes has changed towards supply-side measuresaimed at improving underlying growth rate – particularlyfavoured policies are in the area of education and training
  3. 3. Policies in UK focused on:• Low staying-on rates• Limited training opportunities• Poor access to higher educationIn recent elections education high on political agendasRecent policy efforts have concentrated onbroadening the range of post-16 courses availableto young people.The comprehensive system of national vocationalqualifications NVQ is aimed, amongst other things,at providing a clear progression into highereducation.
  4. 4. Higher EducationIn a period of perceived limits on public expenditureGovernments have increased the numbers of students inhigher education by:• Reducing average costs• Placing a higher proportion of costs on to the studentThe latter could be justified due to the high financialrewards 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 highereducation?• Supply side – not enough places• Demand side – low probability of reaching andgraduating from a university
  5. 5. On supply side, number of places increasedOn demand side for 16 year-olds there is a significant costof deferred income and risk in that they may fail to get A-levels or grades to go on to higher educationSmithers and Robinson (1989) found failure rates ofapproximately 30% at A-level. Applications to studentplaces at universities have been of the order of 2:1Social class remains an overwhelmingly important factor instaying-on decisionsWeighting the perceived risks and costs individuals may bemaking a perfectly rational decision to leave school at 16
  6. 6. The policy response has been to:•Broaden post school curriculum beyond that of traditionalA-levels•Reduce risk of failing to secure place in higher educationby increasing placesIn 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 of16
  7. 7. Higher Education ExpansionIn the 1960s approximately 6% of the 18-21 aged cohortstayed on to enter higher education (today the figure isaround 45%)Students received maintenance grants, there were no feesand the higher education sector was funded throughgeneral taxationIn 1963 Lord Robbins recommended that the highereducation sector should be expanded with the number ofplaces doubled in the following 20 yearsRather than being elite institutions, universities should beopen to all who have the potential to benefit
  8. 8. Improvements in secondary school education the labourmarket benefits of a university education resulted in arounda third of the 18-21 aged cohort entering higher educationby the mid-1990s.We also see the end of the „binary divide‟ with polytechnicsbecoming universities.However, state investment in higher education did not keeppace with the increase in student numbers and between1989 and 1997 expenditure per student fell by 36% (HigherEducation Funding Council 2010)
  9. 9. The need to review the methods and level of governmentfunding of higher education resulted in the governmentsetting the National Committee of Inquiry into HigherEducation in 1997, The Dearing Commission whichrecommended the ending of universal free highereducation in regard to tuition fees.It concluded:“There is widespread recognition of the need for new sources of fundingfor higher education. The costs of higher education should be sharedamong those who benefit from it. We have concluded that those withhigher education qualifications are the main beneficiaries throughimproved employment prospects and pay. As a consequence, wesuggest that graduates in work should make a greater contribution tothe costs of higher education in future”
  10. 10. Since the 1960s generally successive governments haveincreased expectations that families and students shouldbe involved in financing the living costs of studentsParents have not found living up to this expectation easy. Agovernment survey carried out in the 1980s found that overa third of students did not receive the expected contributionIn periods of perceived limits on public expendituregovernments have had a tendency to increase the numberof places in higher education by reducing the average costof a university place or put a greater share of the cost ontostudentsIt began initially by replacing a system of grants withstudent loans resulting in an increasing cost of highereducation for students.
  11. 11. Reducing the average cost of supplying higher educationplaces, it was argued, led the government to be able tofinance an increase in student placesSecond, the government claimed that the financial rewardto individuals who graduated was large enough to enablestudents to pay more towards the costs of their educationwithout it leading to a reduced demand for higher educationA number of studies had shown that the private rates ofreturn to higher education were relatively large
  12. 12. Report 7 of the Dearing Report finds• Large earnings premium for graduates• Graduate earnings premium larger for females thanmales• Graduates less likely to be unemployed• Returns to a degree differs substantially by subjectOne of the simplest measures of the contribution thatgraduates make to the economy lies in the high salarieswhich on average tend to be received by graduatescompared to non-graduates which it is argued reflects thevalue added which firms put on skills which graduates bringto the job
  13. 13. The earning advantage of graduates increases with ageEarning patterns for young female graduates is broadly inline with males. However, it tends to diverge after 30 withearnings increasing less rapidly reflecting increasedlikelihood of part-time employment and consequences oftime out of the labour market related mainly to child-rearingactivitiesDifferences in earnings between employed graduates andthose employed where highest qualification is two or more„A‟ levels is only part of the story, graduates are also morelikely to be in employment
  14. 14. 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 degree 9.8% for those with „O‟ levels/GCSE 14.9% for those with no qualifications• The position amongst 16 and 17 year olds who haveleft school is particularly bad with almost 1 in 3 beingunemployed (25.5% in 2008)• Unemployment is also high amongst those aged 18-24 at 17.4% (12.9% in 2008)
  15. 15. How much of the difference in pay reflect differences ineducation? Education is only one of several factorsinfluencing earningsInnate capabilities and family background also play animportant role. Graduates are likely to be more able onaverageSo part of the graduate pay premium will reflect factorsother than education
  16. 16. NCDS Data SetTo enable the expansion of the higher education systemDearing recommended that students pay a deferredcontribution towards tuition fees. The cost of this would berecovered by income contingent loans which would berepaid once a graduate entered employmentThe government in 1997, however, implement a schemewhere students paid £1,000 per year (indexed by theinflation rate) towards the cost of course fees. These feeswere up front rather than income contingent loans.The implementation of income contingent loans outlined inthe Dearing Report in 1997 were not introduced until theHigher Education Act of 2004 and came into effect forstudents entering higher education in 2006.
