Home > Dead Ideas book, Economic policy > Trickling down

Trickling down

August 4th, 2014

Among the zombie ideas refuted in my book, Zombie Economics, “trickle down” economics is the one that dare not speak its name. Even those who believe, or are paid to say, that favored treatment for the rich will benefit the poor mostly avoid the term “trickle down”, preferring bromides like “a rising tide lift all boats”.

But that didn’t deter Ian Young, Vice-Chancellor of ANU and head of the Group of 8 Universities (basically, those established first, which have, as elsewhere in the world, gained a permanent high-status position as a result). As I predicted not long ago, he wants to raise fees and reduce the number of students at elite universities, including ANU, allowing them to offer a more personalised education.

Young’s argument is that students excluded from the Go8 will “trickle down” to lower-status universities, giving them a chance to both increase numbers and raise standards. But this suggestion doesn’t stand up to the most cursory examination. Both logic and historical evidence suggests that all or most universities will follow the lead of the Go8. In both the UK and Australia, whenever universities have been given option to increase fees or hold them steady, nearly all have gone for the maximum increase.

Think about this from the position of a university in the tiers immediately below the Go8 in the prestige hierarchy, the 1970-vintage unis like Griffith and Macquarie, and the Universities of Technology. Both groups can fill all the places they have, and both, like all Australian universities are straining at the seams in terms of both physical space and overloaded staff. They could not possibly take in more students with their current finances. It makes perfect sense for them to do the same as the Go8, raise fees a lot, and pass on some of the benefits in the form of smaller classes.

There’s a cumulative effect here. Suppose the Go8 institutions reduce their student intakes by 30 per cent. A few of those will give up on uni altogether, deterred by higher fees, but most will try a second-tier uni, displacing other students who would otherwise have been accepted. On top of that, there will be less places in those uni, say another 30 per cent. So, something like 60 per cent of the students formerly admitted to these unis will be excluded.

At the bottom of the status scale, the hard-pressed regional universities and former CAEs probably won’t be able to raise their fees as much as the Go8. But they will still be in a position to raise fees and entry standards at the same time, and, if they choose, to reduce their numbers as well. This isn’t so much trickle down as a cascade effect.

Of course, if you believe the increasingly silly Business Council of Australia, this is all to the good. Its head, Catherine Livingstone (BA, Macquarie) thinks we need less university students. Her members clearly don’t agree, judging by their hiring patterns. The unemployment rate for university graduates is estimated at 3.3 per cent, about half that for non-graduates. Wages and participation rates are also higher.

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  1. Ikonoclast
    August 4th, 2014 at 08:04 | #1

    What is the endpoint of these current trends?

    - Real wage growth has been flat.
    - There is an increasing gap between productivity growth and wage growth.
    - Wages are becoming a smaller share of national income.
    - Unemployment and under-employment are rising.
    - University education is becoming more expensive.
    - University students graduate already indebted.
    - More of these students will not get employment.

    Disaffected unemployed plus disaffected workers plus unemployed, disaffected intelligentsia. Now that’s an interesting mix.

  2. SamB
    August 4th, 2014 at 10:00 | #2

    On top of that , raising fees encourages universities to lean towards accepting even more international students leaving Aussies with nowhere to go for their studies.

  3. Uncle Milton
    August 4th, 2014 at 10:10 | #3

    You’re assuming that no new universities could be created at the bottom of the pile, so to speak, to absorb those students who have cascaded down. This is probably true if we think of universities in the expensive traditional way, with campuses and big buildings. But universities can be created online.The model here is the Open University, which has been open since 1971, and has good academic standards.

  4. John Quiggin
    August 4th, 2014 at 10:32 | #4

    @Uncle Milton

    Open Uni is all very well, but I can’t imagine it growing to the necessary size, or meeting the needs of undergrads straight from school. Similarly with MOOCs etc.

    A more plausible story would be upgrading of TAFEs, but the same people pushing fee deregulation are also gutting the TAFE sector.

