Category Archives: Higher education markets

The VETification of higher education is a precedent that should not be set

In The Australian this morning an article points out that publicly-funded language diplomas may be not be available to new students from next year. In my view, that is a correct implication of both general policy statements on funding diplomas and associate degrees made by the government, and the specific consultation paper on sub-bachelor courses.

Unfortunately, this is a case in which the government, in attempting to fix one problem, would create several new problems.

The original problem here is that diplomas and associate degrees were, at the last minute in 2011, excluded from the demand driven system. That means that the total number of government-funded sub-bachelor places remains set by the government, the allocation of places between universities reflects largely historical decisions, and new places (when available) are distributed according to regularly changing criteria. The distribution of places does not strongly align with the preferences of students, the strategies of universities, or the needs of employers. In the review of the demand driven system I did with David Kemp, we recommended putting sub-bachelor places into the demand driven system.

On the surface, the government’s proposal looks like it is responding positively to this recommendation. Constraints on the number of funded sub-bachelor places will be lifted in two ways. First, sub-bachelor courses approved by the minister will enter the demand driven system. Second, sub-bachelor courses not approved by the minister will be given an exception on the general ban on undergraduate full-fee places at public universities.

Language courses are in trouble because they typically fail to meet both the announced criteria for sub-bachelor demand driven funding – that they articulate into a related bachelor degree program, and that they have been developed with a focus on industry needs. Read more »

Has the demand driven system largely achieved its objectives?

At the AFR higher education conference this week the demand driven system was criticised from the speaker’s platform and elsewhere.

Some Group of Eight universities are arguing for something they call ‘cap and trade’. The core idea is that, in exchange for accepting capped funding or student places, universities could trade in bachelor degree places and replace them with sub-bachelor or postgraduate places. Under the current system, sub-bachelor places are capped in public universities. Universities can enrol unlimited numbers of postgraduates on a full-fee basis, but in some courses they want to offer cheaper Commonwealth supported places, which are currently capped.

From the government’s perspective, cap and trade implemented across the entire system would give them more certainty about future higher education expenditure.

University of Melbourne VC Glyn Davis gave the argument a new feature at the AFR conference. He put as central to the demand driven system the goal of 40 per cent higher education attainment in the 25-34 age group. Noting that this had been achieved in some metropolitan areas, he suggested capping inner city universities while allowing outer metropolitan universities to continue growing.

The 40 per cent attainment goal was certainly part of the original Bradley report recommendations for the demand driven system and the subsequent government policy announcement. But how important is it to the overall logic of demand driven funding? Read more »

Rival fairness arguments in the university fees debate

This week I am on a panel discussing a fair price for students to pay for their university education. Both those who want students to pay more and those who want students to pay the same or less draw on fairness arguments.

Fairness arguments for higher student charges

Fairness to other taxpayers: Critics of free or cheap higher education have long thought subsidising students was unfair to other taxpayers. Way back in 1972 Malcolm Fraser criticised Labor’s free tertiary education policy on the grounds that it would lead to a ‘wharf labourer paying taxes to subsidise a lawyer’s education’. The 1988 Wran report, which recommended the introduction of HECS, justified it partly on the basis that ‘taxpayers carry most of the burden of higher education [but]…most taxpayers are not privileged members of society and neither use nor directly benefit from higher education.’

Fairness to other taxpayers is perhaps the lead trigger idea in reducing public spending and increasing student charges. Two of the three proposed nominal cuts in per student public spending of the last 30 years (1989 was the exception) occurred when there was a Budget deficit, creating an active choice between increasing taxes or charging students more.

A fair price: Underlying the fairness to other taxpayers notion is also an argument that it is fair to ask people to pay for what they receive. This has led to a recurring idea that there should be a ‘balance’ between private and public contributions to the cost of higher education. It appears in the Wran report, the arguments for the 1996 funding cuts and HECS increases, the Lomax-Smith review of funding (never acted on), and again in the Pyne and Birmingham policy documents. Students should pay for the benefits they receive, and the public should pay for the benefits it receives.

