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219 AUSTRALIAN JOURNAL OF LABOUR ECONOMICS Volume 16 • Number 2 • 2013 • pp 219 - 236 The Rate of Return to Higher Education Over the Business Cycle Michael Corliss, Phil Lewis and Anne Daly, Centre for Labour Market Research, University of Canberra Abstract Currently there is only a scant literature available on the business cycle effect upon the private rate of return to higher education in Australia. This is despite the expectation that the business cycle would be of a significant consequence to the relative income of degree holders. This paper presents estimates of the rate of return in Australia associated with the completion of Bachelors degrees for a range of fields of study over the business cycle. The results show that for the average person there are strong incentives to complete these degrees, and the private rate of return compares favourably with the real long term real bond rate. However, there are considerable differences in rates of return according to gender and discipline of study. There also appear to be important business cycle effects on the rate of return to a university degree. JEL Classification: J240, J440, J480 1. Introduction In recent years Australia has gone through a considerable change in economic activity, starting in 1991 with a recession and ending in 2006 with a boom. These changes in economic activity coincide with the Census of Population of Housing (Census) years, conducted by the Australian Bureau of Statistics in 1991, 1996, 2001, and 2006. Evidence of the business cycle is given in figure 1 which shows the unemployment rate for the period using estimates from both the Labour Force Survey and from the Census. The unemployment rate is a good indicator of the level of economic activity taking in the labour market (Lewis et al., 2010). Figure 1 shows the unemployment rate from the Labour Force Survey, for December 1991 at 10.3 per cent (recession), 1996 at 8.5 per cent (recovery), 2001 at 6.6 per cent (expansion), and 2006 at 4.6 per cent (boom). The unemployment rates from the Censuses are also shown and although they differ marginally the two sets of estimates clearly indicate that the Census periods correspond to phases of the business cycle. Address for correspondence: Phil Lewis, Director, Centre for Labour Market Research, Canberra University, ACT 0200. Email: [email protected] © Centre for Labour Market Research, 2013

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Page 1: The Rate of Return to Higher Education Over the Business Cycle · business cycle and its impact upon the private rate of return to higher education that is the subject of this paper

219AUSTRALIAN JOURNAL OF LABOUR ECONOMICS

Volume 16 • Number 2 • 2013 • pp 219 - 236

The Rate of Return to Higher Education Over the Business Cycle

Michael Corliss, Phil Lewis and Anne Daly,CentreforLabourMarketResearch,UniversityofCanberra

AbstractCurrently there is only a scant literature available on the business cycle effect upon the private rate of return to higher education in Australia. This is despite the expectation that the business cycle would be of a significant consequence to the relative income of degree holders. This paper presents estimates of the rate of return in Australia associated with the completion of Bachelors degrees for a range of fields of study over the business cycle. The results show that for the average person there are strong incentives to complete these degrees, and the private rate of return compares favourably with the real long term real bond rate. However, there are considerable differences in rates of return according to gender and discipline of study. There also appear to be important business cycle effects on the rate of return to a university degree.

JELClassification:J240,J440,J480

1. Introduction InrecentyearsAustraliahasgonethroughaconsiderablechangeineconomicactivity,starting in1991witha recessionandending in2006withaboom.Thesechangesin economic activity coincidewith the Census of Population of Housing (Census)years,conductedbytheAustralianBureauofStatisticsin1991,1996,2001,and2006.Evidenceof thebusinesscycle isgiven infigure1whichshows theunemploymentratefortheperiodusingestimatesfromboththeLabourForceSurveyandfromtheCensus.Theunemploymentrateisagoodindicatorofthelevelofeconomicactivitytakinginthelabourmarket(Lewiset al.,2010).Figure1showstheunemploymentratefromtheLabourForceSurvey,forDecember1991at10.3percent(recession),1996at8.5percent(recovery),2001at6.6percent(expansion),and2006at4.6percent(boom).TheunemploymentratesfromtheCensusesarealsoshownandalthoughtheydiffermarginally the twosetsofestimatesclearly indicate that theCensusperiodscorrespondtophasesofthebusinesscycle.

Addressforcorrespondence:PhilLewis,Director,CentreforLabourMarketResearch,CanberraUniversity,ACT0200.Email:[email protected]©CentreforLabourMarketResearch,2013

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220AUSTRALIAN JOURNAL OF LABOUR ECONOMICSVOLUME 16 • NUMBER 2 • 2013

Figure 1 - Unemployment rate, per cent, 1991-1992

Source:AustralianBureauofStatistics,TheLabourForce,CatNo.6202.0andAustralianBureauofStatistics,1991,1996,2001&2006,CensusesofPopulationandHousing.