  5. Uncle Milton
    August 4th, 2014 at 10:37 | #5

    On Catherine Livingston, many successful business people are frustrated policy makers, if not Prime Minister wannabes. and use the presidency of the BCA and the like as a platform to vent ideas which might generously be called half-baked. Some BCA Presidents confine themselves to their job, which is lobbying for big business, but others genuinely believe that their pearls of policy wisdom are actually in the national interest.

  6. Uncle Milton
    August 4th, 2014 at 10:45 | #6

    @John Quiggin

    You’d be surprised how many undergrads straight from school, while nominally enrolled at a traditional university, rarely set foot on the university campus. They watch their lectures online, and get their reading and other reference materials online (Wikipedia is available everywhere).

  7. Neil
    August 4th, 2014 at 11:16 | #7

    @Uncle Milton

    Evidence to back up this assertion?

    With non-university providers now eligible to receive government funding through the same mechanism as universities, I think that’s a more likely route for soaking up the excluded. Soaking up, and very often just soaking.

  8. Uncle Milton
    August 4th, 2014 at 11:19 | #8

    @Neil

    Which one?

  9. Neil
    August 4th, 2014 at 11:31 | #9

    @Uncle Milton

    Sorry, wasn’t clear. The assertion that “many undergrads straight from school, while nominally enrolled at a traditional university, rarely set foot on the university campus”.

  10. Uncle Milton
    August 4th, 2014 at 11:40 | #10

    @Neil

    Anectodal only. Consider it a hypothesis that should be tested.

  11. Nevil Kingston-Brown
    August 4th, 2014 at 11:48 | #11

    I believe the “trickle-down” meme died when the question “what is this liquid substance that the rich are trickling onto the poor?” began to be asked.

  12. Ken Lovell
    August 4th, 2014 at 11:54 | #12

    It’s a difficult set of issues at least as far as business schools are concerned. Vast numbers of undergraduates (and increasingly, of postgrads) who know nothing about business, public administration or indeed anything else of consequence are herded through various courses in strategic management and leadership and organisational behaviour and so on as if they all have CEOs’ batons in their knapsacks. It’s like teaching someone to swim who has never seen water. Yet for some reason it’s become some kind of de rigeur ritual for students who don’t really know what they want to do but feel they ought to “go to uni”.

    They ought to be taught some basic vocational skills, but needless to say most academics recoil in horror at the very suggestion (could it be that many find the idea personally confronting?). The only practical skills they get taught are how to write uni assignments, and that of course is a task for the teaching and learning people over in A Block or wherever. It would be much better if most of the students went to TAFE and learnt some practical skills in a series of short courses, but as you say John TAFE is in no position to meet the need and the notion that knowledge must come wrapped in a 24 subject package that takes a minimum of 3 years to complete seems so deeply engrained it’s not going to be shifted easily. Perhaps the BCA would do the country a service by promoting a detailed, practical agenda for reforming business education instead of harping on funding all the time.

  13. ZM
    August 4th, 2014 at 12:18 | #13

    With regard to TAFEs and non-university higher ed providers – I caught a taxi the other day as I was running late – and chatting with the driver learned he had taken a hospitality course at TAFE or another provider (I can’t remember if he said) that cost about double of the CSP Masters I’m doing.

    Also – students studying online have access to their university’s library (more and more if which is in digital form) just the same as a student studying in person. Students often need to study online fully or partly (eg. needing to catch up on missed lectures via video/audio/slide postings) due to other commitments especially work commitments these days.

  14. August 4th, 2014 at 12:29 | #14

    Of course, if you believe the increasingly silly Business Council of Australia, this is all to the good. Its head, Catherine Livingstone (BA, Macquarie) thinks we need less university students.

    Actually, there are quite solid grounds for thinking that modern countries (not merely Australia), taken as a whole, only need a majority to have a primary education, little over half to have a secondary education, and only a small minority to be university educated. That is, it’s only at around that point that the economy and social cohesiveness starts to struggle (there were even natural experiments that bring this out, like the effects of a generation of collapsed education after the Dissolution of the Monasteries, even though that was in a less modern world). See below…

    Her members clearly don’t agree, judging by their hiring patterns. The unemployment rate for university graduates is estimated at 3.3 per cent, about half that for non-graduates. Wages and participation rates are also higher.

