Can business students do their sums?

This morning’s Higher Education Supplement in The Australian gave the lead story to various interest groups complaining about the Budget decision to reduce Commonwealth subsidies to commerce students by about $1,000, with universities being allowed to increase student contribution amounts by about $1,200.

“It is hard for us to see how this is going to attract more people into doing those courses. In fact, it might turn them away.”

… said Geoff Rankin, chief executive of CPA Australia, which represents 112,000 finance, accounting and business professionals. …

It is a great worry to us,” University of Western Sydney vice-chancellor Janice Reid said.

“It will be a significant disincentive for students who might have seen a bachelor of business or bachelor of commerce as a viable alternative to a bachelor of arts or a general degree in the humanities.

As usual, these arguments assume that prices have a big impact on which courses students choose. Yet a study (pdf) released a couple of years ago put the average income premium from a business undergraduate degree, compared to a Year 12 qualification, at $542,000. The maximum extra cost that could be imposed on a student would be 0.66% of that. Prospective business students who can’t work out that the course is still a good deal have no aptitude for financial reasoning and – as Janice Reid suggests – should perhaps do Arts instead.

In reality, is is unlikely that anyone who was seriously interested in a business career would do Arts to save a few thousand dollars. Just as Labor is naive to think that people will change their career plans to science or maths for small sums of money, these complaints about the policy shift for business degrees misunderstand the decision-making process of potential university students. People look for courses and careers that will interest them, as it is entirely rational for them to do – a lot of their future job and life satisfaction will depend on it. This is why we see only small shifts of market share in applications over time, despite changes in price relativities in 1997 and more modestly in 2005.

Cost – including opportunity cost – affects the attend/don’t attend decision. If there was price competition in the sector, it would probably influence which university students applied to enter. But its effect on discipline choice is minor, on those with multiple or under-developed interests who can be swayed by factors other than their own hoped-for careers.

The test will be next year’s applications. I’ll put my prediction in now. Applications for business degrees will not move outside the normal +/- <1% market share we see for most disciplines each year.

9 thoughts on “Can business students do their sums?

  1. Andrew, the business courses don’t just include business. They also include economics. Now it seems reasonable to believe that students specialising in economics are interested in the social sciences. As such, some of them might well be willing to substitute geography or sociology for economics in respoinse to a relative price change.

    In any event, the focus should not be on the average business student but on the marginal business student. There could well be students who are almost indifferent between business courses and some other course with a similare entrance requirement at present. These students might prefer the other course after the increase in the relative price of the business course. The relevant question is how many students fall into this category. If only a small number of students fall into this category, then there will only be a small impact on university funding from business students. If a large number of students fall into this category, then there will be a larger impact on university funding from business students.

    Of course, another factor that needs to be considered is the extent of excess demand for business places. If there is a large excess demand for these places, then universities could avoid losing places by letting the required entrance score for business course drop. Whether they woul;d be willing to do remains to be seen.

    Regardless of the outcome for student numbers and funding, the decision to cut Government subsidies for business course while raising them for most other courses seems both arbitrary and unfair.

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  2. Damien – When fully operational, this policy shift will save taxpayers about $65 million a year. Attracting a few marginal students (probably in both senses of the word) to business/economics is not worth $65 million.

    In my view, the necessary level of subsidy is largely an empirical question. Cuts have been going on since the late 1980s with no obvious problems (demand has gone down recently, but still exceeds supply except in science and agriculture, and it is not clear what role price changes had in demand shifts).

    My hypothesis is that no subsidy at all is required. This is another experiment that will take us closer to that point.

    But I agree that more critical scrutiny could be applied other disciplines. Maths and statistics, for example, did a huge con job on the government which will make their courses very competitive with econometrics for people with overlapping interests between them.

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  3. On the subsidy, I agree that that is an empirical question. I also agree that it is possible that the subsidy is too high for all or many degree categories. However, I do not believe that it was only too high for business degrees. Asc such, the lowering of the business subsidy could result in a suboptimal allocation of studewnts to courses. This was the sense in which I meant the policy was arbitrary and unfair. Your point about the differences between quant units offered by non-maths disciplines and quant units offered by maths disciplines is a good one.

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  4. Maths and stats: Cth contribution $8217, student contribution $7260, total $15,477

    Econometrics: Cth contribution $1674, student contribution $8500, total: $10,174.

    Fixed costs for the two are probably very similar; not sure of economies of scale. I will look into it.

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  5. I have to follow up on Damien’s comment that we need to think about the marginal business student here. And my follow-up would be that you need to think about the marginal net benefit (cost) for that marginal student in taking a business degree. My experience is that there are many marginal students doing business degrees who would be better off in the workforce.

    I study in the Commerce faculty at The University of Melbourne, and I support myself by working part-time for one of the big four banks. At the bank, my colleagues are mostly university students, while my supervisors and managers mostly either never bothered to attend university or dropped out part way through. The average age of the supervisors and managers is probably only five years old than us rank and file.

    I continue with my degree because I get good marks, enjoy what I am learning and know it will lead to increased job opportunities in the future. However as we get to the end of the course, some of my fellow students at university, who never enjoyed the academics and didn’t excel come exam time, are struggling to find work. I can’t help but think that for people like them, a year spent travelling followed by two years spent battling away at the bum end of the labour market might have been a better use of three years than sitting through a university course that taught them (1) hopeless platitudes, (2) how to speak like a management consultant, and (3) that academics is pointless.

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  6. I tend to agree with Damien’s point to an extent. If the government is going to offer any subsidy towards University degrees, they should at least do it in a consistent way, to avoid distorting the market. That’s why I would support an across the board cut and equalisation of the subsidy for all subjects at a similar level to law.

    Having said that, I’m willing to bet that the effect even at the margin for business students of this cut will be next to nothing. Think about the current (pre-cut) market:

    How many high-school students who want to study Law (and have the marks) subsequently choose Arts, Commerce, Science, Nursing or Teaching because they receive a higher subsidy and are as a result cheaper for the student? (In the case of Nursing and Teaching, massively cheaper).

    If the answer isn’t zero, it is pretty close.

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