The business cycle affects the labour market in terms of both wages andunemployment.Atthebottomofthecycle,businesscycleeffectsareconcentratedontheunskilled,increasingunemploymentandthecompetitionforjobs.Lewis(2006)suggeststheeffectsofarecessionaredisproportionallylargerforunskilledworkerscomparedwith theskilledand thus likely to influence therelative incomebetweenunskilledandskilledlabour.Atthetopofthecycle,asthepoolofunskilledlabourhasdriedup, thebusinesscycleeffectsareconcentratedonwagesputtingpressureonwages to rise. If all other effectswereheld constant itwouldbe expected that,on theonehand, theprivaterateofreturn toadegreewouldbegreatestduringaneconomic downturn as the unemployment rate of the unskilled would increase,relative to university educated, and relativewages of unskilledwould fall. On theotherhand,thereturnstoadegreewoulddiminishatthetopendofthebusinesscycleasunemploymentdecreasesandtherelativewagesoftheunskilledincrease.

Thisstoryiscomplicatedhoweverbythelong-termstructuralchangeswhichhastakenplaceintheAustralianlabourmarketoverthelastfewdecadeschangingthe demand for skills. In 1975, services accounted for just over 50 per cent of alljobs,butby2010theservicesectoraccountedforover70percentofalljobs(ABS,2010).Bycontrast,manufacturing’sshareoftotalemploymentalmosthalvedoverthesameperiod, to less than10percent.Thereweresimilar reductions in therelativesharesofjobsinthe‘industrial’servicessuchaselectricity,gasandwater.Structuralchange has increased the number of jobs in the service sectorwhich values skillsthataredevelopedinuniversitiessuchasknowledge,communicationandcognitiveskills(KellyandLewis,2006).Technologicalchange,drivenbytherapiduptakeofInformationandCommunicationTechnologies(ICTs)investment,affectsthedemandforskillsdirectlybyincreasingdemandforICTrelatedskillsandindirectlythrough

1991

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6

8

11

7

5

Labour Force Survey

10

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

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2004

2005

2006

11.6

9.2

7.4

5.2

9

Censuses of Population and Housing

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221MICHAEL CORLISS, PHIL LEWIS AND ANNE DALY

The Rate of Returns to Higher Education Over the Business Cycle

theenablingeffectsofICTs(Kelly,2007).KellyandLewis(2010)foundthatwhiletheeconomicrecoveryperiodof1991to1996wascharacterisedbyskillchangesresultingfromstructuralchange,fortherecoveryandboomperiodstechnologicalchangewasthemaininfluenceonskillschange.

While there isaconsiderablebodyofresearchon thereturns toeducation,currentlythereisonlyascantliteratureavailableonthebusinesscycleeffectsupontheprivaterateofreturntohighereducation.Thisisdespitetheexpectationthatthebusinesscyclewouldnothaveneutraleffectsonparticipantsinthelabourmarket,butwouldhavedifferentialeffectsonworkersaccordingtotheirdegreeofskill.Peopledecidingaboutgoingtouniversityneedtobeawareofbusinesscycleeffectontheirexpected wages. Policy makers in choosing the level of public subsidy to degreeeducationneedtobeawarethatthereturnstohighereducationvaryovertimeforanumberofreasonsincludingtheeffectsofthebusinesscycle.

Daly and Lewis (2010) showed that during the recession and subsequentrecoveryupto2001therewasanincreaseintheprivaterateofreturnforuniversitydegrees.However,thisdeclinedduringtheboomin2006.Theysuggestthatitmaybeduetostronggrowthintheeconomyoverthatperiodthatraisedtherelativeincomeof year 12 completers. Corliss andLewis (2011) suggested the business cycle hadlittleimpactontherelativeincomeoftradespersonsasawhole.Howeveritdideffecttradeoccupationsdifferentlyandcreatedgreaterdispersionofincomewithinthetradeoccupationsasthemarketprovidedgreaterrewardsforthemorehighlyskilled,bestpaidtradespersonsduringtheeconomicboom.Otherstudies,inthebusinesscyclescontext,havefocusedonskillswagedifferentials.Forinstance,Reder(1955)examinedthecyclicalityofwagedifferentials,hisfindingssuggestingthat theaggregateskillpremiumwascountercyclicalinthe1930sand1940s.Morerecently,KeaneandPrasad(1993),CastroandCoen-Pirani(2008),andLindquist(2004)showthattheaggregateskill premium is acyclical. Therefore it is of interest to investigate whether thesesamephenomenaareobservablefordegreeholders.Itisthisrelationshipbetweenthebusinesscycleanditsimpactupontheprivaterateofreturntohighereducationthatisthesubjectofthispaper.

2. General issues in estimating the returns to education Asaninvestment,thereturnstoeducationcanbeconsideredfrombothanexanteandexpostposition.Forinstance,ayoungpersoncompletingsecondaryschoolmustconsidertheavailableevidenceonthecostsandbenefitsofeducationbeforedecidingwhethertocontinuetothenextlevel.Partofthereturntocompletingaqualificationistheoptionvalueitcreatesforcontinuingontothenextlevelofeducation(Heckman,LochnerandTodd2005,Wei,2007).Oneoftheeasiestmethodsforassessingthefinancialbenefitsofeducationistolookatthecurrentincomelevelsofpeoplewithgivenqualificationsavailableincrosssectiondata.Thereareanumberofassumptionsthatmustbemadeinordertotaketheincomesofpeoplewithagivenqualificationatallsubsequentagesas theexpected future incomeofaperson justbeginning thatqualification.Currentskilldifferentialsmustbeassumedtopersistintothefuture.Eachagecohortmustalsoembodythesameeducationalqualityandthereisalwaystheissueofheterogeneousreturnstoindividualsandtheroleofuncertaintyinactualoutcomes.

