Tertiary Education Systems and Labour Markets Report prepared for the OECD

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Tertiary Education Systems and Labour
MarketsReport prepared for the OECD

• Stephen Machin and Sandra McNally
• 1 December 2006
• Centre for Economic Performance, LSE
• Department of Economics, UCL
• Centre for Economic Performance, LSE

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Issues

• In the context of rapid expansion of tertiary
  education
• Is there now over-supply of graduates?
• Is there evidence of over-qualification and
  skill mismatch?
• Are students studying the right type of
  subjects at tertiary level?
• In particular, is there a shortage of science and
  technology graduates?
• Does the type of institution matter for labour
  market prospects?

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Context

• Rapid expansion of tertiary education general
  phenomenon across OECD countries. Evident for
  several decades
• Much variation across countries
• Differences in the type of tertiary education.
  For example, The EU lags behind the US - mainly
  attributable to lack of supply of general and
  advanced research programmes (Wasmer et al. 2006)

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Labour Market Consequences of Increasing Supply

• Depends on the demand for graduates by employers
  as well as the supply of graduates from tertiary
  institutions.
• Increase in supply of graduates leads to fall in
  the wage (everything else constant)
• Increase in demand for graduates leads to a rise
  in the wage (everything else constant).

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Labour Market Consequences of Increasing Supply
(2)

• What is the outcome of changes in demand and
  supply?
• Compare the wage of tertiary graduates to the
  wage of closest substitutes
• (upper secondary or post-secondary non-tertiary
  graduates). Look at changes over time.
• Has the differential fallen over time on account
  of the increasing supply of tertiary graduates?

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Evidence from the literature

• Method regression analysis where human capital
  is one of several factors that determine an
  individuals wage
• (Mincerian wage regressions).
• In general, the wage premium to tertiary
  education has increased or remained stable,
  despite expansion of tertiary education.

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Role of demand

• Demand has been increasing faster than supply
  the only way to rationalise stable or increasing
  wage premium to tertiary education
• Why has demand been increasing so fast?
• Weight of evidence is behind skill biased
  technology change explanation introduction of
  new technologies that are biased in favour of
  skilled workers.

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What has happened to employment and unemployment?

• Compare employment and unemployment rates of
  graduates of tertiary education and those who
  achieved upper secondary or post-secondary
  non-tertiary education 21 countries 1991-2003
• Tertiary graduates have much higher probability
  of being in employment lower probability of
  being unemployed
• Some evidence of catch-up of less educated
  group over time, most clearly for employment
  rates (some exceptions e.g. Poland).

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Evidence of over-supply?

• No. Plenty of scope for tertiary education to
  keep on expanding.
• As more people obtain a tertiary education,
  greater variation in the earnings of graduates.
• Explanations
• - Variation in personal characteristics of
• graduates
• - Graduates studying wider range of subjects and
  attending larger number of institutions.

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Over-education and skill mismatch?

• Can take a long time for (usually less well
  performing) graduates to find a job some are not
  in jobs that appear to be well matched to
  qualifications shortages in certain sectors are
  reported
• Literature on over-education and
  under-education (terms are sometimes misused)
• Workers who are over/under educated might
  still be well matched to jobs.
• Apparent over/ under education might be a
  temporary phenomenon.

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Over-education and skill mismatch? (2)

• Wasmer et al. (2006) look at these issues for
  several European countries. Find some evidence
  that over-education is a transitory phenomenon.
• Only small wage penalty associated with
  over-qualification. However, skill mismatch
  is a more serious issue.
• In some countries (like UK) major problems with
  vocational system of qualifications.

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What type of education?

• Trade-off between highly specialised education
  and more general education programmes.
• Some evidence to suggest that the latter makes
  workers more adaptable to economic shocks. This
  affects their wages and ultimately economic
  growth.
• Raises a question about whole education system
  not just tertiary education.
• Is early stratification into a general (academic)
  route and a vocational route damaging to young
  people and ultimately to economies?

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Who provides education?

