The asbolute number of lower-ATAR students is still small

In The Conversation today, I have some suggestions about how to handle the increasing willingness of universities to make offers to lower-ATAR applicants. One point I should have made (other than just noting that many lower-ATAR students reject their offers) is that the absolute number of lower-ATAR offer acceptances is not that high, despite a high growth rate since 2010 – about 3,500 in 2014, out of 86,500 acceptances by school leavers admitted with an ATAR (or about 4 per cent). The trend in lower-ATAR absolute numbers can be seen in the slide below.

Comparing acceptance data and enrolment data during the demand driven review last summer there were significant discrepancies between lower-ATAR acceptances and enrolments, indicating drop outs before the HELP census date. If the past is a guide, nearly a quarter of those who made it to the census date won’t return in second year, and just over half will complete. So the absolute number of lower-ATAR students in the system is lower than these acceptance numbers might suggest.

lower ATAR offers
Source: Department of Education applications reports

The other interesting thing about this chart is the sharp increase in applications. As cut-off ATARs began to fall with the enrolment boom it is likely that school leavers who had previously dismissed higher education as unrealistic began to think it was possible, and put in an application. Of course universities also alerted them to this possibility. An example from Victoria University is below.

lower ATAR

Is the prospect of higher fees deterring university applications?

The number of applications to university for courses commencing in 2015 has attracted more interest than usual, due to the controversy over higher education fees. Some data has already been released by individual tertiary admission centres, but it is now available in consolidated form. The figures are preliminary, reflecting applications made as of October 2014. Based on recent history, there will be tens of thousands more applications lodged after this date. I am still seeing plenty of university advertising aimed at that goal.

There is a particular complication this year in Western Australia. A change to the school starting age in 2003 has flowed through the school system, leading to a Year 12 cohort that was only about 60 per its normal size. This makes the WA figures hard to interpret, and the report presents trend data with and without WA.

Without WA, school leaver applications are up 2.2 per cent. Possibly this could be interpreted as saying that the fear of fees has had little or no impact on demand. That’s probably right, although the apparent upward trend may be due to people who would have taken a gap year starting in 2015, so that they get at least one year on the fixed student contribution rates. We also don’t know exactly how many students completed Year 12, so we cannot calculate an application rate.

Non Year-12 applications are down 6.5 per cent. However, this may not mean anything at all. For non-Year 12 applicants, there is a longer-term structural shift away from using tertiary admission centres and towards applying directly to universities. Since 2010, the number of TAC non-Year 12 applications has declined every year, while the number of direct applications has increased.

The report also raises the possibility that the demand driven system might have reduced a backlog of unmet demand for higher education. It is plausible that as people who had unsuccessfully applied to higher education in the past get admitted the pool of higher education hopefuls will diminish. And as more people get into university straight from school, there is a smaller potential market for mature-age higher education.

While these theories may be right, it is still possible that there will be no decline in overall non-Year 12 applications when we get the direct applications data later in the year.

If the demand driven system survives it will be our best yet test of theories in this area. Under the old system, the supply of places was always well below demand. Unless there was a huge decline in demand any price sensitivity would not show in enrolment numbers. We therefore had to use applications data to assess underlying demand. But applications are an imperfect proxy for a serious intention to pursue higher education. Large numbers of people reject the offers they receive, raising questions about whether some apparent demand for higher education is really just keeping options open, or contingent on an offer for a very specific course. Actual enrolments in a system without supply constraints will be a better guide to the true level of demand for higher education.

Higher education applications slightly down in 2014

After some long delays, the 2014 applications report is finally out. It shows that for the 2014 academic year the number of applicants (as opposed to applications) went down, although only by 300. Offers continued to increase, so that now only 14 per cent of applicants don’t get an offer, compared to 20 per cent in 2010. The first half 2014 enrolment data shows that these offers translated into enrolment increases.

unique applicants

These results won’t do much to dissuade the people arguing that admission requirements have dropped too much. In 2010, fewer that 2,000 offers were made to applicants with ATARs below 50. In 2014, more than 7,000 such offers were made. Only half of these offers were accepted. Evidence in the demand driven review suggested that a reasonable number of the people who do accept don’t make it to the HELP census date (about a month in; if they drop out before they do not incur a debt and are not counted in enrolment statistics). And only a bit over half who make it to the first census date are likely to complete, if earlier low-ATAR cohorts are a guide.

