ABC Factcheck looked at Christopher Pyne’s claim that university graduates, over a lifetime, earn 75 per cent more than someone who doesn’t go to university. Factcheck found that the financial case for going to university varies considerably depending on who did the calculations, assumptions, the profession and the grades obtained. This post uses some of the Factcheck data to ask whether going to university makes sense.
I started university in 1961 and was paid by the government and my employer to get a chemical engineering degree. Looking back, the decision to go to university turned out to be a good one. In tangible terms, the profession paid me well enough to live a comfortable life while saving enough for a comfortable old age. It is worth noting however, that some of the plant operators who have worked for me took great satisfaction in showing me their pay sheets. They knew they got more than me even though most of them left school at the end of their year at high school.
Going to university was also a good decision in terms of intangibles. I wouldn’t have missed the university experience for worlds. The jobs I have had since leaving university were far more satisfying to me than a job requiring less education would have been. (It always struck me that one of the ironies of our society is that the people with the most satisfying jobs were normally paid far more than those with the boring, physically hard jobs.)
In some ways the degree was a trap. If I hadn’t gone to university I may well have had more impetus to go into business like some of my less educated relatives. (For example, there was Uncle Ted who left school at the end of primary and did quite well thank you as a farmer, milk processor and real estate agent.)
Which brings me back to the Christopher Pyne claims:
“University students who have a less than 1 per cent unemployment rate and who, over a lifetime, earn 75 per cent more than someone who doesn’t go to university, can borrow every single dollar from the taxpayer to go to university,” he said on May 5. And:
Mr Pyne has repeated the wage gap statistic, telling ABC’s Lateline on May 20 that graduates earn “75 per cent more over a lifetime than people without a university degree” and that they earn “$1 million more than people who don’t go to university”.
To be fair, Pyne’s statement was not based on a figment of his imagination. Factcheck reported that:
A spokesman for Mr Pyne said he based his earnings statistics on a March 2014 policy note,“Graduate Skills and National Productivity”, published by the Group of Eight, a collection of representatives from the top Australian universities which will benefit most from the Government’s planned changes to higher education.
The report uses 2011 census data to graph earnings by age for full-time workers with no tertiary education, vocational training, and a bachelor’s degree. “At almost every point along the profile, graduate wages exceed school leaver wages by 75 per cent or more,” the report said.
I won’t go through all the studies factcheck considered. (They are worth reading to see how assumptions and data affect the results.) The one that appealed to me most was the CLMR report. This report calculated a “rate of return” over a lifetime on the investment in time and money made by a student. The 2010 report, titled “The Private Rate of Return to a University Degree in Australia”, said:
An annual rate of return on investment in education by the average university graduate was about 14 per cent, which means they earn about 14 per cent more each year than a non-graduate, taking into account their education costs.
Report author Professor Phil Lewis said:
Even the rate of return calculations rely on various assumptions, not least which discipline the student is undertaking. The report says for males, the average rate of return is about 15 per cent per year of education, and 12 per cent for women. But for some degrees, such as arts, that annual rate of return is 3 per cent for males and 9 per cent for females.
“For the average student, the rate of return is quite good. But there is a whole crowd of people where that is not the case,”
Professor Lewis also said that:
For about one in every five students, their degree is not financially worthwhile at the moment. If proposed changes to higher education made courses more expensive and introduced interest on HECS loans, he expects that figure could rise, possibly to one in three or worse.
The above calculation probably assumes that a person who has qualified to go to university but decides not to do so will earn the same amount as someone who failed to meet university. In practice, I would expect the person who qualified to be able to be earn more.
The return on investment not only varies with degree. It also varies with effort:
“The evidence by different subjects is more sketchy. If we look at international evidence from, say, the UK we find some interesting points. There is a big return to effort – getting distinctions or better – perhaps adds an additional 50 per cent to the dollar value over a lifetime compared to having lower grades.
Factcheck concentrated on the return to the individual. However, any discussion on subsidizing education needs to consider the benefits to the country as well as the individual. Firstly there are the increases in taxes paid over a lifetime Then there is the increases in efficiency, opportunities identified and better problem solving as the workforce becomes better educated. (An old boss used to say that graduates should be contributing over 6 times salary to company profits. )
- The changes to higher education policy will increase the cost of enrolling in some of the more economically desirable courses at the higher status universities.
- This is not going to have much effect on the better off but it may deter students from low income families. This is in line with the general thrust of the 2014 budget in the sense that it will help protect the children of the entitled rich avoid competition from the bright children of the un-entitled poor.
- The proposal to charge above inflation interest rates on HECS loans will have the largest effect on idealistic graduates who go into relatively low paying jobs such as teaching, caring for the elderly etc. It will have a much lower effect on graduates going into better paid jobs in industries such as banking and mining.
- Working hard and getting good results really does make a financial differences.
- There are many people who will not benefit financially from becoming a university graduate.
- There are intangible benefits that come from being a university graduate. These can be more important to many people than any financial benefits.