The public-private balance idea has had little influence on policy detail. Public benefit calculations have never been used to set public funding rates, and private benefits have been used to set private funding rates only once, in a back of the envelope way, in introducing differential HECS for 1997. This created the idea that student contributions should be linked to likely future earnings. Differential HECS connects to a market idea of a ‘fair’ price – pay more, get more. But it also links to progressive notions that the relatively rich should pay more, or get less in taxpayer-funded benefits. This is a common idea in the Australian welfare system. Despite the weak association with policy detail, repeated use of the balance metaphor suggests it reflects intuitions about how higher education should be funded.
Read more »

Should teacher education places be capped?

NSW education minister Adrian Piccoli has long been a critic of universities over-supplying the teacher education market. In this morning’s Australian, he is calling for caps on student places. If accepted, this would be the second course after medicine to be capped.

It would also be a major precedent, as it would set a low benchmark for justifying capping. According to employment surveys education graduates do slightly better than average in finding full-time work. Among those finding FT work, education graduates do significantly better than graduates in other fields in getting jobs that use their qualifications. That said, full-time employment for education graduates is down 11 percentage points on 2008, the recent peak of graduate employment rates.

The strength of the demand driven system is not that student and universities will always make the right call about where the job market is going, but that it can adapt as new information becomes available. Over the last few years, the message that the teacher market is saturated has been well publicised. Commencing student numbers were already past their peak by 2015, as the chart below shows. The trend would have been further down except for a major move by Swinburne Online, which went from no students in 2014 to 8.5 per cent of the national commencing market for initial teacher education in 2015.

commecning ed students
Source: uCube

There are bigger falls in education more generally – down 10% percent in commencing students between 2014 and 2015 and 13 per cent in full-time equivalents (presumably part-time enrolments at Swinburne Online are affecting that). Under the legislation, capping occurs in full-time equivalent places, not on a head count of students.

The initial 2016 applications and offers data suggests a fall of 2.4 per cent in applications and 4.7 per cent in offers for education, so a further drop in student numbers seems likely.

Cutting student numbers under the pre-demand driven system was a slow, politically painful process. With demand driven funding, it is happening quickly with few people even noticing.

18 year olds or politicians: who makes the better course choices?

Former Greens higher education adviser Osman Faruqi thinks that it is time to reconsider the demand driven system, in light of the annual ATAR controversy and mediocre employment outcomes. It is the usual story of good intentions turning to not-so-good outcomes:

There was an opportunity for universities to work with policymakers and industry, identify economic trends and skills gaps and use their new-found flexibility to provide students with a rigorous learning environment.

While university managers might have convinced themselves this is what has occurred, the numbers tell a different story. Enrolments shot up across the board — but particularly in relatively profitable courses such as business, commerce and media. As more students with lower ATARs gained entry into university, attrition rates increased alongside them. One in seven students currently drop out by the end of their first year, the highest level in a decade. Graduate unemployment is at its highest level since records began in 1982.

The demand driven review I did with David Kemp is the main analysis of how the system is going, but it is now two years old. It’s worth looking at a few statistics to update trends.

The actual enrolment increases for domestic bachelor degree students are a little different to Osman’s take, and can be used for and against in the debate about different systems. The chart below shows the disciplines with at least 2,000 EFTSL enrolment increases between 2008 and 2014. Law and business are on the list, but not at the top, and below the average in percentage terms.

enrolment increases

Consistent with what Kemp and I generally found two years ago, disciplines related to occupations with skills shortages generally responded with increased places under the demand driven system. Two of the top three growth areas were disciplines in skills shortages at the time (although not now except for some specialised areas). This we saw as one of the system’s strengths compared to the previous system, which had no established process for identifying or responding to skills shortages. Before the demand driven system, it was very ad hoc: if employers screamed loudly enough and there was money in the Budget for extra places then the system responded; otherwise not.