Actual outcomes may differ significantly from expected ones. Heckman,LochnerandTodd(2005)presentevidenceofsubstantialdifferencesintheexante

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andexpostreturnstoeducationintheUSA.Daly,FlemingandLewis(2006)showthattheexpostreturnstohighereducationforthosestartingtheirdegreesinAustraliain1986werehigherthanwaspredictedexanteasthereturnstoskillgrewinAustraliaoverthe1990s.Themethodsdescribedbelowhavebeenappliedempiricallytocrosssectiondataandtheassumptionsinvolvedinthismethodologyneedtobeborneinmindwhenconsideringtheresults.Thealternativeofcalculatingtheexpostreturntoeducationattheendofworkingliferequiresover40yearsofdataandisoflittleassistancetosomeoneinmakinganinitialinvestmentdecision.

Another major issue arising in estimating the returns to education is theimpactofanyabilitybiasesonresults.Thedifficultyrestswithmeasuringtheeffectsofabilityonincomeindependentofeducationlevels(Wei,2008).Itisoftenassumedthat natural ability and educational attainment are positively correlated but it ispossiblethatthecorrelationgoestheotherwaywiththemoreableleavingeducationinpursuitof incomeopportunitieswhile thosewith lowerabilitycontinuing in thesystem(Leigh,2008).LeighandRyan(2008)inexaminingthereturnstoschoolingestimatedthatbetweenone-tenthandone-fifthofthereturntoschoolinginstudiesisduetoabilitybias,butthisfindingisofonlylimiteduseinsuggestinganestimateforuniversityeducation.However,manyUSstudiessummarisedbyCard(1999and2001)showthatabilitybiasestoestimatesofthereturntoeducationarenotlarge.

The role of family background in the returns to education has also beendiscussedintheliteratureasitislikelytoconfoundthereturnstoeducation.Weale(1993), forexample, reportsBritish resultswhichshow thatonce theoccupationoftheparentsistakenintoaccount,theprivatereturntoanadditionalyearofeducationislowerforpeoplefromahigheroccupationalbackgroundthanforthosefromlessprivilegedbackgrounds.

Thefinancialreturnstoeducationwillalsobeaffectedbytheextenttowhichindividualsparticipate inpaidemployment.Thishasparticular implicationsfor thereturns toeducation identified forwomenwho typicallyhavesome timeoutof thelabourforcewhiletheyraiseafamily.It isalsoimportantforothergroupssuchasIndigenousAustralianswhomayhaveamarginalattachmenttothelabourforce.Leigh(2008)drawsanimportantdistinctionbetweentheproductivityeffectsofeducationasmeasuredbychangesinthehourlywageandtheparticipationeffectwhichisreflectedinhigherannualincomesasthemoreeducatedarelesslikelytospendtimeoutofthelabourforcethanthelesseducated.

Anothernotionrelevanttothestudyofthereturnstoeducationisthegrowthinparticipationineducation.Withtheincreasingnumbersofuniversitygraduates,itispossiblethattheaveragenaturalabilityofstudentsmayhavedecreasedovertime(Wei, 2008). In this context the distinction between the average return to tertiaryeducationandthereturntothemarginalstudentisimportant.

Theprinciplesofrateofreturnanalysisarewellknowninlaboureconomicsandtheliteraturedatesbacktothelate1950s(Becker,1960;Schultz1961).Theprivaterate of return is the discount ratewhichmakes the net present value (NPV)of aninvestmentzero.Analternative(equivalent)methodistospecifyadiscountrateandcalculatetheNPVofthefutureincomestreamnetofcosts.ThedecisionruleisthentoinvestwheretheNPVispositive.Inthecaseofthereturnstoeducation,theNPVofan investment is thedifferencebetween thediscountedpresentvalueof lifetimemonetarybenefitsfromobtaininganadditionalqualificationoryearsofeducationandthecostsincurredinthisinvestment.

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Thismethod calculates an average rateof return for graduates as awhole.Given the heterogeneity among individuals facing different costs and benefits, theaveragemaynotbeagoodguidetotheexpectedrateofreturntoanygivenindividual.Fromapolicymaker’spointofview,itdoesnotaddressthequestionofthereturntoeducationforthelowestpaidgraduate.Thispaperwillattempttothrowlightonthisquestionbyexaminingtherateofreturnforthosegraduatesreceivingrelativelylowincomecomparedtotheaveragegraduate.

Thereremainotherlimitationstothismethodology.Thereisstilltheproblemthatitisdifficulttocapturethe‘pure’effectofeducationonincomebecauseofthecorrelationbetweeneducationaloutcomesandabilityandfamilybackgroundfactors.Factorssuchasthecurrentstateofthebusinesscycle,selfselectionofindividualsintothelevelofeducationthatismostlikelytoproducethehighestreturnsforthemandthelimitationsoutlinedearlierrelatingtotheuseofcrosssectiondataremainimportantconsiderations.