    That does not follow. All that that shows is that they prefer to get graduates if they can, not that there is any overall gain at that point. It is just as consistent with credentialism and a race to the bottom for graduates that could still operate even if there were no overall gains, driven by a Tragedy of the Commons sort of mechanism – which means that neither employers nor would be employees face appropriate costs and benefits.

    Of course, the very fact that a mechanism like that can operate is grounds for trying to make institutional changes to stop it, but by the same token those would operate elsewhere and otherwise than by assisting ever more education and credentials. It would have to achieve better outcomes for those who chose to stop their education at points that were more optimal overall, so that they wouldn’t face the incentives of that race to the bottom.

  15. bjb
    August 4th, 2014 at 13:36 | #15

    I think I agree with Ms Livinghstone about too many people going to university. We could start be eliminating all those mickey mouse courses – and no I don’t mean in the humanities which the Tories and business class are quick to mock. All those BBus type courses, and the proliferation of MBA courses in the past two decades seem to have done little to increase the quality of business management. Things like law could also go back to the articled clerk model rather than a uni degree.

  16. John Quiggin
    August 4th, 2014 at 13:46 | #16

    @bjb

    I’m sympathetic to both suggestions, but AFAICT it’s been the better part of a century since you could enter the legal profession via a clerkship and without a law degree.

    As regards BBus degrees, and again AFAICT, the big numbers aren’t about training senior managers, rather for HR, events management and similar low-level functions that would nonetheless be beyond the capacity of a middling high school graduate (the typical intake to these degrees).

  17. bjb
    August 4th, 2014 at 14:10 | #17

    @John Quiggin

    I was being a bit naughty about the law degree :)

    An MBA though, does seem to necessary requirement for the management ranks these days, and it seems to me the only benefit of doing an MBA is the networking opportunities it affords one – hence unless you’re doing an MBA at Harvard, AGSM or the like you’d be wasting your money. You even have to wonder about AGSM – if my memory is correct Fred Hilmer was the big cheese there prior to getting the gig at Fairfax. Now you’d think in an MBA program there’d be a course “Positioning a business in a changing world” or some such, a course Prof Hilmer didn’t seem to have availed himself of.

  18. John Quiggin
    August 4th, 2014 at 14:16 | #18

    @bjb

    I’ve seen studies saying that there are only 10 or so MBA programs in the world that yield a payoff greater than the cost, but the perception that it is necessary persists. much to the benefit of business schools

  19. Uncle Milton
    August 4th, 2014 at 14:21 | #19

    @bjb

    MBAs are largely funded by students themselves, or at least more so than most degrees. MBA students can decide for themselves whether they are worth their while, and cutting MBAs wouldn’t free up any money for ancient philosophy or number theory.

    “it’s been the better part of a century since you could enter the legal profession via a clerkship and without a law degree”

    Much less than that. Was still possible in the 60s.

  20. Tim Macknay
    August 4th, 2014 at 14:36 | #20

    @Uncle Milton
    I’m aware of one individual who was able to enter the legal profession via a clerkship in the late 1980s. Of course, that was when university law courses where still exclusive and difficult to obtain access to. These days law degrees are more like (expensive) arts degrees – not difficult to get an enrolment, and no guarantee of employment once you graduate.

  21. Ikonoclast
    August 4th, 2014 at 14:53 | #21

    I wonder how many MBA’s General Motors had working for it? I mean in the period when it went bankrupt (Chapter 11 bankruptcy) and also in the period straddling that when it made IIRC 29 million cars and had to recall 28 million of them.

    http://www.caradvice.com.au/293893/gm-global-recall-woes-expand-past-28-million-vehicles/

    IMHO, it is clear that MBA certs are mostly just expensive toilet paper.

