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.

The beginning of the end for no-questions-asked student loans?

The Australian this morning is running stories on the likely increases in doubtful HELP debt* and crackdowns on lending through VET FEE-HELP, which principally lends to students taking vocational education diploma courses.

Industry minister Ian Macfarlane (the Australian must have been sitting on this story, as Chris Pyne become the responsible minister in the pre-Xmas reshuffle) is said to have:

…blasted “criminal’’ training colleges for recruiting elderly students from retirement homes to cash in on taxpayer funding.

Mr Macfarlane said the federal government would take action early next year to stop training companies and brokers offering free iPads to “suck in’’ students who are unlikely to graduate.

Under the proposed measures, some of the government payment to colleges would be withheld until the student found work. This has parallels with the ‘gainful employment’ rules proposed in the United States to deal with similar problems there.

While obviously measures should be taken to reduce rorting, bad provider practices highlight deeper problems with HELP loans. Income-contingent lending has been expanded many times since HECS was introduced in 1989 without anyone going back and thinking carefully about the lending or repayment systems.

In 1989 higher education was still a relatively elite activity and graduates a relatively small proportion of the workforce. Recent graduate un-or-under-employment was only a third of what it is now. To a significant extent, the admission requirements for university could double as a creditworthiness check. The income contingent loan scheme largely acted as a genuine risk manager, rather than handing out mislabelled subsidies to people who were never likely to repay.

Now higher education participation is heading towards 40 per cent of the age cohort, and HELP has been extended to vocational education. Higher education students with lower ATARs are significantly less likely to complete their degrees, leaving them with a HELP debt but without significantly enhanced income-earning potential. People with vocational education qualifications on average earn significantly less than higher education graduates, and more importantly for HELP are much less likely to earn more than the repayment threshold (pp 20-23). Admission to a course is no longer a good proxy for ability to repay.

During 2014 several people have suggested that institutions enrolling students using HELP should share some of the risk of non-repayment (eg Judy Sloan and Core Economics bloggers). The proposal to making some provider payments contingent on student outcomes looks like the first sign of this becoming reality. However, this may not be the best solution.

While vocational and higher education providers could use their own data to develop sophisticated analysis of what types of students are most likely to drop out, they are much less well-placed to assess employment outcomes for those who complete. Former students are under no legal obligation to answer employment surveys. By contrast, the government as the HELP lender has vast amounts of information. Tax file numbers are used for both HELP borrowing and tax collection, what matters for HELP repayment. Linked back to Education Department records, this data could also be used to produce sophisticated analysis of repayment risk.

Arguably, under current arrangements the government is not being a responsible lender. Good lending practices in the financial sector protect both the lender and the borrower from imprudent decisions. Neither protections are currently robust for HELP. Asking some more questions about repayment prospects before lending under HELP could be good for many prospective students, and good for taxpayers who face ever-increasing bad student debt.

* Using Grattan projections based on a mix of official figures and extrapolations from historic data.

Few disciplines escape the graduate employment downturn

As reported yesterday, Australia has recorded its worst ever employment outcomes for recent bachelor-degree graduates. The employment pain is widely spread, with only four of the forty disciplines monitored by Graduate Careers Australia escaping an employment downturn between 2013 and 2014. They are social work, medicine, veterinary science and allied health.

The largest deterioration in employment outcomes was experienced by engineering graduates, showing yet again that this is a boom and bust field of education, with periods of very low unemployment quickly followed by periods of high unemployment.

engineering

There have been many media stories about the declining job market for law graduates, and this is supported by the GCA data. Law graduates managed reasonably well in the early 1990s recession, but now there is a clear negative trend. The upside is that their un-/under-employment is still lower than the average.

law

I have been saying for years that there is nothing in the graduate employment data that justified claims of too few science graduates, and this year’s numbers again support my argument. Un-/under-employment rates for life science graduates now exceeds 50 per cent, second worst only to perpetual employment wooden spoon winners, graduates in the visual and performing arts. The full list of graduate un-under-employment rates is beneath the fold.

————-
Read more »

Worst ever new graduate employment outcomes

The latest graduate employment statistics bring bad but not unexpected news: the proportion of graduates looking for full time work four months after completion has reached a record 32 per cent. This replaces the previous worst result of 29 per cent in the early 1990s recession – but without a major recession. For graduates aged under 25 years, 35 per cent were still looking for work four months after completion.

Grad unemploy
Source: Graduate Careers Australia, as above and here.

Of those looking for full-time work in early 2014, 20 per cent were working in a part-time or casual job, and 12 per cent were unemployed.

Oddly, there was little sign of this employment misery in the latest ABS Education and Work survey, which was released recently. Overall graduate unemployment remained a little over 3 per cent, the proportion of working graduates with jobs classified as professional or managerial increased, from 73 per cent to 76 per cent. I think these results should be treated sceptically. The survey is reporting increases in postgraduates that seem unlikely, being way in excess of the completions reported by the Department of Education (migration can affect the results, but not on the scale observed). The sample size means that the true result could be a fairly wide range for these sub-categories. I think they have erred on the high side.

