Higher Education (Walker&Zhu, Becker, DeVries, HC Vs SS)

Question 1

Higher education stats from 1970-80 compared to 2019/20 (Walker & Zhu)

Answer 1

1970-80: 15% of men, 13% of women went to uni.

2019/20 - 53% of young people!

Question 2

Recent policy issues: (2)

Answer 2

General elections June 2017 + Dec 2019:
1) Labour pledged to abolish tuition fees and reduce student loan debt (write-off). Would cost £10bn a year (just England)

Augar review 2019
2) Short term pressure on uni finances, due to a freeze in home tuition fee cap, amplified worsened effect by occurring during a time of high inflation.

Question 3

History of higher education funding

(dates are not essential but good to know vague timeline, good for first i guess!)

Answer 3

Used to be free, + maintenance grant

1989: Grants only available for lower income people, loans introduced.

1996: Dearing report - PROPOSED tuition fees

1998: 2 years later, tuition fees introduced by Labour (£1000 p.a).

2001: Labour re-elected upon pledge to NOT introduce top-up fees

2003/04: Top up fees are introduced.

2006/07: £3000 p.a

2010/11: Max fee set to £3290 p.a, and government contributed £3951 per student to help with the cost of tuition. (So about 50/50 contribution between gov and individual)

2010: Lord Browne recommends no maximum fee. Also 40% cut to funding

2012: Fee cap raised to £9K

2017: Max fee up to £9250.

Question 4

So essentially gone from 1000, 3000, to 9000. Tripled each time, within a 20 year period (1998-2018).

What has happened to government funding overtime

Answer 4

Government are reducing their contributions TO funding HE (more student/overseas student funded)

Question 5

2017/18 - £9250 cap:

How many unis charged the maximum fee for ALL courses?
Why was this controversial?

Answer 5

29% of unis charged the max fee for ALL courses.

Max Fee only supposed to be in exceptional circumstances (Lord Willetts)

Question 6

England’s tuition fee compared to other countries (US, Germany, Denmark)

Answer 6

2nd most expensive par private universities in the US e.g Harvard, MIT, Princeton, Yale

Germany and Denmark is free

Question 7

Has there actually been a response to these drastic price increases?

What does evidence suggest for elasticity?

Answer 7

No: applicants has continued to rise along with prices. (INELASTIC DEMAND FOR HE)

Question 8

One reason high fees does not deter applicants

Answer 8

Student loan systems!

Question 9

Student loan system (Plan 2) - for those starting course 2012-2023

Discuss 3 main details.

Answer 9

Loans repaid if income > £27,295 p/a. 9% tax on income above this.

Interest - RPI +3%. Controversial since interest accumulates with inflation while studying, and RPI higher than CPI. However cap at 7.6%.

Debt written off 30 years after begin to repay. essentially a graduate tax payable until around 50s.

Question 10

It is predicted 55% of loans won’t be paid back.

Perhaps explains reason why H.E consumption hasn’t fallen with price rises. (Don’t think they’ll have to pay)

Bad for government tho: potential problem in future, may not be sustainable.

Question 11

Loan debt trends in the UK

Answer 11

Debt is accumulating - debate on whether this is sustainable and if action needs to be made.

Question 12

Augar review 2019 - key recommendations (7)
5 good 2 bad

Answer 12

Reduce cap to £7500. (Good for students)

Extend payback period to 40 years. (Bad for students)

Reduce income threshold for repayment to £23000 (Bad for students)

Reduce interest rate on loans WHILST STUDYING (Since unfair to have accumulating at RPI+3% while not even in job). (Good)

Cap the overall amount repaid to 1.2x value of loan. (Good)

Reintroduce maintenance grant of £3000 for low incomes. (Good)

Increase teaching grant (Good)

Question 13

Plan 5 Student Loans - for people starting 2023

3 details (loan, interest, debt)

Answer 13

Loans paid after income reaches £25000 (not quite the 23k in Augar but still worse)

Interest charged at RPI level. (No longer RPI+3%) (Good)

Debt written off 40 years. (Bad)

Question 14

Will this benefit government?