  22. derrida derider
    August 4th, 2014 at 15:14 | #22

    MBAs might be one of the cases where the screenng hypothesis applies – its the signalling effect of having done one rather than what you learned in it that helps you climb the greasy pole. Which means that it could easily have a good PERSONAL payoff but much smaller – even negative – social payoff (as climbing the greasy pole is largely a zero sum game).

    Note this is not true of uni education generally. Why there is such a big lifetime payoff to graduates has been studied to death, and most of it does seem to be because their education makes a graduate more productive, rather than just being a way of selecting those who would be productive anyway. PML @14 is, as often, completely wrong on this.

  23. John Quiggin
    August 4th, 2014 at 15:17 | #23

    @derrida derider

    Agreed both on the screening role of MBAs and the unimportance of screening effects more generally

    http://www.uq.edu.au/economics/johnquiggin/JournalArticles99/HumanCapitalAustER99.html

  24. Megan
    August 4th, 2014 at 15:37 | #24

    @Tim Macknay

    In Queensland the most recently admitted Solicitor without a law degree, at least who I know personally, was admitted in about 2011.

    I’m fairly sure it can no longer be done.

  25. August 4th, 2014 at 15:46 | #25

    derrida derider :
    … PML @14 is, as often, completely wrong on this.

    Would you care to substantiate that last remark, at least in this case if not for the sweeping range it also casts aspersions on?

    After all, I did point out that there were across the board benefits up to a saturation level, and I did point out that we did have a certain amount of natural experimentation to show us how things worked out; England took a generation for the 16th century shortfall of educated people to build up and matter (here’s another: railways in late 19th century Britain had to change their signalling systems once they had a shortage of intelligent illiterates to hire, as it turned out that literacy was a handicap for learning the previous system).

    So, what leads you to think either that there is no such saturation level for graduates, or that if there is we have not reached it here in Australia? The creeping credentialism and lesser job opportunities for graduates at least suggest that there may be, and I wasn’t asserting anything more definite than that in the absence of stronger evidence.

  26. Uncle Milton
    August 4th, 2014 at 16:40 | #26

    @derrida derider

    It’s not the signalling effect of having done one that counts. These things are not brain surgery. For the top MBA programs, it’s the signalling effect of having been admitted to them that counts.

  27. J-D
    August 4th, 2014 at 19:25 | #27

    I don’t know whether it’s still possible to be admitted to legal practice in Queensland without a university degree, but it’s still possible here where I am in New South Wales. To qualify without having a university degree you must instead pass the exams administered by the Legal Practitioners Admission Board. There is a course of instruction offered by the University of Sydney Legal Extension Committee, but the students are not students of the University and the Diploma in Law is awarded to those who pass the exams not by the University but by the Board, which does not have university status. How many people now use this avenue I do not know, but it was a good enough foundation for the legal career of former High Court Justice Michael McHugh.

    I’d say there must once have been some similar arrangement in Queensland and I’d be a little surprised to learn that it had been abolished.

  28. J-D
    August 4th, 2014 at 19:27 | #28

    If there is a 3.3% unemployment rate for university graduates, wouldn’t that tend to suggest that employers have as many graduates as they want?

  29. John Quiggin
    August 4th, 2014 at 19:40 | #29

    @J-D

    Are you saying that unless there are no unemployed there can be no vacancies? Some frictional unemployment is inevitable, even when there are lots of unfilled jobs.

  30. Megan
    August 4th, 2014 at 19:52 | #30

    @J-D

    I’d say there must once have been some similar arrangement in Queensland and I’d be a little surprised to learn that it had been abolished.

    There was. And it has.

  31. Donald Oats
    August 4th, 2014 at 20:49 | #31

    From anecdotal experience, I know of some jobs that remain unfilled for months, thanks to an absolute insistence on experience, even though the training wouldn’t be long or difficult for a previously working adult. Now that is the employer’s decision, not the applicant’s, and yet it prevents an advertised job from being filled. If the work is essential to the business and you can’t get suitably experienced applicant, why not risk training an applicant to fill the role?

