Friday, May 30, 2014

Credential creep, the economics of education, with a dash of contract breaking or (alternatively) retrospective taxation

Soon after starting work in the Commonwealth Public Service I found myself in the Commonwealth Treasury. While I had completed a major in economics, my honours degree was in history. Given where I was now working, it made sense for me to switch my master’s plans from history to economics. To do this, I had to complete a masters qualifying, achieving distinction status in a third year course, one of the honours courses plus a sub thesis. I mention this now because the sub thesis topic I chose was the economics of education.

At the time, there was interest in two different types of measurement. One was the contribution increased education made to economic growth. This was positive, providing an economic justification for increased state spending on education. The second measurement was the contribution education made to increased life time earnings. This was positive too. The combination meant that greater spend on education was justified in economic terms, but there was also a case for charging students something for that education since they received a direct financial benefit over time. The challenge was to find a way of striking a balance between the two. Charge students too much and you reduced the overall national return on education by reducing investment in education.

This simple analysis forms the basis of especially higher education policy in many countries including Australia. I am not implying anything especially profound with my own analysis, although it was new to me. The same logical paths were being followed by many others. 

The discussion today around the Australian budget changes to higher education reflects that old model. Minister Pyne talks about the high individual returns from university education, a claim that the ABC Fact Checker program concluded were overblown. I have a more fundamental problem, call it a confusion if you like.

When these calculations were first run, the proportion of graduates was far lower as was the proportion going onto year twelve. With the explosion in mass university education, both the absolute number of graduates and the proportion of graduates has exploded. Logically, you would expect the return on a degree to have fallen. Yet, somehow, it is still showing a significant rate of return. You have to ask why?

To my mind, and I have argued this before, we are dealing with a side effect of credentialism. The rates of a return on a degree are calculated by a comparison with the non-degree populations. Over the last forty years, swathes of sub-professional areas have moved in credential terms from the non-degree to degree space. They are now, as they were then, comparatively less well paid than the professions themselves. However, they are now as they were then, better paid than most semi-skilled or unskilled occupations.

My hypothesis is, and I stand to be corrected by someone who knows the numbers better than I do, that the absolute return on a degree has fallen with increased numbers. However, the relative return on the degree has stayed positive because the returns as compared to the diminishing non-degree group have been held up by the migration of mid range wage and salary occupations from the non-degree to degree group.

On a tangential if related issue, Fact check also looked at this question: Is the Government's plan to charge interest on existing student loans a broken contract? This measure really annoyed me because my daughters made judgements based on existing arrangements. Would they have changed their plans? Probably not, but they would have had to make a choice. If the change is not a breach of contract, then it becomes a retrospective tax measure. Still, as kvd pointed out, it makes it easier to sell the student loan portfolio for a bigger price. Surely that’s good?


Evan said...

I'd love to hear from those who know about your idea of the differential usefulness of university degrees.

How I would love to see a class action for students against breach of contract!

Jim Belshaw said...

Good morning, Evan. I doubt that a class action could be mounted for breach of contract, although it would certainly be interesting!