University As Consumption Good

Firstly, James Zuccollo at TVHE:

As summarised by the Economic Logician, “except for the top students, high school graduates do not care about academics at all. All they want is excellent “college consumption amenities.” And this likely explains why they learn so little while in college. Their focus is on the university as a consumption good, not an investment good.” The policy-maker’s view of the value of university and the student’s view are very different.

What does this mean for policy, then? Well, if the private value of university is largely in the consumption value then the total value is far higher than most estimates suggest since they are usually based entirely on investment value. That has implications for the level of the subsidy we want to provide to tertiary students. In addition to the efficiency questions we also need to ask whether,as a society, we want to heavily subsidise most students’ on an extended holiday?

Secondly, Eric Crampton at Offsetting:

I conclude that MOOCs aren’t likely to eat a substantial part of our academic lunch barring substantial changes in tertiary funding, or unless parents start balking at the large cost differential between online and on-campus options.

The literature generally looks at university as an investment. You incur costs – foregone wages, tuition, lower income etc. for a few years in the hope of earning a higher labour market income after graduation.

In New Zealand, interest free student loans and the availability of Studylink to subsidise living costs introduce distortions to the market for higher education. Without facing high out-of-pocket costs, sub-optimal decisions are easier for high school graduates. With social mobility as one of the goals for the student loan scheme, I’m not sure it’s delivering when degree completion seems to be significantly easier for those from high income households.

When this is added to a lot of nonsense about “do what you love”, and a lack of frequent examination of the data on what graduates actually earn in New Zealand, it’s hard to classify university as an investment if almost everyone is treating it like a consumption good.

I’d point people to the 2013 Student Loan Scheme Annual Report for an interesting look at how the public sector discuss human capital and the effectiveness of the student loan scheme in achieving higher levels of “social and economic wellbeing”.

My concern at the moment is seeing a lot of people my age “double down” on what has proven to be a sub-optimal allocation of time and capital. Failing to obtain employment after undergraduate studies, but having good enough grades to continue with post-graduate employment, is typical. The changes to Studylink don’t matter as much if you have a part-time job and parental assistance – which far more people do than they might let on.

The student loan scheme is a major financial asset for the government. But are the higher incomes on offer really worth the enormous costs? How does this table below compare to the return on a trade qualification? I would argue that trades training is cheaper and leads to similar earnings profiles once you finish your apprenticeship and start your own firm.

Who Do Employers Compete With For Labour?

The common assumption is that employers compete with each other for labour. This is true for the currently employed or recent graduates. They have to deliver a salary that reflects the level of work expected and what the workers themselves want from an employer. It’s a two way street despite what some lobbyists would have you believe.

This ignores the alternatives to the labour market that are available. These include working in the cash economy, payment in kind, living off benefits or from family support.

I’m not casting value judgments here – I’m simply saying that in order for an employment offer to be competitive it has to substantially exceed that available from WINZ or StudyLink.

No potential employee will care about you if you are offering a rubbish wage. They’ll clock in and clock out just as they should – you’re on a different planet if you think employers arbitrarily lowering wages and moving towards casualisation doesn’t have blowback in labour productivity trends.

One of the reasons employers are struggling to plug the mythical “skills gap” is they’re not offering wages that are competitive with alternatives on offer, primarily from the welfare budget.

If the labour market was functioning healthily, and entrepreneurs were creating lots of new jobs to replace those lost in the recession, going back to university for another degree would be a financially irresponsible decision.

Foregoing a $40,000 salary for another 2 years of StudyLink would be blatantly stupid. But in the current environment, part-time and casual employment is significantly more likely than full-time graduate employment in the field that you studied.

There is a funny idea that students go onto post-graduate study because they want to. That might be true for many.

But the reality is that without Studylink many students would starve. They can’t even get low-skill part-time jobs to help them through university because the low skill labour market has become a numbers game.

So returning to study is actually a way of earning an income and putting food on the table. Not all students receive parental support or have the connections to get decent summer jobs.

The great tragedy of this whole debacle is that my generation has a lot of resentment towards the baby boomers at the top.

We don’t want much – contrary to popular belief – but it really irritates me how myths like “word harder” or “just get a valuable skill” persist.

The mathematics mean that not only can most graduates not look forward to full-time graduate employment, they can’t look forward to any employment that justifies the direct costs and opportunity costs they’ve spent on their wonderful university education.

There are 175,000 people unemployed, over 300,000 on benefits of some sort and over 100,000 students receiving student allowance.

These numbers aren’t going down anytime soon. The time for action is now. Aggressive job creation policy is a must by making it far less risky to experiment and find patterns of sustainable specialisation and trade.

And no, training wages and eliminating employment rights are not what I mean by “making it far less risky”.