Tertiary Education Systems and
Labour Markets
Report prepared for the OECD
Stephen Machin* and Sandra McNally**
1 December 2006
*Centre for Economic Performance, LSE;
Department of Economics, UCL
**Centre for Economic Performance, LSE
Issues
In the context of rapid expansion of tertiary
education:
• Is there now ‘over-supply’ of graduates?
• Is there evidence of ‘over-qualification’ and skill
mismatch?
• Are students studying the ‘right type’ of
subjects at tertiary level?
• In particular, is there a shortage of science and
technology graduates?
• Does the type of institution matter for labour
market prospects?
Context
Rapid expansion of tertiary education – general
phenomenon across OECD countries. Evident
for several decades
Much variation across countries
Differences in the type of tertiary education. For
example, The EU lags behind the US - mainly
attributable to lack of supply of general and
advanced research programmes (Wasmer et
al. 2006)
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Percentage of population (aged 25-64) that has attained tertiary education - changes over time
60
50
40
30
1994
2003
20
10
0
Labour Market Consequences
of Increasing Supply
Depends on the demand for graduates by
employers as well as the supply of graduates
from tertiary institutions.
Increase in supply of graduates leads to fall in
the wage (everything else constant);
Increase in demand for graduates leads to a rise
in the wage (everything else constant).
Labour Market Consequences
of Increasing Supply (2)
What is the outcome of changes in demand and
supply?
Compare the wage of tertiary graduates to the
wage of closest substitutes
(upper secondary or post-secondary non-tertiary
graduates). Look at changes over time.
Has the differential fallen over time on account of
the increasing supply of tertiary graduates?
Wage Differentials: Tertiary versus Upper Secondary or Post Secondary ( = 100)
For most countries here, relative wage in 1997 and/or 2002/03
1997
2003
190
180
170
160
150
140
130
120
110
100
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Source: OECD Education at a Glance
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Evidence from the literature
• Method: regression analysis where ‘human
capital’ is one of several factors that determine
an individual’s wage
(Mincerian wage regressions).
• In general, the wage premium to tertiary
education has increased or remained stable,
despite expansion of tertiary education.
Role of demand
Demand has been increasing faster than supply
– the only way to rationalise stable or
increasing wage premium to tertiary education
Why has demand been increasing so fast?
Weight of evidence is behind ‘skill biased
technology change’ explanation: introduction of
new technologies that are biased in favour of
skilled workers.
What has happened to
employment and unemployment?
• Compare employment and unemployment rates of
graduates of tertiary education and those who
achieved upper secondary or post-secondary nontertiary education; 21 countries 1991-2003
• Tertiary graduates have much higher probability of
being in employment; lower probability of being
unemployed
• Some evidence of ‘catch-up’ of less educated group
over time, most clearly for employment rates (some
exceptions – e.g. Poland).
Evidence of ‘over-supply’?
• No. Plenty of scope for tertiary education to
keep on expanding.
• As more people obtain a tertiary education,
greater variation in the earnings of graduates.
• Explanations:
- Variation in personal characteristics of
graduates;
- Graduates studying wider range of subjects
and attending larger number of institutions.
Over-education and skill mismatch?
• Can take a long time for (usually less well
performing) graduates to find a job; some are
not in jobs that appear to be well matched to
qualifications; shortages in certain sectors are
reported
• Literature on ‘over-education’ and ‘undereducation’ (terms are sometimes misused)
• Workers who are ‘over’/’under’ educated might
still be well matched to jobs.
• Apparent ‘over’/ ‘under’ education might be a
temporary phenomenon.
Over-education and skill mismatch? (2)
• Wasmer et al. (2006) look at these issues for
several European countries. Find some
evidence that ‘over-education’ is a transitory
phenomenon.
• Only small wage penalty associated with ‘overqualification’. However, ‘skill mismatch’ is a
more serious issue.
• In some countries (like UK) major problems
with vocational system of qualifications.
What type of education?
• Trade-off between highly specialised education
and more general education programmes.
• Some evidence to suggest that the latter
makes workers more adaptable to economic
shocks. This affects their wages and ultimately
economic growth.
• Raises a question about whole education
system; not just tertiary education.
• Is early stratification into a general (academic)
route and a vocational route damaging to
young people and ultimately to economies?
Who provides education?
• Balance between employer provided training and
publicly provided training.
• General skills Vs firm specific skills.
• Bassanini et al (2006) evaluate what is known about
work-based training in Europe. Many questions of
policy relevance cannot yet be answered (e.g. Is there
enough employer based training? Is it effective in
raising productivity?)
• Governments have an important role to play in
improving information about training opportunities;
setting appropriate legal frameworks; ensuring
portability of skills.
Are graduates studying the ‘right’
subjects?
• Few academic studies estimate returns to
higher education by subject of degree,
especially if we want to compare countries and
consider changes over time.