Of course, in theory it would be possible for the government to more actively steer the system. But should we trust them to make good judgments? The several science-related disciplines in the top half of the fast-growing discipline list suggests not. That was a response to cutting science and maths student contributions in 2009 and campaigning for STEM, with the former Chief Scientist being a major advocate for study in these fields. It was bad analysis all along, and has predictably led to very poor employment outcomes.

Have our political leaders learned their lesson from this? Labor’s plan to pour even more money down the STEM drain suggests not, and the STEM evangelism of the current government (fortunately without any extra student spending), also suggests not.

While student course choices are structured by their interests and aptitudes, precisely which courses they choose is influenced by what they hear and observe. We can see publicised ups and downs of the labour market flowing through into applications and enrolments ups and downs. But government campaigns also make a difference, and not always for the better.

Yes, demand driven funding is leading to more growth in some disciplines than the labour market warrants. But on the historical evidence, I am not convinced that it is worse than the realistic alternatives. Our much-maligned 18 year olds spot and respond quickly to real skills shortages; the old system did neither in a reliable way. Some young people’s course choices look to be misjudgments, as least if they are looking for work. But on that they have been misled by the actions and words of politicians and officials, the very people who would have to run a non-market system of distributing student places.

Does attending a prestige research university reduce earnings?

The latest HILDA statistical report has a finding that the AFR says:

threatens to undermine the prevailing view that it’s worthwhile for students sweat out a high ATAR score in year 12 so they make it into one of the elite Group of Eight universities.

What the report says is that Group of Eight graduates in their sample earn less than graduates who went to universities in the Australian Technology Network or Innovative Research Universities groups.

In my view the finding is not so much wrong as misleading. We did similar research at Grattan last year, using the same HILDA data source. We found a salary premium for the Group of Eight and Australian Technology Network universities of about 6 per cent, after controlling for various personal attributes and, most importantly, discipline.

I believe that the main reason the HILDA report is getting its result is that Group of Eight universities have enrolment skews towards relatively low paid disciplines such as arts and to a lesser extent science. As can be seen in the chart below, these tend to have lifetime earnings in the lower half of the income distribution.

earningsJPG
Source: Grattan analysis of ABS Census 2011 data. It shows the median lifetime private financial benefit of holding a bachelor degree in the stated discipline, compared to the median person of the same gender who finished their education at Year 12.

Just taking 2013 completions, 31 per cent of Group of Eight completions were in the ‘society and culture’ field that includes humanities compared to 23 per cent of IRU graduates and 14.5% of ATN graduates. For science, this field includes 16 per cent of Group of Eight graduates but only 8 per cent of IRU and 6 per cent of ATN graduates.

All this said, past research that does control for discipline has consistently found that the financial advantage of attending a Group of Eight university is less than we might expect, given their relatively high prestige. Despite some anecdotal evidence to the contrary, employers of new graduates don’t seem to pay a Group of Eight salary premium. And Grattan’s work using HILDA data found only a fairly small advantage in the long run. As we did not control for prior ability, even that small advantage might be over-stated due to partly reflecting the higher prior academic ability, as measured by school results, of the students who attend Group of Eight universities.

If a prospective student wants to maximise their income, the key advice is that what they study matters more than where they study it.

But for Group of Eight universities to come out worse in the long run on a discipline basis they would have to be doing significantly worse in adding human capital during their courses, bad enough to cancel out the positive effects of higher prior ability and whatever proxy value their brands have in the labour market. That seems pretty unlikely. I think if the analysis was done again including discipline we’d see a finding more consistent with theory and past research: a small Group of Eight advantage.

No need to spend more than $2 billion promoting STEM subjects

Unfortunately Labor’s promise to write-off the HELP debt of 100,000 science, technology, engineering and maths graduates suggests that they have learned little from their previous mistakes in this area. Following a 2007 election promise, to boost science and maths they cut student contributions and introduced a HECS-HELP benefit, under which around $1,700 a year of HELP debt is written off if graduates work in specified occupations related to their degree.