Although enrolments continue to grow, a softening of demand is sensible given the weak graduate employment market.

Is this graduate employment downturn different to the early 1990s recession?

The experience of graduates from the early 1990s recession suggests that a slow career start isn’t necessarily fatal to long-term prospects. Employers seem willing to consider graduates who haven’t managed to quickly find employment. But this doesn’t rule out more pessimistic interpretations of recent graduate employment surveys.

There are several reasons why this might be the case. There could be some structural changes in the economy that reduce the quantity of or slow growth in professional jobs, to which graduates typically aspire. For example, there could be greater automation of tasks previously done by professionals, or more outsourcing to countries with lower labour costs. Or professional job growth could stay around its long-term trend, but the number of graduates increases more quickly.

The slide below shows the long-term trend in the number of jobs classed as professional. Annual growth is volatile, but I can’t see a structural slowdown. 2013 showed relatively low growth, which might help explain why that was a bad year for graduate outcomes compared to the immediately preceding years. But 2014 was a good mid-range result, with an estimated 85,000 additional professional jobs.

Prof employment
Source: ABS.

Completion numbers show less volatile growth than job numbers, but multi-year comparisons suggest that they are not (to date) growing at a much stronger rate than professional employment. However, new graduates are not the only flow into the graduate labour market. Existing graduates move in and out of the labour force, and there is migration, both from new migrants and expatriates returning to Australia. Permanent skilled migration in recent times has included 32,000 to 39,000 professionals a year, although there are larger numbers here on temporary visas.

From the ABS Education and Work survey and its predecessors we can construct a time series of graduates in professional and managerial jobs, both as a percentage of all graduates and of graduates with jobs. The slide is below. The trend is affected by occupational definitions, and is most meaningful within the periods in which a reasonably consistent classification system was used. Unfortunately Education and Work 2014 has some results that are hard to believe. I think they have over-sampled people with postgraduate qualifications and under-sampled people with bachelor degrees, and as a result the employment result is biased upwards. But the bias would not be large enough to turn the slight decline in graduate managerial and professional employment shown in the slide into a large decline.

managerial and professional jonbs
Sources: ABS here and here.

The way Education and Work is conducted means that it would not show any fast consequences of a deteriorating new graduate labour market. The number of new bachelor-degree completions in 2013 was only about 5 per cent of the stock of professional jobs. Also, Education and Work is done as part of the broader labour force survey. Respondents to that survey are on an eight month cycle, with an eighth leaving the survey and being replaced each month. As Education and Work is conducted in May, only some of the people being captured as un- or under-employed in March or April by the Graduate Destination Survey could have been included.

Another issue is whether the Graduate Destination Survey, in investigating the employment situation of graduates so soon after completion, has always painted an overly-pessimistic picture of outcomes. Although many employers have graduate intakes structured around the cycle of university completions, normal economic growth isn’t going to to produce a sudden burst of professional jobs over December to April. It’s more likely that graduates will gradually be absorbed into the workforce.

One way of investigating this is the Beyond Graduation Survey, which looks at graduates three years out. It uses a sub-sample of the original Graduate Destination Survey. The respondents to the Beyond Graduation Survey report better employment outcomes four months out than did the full GDS sample, so the results are likely to biased upwards somewhat. What the slide shows is that full-time employment outcomes are trending downwards three years out for the cohorts that had bad outcomes four months out, for those who were new graduates in early 2009 and early 2010. The drop is about 4.5 percentage points on the peak year, but only 2 percentage points below what new graduates from early 2006 experienced three years out.

Beyond Graduation

The BGS survey also lets us look at job quality. Of those who have full-time jobs, there is only a very small decline in the share of people who have managerial or professional jobs. There is a larger decline in people with full-time managerial or professional jobs as a proportion of all graduates. There has been a shift to full-time study and job searching.

BGS job quality

The Beyond Graduation Survey is the clearest evidence of negative trends beyond the short-term employment outcomes, but the fairly small full-time employment declines the BGS finds are not disastrous. Taken in the context of the other ABS employment data reported in this post there is not yet enough evidence to say that there are major structural issues with graduate employment, although the relevant trend data needs to be watched carefully. The slowing growth in domestic undergraduate commencing student numbers is desirable. But it is still possible that the bad initial employment outcomes of recent years will end up being like the bad job figures of the early 1990s: slow career starts, but not career killers.

Does graduating into a recession affect long-term job quality?

