The ABS has an interesting new publication out today on the financial benefits of higher education.
ABS anlayst Hui Wei uses data from the 1981, 1986, 1991, 1996, 2001 and 2006 censuses to provide estimates of rates of return for investment in higher education. In the figure below, the rates are based on post-tax earnings of graduates compared to someone who finished their education at year 12 (say a Year 12 completer earned $800 a week and a graduate $1,200 a week – the graduate premium would be $400). The graduates are aged through the census of the stated year (eg it assumes that a 1996 graduate would at age 40 earn what a 40 year old graduate earned in 1996).
The costs are assumed to be the opportunity cost of four years out of the workforce with no earnings in that time, plus direct costs such as HECS.
As student labour force participation has increased over this time, the opportunity costs are increasingly over-stated. However the graduate premium is also over-stated, as those who go on to university are not a random group of Year 12 finishers – they are on average of higher ability. A further difficulty is that the highest census income category ($2,000 a week in 2006 ) understates the earnings of many graduates.
With these caveats, the following observations:
* As Wei notes, the rates of return are much higher for male persons than male employees. This is because a significant part of the benefit of being a graduate is protection against unemployment or not being in the labour force.
* For employees, the rate of return is quite stable over time at around 9-11%. The one exception is 2006. What seems to be happening there is that the booming labour market was employing a lot of lower-skill people, who earned significantly less than graduate employees (and so pushed up the latter’s premium) but also reduced the graduate persons premium because the Year 12 only group were increasing their average earnings.
* The massive increase in the number of graduates has not reduced their rate of return.
* HECS has not reduced the rate of return (though for most of this period it was so low that as a cost it was minor compared to foregone wages)
These results are generally positive for the next wave of higher education expansion – past expansions and their assumed consequential decline in graduate quality have not had an obvious impact on rates of return (though it would be interesting to see if there has been an increase in earnings dispersion over time).