and the labour market

					CentrePiece Autumn 2007

and the labour market
                                                                                                                             CentrePiece Autumn 2007

                   Higher education around the world has expanded rapidly in recent years,
                   yet graduates continue to command a wage premium in the labour
                   market. So, as Stephen Machin and Sandra McNally show, there are no
                   problems of ‘over-supply’ or ‘over-qualification’ – rather there are
                   ‘shortages’ in some fields, which further expansion could alleviate.

                               n recent decades, there has       choose from. But if, for whatever reason,     return to higher education suggests that

                               been rapid expansion of higher    employers demand more graduates, then         ‘under-supply’ is more of an issue and that
                               (‘tertiary-level’) education      the wage premium may not fall.                continued expansion is justified. In terms
                               across many countries. This has        The wage premium depends on the          of employability, in many countries, there
                               had important and profound        interaction of demand and supply. In          has been some catch-up of less educated
                               effects on labour markets and     recent decades, there has been a big          groups over the last decade, but graduates
                   the way in which employers use highly         increase in both the demand for and           continue to have a much higher
                   educated labour.                              supply of graduates. It is the fact that      probability of being in a job.
                       These expansions have, for the most       demand has outstripped supply that has
                   part, been predicated on the assumption       given rise to an increasing wage premium      Mismatches and shortages
                   that more education is good for individuals   for a university degree. There is             Nevertheless, it sometimes takes a long
                   and for society as a whole, not only in       much controversy about the reasons            time for some (usually less well
                   terms of economic outcomes like wages or      for increasing demand for graduates,          performing) graduates to find jobs after
                   employment, but also for a wide range of      but the predominant view is that ‘skill-      leaving higher education and even then,
                   social outcomes like improved health,         biased technological change’ is a major       some are not in jobs that appear to be
                   reduced crime and higher well-being.          contributory factor.                          well matched to their qualifications. At the
                       But along with expansion of the                In most countries, there has been        same time, there are shortages in certain
                   system has come a range of new                continued expansion of higher education       sectors: this is evident in employer surveys
                   questions that have emerged as a              in the last decade. But the wage premium      and in some data analysis that shows a
                   consequence of there being many more          attached to higher education has increased    negative wage premium associated with
                   graduates. Is there now ‘over-supply’ of      in most of them. The exceptions are Spain     ‘skill mismatch’.
                   graduates? Is there evidence of ‘over-        and New Zealand – two countries with               A body of research has attempted to
                   qualification’ and skill mismatch?            particularly large expansion of higher        measure these outcomes, and the
                   Are students studying the ‘right type’ of     education in the last 10 years – and Korea,   (sometimes misused) terms of ‘over-
                   subjects? And is there a shortage             where the wage premium declined               education’ and ‘under-education’ have
                   of science and technology graduates           markedly between 1974 and 1990, a             emerged: the former arises if an individual
                   in particular?                                period of industrialisation when there was    holds higher qualifications than required
                       In a recent report, we review the         massive growth in higher education.           by his or her job whereas the opposite
                   evidence on these questions. The report            But even in these three countries,       applies for the ‘under-educated’. But
                   offers some conclusions about the way in      there is still a positive return to higher    statistics on over- and under-education are
                   which the expansion of higher education       education. Thus, it makes little sense to     difficult to interpret as workers are
                   has had important effects on economic         speak of ‘over-supply’ of higher education.   matched to jobs based on a range of
                   outcomes – and draws policy implications      The strong, positive and (often) increasing   characteristics and not just their education
                   for the future.

                   The increasing supply
                   of graduates
                   The labour market consequences of
                   increasing supply can be considered within
                   a simple demand and supply framework.
                   Starting from a position where the                                  Concerns about the
                   demand for and supply of graduates are in
                   balance, a boost in the supply of                                  ‘over-supply’ and/or
Image: Kevin Lau

                   graduates should, other things being
                   equal, lead to a reduction in the wage                            ‘over-qualification’ of
                   premium because employers have a wider
                   range of similarly qualified people to                         graduates are misplaced
CentrePiece Autumn 2007