Should uni students pay a fixed share of total course costs?

In a Conversation article today, Louise Watson revives an idea from the 2011 base funding review (on which she served): that the government and students should each pay a fixed share of the total funding rate for the course the students take. She says:

The wide variation in subsidy levels from 16% to 71% of total course costs is the product of incremental political decisions made by previous governments. Pyne’s proposal to cut government subsidies by 20% across the board does not address these anomalies. It would be fairer if all government subsidies met the same percentage of course costs, regardless of discipline, even though this would cause an increase in some students’ HECS liability.

In the base funding review a 40 per cent student/60 per cent government ratio was suggested; in today’s article Watson refers to a National Commission of Audit suggestion of 45/55.

My Graduate Winners report was a detailed critique of this idea from the perspective of using higher education subsidies to produce public benefits.

But I don’t think the fixed ratio idea is much better from Watson’s perspective of fairness to students. Under the current system, student contributions are mostly based on presumed private benefit from a degree, with a nod to cost differentials in delivering courses. This is how we get apparent anomalies – law has high private benefits but low delivery costs, and therefore the student contribution is a high percentage of the total funding rate.

While the private benefit categorisations are old and were always rather back-of-the-envelope, their practical effect is to even out the number of years it takes to repay a loan. The chart below shows, using 2011 census data, how long it would take male graduates to repay their HELP debt, if they were earning the median income for someone with a bachelor degree in their discipline.

HELP repay

Under the current student contribution system, most repayment times are clustered around the overall average of 10 years.

Under the base funding review flat rate subsidy recommendations, science and agriculture would become much more expensive, even though they already have relatively long repayment times. Law and IT would become cheaper, even though their graduates are already relatively quick to repay. It’s not obvious to me how this improves on fairness.

These issues arise because although we spend more than $6 billion a year on the main tuition subsidy program, nobody knows exactly why. But I think the main practical effect of this spending is that it shortens student debt repayment times, and keeps them clearer of the cash-constrained child-rearing years. This is one of the main things I take from this year’s debate on fee deregulation – while the arguments were often under-developed, people were expressing concern about women carrying debt while they were out of the workforce with kids, and about delays in the capital accumulation needed to enter the property market.

The current student contribution system helps with income smoothing, with graduates eventually paying via high marginal tax rates later in their careers. By causing already long repayment times to extend further, and already short repayment times to reduce still more, the Watson proposal would work against this policy objective.

Increases in low SES uni participation, 1991-2011

Using the trend data from the chart below, it is often said that we are making little progress in increasing higher education participation for people from low SES backgrounds.

low SES trend

The chart shows domestic low SES students as a percentage of all domestic students. But the denominator is important: it means that low SES enrolment has to increase more quickly than enrolment generally for the percentage to go up.

A more meaningful indicator is low SES enrolment as a percentage of the relevant low SES population. This tells us whether people from low SES backgrounds are becoming more likely to attend university over time.

An interesting paper out from the Group of Eight today (disclosure: drawing on some of my work from a few years back) shows how, for the late teenage children of low SES workers, university attendance has become more likely over time.

For example, in 1991 16 per cent of the children of tradespeople were at university. Twenty years later that number was 26 per cent. The gaps between SES groups remain very wide, but with participation growth in the leading SES group, professionals, slowing down the gaps are not as large as they were in the past.

Census trends occupational partic

—-
Note: The data is drawn from the census, using 18 and 19 year olds living at home. At home is needed to determine parental occupation. According to the two latest censuses, about 80% of 18 year old university students and 70% of 19 year olds are living with their parents.

HELP and vows of poverty

On Twitter I was challenged on the religious colleges point, that there was a difference between being eligible for FEE-HELP loans and directly receiving tuition subsidies. Having just checked the census income numbers, looking at ministers of religion and graduates of ‘religious studies’, it seems that in this case there may not be so much difference between the two.

In 2011, the year of the last census, the threshold for repayment of HELP was an annual income of about $47,000. Unfortunately that does not neatly fit with the census income categories, falling into one with the range of $800-$999 a week.

The slide below shows incomes for ministers of religion, with 47 per cent definitely earning below the threshold (the bars show the cumulative percent of ministers), with another 16 per cent in the income range including the threshold.

ministers of religion

The results for people with degrees in ‘religious studies’ are even worse. For this group, 56 per cent earn less than threshold and another 12 per cent have an income in the the threshold’s income range.

religious studies

By contrast, for graduates generally 34 per cent are clearly below the threshold and another 12 per cent have an income in the threshold range.

There are many people who are below the threshold in a given year who will still repay eventually, as they are temporarily out of the workforce or working part-time. But religious vocations are often characterised by the religiously-motivated forgoing of material luxury, and also payment-in-kind by the church, such as free or heavily subsidised accommodation. These factors are likely to put some ministers of religion below the threshold for their careers, despite working full-time.

This means that the effective costs of extending tuition subsidies to religious colleges is likely to be less than what I estimated yesterday, as some of the tuition subsidies will just replace debt that will never be repaid anyway.