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and the labour market
CentrePiece Autumn 2007 Higher education 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 I 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 7 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 8 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. over-qualification Conclusions and policy implications 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 http://www.oecd.org/dataoecd/55/31/ 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. 9
"and the labour market"