level. What’s more, apparent mismatch                                                         the degree for individuals – for example,
may be a temporary phenomenon.                                                                higher education has a ‘consumption’
     The extent to which such problems are                                                    value as well as a value in the labour
seen as temporary varies across studies                                                       market; and jobs have non-pecuniary
and countries. But one generalisation that                                                    aspects that make them attractive to
can be made is that the fact of observing                                                     individuals. Second, students may not be
‘over-qualified’ individuals in the                                                           well enough informed about the likely
workforce does not mean that there is                                                         returns to subject of degree.
over-supply of graduates. If there were
over-supply, relative wages and                                                               The value of science degrees
employment probabilities would fall to the                                                    The existence of the relatively high wage
level of their closest substitutes – and this                                                 differential for science/engineering/
has not happened.                                                                             technology compared with other subjects
     The indications are that skill mismatch                                                  illustrates the high value placed on the
(or inadequate levels of skill) is more of a                                                  field by employers and indicates high
problem than over-qualification. In some                                                      relative demand for graduates with
countries, there is a need to improve the                                                     this field of study. This might be
content and accreditation of vocational                                                       interpreted as a ‘shortage’ of science and
qualifications so that they provide what                                                      technology graduates and would be
employers need and are recognised to                                                          consistent with some reports of
do so.                                                                                        ‘shortages’ that have appeared in several
     This is not to say that higher education                                                 countries, including Australia, Belgium,
should be geared to providing highly                                                          Britain and New Zealand.
specific skills that are currently needed by                                                       There are big differences between
employers. Some studies suggest that                                                          countries in the proportion of graduates
general education and skills are more                                                         who qualify with a degree in science and
valuable because they enable workers to                                                       technology. Comparing across continents
respond to shocks to the economy (for                                                         (using data from 2000), Asia has the
example, those that require sectoral                                                          highest percentage of graduates with
change) and advances in technology.                                                           science and technology degrees (32%),
                                                                                              which is just above Europe (28%) and
Degree subjects                                                                               considerably above North America (18%),
One hypothesis put forward to explain skill                                                   South America (22%) and Oceania (22%).
shortages is that individuals are not                                                              Within Asia, China has a particularly
choosing the right type of graduate                                                           large share of graduates with a degree in
                                                Just because there are
studies (whether this education is                                                            science and technology (53%). Even
                                                over-qualified individuals
general/academic or vocational). In other                                                     though the EU has a better performance
                                                in the workforce does
words, the choice of higher education                                                         than the United States in terms of
                                                not mean that there is
made by individuals does not correspond                                                       producing science and engineering
                                                over-supply of graduates
to the needs of the labour market in terms                                                    graduates, it lags well behind the United
of field of study.                                                                            States in terms of the proportion of
     As yet, there are relatively few studies   among the category of subjects with a         science and technology researchers in the
that estimate returns to higher education       relatively high return (along with some       labour market. Nevertheless, as in other
by subject of degree – especially when we       social science subjects and professions       countries, there are claims of a ‘shortage’
are most interested in change over time.        such as law and medicine) whereas             in the United States, which economists
One study looks at changes in returns to        arts and humanities are often among           have struggled to reconcile with the facts
subject of degree over time in Britain,         the category of subjects with a relatively    (which belie this concern).
Germany, France and the United States,          low return.                                        Further analysis suggests that
and finds that a return to an arts degree           So it may be relevant to talk of          the underlying issue is that the United
had the lowest relative return within           graduate over-supply in relation to some      States maintains an adequate supply of
all countries, for two time periods (the        subjects of degree. For example, there        scientists and engineers only because of
early 1990s and 2000) and for both men          have been estimates to suggest that the       the sizeable influx of foreign-born
and women.                                      wage return to an arts and humanities         students and employees. This could be a
     In contrast, the returns to degrees in     degree is zero in Britain.                    risk to US research if there is any
science, engineering and technology are             This raises the question as to why        interruption of the flow of immigrant
substantial (especially for men). Such          people continue to pursue such                scientists and engineers.
findings are broadly consistent with what       qualifications. There are various possible         The ‘brain drain’ to the United States
is found for a number of other countries –      explanations: one is that wages do not        is also a concern for other countries. For
science/engineering/technology is often         capture important aspects of the ‘value’ of   example, analysis of migration flows in

                                                                                                            CentrePiece Autumn 2007

and out of Europe suggests that Europe
has lost out in terms of its own potential
                                                                                              Skill mismatch – or
supply of ‘domestic’ graduates and its                                                          inadequate levels
ability to attract scientists and engineers
from other countries. The shortage of
                                                                                              of skill – is more of
personnel in these areas is likely to have                                                        a problem than
costs in terms of innovation and
consequent productivity growth.
Conclusions and policy
While concerns about over-education are
largely misplaced, there do appear to be
problems with graduates not always
having the skills required by employers.
One response to this is to make sure that
vocational courses meet the requirements
of employers and to ensure that the
accreditation system is appropriate.
    But it would be unwise to emphasise
acquisition of highly specific skills at the
expense of general education. This is a
challenge for whole educational structures
not just higher education since, in many
countries, students have to make a
decision between general and vocational
education long before they reach the
stage of entering higher education.
    There is also a question of the balance
between employer-provided training and
education provided by institutions of
higher education. Employers have a role
in addressing concerns about skill
mismatch. And governments have an
important role in improving information
                                                 In many countries, there
about training opportunities, setting
                                                       is relatively higher
appropriate legal frameworks and
                                                    demand for graduates
ensuring portability of skills.
                                                   in science, engineering
    Potential policy responses to the
                                                           and technology
variation in returns to higher education by
subject include differential fees (or
bursaries) by degree subject so that           young people do not pursue higher
graduates are encouraged to study              education. One possibility is the cost
subjects for which there is high relative      both in terms of fees and the
demand in the labour market. There may         opportunity cost (the earnings students –
also be a case for the provision of better     and possibly their families – must forgo
information to potential students on job       while in higher education). Where such        The article summarises ‘Tertiary Education
prospects and earnings by degree subject.      constraints exist (most likely for students   Systems and Labour Markets’ by Stephen
    More generally, given the positive         from poor social backgrounds), there is a     Machin and Sandra McNally, a report
relationship between education and             good case for bursaries.                      prepared for the OECD.
economic growth, and the fact that                 Another possibility is that there is      The full report is available here:
returns to higher education are strongly       insufficient information available to
positive, there is a good argument for         potential students about the returns that     38006954.pdf
continuing to expand higher education.         might be gained from pursuing higher
    This could be achieved by public           education (or returns in certain subject      Stephen Machin is CEP’s research director
provision of more places in higher             areas). In this case again, the appropriate   and director of the Centre for the Economics
education. Where capacity constraints          policy response would be to provide this      of Education (CEE). Sandra McNally is
are not the issue, then an important           information at appropriate stages of an       director of CEP’s research programme on
matter for investigation is why more           individual’s education.                       education and skills.


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