Answer 14

Yes - IFS predicted save £2.5/3bn each year

(Since now subsistent income is lower, debt written off takes longer)

Question 15

How do economists view education

Answer 15

An investment in human capital.

Question 16

Becker model of education
1 benefit
2 costs

Answer 16

Benefit: payoff i.e higher earnings in future.

Direct costs - Actual cost of uni (reduces lifetime earnings)

Indirect costs - forgone earnings (i.e opportunity cost income lost from not going straight into work)

Question 17

Diagram pg 12 to show earning profiles for with/out degree.

Interpret areas of the diagram (A,B,C)

Answer 17

With degree: start at negative earnings, since they incur the cost of a degree. Once finish education (21) still below without degree earners since they lack experience. Soon overtakes.

Under rational choice: C > A+B
C is wage premium
A is direct cost
B is opportunity cost of not working straight away

Question 18

Factors that influence costs and benefits in this model (7)

Answer 18

Fees (cost)

Interest rate on student loan (cost)

Labour market conditions i.e EXPECTED wage premium (benefits)

Age - may be too old to break even on the costs of investment following the increased fees. (Elastic demand)

Lower unemployment rates for grads (so more incentive)

More pleasant working environment for grad careers

Non-pecuniary benefits e.g socials, etc

Question 19

Intangibles in an individual’s decision to pursue higher education (3)

Answer 19

Lower unemployment rates for graduates (also in a downturn, graduates kept held of in favour to non)

A more pleasant working environment in graduate careers

Other non-pecuniary benefits such as life/social skills gained. (Uni life experience!)

Question 20

So how much is a degree actually worth? 3 estimates:

Browne review (2010)
BIS (2013) (men & women)
IFS (2020) (men & women)

Answer 20

Browne: additional £2500 p.a. (£100K over the course of a 40 year worklife)

BIS: Female - £252K, £168K men.

IFS: £100K for women, £130K for men

Question 21

We also consider the college wage premium (CWP).

What is the CWP in the UK: Chevalier

Answer 21

Chevalier (2002)- 10-40%

Question 22

Problem with calculating the pure CWP?

Answer 22

We have to control for all other relevant factors.

Since we only want to see the PURE effects of having a degree or not.

Question 23

What is the hardest factor to control

Answer 23

Ability - hard to observe and measure

So we may get a CWP i.e diff between non-grad vs grad pay, but this may be down to individual ability!

Question 24

Labour market to show the rational choice framework pg16

Hint: Everything is in relative terms

Answer 24

X axis - Nh/ Nl (grads/non-grads)

Y axis - Wh/Wl
(Wage of graduates/Wage of non-grad)

Downward sloping demand as when Wh (wage of grads high) , demand is low.

Start at A, more graduates (Nh increases) so supply increases, so college wage premium falls to w₁a t point B.

Question 25

Mitigating factors

Answer 25

Demand for non grads may fall, reducing the non-grad wage (WL)

Which influences the CWP.

Question 26

What influences whether the CWP falls, rises or stays the same.

Answer 26

The size of the shift when supply and demand change.

Question 27

Walker and Zhu compared 2 groups: effect on supply & CWP

Answer 27

Pre expansion and post expansion of HE

Supply: ratio of graduates to non graduates (A-level) increased by 50% for men, 73% women

CWP: 18% for both pre/post for men, 28% to 32% for women.

So this shows that it goes against the idea of a supply shift ceteris paribus. (Increased Nh should’ve lowered wage ceteris paribus, but in fact CWP increased!)