  17. 17. Fees were capped at £3,000 (indexed over time)In 2009 the then Labour Government asked Lord Browne toundertake a further review of higher education to ensure HE is:• Sustainably financed• Quality is world class• Accessible to anyone who has potential to succeedBrowne-report: Securing a Sustainable Future for HigherEducation (2010) education matters• Creates knowledge• Underpins a civilised society• Leads to innovation• Inspires creativity
  18. 18. Higher education matters because it transforms lives ofindividuals• Higher wages• Higher levels of job satisfaction• More likely to be employed• Greater ease of job mobility• Substantial health benefits Less likely to smoke Lower incidence of obesity Lower incidence of depression• Less likely to be involved in crime• More likely to be involved in education of children
  19. 19. Higher Education and the Economy• Drives innovation and economic transform• Drives economic growth leading to greater prosperityGreenaway and Haynes (2000) find OECD countries with fastergrowing higher education had faster economic growthGriffith et al. (2004), firms with relatively high levels of graduateunemployment make more effective use of technologies
  20. 20. Council for Industry and Education (2007), firms employinghigh levels of graduates are more successfulDTI (2006) actively innovative enterprises have twice theshares of graduates than those firms not involved ininnovationBrown (2010) “over the course of a working life the averagegraduate earns comfortably over £100,000 more in today‟svaluation and net of tax, than someone with „A‟ levels whodoes not go to university”
  21. 21. Source: Independent Review of Higher Education Funding & Student FinanceThe Principles
  22. 22. Source: Independent Review of Higher Education Funding & Student Finance
  23. 23. Source: Independent Review of Higher Education Funding & Student Finance
  24. 24. Following Brown the block grant given by the government will bereduced but the amount universities receive in tuition loans fromstudents 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 andstudents are required to repay 9% of income above £21,000 rather than£15,000.Wyness (2011) Fees and Loathing recent research shows tuition fees bring small impact onparticipation, the major fact is education attainment (UCAS points)where economic background is important. “Only 3% of young peoplefrom the poorest backgrounds achieve 301 or more UCAS points in2004 compared with 25% of young people from the richestbackgrounds”.
  25. 25. Degree Subject ChoiceStudent choice of subject is influenced by many factors:• Expected remuneration• Subject interest• Future employment choice• Available placesIn 1988 it was the government‟s view that, “subject choiceshould continue to be a matter of individual preference, butthat preference needs to be informed by a better educatedunderstanding of the needs of the employment market, andthe future rewards associated with particular lines of studyand professional preparation. A system of support whichrequires no contribution by the student undermines therealism from its economic implications that is in theinterests neither of the student nor of the economy”
  26. 26. A ten-year study of 18,000 graduates showed enormousvariations in earning power, with some subjects leading tosalary levels twice as high as others
  27. 27. Blackaby, Murphy and O‟Leary (1999). Graduate Earningsin Great Britain: a matter of degree? Labour Force Survey provides evidence as to whichdegree courses render the greatest pecuniary benefits tograduates in the labour marketTable 1 calculates the relative mark-up of different degreesof educational attainment
  28. 28. Males FemalesHigher degree 101 132First degree 89 113Other degree level qualifications 79 99Diploma in higher education 45 80A-level 50 49O-level 25 25Table 1Returns to Education LFS 1993-1995 (%mark-up)Note: figures relative to individuals with no qualifications
  29. 29. Males FemalesEconomics, Accountancy, Law &Management41 49Engineering & 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 44Table 2Returns to Degree Subjects 1993-1995 (% mark-up)Note: figures relative to individuals with at least one „A‟ level who didn‟t goto university
  30. 30. Walker and Zhu (2010). Differences by Degree: Evidenceof the Net Financial Rates of Return to UndergraduateStudy for England and Wales. 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 evenfind small negative returns in Arts, Humanities and otherSocial Sciences”.“Degree class has large effects in all subjects suggestingthe possibility of large returns to effort. Postgraduate studyhas large effects, independently of first degree class.”
  31. 31. “A large rise in tuition fees across all subjects has only amodest impact on relative rates of return suggesting thatlittle substitution across subjects would occur.”They find for those studying Economics, Management andLaw the premium for getting a IIi or IIii is 25% for men and15% for women at median earnings. The premium forgaining good degrees are much greater inEconomics, Management and Law than in other areas suchas STEM (Science, Technology, Engineering and Maths)subjects.
  32. 32. They find a strong return to effort – “although we are unableto say how much effort is required to generate such abetter result.”Strinebricker and Strinebricker (2009) also find for the USthat effort has a large effect on US degree scores – GradePoint Average.The implications are that degree subject taken and overalldegree classification can have dramatic implications for lifetime earnings.