• Balance between employer provided training and
  publicly provided training.
• General skills Vs firm specific skills.
• Bassanini et al (2006) evaluate what is known
  about work-based training in Europe. Many
  questions of policy relevance cannot yet be
  answered (e.g. Is there enough employer based
  training? Is it effective in raising
  productivity?)
• Governments have an important role to play in
  improving information about training
  opportunities setting appropriate legal
  frameworks ensuring portability of skills.

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Are graduates studying the right subjects?

• Few academic studies estimate returns to higher
  education by subject of degree, especially if we
  want to compare countries and consider changes
  over time.
• Machin and Puhani (2006) estimate returns by
  degree subject in Britain, France, Germany and
  the US using a consistent framework

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Returns by field of study

• In the four countries considered, returns to a
  university degree are lowest for Arts subjects
  whereas they are higher for other subjects
  often highest (at least for men) in
  Science/Engineering/Technology
• Requires much further research for other
  countries especially for making comparisons
  over time and across countries.

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Shortage of Science and Technology Graduates?

• High wage return reports of shortages e.g.
  Belgium, Australia, New Zealand, UK.
• Variation between countries in the proportion of
  ST graduates

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Science and Engineering degrees as a of all
first university degrees, 2000
Asia 32
European Union 28
EFTA 19
Central/Eastern Europe 29
North America 18
South America 22
Oceania 22
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Shortage of Science and Technology Graduates?

• Countries differ in relative numbers graduating
  with an ST degree working in the labour market
  e.g. US and Europe
• Research on perceived shortage in the US and
  Europe
• Explanation related to international mobility of
  highly skilled professionals, scientists and
  engineers.
• Concern about brain drain and implications for
  economic growth

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How does type of institution matter?

• Countries differ along a number of dimensions
  unitary vs binary systems importance of private
  sector extent of decentralisation extent of
  change over time.
• Graduate outcomes are often correlated with
  institutional characteristics
• Difficult to separate the effect of institutional
  type from the fact that students with very
  different characteristics may choose to attend
  different types of institution

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How does type of institution matter? (2)

• Has higher numbers going to institutes of
  tertiary education led to a decline in the
  quality of tertiary education? Are new institutes
  providing as good an education as longer
  established institutes?
• One would expect wage returns to vary by quality
  of institute attended to the extent this is
  perceived by employers
• Little empirical evidence outside the US

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US research on institutional quality

• Difficult issues how to measure quality how to
  take account of the other attributes of college
  entrants (e.g. ability).
• In general, evidence for a positive effect of
  measures of college quality on the subsequent
  wages of graduates

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Conclusions and implications(1) Further expansion

• Despite very rapid expansion of tertiary
  education, no evidence of over-supply the
  average wage gap between graduates and
  non-graduates remains high. Furthermore, it has
  been stable/increasing in most countries in
  recent years.
• High positive wage returns to tertiary education
  and the positive relationship between tertiary
  education and economic growth are good reasons
  for further expansion.

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Further expansion

• What barriers are there to tertiary education and
  what should be the policy response?
• Capacity constraints? provide more places.
• Credit constraints? student bursaries
• (especially for those from poor socio-economic
  backgrounds)
• Is sufficient information available to potential
  students?

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Conclusions and implications(2) Field of Study

• Much more evidence needed, especially for
  comparisons over time and between countries.
• Available evidence suggests great variation in
  returns to tertiary education conditional on
  field of study.
• Policy response provision of good information to
  potential students Argument for permitting fees
  to vary by subject of degree and/or to provide
  bursaries which are differentiated by subject area

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Conclusions and implications(3) Skill shortage
and mismatch

• Problems with graduates not always having the
  skills required by employers
• Policy response
• - examine the content and accreditation system
  of vocational courses. Is it appropriate?
• - what is the balance between employer-provided
  training and that which is publicly provided?
• - In the public system, what is the balance
  between general education and vocational
  education?

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Conclusions and implications

• Well founded concerns about international
  mobility among science and technology graduates
  and potential implications for RD and
  productivity. How can conditions of employment be
  made better?
• Quality of tertiary education institutions
  little good evidence outside the US for how this
  affects labour market outcomes Priority for data
  collection and analysis in other countries.