Question 28

P18 diagram also shows this. Despite supply of graduates increasing, wage ratio remains to stably rise. I.e Shows labour market is absorbing the supply, suggesting a continuous flow of graduates are needed

Question 29

So that was men (18%) and women(28% to 32%). Now look at genders for different ability for PRE VS POST EXPANSION OF HE

High ability non-graduates

Highest ability graduates

Lowest ability graduates

Answer 29

High ability non-graduates - large fall in wages

Highest ability graduates - CWP rose by 12% men, 10% women

Lowest ability graduates - CWP -15% for men, +2% for women (Perhaps lower grade or less sought after course)

So high ability non-grads and low ability grads do bad. Are we just turning high ability non-graduates into lowest ability graduates?

Question 30

What has happened to underemployment for graduates

And what evidence proves this

Answer 30

Increased - more graduates in non-graduates jobs

(Seemingly puzzling as CWP remains positive despite the increasing graduate supply Nh, yet they’re underemployed?)

Question 31

Heterogeneity in the CWP - key finding in DeVries

Answer 31

Not all degrees are created equal.

Factors such as type of uni (Oxbridge gap) , subject (medicine/econ), socio-economic background of the graduate influence the CWP.

Question 32

Example of heterogeneity in CWP:

Oxbridge Gap diagram: what does it show

Answer 32

Shows Oxbridge mean STARTING salary is highest and the gap between Oxbridge and Post-92 (the worst) , is £4760 (25% more), even after accounting for other relevant factors e.g subject choice, family income etc)

Question 33

Heterogeneity - What subjects earn the most

Answer 33

Medicine and economics earn highest.

Supports idea of heterogeneity.

Question 34

Who benefits from HE, and what question arises

Answer 34

Private and social benefits (innovation, less crime)

Since social gains: should HE costs should be directed to the actual student, or society?

Question 35

2 theories on why more years of education increase wages

Answer 35

Human capital investment perspective
Signalling/screening perspective

Question 36

Human capital investment perspective

Answer 36

Human capital increases productivity, increasing wage (recall w=MPL!)

Question 37

Signalling screening perspective

Answer 37

Education merely indicates inherent productivity, genetically or acquired early on in life. (not the schooling)

HE merely a signalling tool to indicate attractive prospects to employers.

Question 38

Under HC vs SS perspective, views on distribution of gains

Answer 38

HC - society benefits from a more productive population

SS - Gains to higher education are now private: they accrue to individuals and firms.

Question 39

So what is the main difference between the 2 perspectives

Answer 39

HCI perspective: HE is good for society, and so the taxpayer should contribute towards the cost.

Signalling/screening: gains are private, so individuals should fund their own HE. Firms should maybe also contribute, since they benefit from the screening mechanism that higher education provides!

Question 40

Signalling/screening evaluation/puzzle

Answer 40

Why hasn’t somebody come up with a more
efficient (quicker, cheaper) signalling mechanism?
Could we have two year UG degrees in future?

Question 41

So basically reason for people to pay for own education is because CWP exists. (Mention stats/cases, and diagram showing despite Nh increases, CWP remains. (Of course we can evaluate e.g omits ability, and certain groups i.e low ability grads get a small/NO CWP - men got -15% and women only 2%)

Taxpayer/gov should pay according to HC perspective.

Also private firms should contribute according to SS perspective. (But we can dismiss this concept by saying if it really was purely for screening, surely there would be a faster/cheaper way; could degrees even be only 2 years?)

Question 42

Most recent action in England 2022

Why is it bad?

Answer 42

Frozen income threshold for student loans at £27K in attempt to reduce taxpayers contributions to HE. (They believe taxpayer pays too much!)

Bad as it doesn’t rise with inflation or earnings. Have to pay taxes at a lower threshold essentially.

Question 43

Most recent challenge as of 2023

Answer 43

Tuition fees not keeping up with rising costs; shortfall of £2500 on every undergrad student. (Spending per student falling - knock on effects)

Due to inflation, international fees previously used for research, now diverted for shortfalls. (So increase fee cap further? Gov or taxpayer contribute more?

Question 44

What do some economists suggest (Cox)

Answer 44

Joint operations - synergy and E.O.S cost benefits e.g same teachers