1. Monash University – ACER CENTRE FOR THE ECONOMICS OF EDUCATION AND TRAINING Private Rates of Return for VET Michael Long CEET’s 12 th Annual Conference The expansion of education and training: Ensuring relevance, quality inclusion 31 October 2008 Ascot House, Ascot Vale, Melbourne

2. Some topics  The results ♦What are the rates of return for participation in VET? ♦What do these results mean?  The methodology ♦How are the rates of return calculated?  The meaning ♦Reflections on some aspects of calculating rates of return

3. Rates of return  An accounting device for estimating the value of an investment where the costs and benefits may be distributed over time.  A percentage or interest rate  Future benefits are discounted— a $100 next year is not worth as much as a $100 this year.  The rate of return is the discount rate that equates costs and benefits in present day value

4. A stylised example Year...012345 Total Costs ($m)100 Benefits ($m)2025303530 Discount 7% 1.000.930.860.800.750.70 Discounted benefits 18.621.624.126.220.9111.4 Discount 10.2% 1.000.900.810.720.650.58 Discounted benefits 18.020.121.722.717.5100.0

5. Applied to education

6. Estimates of Rates of Return Advanced Diploma/Diploma: Male cf Year 12

7. Rates of Return for VET are affected by: ♦ Full or part-time study *** (PT for higher RoR) ♦ Duration of study *** (shorter for higher RoR) ♦The level of the qualification *** (variable) ♦ Sex of student ** (variable) ♦ Tuition fees ** (cheaper for higher RoR) ♦ Age of student * (younger for higher RoR) ♦ Comparison group * (variable)

8. Implications ♦ The rates of return to study in some VET courses are sufficient to provide students with a financial incentive to enrol o True for Advanced Diploma and Diploma courses for males and females and Certificate 3 & 4 courses for males. o Certificate 3 & 4 for females is a little less certain, but probably OK. o Estimates for Certificate 1 & 2 are unstable because of small benefits and small costs. ♦ There is scope to increase fees without removing the financial incentive to enrol in Advanced Diploma and Diploma courses and in Certificate 3 & 4 courses ♦ Age makes only a small difference to the rates of return

9. Methodology ♦ Estimates of rates of return for educational qualifications are sensitive to the specification of the calculation of benefits ♦ The main underlying equation used here is: Log annual after-tax income = Highest qualification + Schooling + Age and Age-squared + Current enrolment for full-time study + Whether English was first language + Disability ♦ Truncated sample

10. The utility of Rates of Return estimates ♦RoR studies typically focus on full-time study, possibly because estimates for part-time study are absurdly high (frequently well over 50%) ♦If these RoR estimates reflect financial incentives to enrol, and educational institutions are not being swamped by applicants, then: a)There are other (unmeasured) costs; b)There are supply constraints; c)Financial considerations are not the only (or main) consideration for students choosing to enrol. ♦Comparisons across levels of qualification requiring different amounts of investment are not necessarily meaningful.

11. The utility of Rates of Return estimates ♦RoR estimates are sensitive to the underlying methodology, measurement and samples. Comparisons among studies using different methodologies may be very misleading. ♦RoR studies are used to examine financial incentives for study across countries. If non-financial considerations (including cultural differences about the importance of education and the value of work in various occupations) are major motivations for students, these studies may not be particularly informative. ♦There is a lot of individual variation. ♦Perhaps the focus should be on whether there are ‘sufficient’ applicants for places in (the largely publicly-funded) education system to maintain expected supply.

12. Thank you See Long M & Shah C, 2008. Private Returns to vocational education and training qualifications, NCVER, Adelaide. www.ncver.edu.au/publications/2011.html  and also www.education.monash.edu.au/centres/ceet