Itispossibletorefinethecalculationstotestdifferentassumptionsthathavebeenmade.DalyandLewis(2010)forexample,presentprivateratesofreturnusingdifferentassumptionsabout the lengthofadegree, student incomewhile studying,the timing ofHECSpayments and the absence from theworkforce bywomen forseveralyearssometimeduringtheircareers.Itwouldalsobepossibletomakesomeadjustmentstotheseestimatesinthelightoftheavailableevidenceontheeffectofabilityonincome.

TherehavebeenanumberofAustralianstudiesoftheprivaterateofreturntoinvestmentinanundergraduatedegreeoverthepastthirtyyears.Differencesintheunderlyingassumptionsandmethodologiesofthesestudiesmakedirectcomparisonsdifficult,butthereisgeneralagreementthatinvestmentinanundergraduateeducationishighlyprofitablefromanindividualviewpoint(Miller,1982;Maglen,1994;Dalyand Jin, 1997; Chapman and Salvage, 1997; Borland et al., 2000; Borland, 2001;Larkins,2001;Dalyet al.,2004;Lewiset al.,2004;LeighandRyan,2008;Leigh2008;DalyandLewis,2010;Wei,2010).

Inthispaperwearespecificallyinterestedintheextenttowhichthereturnstohighlevelsofskillareinfluencedbythebusinesscycle.Withascarcityofresearchonthisitistheaimofthispapertopartlyrectifythis.

3. Assumptions of this study Thereareanumberofkeyassumptionswhichmustbemadeinordertocalculatetheprivaterateofreturn.Theseincludethefollowing:

• The length of the degree and therefore the period for which income isforegone,

• Whetherstudentsearnanyincomewhilestudying,• Thesizeofdirectcostsincludingthepurchaseofbooksandequipmentandfees,

• Thesizeofanyadjustmentforabilityorotherunmeasuredcharacteristicswhicharelikelytoaffecttherateofreturn.

The following discussion outlines the assumptions made in the base casereported here. The results of further calculations to test the sensitivity to theseassumptionswillbereportedlater.Thedatausedfortheincomecalculationsarefrom

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224AUSTRALIAN JOURNAL OF LABOUR ECONOMICSVOLUME 16 • NUMBER 2 • 2013

the1991,1996,2001and2006CensusesofPopulationandHousing.Thefollowing12fieldsofstudywereidentified:Humanities,Science,AlliedHealth,MathematicsandStatistics, Information Technology, Engineering, Architecture, Medicine, Nursing,Dentistry,EducationandVisualandPerformingArts.

InthebasecaseforaBachelordegree,thelengthofthedegreeisassumedtobe threeyears forHumanities,Science,Mathematics andStatistics, InformationTechnology,NursingandVisualandPerformingArts; fouryears forAlliedHealthand Engineering; and five years for Architecture, Medicine, and Dentistry. Therehavebeensomerecentchangesintheconfigurationofthequalificationsrequiredtopracticeinsomeoftheseprofessions.Medicineisnowapost-graduatequalificationat some universities andArchitecture has changed from a five year undergraduatedegreetoathreeyearundergraduatedegreefollowedbyatwoyearMasters.Asmostofthecurrentholdersofthesequalificationscompletedtheirdegreesundertheearliersystemasundergraduatedegrees,thisassumptionhasbeenappliedtoallgraduatesinthesefieldsofstudy.WhiletheaggregatedgroupsofHumanitiesandSciencearehomogenous in theminimum lengthof time required tocompleteadegree,AlliedHealthcontainssomevariationwithin.Outofthesevensub-fieldsofstudyidentifiedinthiscategory,fourfieldsrequirefouryearstocomplete(Radiography,RehabilitationTherapies, Complementary Therapies, and Pharmaceutical), two fields take threeyearstocomplete(PublicHealthandOtherHealth)andonefieldofstudytakesfiveyearstocomplete(OpticalScience).

Tocarryouttheanalysis,specialtabulationsofmedianincomebyqualificationforeachagebetweenandincluding18to64yearswerepreparedfromthe1991,1996,2001and2006Censuses.Theseincomesarethemediansforallpeoplewithagivenqualification inanagecategoryandall labourmarket statesare included; full andpart-timeemployed,unemployedandnot in the labourforce.They thereforereflectthedifferentemploymentoutcomesforgraduatescomparedwithYear12completersandmalescomparedwithfemalesaswellasanyincomedifferencesthatexistwithinaparticularlabourforcestatus.Asimpleregressionrelatingmedianincometoageandagesquaredwasestimatedtoprovideasmoothseriesformedianincomesateachage.Netincomeswerethencalculatedusingthe1990/91,1995/96,2000/01and2005/06incometaxationrates.

