Does higher education matter?

Alison WolfKing’s College London

The European dilemma

• Slowing growth rates

• High costs of a welfare state looking increasingly unsustainable

• Structural unemployment especially among specific social groups and regions

The Lisbon StrategyAiming for a ‘knowledge society’

Focus on educational attainment and especially on years of

schooling/percentage qualified at ‘high’ levels. This was not a success! –

can we understand why and how to do better?

Education remains the panacea

• Seen as the way to raise growth in developing countries

• Seen as the way to get individuals into good employment

• Seen as the cure for unemployment (‘skills’)• Seen as the way to restore growth and reduce

growing inequality in developed nations

Based on wage returns to current qualifications,

extrapolated

But also on an underlying theory of what creates growth

‘A one percentage point increase in the

number of workers with higher education

qualifications raises GDP by 0.5%.’

Estelle Morris

UK Secretary of State for Education

23 May 2002

Average ‘returns’ vary greatly between countries.They are much lower in Scandinavian countries, with more compressed income distributions.But they remain the main economic justification advanced for expanding higher education.

Virtuous Circle: Skills

Economic development

Economic investment

Skills

Education

Investment

Two forms of capital input

• PHYSICAL CAPITAL - the focus of early theories about how to modernise/grow

• HUMAN CAPITAL – a term only used widely in recent decades –

• Gary Becker Human Capital – discussed formal but also informal/on-the-job acquisition

Q = total real outputK = total real capital stockL = total labour force employedA = total land in uset = time

Q = ƒ (K, L, A, t)

Q = ƒ (K, L, A, t)

So if your labour force is not, or not just, bigger but also better, then a larger real output will presumably follow automatically

A century of economic growth was also a century of university

expansion

University enrolments at either end of the twentieth century

HE graduates (% age 30-35)

Enrolments at tertiary level as % of 18-24 age group

0

10

20

30

40

50

60

70

80

90

1980 1985 1990 1995 2000

Thailand UK Germany South Korea USA

SWEDEN

• Official target of 40-45% of 30-34 cohort will have at least 2 years of tertiary education

• 47.5% already do• Big enrolment increases – c. 150,000 first &

second cycle in 1977, over 350,000 today• Gender differences marked, even more so

than in many other countries. (About 60% female, 40% male)

But bigger does not necessarily mean better

• USSR - huge capital investments• Post-1945 consensus on economic

development : investment in heavy industry • Tax breaks to encourage ‘investment’;

government encouragement of manufacturing plant, machine goods etc very common

• Often leads to highly inefficient investment decisions

WHY SHOULD INVESTMENT IN ‘HUMAN CAPITAL’ BE DIFFERENT?

Maximizing investment in physical capital is not a sure-fire way to maximize or indeed generate growthi

Around the world

• Switzerland has a much smaller proportion of young people attending university than any other OECD country

• Within the UK, Scotland has higher participation and graduation levels than England and a significantly less successful economy

• Philippines 1971: % enrolled in higher education very close to US, higher than almost anywhere in W Europe

• Egypt – 1970 to 1990, move from 30% to 75% secondary education, 20% higher..

Repeated studies show that large numbers of people are, at any

given time, doing jobs for which they are over-qualified

The current job market

• Move towards an ‘egg-timer’ , or ‘squeezed middle’. Many jobs at professional or managerial level although rapid growth here has stopped. Lots of lower-level service jobs.

• Fewer in the middle because this is where there have been huge productivity gains even in countries with relatively high levels of manufacturing.

• High unemployment, some structural

Education and income

• Returns to high levels of education are positive and often very high and have remained so for many years

• The highly educated are much less likely to be unemployed

• BUT• Average real wages in the US have stagnated for the

middle class• There is no apparent relationship, globally, between

education spending or graduation rates or rates of return to education, and growth

Supply, demand, and returns

• In the US, absolute levels of income have stagnated for all except the top few percent

• But the gap between those with some college and high school drop outs has actually widened – being a drop out is even tougher and less ‘profitable’ than it used to be

• At odds with the conventional idea that a drop in supply raises demand!

So what is going on?

Sorting and selection as well as education

Universities’ traditional position: the tip of a highly selective pyramid

• 1900

As more and more people finish secondary school, enter tertiary education, graduate from university, and gain postgraduate degrees, getting more education still makes sense for individuals. That is because it is an increasingly important ‘positional good’.

Employers’ view of where the formally qualified are to be found: 1970

Low ability High ability

Graduates

Employers’ perceptions of the labour market: 2050?

Low quality High quality

Graduates

Selection through education is legitimate

• Very good for women – the route by which they have advanced, world-wide (The XX Factor)

• As appointing people to jobs on the basis of connections becomes unacceptable, families promote their children’s interests via formal education instead.

