What do higher education subsidies achieve?

This year, the federal goverment has budgeted to spend around $4 billion subsidising higher education tuition. Strangely, though most people in higher education politics think we should spend more than this, nobody seems quite sure what this expenditure is supposed to achieve. The Bradley report confessed that ‘there is no easy basis on which to determine the “right” mix of public and private contributions’. This was not just an empirical problem; it was a conceptual problem too.

The most defensible theory of higher education subsidies is that by fiddling with prices via subsidies demand for education is increased to socially desirable levels and/or supply is increased by making it more attractive for higher education providers to offer disciplines that might otherwise be under-supplied.

Behind this theory is an argument about externalities. In comments over the weekend, commenter Rajat Sood suggested that the widely varying share that Commonwealth subsidies make of per student funding, from as little as 16% for law to more than 80% for science, may reflect (at least approximately) the ‘social externalities’ involved. The idea here is that because not all the benefits of higher education are captured by the student, in a pure market they won’t pay the prices set and higher education will be ‘under-produced’.

But this theory does not fit with current system design. Under the quota system, suppliers do not receive price signals, so they cannot respond to extra demand or provide extra supply. Under a voucher scheme, they would receive price signals. But as my Issue Analysis paper argued the effect of the combined subsidy-price cap system recommended by Bradley would mean that suppliers would receive price signals that would encourage them to reduce supply below what a pure market would provide. So the effect of Commonwealth fiddling with prices would be the opposite of what the externalities theory says it should be.

This leaves a demand-side justification. Of course it is difficult to decide on the ‘optimal’ number of graduates, but as I have long pointed out there is no clear labour market need for graduate output at historical levels, much less all the unsuccessful applicants whose demand-side applications were rejected. As demand well exceeds needed supply, it suggests that subsidies are too high rather than too low.

A narrower version of the demand-side argument looks at the possibly differential effects of prices on low SES groups. The evidence for differential effects is very weak, but even it wasn’t it would not justify across-the-board subsidies for all students.

A less outcomes-oriented of the externalities argument seems to be that while subsidies may not actually increase socially desirable output of higher education, people who go to university should nevertheless be rewarded for producting them. The idea that students receive a flat percentage of the cost of their education (considered by the Bradley committee, but not recommended) might incorporate some version of this idea. Since we can’t easily quantify many claimed externalities, we just use some overall percentage that seems about right.

But the difficulty with this is that if we spent all our money subsidising hypothetical externalities, there will be little left for programs that might actually remedy genuine ‘market failures’. Without the flat percentage, this is what has happened in recent years. The funding ‘agreements’ signed by universities specify that they must protect certain disciplines, but provide no funding to do so. The same funding agreements subsidise courses like law and commerce that have no obvious need for any subsidy. So profits on international student markets subsidise public policy goals, while public spending subsidises future lawyers and accountants. Things seem to be the wrong way around.

It’s difficult to escape the conclusion that much of the money spent on tuition subsidies doesn’t serve any public policy purpose at all. It is part churn, part redistribution to graduates, and little or no public benefit.

11 thoughts on “What do higher education subsidies achieve?

  1. I’ve been thinking about the general thrust of your ideas. I am in Bundaburg at the moment, the town of the un-certified doctors and other obvious failures. We are a country that has failed to educate enough doctors, engineers etc and so on. Instead we are taking the people educated ( and in some cases uneducated) by others. Recent funding of higher education in this country has been a total failure. Basically in my view you need to get over old ideas and old irrelevant wars and start working out how the higher education system is going to educate the resources this country needs.

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  2. And the amazing thing, I read blog posts from you that claimed pushing science and maths is a waste of time, look at the shortages and the foundation subjects needed to fill them. We don’t need more arts degrees.

    <rant mode off.

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  3. “Recent funding of higher education in this country has been a total failure.

    I’m glad you’ve understood at least one point I have been making!

    There is only one area of chronic shortage of graduates, which is the health professions. There have been too few engineers in recent years, though we can be pretty sure that engineering has now hit one of its cyclical downturns and shortages will be rare over the next few years. The problems in the higher education system are all on the supply side, and all caused by government policy.