Theresultspresentedherearebasedoncross-sectionaldatafromtheCensusesand,therefore,maketheassumptionthatthefutureincomestreamofan18yearoldchoosingbetweenundertakingadegreeorleavingtheeducationsystemattheendofYear12isbestrepresentedbywhatpeopleofdifferingageswithdifferentlevelsofqualificationsarecurrentlyearning.DuetothechangeintheCensusquestionrelatingtohighestlevelofschoolingattained,the1991and1996‘ageleftschoolequals18’istakentobeequivalentof‘highestlevelofschoolingcompletedequal’sYear12orequivalent’in2001and2006.Theforegoneincomeofundergraduateswereassumedtobethemedianincomeofahighschoolgraduate.

Thebasecaseisthesimplestcasewhichcanbemodifiedtotestthesensitivityofresultstochangesinassumptions.Itassumesthatuniversitystudentsdonotearnincomewhilestudyingandthatthereareexplicitcostsforstudents;undergraduatesincur$1,720peryear(in2006dollars)indirectstudycost.Thesedirectcostestimateswere taken from theAustralianUniversitiesStudentFinancesReport2006 (AVCC2007). In addition students are assumed to pay upfront the student fees applicable

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foreachfieldofstudyandyearattherelevantrate(i.e.1991,1996,2001,or2006)oftheHigherEducationContributionScheme(HECS)chargeandcollecta20percentdiscountforpayingfeesupfront.Thebasecaseresultsdonotmakeanyadjustmentforabilityorotherunmeasuredcharacteristicswhichmayaffecttheprivaterateofreturn.

4. The labour market for graduates Table I shows the number of graduates per 1000 population over 15 years of ageincreasingdramaticallyovertheperiod1991to2006withnearlyan80percentincreaseintheproportionofgraduatesfrom87graduatesper1000in1991to156graduatesper1000in2006.Thisincreaseinthenumberofgraduatesper1000populationhappenedatthesametimetherewasconsiderablepopulationgrowthintheorderof22percentduringtheperiod1991to2006.BothofthesefactorshavesignificantlyincreasedthenumberofgraduatesinAustralia.

Holding everything else constant, such a large increase in the number ofgraduates in theAustralianpopulationover 15years of age,wouldbe expected toreducetherelativemedianincomesofgraduatescomparedtothoseholdingayear12certificate.However,thisisnotthecaseasshowninthetable.Infacttheearningsratioofgraduatestoyear12certificateholdersincreasedfrom1991to2001formalesandwhilefemalesdidseeafallfrom1991to1996theearningsdifferentialbecamelargerfrom1996to2001.

Asdiscussedearlierthebusinesscyclecouldpartlyexplainthetrendintheearningsratioofgraduatestoyear12certificateholders.Atthebottomofthecycle,businesscycleeffectsareconcentratedontheunskilled,increasingunemploymentandthecompetitionforjobsreducingrelativewages.Atthetopofthecycle,asthepoolofunskilledlabourhasdriedup,thebusinesscycleeffectsareconcentratedonputtingpressureonrelativewagesoftheunskilledtorise.Table1showsaconsiderablefallin the earnings ratio forbothmale and femalegraduates from the2001expansionto2006topof thecycle.Whileforfemalesthehighestearningsratioisduringthe1991recessionaspredicted,formalestheearningsratioofthe1991recessionisnotthehighestpointand in fact theearnings ratiogrowsupuntil its2001peakat theexpansion phase of the business cycle.No doubt there have been cyclical changesalongsidelongertermstructuralandtechnologicalchanges.

Table 1- Summary statistics on the graduate labour market in Australia

1991 1996 2001 2006Population15+ 13,085,092 14,040,303 14,856,774 15,918,082Graduates/1000population 87 103 146 156MalesMedianincome-graduates $47,273 $53,159 $67,729 $62,921Medianincome-year12 $25,978 $28,598 $34,148 $42,356Ratiograduate/year12 1.82 1.86 1.98 1.49FemalesMedianincome-graduates $34,117 $37,632 $46,108 $42,259Medianincome-Year12 $18,410 $21,894 $25,765 $27,164Ratiograduate/year12 1.85 1.72 1.79 1.56

Source:Dalyet al.,(2006);AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

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However,asstatedbefore,thegraduatelabourmarketisfurthercomplicatedby structural and technological change taking place during the same period. Asdiscussedearlier,bothstructuralandtechnologicalchangehaveincreasedthedemandforgraduatesinAustralia.

5. Results Webeginbycomparingtheratesofreturnformalesandfemalesinthemostrecentyearforwhichwehaddata,2006,toprovideabenchmarkforlookingatchangesovertime.Table1showsquiteclearlythereissubstantialincentiveforprivateindividualstoattainaBachelordegreeinmostdisciplinesandthatthereisconsiderablevariationbetweendifferentfieldsof study. Italsoshows that thereare importantdifferencesin ratesof returnaccording togender.The rateof return in2006 forallgraduateswas12percentforfemalesand15percentformales.Clearly,failuretoaccountforthesedifferencescanbeverymisleading.Thehighest ratesof returnformenwereinDentistry,Nursing,andInformationTechnology.Forwomenthehighest ratesofreturnwereinDentistry,Medicine,andInformationTechnology.ThelowestratesofreturnforbothmalesandfemaleswereintheVisualandPerformingArts(negativerateofreturn),HumanitiesandArchitecture.Inmostcasesbutnotall,theprivateratesofreturnwereslightlyhigherformalesthanforfemales,mostnotablyinDentistryandNursing.OntheotherhandfemaleswithaHumanitiesqualificationreceivedaprivaterateofreturnofninepercentcomparedtothreepercentfortheirmalecounterparts.

