The demographic challenge of higher education: Impacts of a decline in student

numbers on the Scottish economy

Kristinn HermannssonKaterina Lisenkova

Peter McGregorKim Swales

June 30, 2009Scotland’s Universities and the Economy: Impact, Value and Challenges

Fraser of Allander Institute, Department of Economics, University of Strathclyde; Centre for Public Policy for Regions (CPPR), Universities of Glasgow and Strathclyde

The “demographic challenge” for HEIs

• Demographic changes in the UK are projected to result in a fall in the number of students

• Recent Universities UK report makes projections of likely numbers of students

• We provide a CGE analysis of likely impacts on Scottish economy of Universities UK scenarios

Population aged 18-20Scotland

2006-based principal GAD/ONS projection

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In 2007 71% of the first year full-time UK-domiciled undergraduates were aged 18-20

-16.9%

-11.0%

UUK projections

• Two types of projections in UUK report:

– Baseline projection – based on demographic factors• Projected age/gender/ethnicity composition of the UK

population• Projected population of EU countries• Projected number of non-EU students• Projected conversion rate from undergraduate to

postgraduate study (increasing in line with recent trends)

– Three scenarios – take into account how HEIs may react to these changes

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Projected total number of students (FTE*): UUK baseline

Source: Universities UK, own calculations

-11.4%

-6.8%

*FTE – full-time equivalent; part-time students added with coefficient 0.5

Description of scenarios

Scenario 1Slow adaptation to change

Scenario 2Market-driven and competitive

Scenario 3Employer-driven flexible learning

Participation of young people

Participation of older people

Employer engagement

Competition (UK)

Technology-based learning

As now but with some switch from full-time to part-time

Reduced participation in full-time but increased participation in part-time

Substantial reduction in full-time, but on headcount basis participation at current level

Modestly increased Substantially increased Substantially increased

Modestly change, mainly through increased influence on the curriculum

Increased but not necessarily primarily with publicly funded HEIs

Substantially increased – employers are the primary drivers of large proportion of public funding

Increased competition amongst publicly funded providers

Significant expansion of the range of private providers – fierce competition for UK students

Highly stratified and polarised system with only limited competition

Competition (int-l) UK HEIs compete effectively despite increased competition

UK HEIs compete less well With the exception of elite HEIs, UK HEIs compete less well. However, they engage with technology-based borderless education

Some increase in e-learning, but face-to-face learning is the predominant mode

Substantial increase in e-learning

E-learning is the predominant mode

Academic staffing As now with academic staff undertaking teaching and research

Two streams: one – research and teaching in large HEIs, the other – teaching in small HEIs

Flexible academic workforce. Increased movement between academia and business. Significant part of academic staff becomes self-employed, contracting work at several HEIs

Projected total number of students (FTE): all scenarios

Source: Universities UK, own calculations

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Baseline Scenario1

Scenario2 Scenario3

Sources of Scottish HEIs income

• Funding Council grants– Recurrent grants (Teaching) –proportional to the number of Scottish

students (FTE)– Recurrent grants (Research)– Recurrent grants (other)

•  Tuition fees & education grants & contracts– Home & EU domicile

• Full-time fees – proportional to the number of full-time home and EU students

• Part-time fees – proportional to the number of full-time home and EU students

– Non-EU domicile – proportional to the number of non-EU students (FTE)

• Research grants & contracts; Other income

• Effectively a regional, empirical, general equilibrium variant of the Layard, Nickell and Jackman (LNJ) model. So the supply side is crucial (and, of course, non-passive)

• Multisectoral CGE calibrated on 2006 Scottish Social Accounting Matrix, with HEIs as one sector:

– 25 sectors, cost minimisation– 3 domestic transactor groups

• Goods markets modelled as competitive, with equilibrium relative prices determined simultaneously by demand and supply