Creates enormous pressure on resources

• Parents are well aware that higher education is desirable – 99% of British parents want their new born baby to go to university

• In a democracy, citizen demand is, rightly, popular

• But high quality teaching is intensive• (And remember, those ‘returns’ are relative.

Costs are real.)

Not all degrees are equal and they are getting less so

• In the UK, when fees were introduced, everyone charged the maximum – because to charge less was to announce your inferiority

• Obsession with global league tables• Increasing variability in the returns to a given type of

degree as well as to different types• Academics seek jobs in and promotion to ‘top’

institutions (and get them via research not teaching)

Entering the labour market

• Qualifications provide a useful sieve• Qualifications provide a legitimate sieve• Qualifications provide evidence of sticking power• BUT• Half the job advertisements in the UK don’t mention

specific qualifications or education-based skills at all• In predicting incomes, in the US and other developed

countries, work experience trumps everything else after the initial period of employment

Try a thought experiment or two

• Suppose everyone in your office/department/business acquired another tertiary qualification

• Suppose you went back to university and obtained another postgraduate degree

• Suppose absolutely everyone in the country went to university

• BUT NOTHING ELSE CHANGED – then what?

Is it really plausible to suppose that increasing the proportion of graduates will automatically boost growth rates or end youth unemployment?

European countries have had far lower rates of youth unemployment in the past, when educational achievement was much lower.

Within countries, regional differences cannot be explained by education or qualification rates: in every case, within a region, the more highly educated you are, the more likely you are to be employed. But for a given qualification level, rates vary hugely between regions.

Unemployment rate (age 15-24)

The argument revisited: does higher education matter?

• Growth seems to involve far more than simply increasing fixed capital inputs

• Denison - the ‘residual factor’

• ‘More education may raise the quality of the labor force and this may be presumed to increase labor productivity.’

National income, total and per head, affected by

• Proportion of potential workforce in work

• Land/capital/natural resources

• Productivity levels, for which human capital is indeed crucial (but not the same as formal education)

• How would we know if education actually raises productivity? and what sort of education to pay for? - by the wages people with more/less education receive perhaps.

• But incomes are not determined by anything approaching a free, let alone, ‘perfect’, market.

• In the private sector, growing wealth at the top because of market distortions and ‘rent seeking’ by well-placed individuals.

• Much of the job market is public sector, with wages and salaries determined politically.

GROWTH is ultimately about

• How inputs are combined. More effective combinations are promoted by

• Competition• Innovation

• Education plays a critical role but in combination with other factors. It enables, rather than determining or guaranteeing.

Promoting innovation

• In a developed country an innovation pipeline is critical. This may be university-linked (USA) but companies can also be the main drivers (Japan, Germany).

• Linked to specific types of educational institutions. Other features of state/labour market/regulatory environment/finance/incentives are also important but here, high-quality education becomes a necessary condition for success

Universities and labour supply

• Although universities may be quite successful in commercialising developments made by staff, their key roles are in educating and developing innovators, and in providing an environment in which good graduates can be hired

• Companies flock to Silicon Valley because of the labour market – lots of very good ‘hires’, both young and experienced.

• The ‘cluster’ phenomenon is not unique to high-tech/university-based sectors, but is especially evident for them

QUALITY COSTS MONEY

• Inherent tension in modern states between growing demand from the population for equal access to higher education, and cost/selectivity associated with high quality provision

• Tensions compounded by pressures to spread higher education across a country and indeed to use it as a way of subsidising and helping low-growth low-income areas

It is impossible to maintain very high quality in all institutions of a mass system.

The top universities in the world are all, to a greater or lesser degree – and mostly to a greater – found in systems which are stratified and highly selective.

Concentrating research funding

• This is much easier for governments to achieve than concentrating/providing unequal amounts of teaching money

• Very clear in both Sweden and the UK• Makes sense in terms of quality but does produce

and perpetuate a status hierarchy in universities, for both staff and students

• ‘Equal funding’ for students does not translate into equal university quality and facilities

Meanwhile governments are in search of economies…

• Rapid decline in state funding for US state (public) universities

• Increase in funding for England, following years of decline, achieved by introducing fees – now under pressure and attack

• German experiments with fees reversed• Swedish per-student funding in decline• BUT HIGH QUALITY TEACHING REQUIRES

RESOURCES, people learn from people

Dilemmas for the future

• Huge pressure for expansion• The more common higher education becomes, the

worse for those who do not attend• Stratification within the sector is a necessary by-

product of research excellence• But how do we incentivise good scholars and

researchers to teach? And how do we maintain social mobility and equality of opportunity, in a stratified system with huge downward pressure on teaching costs per student?