Graduating into a recession may not affect overall employment levels, but could it affect job quality? The theory here is similar to the employment scarring effect. By graduating into a recession, a proportion of graduates don’t acquire jobs that allow them to maintain or develop their skills. This harms their CV, and employers will continue to overlook them as they age, stalling their careers.

In this analysis, I will take professional and managerial employment as a proxy for a quality job. I realise that this is imperfect. Broad job categories can under- or over-state the skills actually required in particular jobs. Job categories are also known not to always match with subjective perceptions of skills use or job satisfaction. But this is the best I can do with readily available data from the census.

As can be seen from the slide below, with dots in the line for the group of most interest, it is hard to see evidence of a scarring effect. It looks like the early 1990s recession cohort are continuing their career climb – not shown, but there is a shift from jobs classified as ‘professional’ to those classified as ‘managerial’, as people move into more senior jobs.

prof and manager 2011

Another test of graduate outcomes is income. Unfortunately the census uses a category of $2,000 a week or more for all higher income earners. But taking this cut-off again we see little evidence (dotted part of the line) that our assumed recession graduates are significantly off-course in their careers. However, by dividing the group into undergraduate degree only and postgraduate we can see one reason why postgraduate study has boomed in recent years.

income 2011

Of course, we can’t rule out that there is some salary penalty hidden in the broad $2,000 a week or more category. But it is hard to argue based on this evidence that there is a significant cohort from the early 1990s who are still doing it tough in 2011.

None of the data sources I have been able to use in analysing this issue are fully adequate. But overall the results I have incline me against the scarring hypothesis. Based on this 1990s recession evidence, employers typically don’t write prospective employees off just because their careers get off to a slow start.

Should there be a GST on higher education?

As public sector financial woes get worse, we are hearing more calls to put a GST on education. I’m not convinced this is a good idea. Some of my concerns are specific to higher education, others apply to education more broadly.

1. Conceptually, it’s not clear that it makes sense for the government to tax and subsidise the same commodity. Subsidies are supposed to make education more affordable, while taxes make it less affordable.

2. Education is a mixed economy sector, with subsidised services existing alongside unsubsidised services for largely historical reasons. Putting a GST on the more privately funded part of the sector further distorts the market in favour of the subsidised sector. Originally, the GST was supposed to reduce microeconomic distortions, but in this case it would increase them. Perhaps in phase two of the GST it is purely about revenue. However, in mixed sectors GST fiscal gains are likely to be reduced by shifting demand to the more heavily subsidised sector. These are bigger issues in school and vocational education than higher education, where the private sector is still small.

3. In higher education, about 40 per cent of student fee/contribution revenue comes from international students. Typically, exports are exempt from GST to increase Australia’s international competitiveness (another of the original justifications). The international student market is very competitive globally, so we could exempt international students, but they are an unusual kind of export – many international students pay their fees in Australia at least partly from income they have earned working in Australia. And if we exempt international students, in full-fee markets we could see the somewhat counter-intuitive outcome of domestic students paying more for a degree from an Australian university that their international student classmates.

4. Most Australian students borrow money under HELP to pay their fees/contributions. This means that any GST would just be added to the already rapidly increasing level of HELP debt. Given HELP’s poor and worsening finances, 20 to 25 per cent of the GST revenue on higher education is likely to have to be written off. And most of the significant cash revenue gains from a GST on higher education would be 15 years away, after people finish paying off what they will owe anyway and start repaying what they borrowed to pay for the GST.

Overall, a GST on higher education would be likely to distort the higher education market while raising little revenue in the short to medium term.

Does graduating into a recession reduce long-term employment levels?

Poor recent graduate employment outcomes inevitably raise questions about whether this shows just a slow period of labour market adjustment, or whether it is a sign of something more serious. One theory is that early periods of unemployment or low-skill employment have a scarring effect on future employment. The basic theory is that during unemployment existing skills deteriorate and new skills that come with work experience are not developed. Either or both of these things happening or employers assuming from CVs that they may have happened compound the original employment problem. What could be a temporary setback is turned into a long-term disadvantage.

For graduates, the early 1990s recession provides an opportunity to look at potential scarring effects. There were three years of more than 25 per cent un- or under-employment from 1992-94, and 20 per cent plus for 1991 and 1995.

