Tuesday, 26 June 2012

Higher education and growth

Last weekend I spent some time reading a very strange report, in fact the more I think about it, the stranger it seems. The report in question was produced by the think-tank, Institute for Public Policy Research (IPPR), for the University and College Union (UCU). Entitled Further Higher? Tertiary education and growth in the UK's new economy, the report was published earlier this month. It's discussing some really interesting and important issues, and to that extent the report is to be welcomed. However, some of the report's analysis is pretty shaky and quite confusing, and so in my view it should be read with great caution, and in a critical spirit.

In a nutshell, the report's line of argument goes like this:

1. Both the social and private returns to higher education have been substantial and will continue to be so.

2. The UK economy needs to get back to growth, and the opportunities offered by low-carbon sectors offer a good way of doing so. Two sub-sectors are examined in more depth, wind power and low-carbon vehicles.

3. These sectors are R&D intensive and call for a skilled labour force, including lots of graduates, especially in engineering. Hence there is potentially a big role for higher education in supporting such development.

4. And we all live happily ever after...........

Actually, the last point is my own addition, but you get the idea! The argument is clearly set out in the report, has a nice logical structure, and ends up with conclusions the universities will like. But let's not be too hasty to accept the whole thing at face value, for there are some flaws.

First, while the analysis of returns to higher education is broadly OK, it fails to take into account one factor emphasised in the more technical economic literature on the subject, namely so called selection effects. This is the point that those who go on to university are presumably drawn from the brighter and/or more hard working segments of the population, and many of them would have done well (i.e. earned more income) even without going to university. Hence the standard ways of measuring returns to higher education might overstate the returns to some extent. Universities are great places for work and study in any case, so we don't need to exaggerate their benefits.

Second, I thought the choice of sectors on which to focus was rather unfortunate, especially wind power. Technically, wind power is all that the report claims, but there was not a single word on the truly dire economics of wind power. Wind power requires massive subsidies to be viable at all, when compared with other means of generating electricity, and eventually we consumers pay - either through higher taxes, or through higher electricity prices. Now, I am not against some state support for new technologies in cases where there would be significant learning effects or other public benefits from support. However, I'm quite sceptical as to whether such a case can be made for wind power.

Last, the report's old fashioned approach to manpower planning was less than convincing. It tends to highlight a sector, project some growth and translate that into new jobs, and then note that much of the new jobs are in STEM subjects or management, finally implying that universities need to be supplying the additional graduates. Only once did the report mention that high salaries - in other words, incentives - might be needed both to draw more people into engineering, and to attract engineers into new sectors.

The conclusions of the report focused on two areas, namely: the problems of ensuring that we have a sufficiently skilled labour force; and creating better conditions for innovation, especially from universities to industry. One can't really disagree with these points, though more on incentives, worker flexibility (with lots of movement between sectors) would have been nice. But these are just my own views, and what really struck me when I reached the end of the report was just how little we understand about either of these issues, i.e. promoting a more highly skilled labour force and promoting innovation.

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