– Demands fairly conventional – Trade flows sensitive to relative prices

• Labour market imperfectly competitive, though unified – characterised by regional bargaining - wage curve (w, u negatively related) - LNJ variant

AMOS-HEI: a CGE model of the Scottish economy

• Second element of flexibility - population is– either fixed– or Harris-Todaro (w, u positively related) - LNJ variant– When combined with wage curve the two relations tie down w, u

• Final element of flexibility relates to treatment of capital stocks, which are– either fixed (total and composition)– or gradually adjusted to optimal level, driven by gap of rental rates and user costs

• Dynamics in model are recursive: sectoral capital stocks updated each period through investment functions; population updated via the migration function

• Financial markets fully integrated and not modelled explicitly

• How does AMOS-HEI relate to IO models of HEI impacts?– Full specification of the supply side– Can therefore capture heterogeneity among regions (e.g. supply constraints?)– Relative prices (competitiveness) endogenously determined– But, if supply-side is passive, AMOS-HEI converges on comparable IO models

AMOS-HEI (continued)

Impact of the loss of income by HEIs: baseline

  2006 2010 2015 2020 2025

UUK baseline

GDP (£m) 0.000 10.434 -15.325 -62.043 -73.158

Total employment ('000) 0.000 0.261 -0.378 -1.633 -2.020

Unemployment (%) 5.797 5.792 5.806 5.815 5.798

CPI (%change) 0.000 0.016 -0.029 -0.063 -0.017

Real wage (% change) 0.000 0.010 -0.018 -0.034 -0.001

HEI sector employment('000) 0.000 0.346 -0.594 -1.670 -1.152

Impact of the loss of income by HEIs: all scenarios

  2006 2010 2015 2020 2025 2026

UUK baseline

GDP (£m) 0.000 10.434 -15.325 -62.043 -73.158 -74.869

Employment ('000) 0.000 0.261 -0.378 -1.633 -2.020 -2.051

CPI (%change) 0.000 0.016 -0.029 -0.063 -0.017 -0.016

Scenario1

GDP (£m) 0.000 15.015 -2.767 -40.618 -42.942 -39.913

Employment ('000) 0.000 0.379 -0.042 -1.057 -1.210 -1.123

CPI (%change) 0.000 0.022 -0.019 -0.052 -0.004 0.002

Scenario2

GDP (£m) 0.000 7.359 -23.555 -75.941 -93.255 -98.651

Employment ('000) 0.000 0.182 -0.598 -2.007 -2.558 -2.680

CPI (%change) 0.000 0.012 -0.035 -0.070 -0.025 -0.029

Scenario3

GDP (£m) 0.000 -3.808 -53.704 -127.030 -165.986 -179.044

Employment ('000) 0.000 -0.104 -1.402 -3.380 -4.506 -4.822

CPI (%change) 0.000 -0.003 -0.059 -0.097 -0.055 -0.065

GDP impact of the fall in student numbers: baseline

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HEI income only Including student's expenditures

GDP impact of the loss of income by HEIs : all scenarios

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£m UUK baseline

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Employment impact of the fall in student numbers: baseline

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HEI income only Including student's expenditures

Employment impact of the loss of income by HEIs : all scenarios

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UUK baseline

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Conclusions and future research

• The macroeconomic consequences of the demand-side impacts of UUK’s projections of student numbers entering Scottish HEIs appear fairly modest, though unambiguously negative

• These effects are smaller than would be revealed by conventional “impact” or “multiplier” analyses, in which wage and price flexibility would be unable to insulate the real economy

• However, here we do not include the adverse supply-side impacts of the projected contraction in student numbers, which we might expect to predominate over the longer term as these are reflected in the level of skills in the host region, and in the scale of knowledge transfer effects. In this sense the estimates represent a minimum estimate of the likely macroeconomic consequences of UUK’s projections

• Future research along the following lines:– impact on other regions– supply-side consequences of the “demographic challenge” – interregional effects – wider economic and social impacts of HEIs.