Tertiary Education Systems and Labour Markets Report prepared for the OECD Stephen Machin* and Sandra McNally** 1 December 2006 *Centre for Economic Performance, LSE; Department of Economics, UCL **Centre for Economic Performance, LSE

Issues In the context of rapid expansion of tertiary education: Is there now ‘over-supply’ of graduates? Is there evidence of ‘over-qualification’ and skill mismatch? Are students studying the ‘right type’ of subjects at tertiary level? In particular, is there a shortage of science and technology graduates? Does the type of institution matter for labour market prospects?

Labour Market Consequences of Increasing Supply (2) What is the outcome of changes in demand and supply? Compare the wage of tertiary graduates to the wage of closest substitutes (upper secondary or post-secondary non-tertiary graduates). Look at changes over time. Has the differential fallen over time on account of the increasing supply of tertiary graduates?

Role of demand Demand has been increasing faster than supply – the only way to rationalise stable or increasing wage premium to tertiary education Why has demand been increasing so fast? Weight of evidence is behind ‘skill biased technology change’ explanation: introduction of new technologies that are biased in favour of skilled workers.

Evidence of ‘over-supply’? No. Plenty of scope for tertiary education to keep on expanding. As more people obtain a tertiary education, greater variation in the earnings of graduates. Explanations: - Variation in personal characteristics of graduates; - Graduates studying wider range of subjects and attending larger number of institutions.

Over-education and skill mismatch? Can take a long time for (usually less well performing) graduates to find a job; some are not in jobs that appear to be well matched to qualifications; shortages in certain sectors are reported Literature on ‘over-education’ and ‘under- education’ (terms are sometimes misused) Workers who are ‘over’/’under’ educated might still be well matched to jobs. Apparent ‘over’/ ‘under’ education might be a temporary phenomenon.

Over-education and skill mismatch? (2) Wasmer et al. (2006) look at these issues for several European countries. Find some evidence that ‘over-education’ is a transitory phenomenon. Only small wage penalty associated with ‘over- qualification’. However, ‘skill mismatch’ is a more serious issue.

Are graduates studying the ‘right’ subjects? Few academic studies estimate returns to higher education by subject of degree, especially if we want to compare countries and consider changes over time. Machin and Puhani (2006) estimate returns by degree subject in Britain, France, Germany and the US using a consistent framework

Returns by field of study In the four countries considered, returns to a university degree are lowest for Arts subjects whereas they are higher for other subjects – often highest (at least for men) in Science/Engineering/Technology Requires much further research for other countries – especially for making comparisons over time and across countries.

How does type of institution matter? (2) Has higher numbers going to institutes of tertiary education led to a decline in the quality of tertiary education? Are new institutes providing as good an education as longer established institutes? One would expect wage returns to vary by quality of institute attended – to the extent this is perceived by employers Little empirical evidence outside the US

Further expansion What barriers are there to tertiary education and what should be the policy response? Capacity constraints?: provide more places. Credit constraints?: student bursaries (especially for those from poor socio-economic backgrounds) Is sufficient information available to potential students?

Conclusions and implications (2) Field of Study Much more evidence needed, especially for comparisons over time and between countries. Available evidence suggests great variation in returns to tertiary education conditional on field of study. Policy response: provision of good information to potential students; Argument for permitting fees to vary by subject of degree and/or to provide bursaries which are differentiated by subject area

Conclusions and implications (3) Skill shortage and ‘mismatch’ Problems with graduates not always having the skills required by employers Policy response: - examine the content and accreditation system of vocational courses. Is it appropriate? - what is the balance between employer-provided training and that which is publicly provided? - In the public system, what is the balance between general education and vocational education?

Conclusions and implications Well founded concerns about international mobility among science and technology graduates and potential implications for R&D and productivity. How can conditions of employment be made better? Quality of tertiary education institutions: little good evidence outside the US for how this affects labour market outcomes; Priority for data collection and analysis in other countries.