Figure 2 - Private rates of return by gender, 2006

Source:AustralianBureauofStatistics,2006CensusofPopulationandHousing,unpublished.

Total

Nursing

Mathematics and Statistics

Humanities

Allied Health

Architecture

0%

Sciences

Medicine

Engineering

Female Male

Information Technology

Visual and Performing Arts

Dentistry

Education

5% 10% 15% 20%

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6. Business cycle effects Turningnowto theeffectsof thebusinesscycle, theCensusesprovideuniquedatacoveringdifferentstagesofthebusinesscyclefrom1991,themiddleofarecession,1996,therecovery,2001,theboomand2006,labourshortages.Figures3and4showtheprivateratesofreturnformalesandfemalesoverthebusinesscycle.

Figure 3 - Private rates of return for males, 1991–2006

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Theprivaterateofreturnformales,showninfigure3,experiencedadramatic

increasebetweenthe1996recoveryto2001expansionphaseofthebusinesscycleformanyofthefieldsofstudyunderinvestigation.Duringthistimetherateofreturnforthewholesampleincreasedfrom11percentin1996to15percentin2001.Thiswasmost pronounced inNursing, Education andMathematics.Other degrees recordedmoremodestincreasesintheprivaterateofreturn,withtheexceptionofMedicineobservingaslightdecrease.WiththeexceptionofInformationTechnology,wheretherateofreturnfellsharplybetween2001to2006,allthefieldsofstudyrecordedanupwardmovementorremainedrelativelyconstantduringthe2001expansionto2006boomphaseofthebusinesscycle.Whilethereisconsiderablevariationintheprivaterateofreturnbetweenthedegreesshownhere, thebusinesscycleappears toaffecttheminafairlyconsistentmanner.

Figure4 suggests a slightlydifferent story forwomen than for theirmalecounterparts over thebusiness cycle.Consistentwithmales, femaledegreeholdersincreased their private rate of return from 1996 to 2001, although it was not aspronouncedasformales.Thesampletotalrateofreturnincreasedfrom12percent

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

0%

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

5% 10% 15% 20% 25%

1996 2001 2006

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in1996to14percentin2001.However,forfemales,therateofreturnfellbetween2001and2006back to the1996 levelunlikemaleswhichonlysawaslight fall inrateofreturnoverthisperiod.ThefieldsofstudyhavingthegreatestincreasesintheprivaterateofreturnforfemaleswereVisualandPerformingArtsandEngineering.A further differencewas that the downward adjustment in the female private rateofreturnoccurringbetween2001and2006wasmoredramaticthanfortheirmalecounterparts and affected more fields of study than just Information Technology,includingMathematics andEducationwithminor reductions noted in some of theotherfieldsofstudy.

Figure 4 - Private rates of return for females, 1991-2006

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Perhapsthemostinterestingresultsarethedramaticvariationintheprivaterate

ofreturnforholdersofInformationTechnologydegrees.Itispossiblethattheraisedexpectationsofpotentialstudents in2000due to theveryhighprivaterateof returnof Information Technology degrees compared with other fields of study created anoversupplyofInformationTechnologygraduates.Thisoccurredatatimewhendemandwascomingoffahighin2006puttingdownwardpressureonwagesthusdramaticallyreducingtheprivaterateofreturnforInformationTechnologydegreeholders.

7. Low income degree holders Sofarthefocushasbeenonthemedianincomeofindividualsattainingabachelordegreetounderstandthereturnstoinvestmentineducationandtrainingforthetypicaldegreeholder.Wenowexaminethereturnsforthosegraduateswhoarelesswellpaid,specificallythelowest20percentofgraduates(20thpercentile).Hereasinthebase

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

0%

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

5% 10% 15% 20% 25%

1996 2001 2006

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casetheopportunitycostofstudyistakentobethemedianincomeoftheYear12certificateholders.Inthisparticularcasetheresultsoftheprivaterateofreturnarenearlyallnegativeand,therefore,havebeenomittedfromthepaper.Thatis,thelowestpaiduniversitygraduateswouldbebetteroffnotgoingtouniversity,inallstagesofthebusinesscycle.

However, the net present value can be calculated and the estimates arepresentedinfigures5and6.Asexplainedearlierinthepaperthenetpresentvalueiscalculatedwitharealrateofinterestoftwopercentwhichisapproximatelythelongrunrealbondrate.Theconclusionsarenotchangedmuchbythechoiceofinterestratewithinreasonablebands.