The cut in student contributions was strongly promoted, and there has been on-going advocacy for STEM disciplines from the Chief Scientist, Professor Ian Chubb. There has been a big increase in science demand and domestic undergraduate enrolments – up 35 per cent between 2008 and 2013, or more than 21,000 full-time equivalent places. By far the largest increase has been in the biological sciences, which made up nearly 40 per cent of the total. Engineering, which did not have a cut in student contributions, increased by 32 per cent over the same period, with more than 8,000 additional full-time equivalent places. Science demand kept growing in 2013 and 2014, despite student contributions being put back up again.

As I have long argued, there has never been any evidence that we need a significant boost in bachelor-level science graduates. The latest employment data confirms that the surge of completions in science is only leading to serious un- and under-employment among science graduates, who have been hit especially hard in the general graduate employment downturn. So it is hard to argue that there is any general problem to solve in the first place.

sci take 3

Possibly there are still some niche employment issues in say secondary maths and science teachers – although they have fallen off the skills shortage list. But a promise to write off a few tens of thousands of dollars in student debt is unlikely to change how many people see a teaching career. Even for financially motivated students, the cost of university is not high relative to career earnings for full-time professionals. Perhaps the main thing that will drive graduates to teaching is that they may have few other options, thanks to the over-supply of graduates.

Course and career choices are primarily about interests and aptitudes, with long-term earnings a factor. These can be influenced – people have multiple interests and are not necessarily aware of all the suitable course and career opportunities. But this influence can be achieved without writing off more than $2 billion in student debt (we get similar numbers to the government). A few million dollars in marketing expenditure would probably have the same effect, if this was a desirable outcome – which it is not. Labor’s latest policy is, unfortunately, only likely to to encourage people to make choices that put them at high employment risk.

Should we have central allocation of student places for low ATAR students?

Plan B higher education reform ideas are everywhere at the moment. Higher education consultant and former higher education bureaucrat David Phillips has a proposal for the problem of drop-out rates among lower ATAR students. His idea is that rather than these students being included in the demand driven system, places for them should be allocated to universities with good track records in supporting them.

I agree that we have a problem here, but I don’t think this central planning response is the right one.

A minimum ATAR cut-off was one of the ideas circulating in 2013, and something we considered in the review of the demand driven system. We didn’t go with this idea. One of the reasons was the inherent limitations of what central planners can know. While the non-completion rates of lower-ATAR students are too high, based on the historical evidence 50 to 60 per cent of them do finish their qualifications. ATAR breaks down as a predictive tool because a range of other personal and institutional factors are likely to be the difference between completing and dropping out. The knowledge needed to predict is held largely by the prospective student and the higher education provider. This is far too decentralised for a central planner that has to go with clear rules.

There is also a big problem with the large numbers of students admitted to courses via entrance tests, prior vocational education and other alternative measures. For these applicants, we don’t have the ranking of ability provided by ATAR. The capacity of the central planner to say which of these students should be in the demand driven system and which in the allocated system is even weaker than it is for ATAR.

Even if we could determine a fair and efficient cut-off point, there are still other problems. One of the arguments for the demand driven system is that it allows for experiments, innovation and competition. It lets providers think of and try out new ideas for assisting particular student groups. The central planning model of just rewarding institutions with historic success would kill this dynamism.

The other difficulty is the weakness of the Commonwealth as a central planner, which in turn influences the incentives of any of the players. With the existing sub-bachelor allocated places, the rules for allocation changed regularly before the system was effectively frozen due to Budget constraints. This kind of uncertainty works against investment in the field, because arbitrary actions by government could wipe out the financial gains.

We would have to be wildly optimistic to think governmental processes of the future would be better than in the past. Politics is increasingly dysfunctional and the bureaucracy has been weakened by successive ‘efficiency dividends’ and revolving door senior appointments limiting corporate memory. The beauty of the demand driven system is that that they only have to get the broad policy framework right once, and after that the system can adapt on its own, without relying on government.

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.