Increasing public returns to higher education by cutting public funding

The Fairfax papers are running a story this morning saying that:

“Australia bucks the international trend as one of only five OECD countries where the public profits at a higher rate than the individual. It ranks second out of 29 countries – behind only Britain – for the biggest benefit to the public, while in 24 countries the private rate of return outweighs or equals the public rate.

Economist David Richardson from The Australia Institute says the OECD study “demolishes the claim” that higher education benefits individuals more than the public.”

But these OECD figures don’t show what Fairfax or Richardson think they do. This is because the financial benefits of education are largely independent of public investment in education. For students, they are earnings gap between one education qualification and some counter-factual. For the government, they are the additional tax revenues (and possibly welfare spending savings) on the same counter-factual.

What the Graduate Winners report argued was that government subsidies are a largely redundant addition to the already large private benefits of higher education. Therefore they don’t have a major effect on incentives, provided there is a good loan scheme like HELP. The government can reduce them without having effects on behaviour – which is what has happened in Australia.

Since 1989, Australia has reduced public investment per student in nominal terms twice and reduced it in real terms in many other years. After all these cuts, higher education participation rates are at record levels.

But because the private financial returns to education have grown over much of the time, and the public benefits are essentially taxes on those private earnings, the government is getting the same or greater financial benefit on a lower initial investment. Consequently, their returns on dollar investment have being going up. Further cuts to public spending would further increase public rates of return.

——

When these OECD statistics first came out a few weeks ago, I strongly discouraged journalists who called me from making too much of them. While the basic logic described above is I think correctly captured in the Australian numbers, the numbers themselves seem misleading. There seem to be two major differences with the published research in Australia. One is that they are talking about ‘tertiary’ rather than ‘higher’ education. I think this means that the OECD are including qualifications that in Australia are seen as upper-level vocational rather than higher education. This would significantly deflate the private benefits compared to a study based on bachelor degrees.

The other issue is what counter-factual they are using. Australian studies (including Graduate Winners) use the earnings of someone with Year 12 only. The OECD is using Year 12 and ‘post-secondary non-tertiary education’, presumably mostly certificate level vocational courses. As there are some good incomes at the Cert III/IV level, that may be inflating the counter-factual income stream compared to other studies.

Unlike the conflation of diplomas and bachelor degrees, I think there are now good reasons to reconsider the use of Year 12 as the comparison point of bachelor degree earnings. When these studies started decades ago, most people did not finish school and Year 12 was a good proxy for bright people who just chose not to go on to further study. But now the vast majority of people finish Year 12, and the people who don’t go to university are heavily skewed to the lower ATARs. They are a much less realistic comparison group to bachelor degree holders than people with Year 12 only education were 30 years ago. But I don’t yet have the answer as to the best way to re-work the financial returns analysis.

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