• Machin and Puhani (2006) estimate returns by
degree subject in Britain, France, Germany
and the US using a consistent framework
Estimated Return to Degree Subject – Men
Britain
France
Germany United States
1993
--
2000
--
1993 2000 1993 2000 1993
------
2003
--
Science/Engineering
/Technology
0.18
0.25
0.31
0.20 0.19 0.25 0.34
0.35
Social Science
0.12
0.21
0.37
0.18 0.15 0.20 0.30
0.34
Rest/Combined
(incl. Medicine,
education)
0.17
0.17
0.40
0.24 0.18 0.20 0.17
0.16
Arts
Source: Machin and Puhani (2006)
Estimated Return to Degree Subject – Women
Britain
France
Germany United States
1993
--
2000
--
1993 2000 1993 2000 1993
------
2003
--
Science/Engineering
/Technology
0.02
0.16
0.21
0.12 0.09 0.09 0.21
0.18
Social Science
0.02
0.10
0.22
0.08 0.07 0.05 0.17
0.14
Rest/Combined
(incl. Medicine,
education)
0.08
0.18
0.20
0.14 0.14 0.07 0.06
0.02
Arts
Source: Machin and Puhani (2006)
Returns by field of study
• In the four countries considered, returns to a
university degree are lowest for Arts subjects
whereas they are higher for other subjects –
often highest (at least for men) in
Science/Engineering/Technology
• Requires much further research for other
countries – especially for making comparisons
over time and across countries.
Shortage of Science and Technology
Graduates?
• High wage return; reports of shortages: e.g.
Belgium, Australia, New Zealand, UK.
• Variation between countries in the proportion of
S&T graduates
Science and Engineering degrees as a %
of all first university degrees, 2000
Asia
European Union
EFTA
Central/Eastern
Europe
North America
South America
Oceania
32%
28%
19%
29%
18%
22%
22%
China
Proportion of first university degrees classified as
'Science and Technology'
Japan
S.Korea
0.9
US
UK
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1970
1975
1980
1985
1990
1995
2000
2005
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Science and Technology researchers per 1000 labour force (1999)
12
10
8
6
4
2
0
Shortage of Science and Technology
Graduates?
• Countries differ in relative numbers graduating
with an S&T degree; working in the labour
market – e.g. US and Europe
• Research on perceived ‘shortage’ in the US
and Europe
• Explanation related to international mobility of
highly skilled professionals, scientists and
engineers.
• Concern about ‘brain drain’ and implications for
economic growth
How does type of institution matter?
• Countries differ along a number of dimensions: unitary
vs binary systems; importance of private sector; extent
of decentralisation; extent of change over time.
• Graduate outcomes are
institutional characteristics
often
correlated
with
• Difficult to separate the effect of institutional type from
the fact that students with very different characteristics
may choose to attend different types of institution
How does type of institution matter? (2)
• Has higher numbers going to institutes of
tertiary education led to a decline in the quality
of tertiary education? Are new institutes
providing as good an education as longer
established institutes?
• One would expect wage returns to vary by
quality of institute attended – to the extent this
is perceived by employers
• Little empirical evidence outside the US
US research on institutional quality
• Difficult issues: how to measure quality; how to
take account of the other attributes of college
entrants (e.g. ability).
• In general, evidence for a positive effect of
measures of ‘college quality’ on the
subsequent wages of graduates
Conclusions and implications
(1) Further expansion
• Despite very rapid expansion of tertiary education, no
evidence of ‘over-supply’: the average wage gap
between graduates and non-graduates remains high.
Furthermore, it has been stable/increasing in most
countries in recent years.
• High positive wage returns to tertiary education and the
positive relationship between tertiary education and
economic growth are good reasons for further
expansion.
Further expansion
What barriers are there to tertiary education and
what should be the policy response?
• Capacity constraints?: provide more places.
• Credit constraints?: student bursaries
(especially for those from poor socio-economic
backgrounds)
• Is sufficient information available to potential
students?
Conclusions and implications
(2) Field of Study
• Much more evidence needed, especially
comparisons over time and between countries.
for
• Available evidence suggests great variation in returns
to tertiary education conditional on field of study.
• Policy response: provision of good information to
potential students; Argument for permitting fees to vary
by subject of degree and/or to provide bursaries which
are differentiated by subject area
Conclusions and implications
(3) Skill shortage and ‘mismatch’
• Problems with graduates not always having the skills
required by employers
• Policy response:
- examine the content and accreditation system of
vocational courses. Is it appropriate?
- what is the balance between employer-provided
training and that which is publicly provided?
- In the public system, what is the balance between
general education and vocational education?
Conclusions and implications
• Well founded concerns about international
mobility among science and technology
graduates and potential implications for R&D
and productivity. How can conditions of
employment be made better?
• Quality of tertiary education institutions: little
good evidence outside the US for how this
affects labour market outcomes; Priority for
data collection and analysis in other countries.