The ABS Learning and Work survey* has a question on when the respondent graduated. On a question asking what impact their qualification had in their working life in their first six months, those completing between 1990 and 1994 had the highest rate of saying ‘no impact’, 26 per cent. The next worst result was 23 per cent for those completed between 2000 and 2004. Unfortunately, the labour force results are hard to interpret due to sample size issues. The ABS says the margins of error are too high on all the unemployment results for them to be reliable. The not in the labour force results are higher for 1990-94 graduates than either 1985-1989 or 1995-99 graduates. However this is almost certainly due to women absent from the workforce for family reasons (if I break the results into male and female I get the expected outcome, but with the ABS again warning that the margins of error are too high).

Another option is to use the census, which has problems with people not answering all the questions but still has many respondents. While the census has no question on exactly when degrees were completed, as most students start bachelor degrees in their late teens we should be able to see any obvious scarring effects. My theory here is that people aged 39 to 41 years at the time of the 2011 census were likely to have graduated into the early 1990s recession. If there is a scarring effect, they should have worse outcomes than people who are a little younger or older. The slide below shows the results for being in work, for male bachelor degree holders only, as the female not in labour force results are too ambiguous.

census unemployed

What surprised me about this is how employment drops for men in their forties. While there is a slight increase in unemployment for the target 39-41 years group compared to younger men this looks like a life cycle effect. The same phenomenon is evident in the 2006 census. So overall I would say there is no strong evidence of a scarring effect on overall employment levels of graduating into the early 1990s recession.

Update 9 January: After yesterday’s post seemed more interesting for the activities of men in their forties than for employment scarring, I wondered if the issue might at least partly be residualisation of the bachelor-degree group. In other words, the more successful men go on to postgraduate study leaving the men with bachelor degrees who have given up looking for work as a larger share of the remaining people who say a bachelor degree is their highest qualification. As men get older, they do become slightly more likely to give a postgraduate qualification as their highest qualification (slide below).

highest ed level

However, this is only a partial explanation. When I separate the analysis into education levels, men with postgraduate qualifications also start leaving the labour force in their 40s, although at a lower rate (slide below).

uni ed not in albour force

I’ve had a quick look at some of the other characteristics of men with bachelor degrees who are not in the labour force. The affluent retired hypothesis has some truth but far from explains it. About 10 per cent of this group report a personal income of $1,500 a week or more, compared to more than 60 per cent of all men at this age and education level.

About 40 per cent report doing childcare, although this does not mean that they are the principal carers for their children. About a third have no live-in partner, so they are not obviously relying on someone else to pay the household bills.

Around 10 per cent of male bachelor degree holders who are not in the workforce report a ‘need for assistance with core activities’ compared to 0.2 per cent for those working full time. The cumulative effects of accidents and ill health are starting to show in this demographic.

* The results reported here are not available for free on the ABS website.

Fewer new graduates will start repaying their HELP debt

In the mid-year Budget update, the government predicts that repayments of HELP debt will slow down. Unsurprisingly given recent posts on graduate employment, I think that’s right. Fewer graduates have any significant source of income.

What I have not written about so far is what graduates are paid if they have a full-time job. What the latest graduate employment outcomes data shows is that median starting salaries were essentially the same in 2014 as in 2013, at $52,500 a year (for graduates aged less than 25 in their first full-time job). That means that graduate salaries are going backwards in real terms. The HELP thresholds, however, keep being indexed according to average weekly earnings, which are still going up.

Unless there is a surprising surge in salaries paid to new graduates, this means that the median graduate who completed at the end of 2014 will not make a HELP repayment even if he or she has a full-time job. The slide below has the trends in starting salaries and initial HELP repayment thresholds.

starting salary and threshol

An implication of this is that, at least for younger graduates (older graduates are more likely to already have jobs, or employment histories that get them better-paying jobs*), is that few of them will begin HELP repayments in the months after graduation. Overall, only 42 per cent of the graduating cohort from 2013 have a full-time job, down from 56 per cent in 2007 and 2008. If the median starting salary slips below the initial HELP repayment threshold, fewer than half of that group will make a repayment. This suggests that around one in five new graduates will earn enough to start repaying their HELP debt.

Presumably these trends informed the 2014 Budget decision to lower the initial HELP repayment threshold to $50,638, which would require many more new graduates to start repaying, at the rate of 2 per cent of their income. But it is not clear why the Budget went for a once-off cut to the initial threshold, rather than changing the indexation system from average weekly earnings to the consumer price index. The government proposed this change for much more politically sensitive welfare payments.