    On the flip side, the 1st Aug article in The Australian, titled “Skills shortage at record low level” and written by Ewin Hannan, cites recently released figures from the Department of Employment which clearly show that in the professions the competition for jobs is very stiff. For example, in ICT, engineering, and accountancy, there are in excess of 35 applications per job vacancy. Not looking too good for the new graduates on the 40-applications-a-month dole.

  32. J-D
    August 4th, 2014 at 21:09 | #32

    @John Quiggin

    No, I’m not saying that, but surely the higher an unemployment rate is the less likely it is that it is fully accounted for by frictional unemployment? Is there something I’m overlooking there? And if not, is 3.3% a rate easily accounted for by frictional unemployment alone?

  33. J-D
    August 4th, 2014 at 21:17 | #33

    @Megan

    Abolished how? It seems to me that the crucial statutory provision is found in the Supreme Court (Admission) Rules 2004 (Qld), at 6(4): ‘The course [meaning, in context, a course approved as leading to academic qualifications necessary for admission as a lawyer in Queensland] does not have to lead to a degree in law.’

  34. Megan
    August 4th, 2014 at 22:41 | #34

    @J-D

    There are no longer any such “approved” courses available in Queensland (other than getting a degree in law).

    The Solicitors’ Admission Board exams ceased decades ago and the Barristers’ Admission Board exams had their last intake in about 2007.

    When were you admitted to practice?

  35. August 5th, 2014 at 00:06 | #35

    I’m not sure what I think about Ian Young’s ideas, but he is right on some things. Universities enrol students, and get a fixed amount per unit to teach them. They teach them for less than the money they receive, and the remainder is used to subsidise other activities. The university makes more money if they enrol more students. A cynic would notice that the ideal student is one who enrols and then drops out immediately after census date. And universities adjust to this reality by removing pre-requisites, and accepting students who have no realistic chance of success. Or maybe success can be achieved, but only by watering down the course until it is worthless.

    Clearly this perverse incentive has to be fixed.

  36. John Quiggin
    August 5th, 2014 at 04:18 | #36

    @John Brookes

    That’s not true of domestic undergrads. Law and business students roughly pay their way, everyone else a lot less than full cost. The big cross-subsidy in the system is from international to domestic students.

  37. John Quiggin
    August 5th, 2014 at 04:29 | #37

    @J-D

    “is 3.3% a rate easily accounted for by frictional unemployment alone?”

    Yes. IIRC, the general rate of unemployment hasn’t been below 5 per cent in the last 40 years. Since graduates are counted in that average, the rate for non-graduates must be higher, even in periods generally regarded as close to full employment. Even before the 1970s, when vacancies regularly exceed the number of unemployed workers, and when the labour market was very different (almost no layoffs for white-collar workers, for example) the rate was 1-2 per cent.

    To be strictly accurate, the minimal level of employment isn’t just “frictional”, in the sense of brief periods between jobs . There are also workers who are effectively unemployable for one reason or another, such as disability, criminal record and so on. Not high proportions among graduates, but probably add a percentage point or so to a base level of 2.5 per cent which you would get if (say) 5 per cent of the graduate workforce spent six months looking for work in a given year.

    You certainly don’t need to invoke the conclusion that “employers have all the workers they need” to explain 3 per cent unemployment.

  38. J-D
    August 5th, 2014 at 07:03 | #38

    @Megan

    Never. Your question intrigues me. Was there something that made you think I was a lawyer?

    It’s curious that the Queensland admissions bodies have dropped their own courses, while the New South Wales offering is still available. As I said I would be, I’m a little surprised. I wonder if there’s any explanation for the difference, and what the situation is in other States.

    I suppose it would still be possible for somebody without a university degree to pass the New South Wales exams, get admitted in New South Wales, and then get admitted in Queensland on the basis of admission in New South Wales, but that would be more trouble for a Queenslander than just getting a degree.

