Download The Economics of Higher Education

The Economics of Higher
Education
Presentation by Robin Sherbourne to
the Polytechnic of Namibia
22 January 2003
First some definitions…
• Higher education, tertiary education
• Organisation for Economic Cooperation
and Development (OECD)
• Gross Domestic Product (GDP)
Presentation outline
• Economic theory and evidence
Use this to address the following questions:
•
•
•
•
How much should we spend?
What should we spend it on?
Who should pay?
What improvements can we make?
Economic theory
• Economists’ views of higher education:
“screening” or “human capital”?
• The cost-benefit calculation to individuals
and firms
Two contrasting theories of higher
education
• Screening - Is higher education simply a
way of identifying the brightest future
employees?
• Human capital - Is higher education an
investment which makes individuals more
productive?
Screening
• Job advertisements specify “graduate
wanted”
• Companies trawl campuses to recruit best
and brightest
• Academic requirements for particular
professions
Screening
Helps explain two striking facts in OECD
countries:
• Everywhere graduates earn more than
non-graduates
• Everywhere graduates are less likely to be
unemployed
Human capital
• If sieving were all higher education achieved there would be little
reason for government to subsidise it
• Surely cheaper ways to sieve than through universities and
polytechnics
• Some evidence that graduate pay premiums declined following
expansion of higher education in OECD
• However, even in OECD countries with high proportions of university
graduates, graduates earn more and are less likely to be
unemployed
• Likely that graduates learn something useful which makes them
better workers
The Cost-Benefit Calculation
• Individuals weigh up the private costs of
education (fees and forgone earnings) with
the benefits (higher future earnings)
• Firms weigh up the private costs of
training (fees and forgone production) with
the benefits (higher future production)
Why government intervention?
• Broader social as well as private benefits (externalities)
• Consumers may undervalue education (merit good)
• Consumers may unduly lower value of future benefits
(myopia)
• Consumers may be uncertain of future benefits (risk
aversion)
• Consumers may not be able to borrow to fund
investment (credit constraints)
• Employers may be worried about other firms pinching
their newly trained workers (free riders)
• Society may want to finance education for poor using
taxes from rich (redistribution)
Economic evidence
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Does education lead to economic growth?
Does education foster entrepreneurship?
What are the private returns?
What are the social returns?
How much do countries spend?
Who pays and who benefits?
Education and economic growth
• Economic research supports the existence
of a link between education and economic
growth (vast literature)
• Harder to pin down the relationship
between investment in higher education
and economic growth
Education and entrepreneurship
Global Entrepreneurship Monitor finds that:
• problems with education and training were most
important factors inhibiting entrepreneurial
activity in South Africa (lack of basic skills,
creative thinking, and business skills)
• In South Africa tertiary education increases the
probability that a person will exploit a new
business opportunity and create a successful
new firm
Private returns to education (OECD)
Private returns to education (OECD)
“University education is the best investment most
people can make. The OECD’s new estimates of
the annual returns to successful students range
from 6.5% in Italy to 17.3% in Britain. The
calculation treats the costs of study, including
earnings forgone, as the investment; and the
gains in post-tax earnings above those of
school-leavers as the pay-off. Shorter university
courses are one reason why returns are so high
in Britain.”
The Economist 31st October 2002
Total returns to education
Social
Private
Primary
Secondary Higher
Primary Secondary Higher
Asia
16.2
11.1
11.0
20.0
15.8
18.2
Europe/Middle East/ North Africa
15.6
9.7
9.9
13.8
13.6
18.8
Latin America/Caribbean
17.4
12.9
12.3
26.6
17.0
19.5
OECD
8.5
9.4
8.5
13.4
11.3
11.6
Sub-Saharan Africa
25.4
18.4
11.3
37.6
24.6
27.8
World
18.9
13.1
10.8
26.6
17.0
19.0
Source: Psacharopoulos and Patrinos, World Bank 2002
Private returns to education
(Namibia)
Education and income
Average household income by educational level of head of household in N$
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
No formal education
Primary education
Secondary education
Source: Namibia Household Income and Expenditure Survey 1993/94, Central Bureau of Statistics
Tertiary education
Private returns to education
(Namibia)
Unemployment rates by educational attainment
Post graduate
2000 Broad
University
1997 Broad
Teacher training
Standard 10
Senior
Junior
Primary
None
0%
5%
10%
15%
Source: 1997 and 2000 Namibia Labour Force Surveys
20%
25%
30%
35%
40%
45%
Public expenditure on higher
education
Government subsidies to higher education
annual subsidy per enrolled student to UNAM and the Polytechnic in N$
GDP per capita
UNAM subsidy per student
Polytechnic subsidy per student
25,000
20,000
15,000
10,000
5,000
0
1996
'97
'98
'99
Source: National Accounts 1993-2001, UNAM and Polytechnic of Namibia annual reports 1996-2001
2000
'01
Public expenditure on higher
education (Namibia)
Subsidies to higher education as % of GDP
Polytechnic subsidy
0.8%
University subsidy
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
1996
'97
'98
'99
Source: 1993-2001 National Accounts, CBS and UNAM and Polytechnic annual reports
2000
'01
Tertiary enrolment in Namibia
Gross enrolment ratio in tertiary education in %
OECD
Higher Income
Upper Middle Income
South Africa
Lower Middle Income
Namibia
SADC
SSA
0
Source: EdStats, World Bank
10
20
30
40
50
60
70
How expensive is tertiary
education?