Originally, the HECS thresholds were indexed to CPI, but were changed to AWE in 1994. Which it is has major implications for repayment levels. In our doubtful debt report, we showed that if the initial threshold had been indexed to the CPI rather than AWE it would have been $44,836 in 2013-14, rather than its actual figure of $51,309. Although we did not model the other thresholds, using CPI rather than AWE could significantly speed up repayments by bringing people into higher repayment categories earlier in their careers.

* In 2013, graduates aged above 25 or above with previous full-time employment experience had a median salary of $58,000.

What’s going on in the new graduate labour market?

Late last year the mainstream media picked up on the graduate un/under-employment story. At Grattan we have been doing a bit more work to see what is going on.

One of the things we wanted to look at whether the poor employment outcomes were driven by more graduates, as the 2009 and onwards enrolment boom students finish their courses, or a declining labour market, or both.

We have published completions data, but there is no published time series of the number of recent graduates with jobs. What we’ve done is taken the proportion of recent graduates with full-time jobs in the Graduate Destination Survey as a share of the completions number. To the extent that the GDS is an imperfect sample our numbers are likely to be a little wrong, but I doubt this will affect the trend.

As can be seen in the slide below, both supply and demand factors are affecting outcomes. The graduate labour market peaked in 2007, when nearly 61,000 new bachelor graduates found (or already had) full-time jobs. In 2013 and 2014, just over 52,000 new bachelor graduates had full time jobs about four months after completing their degrees.

recent grad employ and complete

There seem to be two shocks to the employment market. The first was the onset of the global financial crisis, with was felt most strongly for the 2008 completing students, with a decline of 7 per cent in the number of graduate jobs on the previous year. Perhaps surprisingly, there was a slightly bigger shock in 2013, with a 7.6 per cent decline on the number of jobs in 2012. One reason it was worse in 2013 is that big health fields which had been little affected by the 2009 downturn declined significantly. This is consistent with fewer health occupations appearing on the skills shortage list (p. 68).

While graduate employment opportunities have trended down, the number of domestic bachelor degree completions has trended up, by 17 per cent between 2008 and 2014. Given there are still some big student cohorts enrolled in our universities, the number of completions will only increase in the next few years. Unfortunately, we cannot have the same confidence about full-time jobs for recent graduates.

Release of the 1988 HECS Cabinet documents

The 1 January release of old Cabinet papers has put on the public record the original submission that led to the creation of HECS.

As Julie Hare reports in The Australian, some of its issues are still current today. The Department of Finance wanted a real interest rate on HECS debt, and the Pyne reform package’s original proposal that this be implemented suggests that they have been consistent over the last 25 years on this point (it was in the leaked 1999 reform submission as well).

The issue of doubtful student debt is not so prominent, but it is alluded to in a related Expenditure Review Committee document. The ATO, concerned about the bureaucratic implications of maintaining records for decades, wanted to close HECS accounts that had recorded no changes for extended periods (10 years was suggested). This was opposed by both the departments of Education and Finance, with the latter saying that the issue was evidence of the need for faster repayment requirements and the real interest rate to provide an incentive to repay. They did later get faster repayments, with the initial rates of 1%, 2% & 3% of income (depending on earnings) soon replaced with higher rates, and progressively increased over the years to the current range of 4% to 8%.

There are a few ideas in the documents that were not pursued. Waiving indexation of HECS debt of people out of the workforce for long periods due to unemployment or invalidity was to be investigated. I suspect that this was rejected on feasibility grounds – there is a lot in these documents about the complexities of implementation, down to such detail as the need to upgrade the ATO’s air conditioning before the necessary IT equipment could be installed. If a variable is not in the existing ATO systems, it is very hard to have policy based on it.

A proposal to not charge HECS in the first year of university to students who had been on AUSTUDY or ABSTUDY in their last year of school was also dropped. The Department of Prime Minister and Cabinet suggested that this could undermine the argument that the loan scheme alone could deal with equity concerns, and lead to lobbying from other groups for exemptions. They thought we should wait and see if there was a problem with demand from this group. They made the right call on this, as subsequent research has not shown socioeconomic background in itself be a significant factor in price sensitivity.

At the Conversation, Gwil Croucher discusses some of the other considerations revealed by this release.

As Christopher Pyne is finding, higher education reform is hard. These Cabinet documents provide some insight into the background of a big reform that was implemented and, in modified form, survives.