Diminishing returns on increasing investment

December 3, 1999

Social return on investment is more difficult to measure in education than in, say, health. The social return from hospitals needs no explanation. They save lives.

Above and beyond sufficient numbers of teachers and lecturers, watertight classrooms and learning materials, arguing for more investment in education is difficult.

Investment in early years education is justified most easily. But what is the net benefit to the economy and society of spending large amounts of money keeping people who could be working in education?

John Van Reenen, professor of economics at University College London, says:

"The social returns from higher education are the returns over and above private returns to the individual, but people come up with different measures. It is an almost intangible benefit."

Even so, higher-level skills are crucial to the running of a technologically advanced and managerially complex economic system.

If social returns decline, the higher the level of education, then there should be more to be gained by investing in sub-degree education rather than degree and postgraduate levels, as demonstrated in this year's funding shareout.

The government is considering introducing a two-year associate degree. It costs less to provide two-year qualifications, yet the benefit to society is substantial. Recipients will earn more than school-leavers, and so pay more tax, and their knowledge will benefit employers and ultimately the economy.

The same is true of graduates and the greater accumulated knowledge they bring to the workplace. But net social benefit from higher education is smaller. Undergraduates forgo earnings for at least three years and are supported by the state, albeit via a repayable loan. Universities are labour-intensive and far more expensive to maintain than further education colleges, where much of the sub-degree expansion will take place.

Graduates are the most obvious beneficiaries of higher education. The Dearing report estimated graduates earned up to 14 per cent more than non-graduates, which became a justification for tuition fees.

Wider social returns are difficult to calculate. How can one work out the wider social returns of a graduate's "knowledge capital" if they are employed in a role that previously had been done by someone without a degree?

Geoff Mason, of the National Institute for Economic and Social Research, says in a forthcoming discussion paper, Graduate Utilisation and the Quality of Higher Education in the UK, that an estimated 45 per cent of newly recruited graduates in a sample of financial enterprises were found to be working in unmodified "school-leaver" jobs on salaries significantly lower than those graduates recruited into graduate-level jobs.

But Dr Mason also found employers in some industries were recruiting more graduates because of changes in their business. In the chemical industry, some recruiters said the work had become more demanding and complex. Others said it had become more pressing, but not more complex, meaning employees have less time for supervision. So firms could not "afford the luxury" of technician-grade people unable to work alone.

Economists have come up with different estimates of what the social returns may be. in the 1970s, Mincer calculated that individuals were ten per cent more productive with every extra year spent in education.

Meanwhile, the current best guess at gross social rates of return, from a macro-economic approach, is 14 per cent. This is higher than the average private rate of return for men (11-13 per cent), but less than the returns for women (up to 19 per cent). Women workers are concentrated in lower-paid jobs, so the benefit of a degree is more.

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