Spending per tertiary student as % of GDP
per capita in 1997
Middle income
High income
Lesotho
Malawi
Mauritius
Namibia
Swaziland
Zambia
Zimbabwe
Malaysia
Source: World Development Indicators
2000 and 2002, World Bank
40.8%
36.9%
1022.3%
1492.0%
140.6%
103.4%
229.8%
356.2%
340.3%
53.6%
Conclusions
• Little data or analysis on returns to education in Namibia
(forthcoming World Bank study)
• Important role for government policy and government subsidies
• Private returns to education likely to be high
• Potential case for demanding higher private contributions
• Higher education in Namibia expensive
• Potential case for expansion of higher education
• Danger of spending on wrong sort of higher education
• General education rather than specific training
• System may not be reaching the brightest and best (lower education
system failures)
How much should we spend?
• What are other countries spending?
• What can we afford?
• What do we get in return?
What should we spend it on?
• Which sectors have grown?
• Which sectors have employed more
people?
• Which sectors are likely to grow in future?
• Dangers of over-education (brain drain
and lower returns)
Which sectors have grown?
Sectoral growth 1993-2001
% increase in value added in constant 1995 prices
Post and telecommunication
Financial intermediation
Hotels and restaurants
M anufacture of food and beverages
Wholesale and retail trade and repairs
Construction
Electricity and water
Transport and storage
Fishing
Other manufacturing
Other real estate and business services
Owner-occupied dwellings
Community, social and personal services
Other mining
Diamond mining
Producers of government services
Other producers
Commercial
Subsistence
M eat processing
Fish processing
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Which sectors have grown?
Sectoral growth 1993-2001
% increase in value added at current prices
Diamond mining
Wholesale and retail trade and repairs
Fishing
Manufacture of food and beverages
Other mining
Construction
Commercial
Other real estate and business services
Other producers
Fish processing
Meat processing
0%
50%
100%
150%
200%
250%
300%
350%
400%
Which sectors have grown?
Non-agricultural employment
No t stated
Extra-territo rial o rganisatio ns and bo dies
P rivate ho useho lds with emplo yed perso ns
Other co mmunity, so cial and perso nal services
Health and so cial wo rk
Educatio n
P ublic administratio n, defence and so cial security
Real estate, renting and business activities
2000
Financial intermediatio n
1997
Transpo rt, sto rage and co mmunicatio n
1991
Ho tels and restaurants
Who lesale and retail trade, repair o f mo to r vehicles
Co nstructio n
Electricity, gas and water
M anufacturing
M ining and quarrying
Fishing
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Who should pay?
• How can we get individuals to contribute
more?
• Does state-subsidised higher education
help those already better off?
• Are the returns to other areas of public
spending higher?
What improvements can be made?
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Provide information (regular survey of graduate employment, wages and
work permits for foreigners) and conduct regular research
Boost financing (reprioritise spending, consider more loans and graduates
tax and work permit tax)
Reduce discretion (introduce performance-related formula to fund higher
education)
Increase competition (turn Polytechnic into university)
Links to foreign institutions (quality, specialisation and choice)
Improve quality (international standards and PISA comparisons)
Cost (investigate cost effective alternatives)
Maintain focus (too many plans, initiatives and institutions)
Promote research and innovation relevant to Namibian business (private
contributions will come when there are private benefits)
Fund raising from ex-alumni and benefactors