    I have never said that science and maths is a waste of time, just that there are no shortages that can be proven. Taking in borderline students hoping to save a few thousands dollars is hardly the greatest strategy for producing the scientists of tomorrow.

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  4. While I’m in a cranky mood, the shortage in this country is not people with phd’s which is the basic requirement for a research position and because of the over supply is becoming the basic requirement for a $60,000 lectures position, the shortage is in people with basic employable degrees. One of the fundamental problems is not borderline students and a few thousand dollars less in fees, the basic problem is the system too dam wrapped up in itself.

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  5. “Under the quota system, suppliers do not receive price signals, so they cannot respond to extra demand or provide extra supply”
    .
    As far as I’m aware, for most science subjects, the main unmet demand is for kids to go to elite universities rather than non-elite ones (this is in no small part thanks to the school system where science and mathematics have been on the decline for ages — which some would consider a market failure incidentally). It seems to me that the most that could happen in terms of science re-enrollments no matter what happened would be a reorganization of where kids go, but that this would be mainly on imagined grounds, not anything to do with what kids learn (assuming most science degrees at most universities are essentially the same — which they are as far as I’m aware, although some, generally non-prestigious universities, have added bonuses like workplace experience). Perhaps if somewhere like Melbourne or Sydney really did let anyone in, some people would do science there that it would reject it at other universities, but I’m not convinced that would make much difference.
    .
    “I have never said that science and maths is a waste of time, just that there are no shortages that can be proven.”
    .
    This is a tough question, since unlike healthcare, it isn’t simple to determine how many you need as you can’t just look at holes in the system. If you want to see how hard this is, then try and imagine if you could have shown that there was a shortage of mining engineers or accountants during the boom. Now imagine how much harder it would be for industries without powerful lobby groups. Beats me if there was or whether it was just extremely powerful companies complaining. (just look at the Australian immigration list and what jobs get points to see how crazy this is — it looks like a list of powerful lobby groups to me).
    .
    I imagine this idea of calculating where there is a shortage is even more problematic for some areas of science, since the only people who are going to be good enough are the really smart ones, and thus to get ones capable in some areas of science, you need a lot of losers (I guess a bit like people doing business degrees — surely most want to become successful businessmen, but only a few will). You could estimate this using various distributions, but I’ve never seen anyone do it (at present, the main way this is solved is by importing foreign postgraduate students).
    .
    There’s also a practical problem with science enrollments — you need a certain amount to make courses viable. If you don’t have enough, universities simply won’t run various courses, in which case you might end up with very few places teaching important things. This goes against the idea of competition.

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  6. So, Andrew, what you are saying is that the thinking behind the system is confused, the system itself is inefficient, and it is also wasteful, ie it allocates resources in a way that produces outcomes which are not those required by the society which it serves?

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  7. On the topic of losers in science, Barzun pointed out that you have whole generations of brilliant scientists but only a tiny handful get lucky with the big breaks and win Nobel Prizes. He pointed out that the others are not usefully described as losers, they are indispensible parts of the enterprise, like the athletes who go the the Olympics but don’t win medals. By any reasonable standard they are all in the elite of sports/science and we should acknowledge their contribution – in teaching, research, scholarship, whatever they contribute that maintains the environment for achievement.

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  8. Conrad – The academic literature on skills shortages is far more sceptical than governments are to employer groups. The strongest test is that an occupation appears in the employer-based skills shortages list and there is low leakage from that occupation (ie, most people with the relevant qualification are in related fields of work). For graduate shortages, my added test is that un- or under-employment of graduates is less than 5% (compared to an average of around 20%).

    In recent years engineering has qualified on employer reports and graduate employment, but engineers are spread across too wide a range of occupations for us to say there are too few people in the community with engineering qualifications.

    I don’t think there is any danger of science falling below critical mass. It consistently has 6-7% of all applications, with low volatility. However, because places exceed demand ENTERs are often relatively low, even at ‘elite’ universities. Indeed, if you want to go to an ‘elite’ university but are only moderately good academically, science is the way in.

