The Impact of Higher Education in Wales Wales Millennium Centre Cardiff, 9 th March 2011 Kristinn Hermannsson Katerina Lisenkova Peter McGregor Kim Swales Fraser of Allander Institute Department of Economics University of Strathclyde

Introduction and overview 1.What kinds of impacts do HEIs have? 2.Demand-side impacts: expenditure 3.Supply-side impacts 1: graduates 4.Supply-side impacts 2: technology spillovers 5.Conclusions and further research

Impacts of HEIs on their host regions Demand Side Impacts Expenditures on inputs Overseas students Higher Education Institutions Supply side Impacts Human capital Skills Research Consultancy/Advisory Other Knowledge exchange Impacts on the Regional Economy Cultural Impacts Cultural outreach (Political stability) (crime) Environmental Impacts Direct effects (pressure for Sustainable Development?) Distributional Income by household (Poverty reduction) (equity) Wider regional impacts

Types of impacts? Existing literature on regional impacts of HEIs falls into two forms: –Expenditure impacts of HEIs (and their students)  HEIs as purchasers of goods  employers of labour  Source of demand in the region –“Knowledge economy”, with focus on technology spillovers  HEIs as a source of innovation  TFP growth  impacts supply in region

Types of HEI impacts in regional literature Demand-side impacts Supply-side impacts Explore expenditure impacts of HEIs and students Employ “multiplier analysis” (e.g. Input-output tables and models) Focus on demand impacts within the host region Assume passive supply side So cannot accommodate supply-side impacts emphasised by “knowledge economy” (or any others) Contribution of HEIs to “knowledge economy” Mix of micro-econometric analyses and case studies Spatial effects are often included No means of assessing system-wide impacts No comprehensive account of the supply-side impacts of HEIs

Problems and gaps? Two disparate literatures in terms of their vision of regional economies Not comprehensive in terms of their coverage –The most obvious omission is lack of a quantitative estimate of the system-wide impact of graduates on host region (but social and private non-market too) Nor is the problem simply at the regional level –Many micro-econometric studies of graduate earnings –Macro growth models (with measure of human capital) = total returns –Macro less micro = social returns –But no micro-to-macro

Measuring HEI Impacts Develop a single framework in which to explore the impacts of HEIs on both demand and supply sides of economy: –Accommodate multi-sectoral expenditure impacts, but  Will emulate regional HEI-disaggregated IO if supply conditions passive  And can identify demand impacts even if supply side constraints –Can accommodate all supply-side impacts of HEIs (provided evidence), in a “micro-to-macro” approach:  Knowledge spillovers, but system-wide impacts  Impact of graduates through their direct impact on productivity on host region  (Other social impact and non-market private benefits on regions and nation) –Framework we propose here is HEI-disaggregated computable general equilibrium model (CGE) for Wales

Measuring HEI impacts BUT: –Here want to explore expenditure impacts of HEIs:  By individual HEI (and students)  Use this analysis to explore “policy scepticism” that has developed around expenditure impacts  More convenient to use HEI-disaggregated IO analysis for this  Reasonable approximation under passive supply conditions (short-run? long-run?) –However, for supply-side HEI impacts need to build in the supply side of the regional economy  HEI-disaggregated social accounting matrix  Calibrate CGE model of Wales  Simulate supply-side impacts: graduates; technology spillovers

Introduction and overview 1.What kinds of impacts do HEIs have? 2.Demand-side impacts: expenditure 3.Supply-side impacts 1: graduates 4.Supply-side impacts 2: technology spillovers 5.Conclusions and further research

Expenditure impacts of HEIs We attempt to ensure comparability by constructing an HEI- disaggregated input-output table for Wales and treating each HEI as a separate sector within the table Use the data base to explore some of the key characteristics of Welsh HEIs Attempt to address policy scepticism through new IO attribution analysis: –balanced expenditure multipliers (“extract” that part of HEI impacts attributable to public funds)

Expenditure impacts of HEIs (2006) Institution IncomeEmploymentStudents Total % Welsh Assembly Government Income per staff Share of wages in expenditure Income per student £ Share non- Welsh UW, Aberystwyth 7753% 48,09158% 9,76471% UW, Bangor9655%63,89759%12,58655% Cardiff32950%71,08558%14,60461% UWI Cardiff5965%57,29462%7,62443% Glamorgan9271%58,40060%6,74433% UW, Lampeter1361%58,73560%5,38474% UW, Newport3678%54,00263%6,94629% NEWIHE2778%62,02557%6,69242% RWCMD880%54,47565%13,41759% SIHE2579%52,89660%5,63530% UW, Swansea11753%61,77063%10,78447% Trinity UC 1268% 44,71659% 7,10315% Total/average89058%61,78660%10,05849%

Expenditure impacts of HEIs Conventional IO Type 2 Impacts IncomeOutput £mGDP £m Employment FTEs (000's) UW, Aberystwyth UW, Bangor Cardiff UWI Cardiff Glamorgan UW, Lampeter UW, Newport NEWIHE RWCMD SIHE UW, Swansea Trinity UC Total8901, % of WAL total output/GDP/employment 1.84%2.33%2.12%

Expenditure impacts of HEIs Conventional IO Type 2 Impacts (£ million)

