The Education Bubble

Education, Education, Education probably has a familiar ring to many of us.  Education has widely been seen as a social tool and an economic tool to a generation or more of politicians.  To the left in Britain,  higher education represented a path to higher wages and access to education could be made more widespread; much talk was devoted to how state school pupils could be given access to top universities.  The more right wing part of the economic spectrum was maybe less enthused by its social aims but could see the benefits of a well educated workforce and it represented a way to address social/economic inequality without resorting directly to redistribution.  Even when not embraced it represented a path of least resistance for many politicians – it was hard for opposing politicians to attack and it was popular with the electorate.

In many ways this has been the free lunch of the past two decades, and there is no reason why we should not be proud of our achievements.  Since 1990 the percentage of young people going to tertiary education has increased from 26.6% to 58.5%, outcomes for graduates are generally good and a deeper pool of graduate talent has worked well for employers.  Certainly few people should have significant regrets about the growth of undergraduate education, however this may change.

I am not the first person to see a potential bubble in education, nor, I suspect will I be the last.  Certainly there may be cause to think that there should be some concerns over current models.

Firstly the premium of a good education in the labour market will depend on relative supply – shortages of skills drive up prices, a glut makes them fall.  This is generally true of most things but where education differs is the lag between investment and reward.  This means prices do not move quickly enough to signal gluts or shortages in skills.

Someone considering higher education may take their first decisions at age 13, when they decide which subjects to keep and which to drop at GCSE but the bigger shift comes at A Level.  At A Level pupils begin to rule out certain subsequent degree courses and push towards others.  This means that someone considering a degree in engineering would be looking at the market for graduates six or seven years before they would take up their first job.  If people look at average lifetime earnings across a career then this lag is even greater.  The consequences of this are clear – a high price for skills does not mean that there will be a high price for those same skills in  seven years time.  There may have been price stability in a lot of occupations (but not all) over the past 40 years but this need not continue.

Secondly, if we look back and see how little effect quantity of graduates has had on the price premium of graduate labour we are missing two key factors in what is an international market.  UK graduates work in export industries as well as domestic industries.  Where the UK has an comparative advantage in products that need graduate labour, we produce an excess and export – as an obvious example we “export” financial services.  We have little reason to think that all markets are as secure as finance.

India has a reputation as a destination for outsourcing work – call centres and data processing are large in the popular view of India.  More recently however there has been a huge growth in skilled labour being outsourced there – particularly programming, given the output of India’s technical universities.  Clearly demand for higher education is also a global phenomenon.  In looking at the change in price of a graduate premium we need to not just look at the growth in the number of graduates in the UK but also the growth in our trading partners.

In the 1990’s and early 2000’s the UK’s rate of graduate production boomed whilst many of our trading partners had a relatively steady level of graduate output.  In the later part of  2000’s however India and China have begun to output many more graduates; an output that has yet to have its full impact on the global labour economy.

 

Graph Showing Uptake of tertiary Education

Graph Showing Uptake of tertiary Education

Data from World Bank: http://data.worldbank.org/indicator/SE.TER.ENRR

There is obviously also a corresponding argument about the movement of labour.  In the UK we are much happier to accept the immigration of skilled migrants than unskilled labour.  Many UK residents frown on unskilled migration, even from within the EU.  As graduate numbers increase from the developing world there is likely to be an increase in competition for graduate jobs in the UK – competition that squeezes graduate wages.

Thirdly we need to seriously consider the role of the state – how much and how should it subsidise higher education?  There are certainly equity considerations which make it more complex, but there are more straightforward matters of public finance as well.  One argument is that education fulfils two roles for the individual.  It makes them a more productive worker and it signals their productivity.

Few people would argue strongly against the government investing in the productivity of the national workforce – through a transport system, an education system or through providing them with security.  The productivity of an individual benefits that individual but also their employer and the consumers of their employers product.  We can all benefit from this investment.

The second side of this is the signalling component.  A worker can use their education to signal intelligence or aptitude to secure a job over competitors.  Whilst this does have a small benefit to society in terms of better matching workers to the jobs they are most suited to there is a bigger benefit to the person sending that signal and a dis-benefit to the person who otherwise would have taken the job in question.  This set-up means that it is advantageous for an individual to invest in education beyond the point where it stops being a worthwhile investment for society.  We fall into the trap of the fallacy of composition if we  say that what is good for each individual is good for society as a whole.

It is worth asking the question where we are in all this, and, what can we do.  Is there a point where diminishing returns mean that higher education is no longer a good state investment?  Is there a point where it no longer becomes a good investment for the individual?  Where are we relative to these points?

These are not trivial questions to answer.  We cannot look at current salary differentials and confidently state that education is still a good investment for an individual, as that individual will only enter the market several years down the line and the bulk of their graduate earnings will be even later.  We can’t look at trends – the logic that says that house prices don’t fall lead to a bubble that caused a worldwide financial crash; if we apply that logic to education we conclude that the value of a degree will rise ad infinitum because it has in the past.

Nor on the other side can we confidently turn around and say that education is no longer a good thing.  In the youth market, graduates are employed, non graduates are not.  Graduates still have higher earnings than non graduates and we have seen little sign of a change.

What we can do is to try to plan to accommodate this change.  We need to understand the consequences of a future where graduate labour is low, and one where it is high.

If we slow down our move to a much more highly educated society and the value of an education is still high then we miss out on these benefits.  A better education for all is a force for equality in society, a force that we could forfeit   In the past decade inequality has been driven not as much by capital accumulation but by disparities in wage growth.

On the other hand if we continue to produce graduates at the current rate, and if demand for such people will not hold up we will have other problems.  We will have a generation of workers deep in debt, unable to command the salaries to pay off the cost of tuition.  We will have a large number of people who wasted several years of labour learning things for which there is no demand.  We will have people with higher debt’s, lower savings, fewer pension contributions and less employment experience but little in compensation.  As much as a good education system may seem a powerful tool to use against inequality these debts and lost earnings will undoubtedly hurt the poorest hardest.

It may be that we simply move up the educational scale – Postgraduate Qualifications become the requirement for skilled jobs.  They may become what is needed to stand out.  This is no bad thing if the industries benefit proportionally from this increased knowledge but if it is simply a screening process then it is a waste of societies resources.

How do we balance these two risks?  This is a complex question and one that has not been well addressed   There have been calls for greater diversity in higher education – more non academic courses and apprenticeships  this will certainly help but it will not be enough.  Tuition fees (with appropriate student finance) was a partial solution – effectively a redistribution from those consuming the service to those that didn’t, although there is still some debate over whether this is the best policy. The issue may be much like state pension liabilities and the are of retirement – it may only be addressed when the issue is desperate and long overdue.

 

 

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