Clearly formost of theworst paid bachelor degree holders the net presentvalueoftheirlifetimeincomewouldbegreaterleavingschoolaftergraduatingfromYear12andobtainingfull-timeemployment.Asshowninfigure5thesampletotalsuggestsin2006theworstpaidgraduatesare$132,210worseoffcomparedtothosewithonlyayear12certificate.However,thislossinlifetimeincomehasbeenreducedconsiderably from its peak in1996of$253,457. In2006 formen inMedicine andDentistry, however, the rewards for the lowest paid obtaining a degree were stillworthwhileandforlowerpaidwomenuniversitygraduatesthereisstillincentivetostudyMedicine,DentistryandEducation.

Figure 5 - Net present value of the 20th percentile of males, 1991-2006

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

-$600

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

-$400 -$200 $0 $200 $400

1996 2001 2006

Thousands

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230AUSTRALIAN JOURNAL OF LABOUR ECONOMICSVOLUME 16 • NUMBER 2 • 2013

Figure 6 - Net present value of the 20th percentile for females, 1991-2006

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Over time the incentive for the worst paid degree holders remains fairly

consistent.Menhadasmallbutpositivenetpresentvaluein2001andfemalesobservedasmallbutpositivenetpresentvaluein1991and2001,however,thenetpresentvaluedoesnotremainpositivefortheentireperiodunderquestion.AdditionallytheonlypositivenetpresentvalueforwomenstudyingEducationtookplacein2006.Theseresults suggest that for the lowest paidmen and women graduates onlyMedicineconsistentlyoffersanyincentivetoundertakethetrainingovertheentireperiod.If,asapotentialuniversitystudent,youknewyouweregoingtobea lowearner thenyouwouldbebestnottostudyauniversitydegree.Thereisabigriskinvolvedwithuniversity education including thepossibilityyoumightnot complete and thatyoumightnotearnmuchasaconsequenceofcompletion.

9. Degree holders employed full-time Inthebasecaseeveryoneisincludedintheprivaterateofreturnestimatesnomatterhowmuch theywork or even if they do notwork at all. There are two effects ofhigher education for individuals - they are higher wages and lower incidence ofunemployment.Bylookingatonlythoseworkingfull-timetheunemploymenteffectcanbeheldconstantandtheeffectuponwagesisolated.Forpeoplefromsomefieldsofstudyunemploymentoragreaterincidenceofcasualworkmaysignificantlyaffectthereturnstoadegree.Also,many(perhapsmost)womenleavethelabourforceforperiodsoftimetolookafterchildren.Thereforeitmaybeusefultocontrolforthisby

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

-$400

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

-$200 -$100 $0 $100 $300

1996 2001 2006

Thousands-$300 -$200

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231MICHAEL CORLISS, PHIL LEWIS AND ANNE DALY

The Rate of Returns to Higher Education Over the Business Cycle

selectingonlythoseworkingfulltime.Boththeuniversitygraduatesgroupandthecomparatorgroup(Year12graduates)onlyincludethoseworkingfull-time.Figures7and8showtheprivaterateofreturnestimatesforindividualswithabachelordegreeandwhoareemployedfulltime.Thebusinesscycleeffectswouldbeexpectedtobegreaterwhenexaminingallgraduatesratherthanthoseemployedfulltime.

Overall the recession through to theboomphaseof thebusiness cyclehasincreasedtherateofreturntomaledegreeholdersthatareworkingfulltimeasshowninfigure7.Thelargestchangeoccurredduringfrom1996(recovery)to2001(expansion)phaseofthebusinesscyclewithanincreaseintherateofreturnforthesampletotaloffivepercentagepoints.Forthevariousfieldsofstudy,themostremarkableoftheseincreaseswasfoundintheInformationTechnology,AlliedHealth,ArchitectureandMathematicsupfivepercentfrom1996to2001.Thereweresomenotableexceptionstothisthough-thosewithanInformationTechnologydegreerecordedasignificantreductionintherateofreturntotheirdegreedroppingoffourpercentagepointsfrom2001to2006despitetheirimpressivegaininthepreviousfiveyearperiod.Theresultsimplythatthebusinesscyclehasagreateffectonwagesnotjustemployment.

Figure 7 - Private rates of return for full-time workers, males, 1991-2006

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Forfulltimefemaledegreeholdersshowninfigure8therecessionthroughto

boomphaseofthebusinesscyclehadasimilareffectontheratesofreturnforfemaledegreeholdersasexperiencedbymaledegreeholders.Thelargestchangeoccurredfrom1996(recovery)to2001(expansion)phaseofthebusinesscyclewithanincreasein therateofreturnfor thesample totalof threepercent.For thevariousfieldsofstudy, themost remarkable increases in the rateof returnwere for thoseholdinga

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

0%

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

5% 10% 15% 20%

1996 2001 2006

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232AUSTRALIAN JOURNAL OF LABOUR ECONOMICSVOLUME 16 • NUMBER 2 • 2013

degreeinInformationTechnologyandEngineering.Although,therewasafallintheprivaterateofreturnforInformationTechnologydegreeholdersfrom2001to2006,formostoftheotherfieldsofstudy,theyobservedafurtherincreaseintheirprivaterateofreturnfrom2001to2006.Thisisincontrasttotheeffecttheboomhadforallwomenwhereareductionintheprivaterateofreturnwascommonplaceamongthevariousfieldsofstudy.