Expenditure impacts of HEIs Conventional IO Type 2 Multipliers

Expenditure impacts of HEIs Balanced expenditure Multipliers

Expenditure impacts of HEIs Attribution of expenditure impacts for aggregate sector Generic public sector impactNet impactGross impact Institutional spending Knock on impacts Switching impact 15 Institutional impact total1, ,625 – % of total impact 63%37%100% Exogenous student spending Knock on impacts of student's consumption88998 Switching impact -42 Student's consumption impact total – % of total impact 9%91%100% Total impact attributable to HEIs 1,0771,2032,280 – % of total impact 47%53%100%

Expenditure impacts of HEIs Traditional and balanced-budget impacts of UW Newport by sector

Expenditure impacts of HEIs (Balance exp mult as % of Type 2) % of public funding

Expenditure impacts of HEIs Type 2 IO Multipliers including student expenditure impacts

Expenditure impacts of HEIs Balanced expenditure multipliers including student expenditure impacts

Expenditure impacts of HEIs Welsh HEIs’ expenditures have a non-trivial impact on demand: –Allowing for public funding does reduce multiplier impacts relative to conventional IO estimates –But “policy scepticism” (at least in extreme form) rejected Attribution of impacts for aggregate sector –HEIs dependent on public funding  63% ‘generic’ public sector impacts, 37% ‘net’ impact –Student’s consumption impacts mostly exogenous  9% ‘generic’ public sector impacts 91% ‘net’ impact –In total: 47% ‘generic’ public sector impacts, 53% ‘net’ impact Institutions differ –Swansea 42% ‘net impacts’ (from institutional spending), RWCMD 16% ‘net impacts’ Students matter –‘Net impact’ of student’s consumption spending sometimes 3x the institutional ‘net impacts’

Introduction and overview 1.What kinds of impacts do HEIs have? 2.Demand-side impacts: expenditure 3.Supply-side impacts 1: graduates 4.Supply-side impacts 2: technology spillovers 5.Conclusions and further research

The impact of graduates on the Welsh economy Projections of graduates (with unchanged participation in key age cohort) Wage premium (assume constant) From wage premium to productivity (signalling) From productivity to system-wide impacts

Future composition of the labour force Projecting future number of graduates by age in the labour force –Based on “UK net retention rate” (calculated from HESA DLHE data set for ) –“UK net retention rate” –takes into account net flow of graduates from other UK regions – was 76-78% –Retention rate is very stable over time ( ) –Apply it to the total number of graduates –According to this calculations about 16,000 new graduates entered Welsh labour force in 2006 –For consecutive years total number of new graduates is adjusted proportionately to the number of people aged Graduates are distributed among age groups proportionally to the number of HE leavers in each age group in 2006

Share of graduates in total labour force

Long-run skill-adjusted labour force increase in Wales 30% 45% 60% Signalling 10% Wage premium 2.8% 4.1% 5.2%

Increase in GDP due to rise in skill-adjusted labour force in Wales

Increase in employment due to rise in skill-adjusted labour force in Wales

Introduction and overview 1.What kinds of impacts do HEIs have? 2.Demand-side impacts: expenditure 3.Supply-side impacts 1: graduates 4.Supply-side impacts 2: technology spillovers 5.Conclusions and further research

Supply-side Impacts of HEIs on TFP. (Based on Harris et al (2010)) The impact of HEI-firm links on firm-level TFP in the GB The model logY i = α + β E logE i + β K logK i + β x X i + β ATT HEI i + ε i β ATT is a measure of the impact of HEI collaboration on TFP Collaborating with HE is associated with TFP that is 12% higher In 2006 (CIS data) 38.3% of Welsh firms (in GVA terms) collaborated with HEIs For the economy as a whole the impact is 4.58% (i.e. 38.3% of 12%) This estimate is effectively a measure of the impact of a “hypothetical extraction” of HEIs on TFP ( too 100 or 4.38% reduction in TFP)

The impact of HEIs on TFP. Based on Harris et al (2010) Long-run percentage change. TFP shock of 4.38%. GDP 6.37 Consumption 1.79 Investment 3.01 Total Employment 1.61 Unemployment Rate Nominal wage Real wage 1.52 CPI Export RUK 6.14 Export ROW 6.14 Capital Stock 2.96

The impact of HEIs on TFP

Introduction and overview 1.What kinds of impacts do HEIs have? 2.Demand-side impacts: expenditure 3.Supply-side impacts 1: graduates 4.Supply-side impacts 2: technology spillovers 5.Conclusions and further research

Conclusions Welsh HEIs’ expenditures have a non-trivial impact on demand: –Allowing for public funding does reduce multiplier impacts relative to conventional IO estimates –But “policy scepticism” (at least in extreme form) rejected However, supply-side impacts (with unchanged HE policy) potentially much bigger: –Through human capital embodied in its graduates Welsh HEIs exert significant impact on GDP and employment –Similarly, significant impacts of HEIs interaction with enterprises’ on total factor productivity Wider impacts of HEIs: –Social returns to HE: measurement difficulties and controversial - McMahon (2009) US: equivalent to 90% of private return –Non-market private returns to HE: measurement issues (122% of private return) –We have conducted some indicative analyses (not reported here) –Potentially important for policy, and appropriate mix of private-public funding Interregional extensions (not reported here) –Integrated regional economic and HEI system –Initial estimates – no very big “spillovers” from Welsh HEIs to other regions