    But it is dishonest to give the impression to applicants that there is some great need for more science graduates. The government’s own 2006 audit of science, engineering and technological skills said that forecast supply should be more than enough, and I am aware of no subsequent evidence that would cause that conclusion to be revised.

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  9. I’m not convinced about the employer based skills shortages list at all — I think what it shows is how bad the government is at deciding these things. Almost all professions in the critical list are ones that are in “in your face professions” so speak (excluding urban planners and engineers) — i.e., the average person might notice them missing or might think they are missing due to employer lobby groups. There are a million other professions out there which are no doubt in equal shortage but don’t make it, but the main reason for this is that the average person doesn’t bump into them. So you don’t really have a list of shortages based on absolute shortages, you have a list of shortages based on what Jo Average might notice, which is no doubt massively biased.
    .
    I also think that your graduate test is problematic. The obvious example is IT, where there were claimed shortages for years, yet graduates couldn’t get into the field. The reason for that was obvious — many employers wanted (and still want) skilled employees with experience, not new graduates. The same is true of science — especially at the higher levels, many companies want people good at particular things, which are essentially impossible to teach in a general undergraduate course. So you can quite happily have skill shortages and rising unemployment or rates of graduates not in graduate level jobs (I think Michael Pascoe was arguing a very similar line a few days ago in the Age, although it looked like it got so badly edited it was hard to understand).
    .
    “But it is dishonest to give the impression to applicants that there is some great need for more science graduate”
    .
    I don’t think too many people are saying that. I think its another case of false perceptions — my bet is that governments allow law and commerce people to be charged more because they know that people think these groups earn a lot more than average. They also know that people think the jobs they do are somehow not as socially altruistic as other professions (with lawyers being the approximate equivalent of car salesmen). There’s also massive demand for these courses compared to most science ones, so no doubt they think they can get away with it too.

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  10. The employer surveys are fine for what they set out to do, which is to say that given the salaries and conditions they are offering they cannot find enough suitable staff. I would not declare any immediate skills shortage if this indicator was not satisfied, though clearly there is a role for demographic projections in seeing if skills shortages might be likely in the future. But if they are just not paying enough, that is their problem, not a public policy issue (unless the government is the employer).

    What the employer surveys don’t on their own tell us is whether there are too few graduates. My indicator is the best I can think of for measuring demand for newly-qualified graduates. It does generally track overall employment trends for the relevant occupations.

    If employers won’t hire the graduates we are already producing, producing even more of them will not solve any problems.

    The level of graduates is only one, and not necessarily a large, factor in skills shortages. It gets disproportionate attention because it is one of the few levers governments can pull (immigration being the other main one).

    Science actually has more applicants than law; the idea that everyone wants to be a lawyer is one of the myths peddled by people who believe they should control what students study.

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  11. Andrew, I take all of your points – an externalities-based explanation only really makes sense where universities receive price signals and prices are not capped.
    But one potential remaining benefit in the current environment could be in promoting efficient student choices. Even assuming a fixed number of places for each course at each university, and unmet demand across the board, a (price-sensitive) student facing tight choices between different courses may be encouraged to choose the best course from society’s perspective if (net) course fees reflect the social externalities of the course. This ultimately means that society benefits by having the best qualified/most productive people doing the courses that provide the highest overall (combined private and social) benefit.
    For example, assume that studying commerce and agriculture yield the same future income and have the same (gross) course cost and receive same government subsidy. As an applicant only interested in money, I am indifferent between the courses. However, if the government believes that studying agriculture yields more social benefits than studying commerce, it might decide to change the structure of subsidies accordingly. This will encourage me – as an indifferent student – to choose agriculture over commerce. Generally speaking, one would expect cut-offs for agriculture to rise relative to commerce, suggesting that better students, on average, are studying agriculture than before. This makes society better off, because more productive people are studying courses more highly valued by society and more valuable overall. It’s a bit thin, I know, especially because it relies on applicants caring about course fees, but I think it’s plausible.

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