This can be explained by distinguishing between salary effects andemploymenteffects.Ontheonehand,whenexaminingwomenworkingallhoursaboomintheeconomyfavouredpart-timeemploymentforwomencausingtherelativewages of unskilled women to increase. On the other hand, when examining onlywomenworkingfull-time,employmenteffectsareeliminatedandonlyapuresalaryeffectremains.Thus,duringtheboomtherewasafallintheprivaterateofreturnforwomendegreeholderswhenexaminingallwomen,andanincreaseintheprivaterateofreturnforwomendegreeholderswhenconsideringonlywomenworkingfull-time.

Interestingly, controlling for hours worked had a much greater impact inreducing the private rate of return for females than it did onmales. This suggestsunemploymentandchildraisingimpactsuponfemaleincomeconsiderablymorethanitdoesonmales.

Figure 8 - Female private rates of return for full-time workers

Source:AustralianBureauofStatistics,1991,1996,2001,2006CensusesofPopulationandHousing,unpublished.

Additionallyaftercontrollingforhoursaconsiderablereductionintherates

ofreturntodegreeholderswasobserved.Itiswellknownthattherearesignificantlydifferentunemploymentratesforpeoplewithdifferentqualifications(seeforinstance,Lewis, 2006). Those holding a degree have on average a considerably reduced

Total

Visual and Performing Arts

Architecture

Mathematics and Statistics

Engineering

Dentistry

0%

Information Technology

Education

Nursing

1991

Medicine

Humanities

Sciences

Allied Health

5% 10% 15% 20%

1996 2001 2006

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233MICHAEL CORLISS, PHIL LEWIS AND ANNE DALY

The Rate of Returns to Higher Education Over the Business Cycle

incidenceofunemploymentwhencomparedwiththosewhosehighestqualificationisayear12certificate.Figures7and8areperhapsevidenceofthis.Itwouldbeexpectedthatthosewithayear12certificatehavehigherratesofunemploymentcomparedtodegreeholders.Thisunemploymenteffectwouldcause themedian incomeofyear12certificateholders tobe loweredbymore thandegreeholders.By removing theunemployedfromthesamplereducestheimpactunemploymenthasonincome.Asexpectedtheresultsshowareducedrateofreturntodegreeholderswhensamplingonlythoseworkingfulltime.Thereisevidencethatwomenshiftbetweennotinthelabourforceandpart-timeemploymentwhenthelabourmarketisgood(Norriset al.,2004).Alsoyouwouldexpectareductionintherateofreturnwhenmoreemploymentopportunitiesareavailable.

10. Conclusion Thispaperpresentsestimatesof therateofreturntoBachelordegreesinAustraliaovereachphaseofthebusinesscycle.Theresultsshowthat,generally,adegreeisaprofitableinvestmentforindividuals.Variousassumptionshavebeenadoptedinordertoprovideasensitivityanalysisoftherobustnessoftheseestimatesandimportantlywhetherornottheseresultsremainconsistentovertime.

While returns to university education are generally high, there are largedifferences between disciplines. For instance, the rates of return to a Bachelordegree are particularly large in some fields of study notably Dentistry, Medicineand InformationTechnology.The results show that thecompletionofaVisualandPerformingArtsdegreeisnotagoodfinancialinvestmentforeithermenorwomen.Also,notallstudentsreceiveconsiderablebenefitsfromobtainingauniversitydegree.For instance,manyof the lowestpaiduniversitygraduateswouldhavedonebetterfinishingtheireducationatYear12andenteringfull-timeemployment.Theresultsshownherealsosuggestthatthisconclusionisrobustovertime.

Itisinterestingthattheprivaterateofreturnwasatitslowestduringthebottomof the business cycle. This is against expectations as typically the contractionaryphaseofthebusinesscyclewouldbeexpectedtodisproportionatelyimpactuponthelowerskilled(Year12certificateholders)intermsofbothemploymentstatusandthemedianwagethusdecreasingtheopportunitycostofstudyandincreasingtheprivaterateofreturn.ItisalsopossiblethatthelargeincreaseinsupplyofgraduatelabourinthepostDawkinseracoincidingwiththedownturntosomeextentoutweighedthebusinesscycleeffect.

Additionally, itwouldbeexpected that at the topof thebusiness cycle theprivate rate of return to a degree would diminish as the pool of unskilled labourdried up alongwith a decreasingunemployment rate puttingpressure onwages torisedisproportionatelyfasterfortheleastskilled.Anotherreinforcingfactorexpectedtoreduceratesofreturntouniversityeducationwouldhavebeenthehugegrowthinsupplyofuniversitygraduatespost1990.ThisisonlyreallyevidentforInformationTechnology degreeswhere a dramatic increase in the private rate of return in theprevious periodmay have caused an oversupply of undergraduates by 2006whichresultedinalargefallintheprivaterateofreturnduringtheboomperiod.Formostdegreestheimpactofthebusinesscycleonratesofreturnhavebeenpro-cyclical.

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234AUSTRALIAN JOURNAL OF LABOUR ECONOMICSVOLUME 16 • NUMBER 2 • 2013

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