  39. J-D
    August 5th, 2014 at 07:24 | #39

    @John Quiggin

    Okay. The description of disability and criminal record as things that make people ‘effectively unemployable’ raises separate issues, of course, but I see that this doesn’t affect the substantial validity of your main point. Still, if the typical rate of unemployment in the period when vacancies exceeded the number of unemployed was between 1 and 2 percent (and that’s more definite information than I had before, so I’m glad I asked and received it), it seems reasonable enough to raise the question about a rate of 3.3 percent to get an explicit answer — for which, again, I thank you.

    Partly because of personal experience, I wonder whether there’s any data on the duration of unemployment among university graduates. Are there university graduates (apart from the ‘effectively unemployable’) among the ‘long-term unemployed’ (over twelve months) or even the ‘very long-term unemployed’ (over two years)? I’ve never had over twelve months of unemployment, but I have had over six months. Perhaps I’m excessively picky or my job-search skills are well below average.

    Moving back towards the original point, if 3.3 percent unemployment is consistent with an under-supply of university graduates — if there currently is (from the point of view of employers) an under-supply of university graduates — still, presumably there must be some point at which expansion of the university system would produce an over-supply of graduates (relative to demand from employers). If (hypothetically) university education were available to everybody who met some fixed minimum entry standard, would the system naturally tend towards an equilibrium, with people losing interest in entry at the point where the supply of graduates had risen to meet the demand?

    (I am aware that people seek out university education for reasons unrelated to employment, but this is and always has been a minority motive.)

  40. John Quiggin
    August 5th, 2014 at 07:52 | #40

    @J-D

    presumably there must be some point at which expansion of the university system would produce an over-supply of graduates (relative to demand from employers)

    Certainly there must be, but this is a moving target. The proportion of the kinds of jobs that require formal education is increasing all the time. Also, jobs that could once be learned “sitting next to Sally” now require a formal education. This is partly a matter of credentialism but mostly it is two things
    (a) The job requirements have changed – for example, most jobs now require you to be able to use a computer which in turn requires some level of literacy.
    (b) Sally no longer wants an assistant sitting next to her, because the jobs the assistant used to do have either been automated or contracted out
    So, there are hardly any jobs for people without at least a high school education or a trade (increasingly involving formal training through TAFE/VET) and more and more jobs need a degree.
    If expansion of the tertiary education system runs ahead of demand we see a diminution of the graduate premium and the differential employment rates of graduates and non-graduates. No sign of this right now, partly because domestic undergrad intake was pretty much frozen under Howard.

  41. Ikonoclast
    August 5th, 2014 at 08:43 | #41

    @John Quiggin

    Surely, the 1960s demonstrated that the frictional rate of unemployment could be as low as 2% or even lower? This is given the fact that unemployment went under 2% for significant periods in the 1960s.

    Much has changed since then of course but an important factor since about 1990 has been that the govt keeps re-defining unemployment so it can under-measure it. Our labour under-utilisation rate is now about 13% IIRC. Surely most unemployables have now been pushed onto disability pensions or out of the official labour force by punitive job search regimes.

    I feel you are making excuses for the current neocon market/labour system by implying that regarding the first 3.3% as frictional is OK and by implying that unemployables still affect the official result (when unemployables are pooled in with disability pensions and/or with the discouraged who appear in no official figures at all.)

  42. Nevil Kingston-Brown
    August 5th, 2014 at 10:33 | #42

    @Ikonoclast
    My understanding is that it is effectively Reserve Bank, that is Govt, policy to keep unemployment at or above 5% because of fear of an inflationary wage-price spiral if unemployment drops below that figure. When unemployment briefly dropped below the 5% mark under Gillard, the commentariat started ramping up fear of inflation, demands for labour market “reform”, articles about “unsustainably” low interest rates, et bloody cetera.

  43. ozquoll
    August 5th, 2014 at 13:05 | #43

    Well, its not a clerkship, but its not a bachelor degree either – check out the following link to the Uni of Syd’s Law Extension Committee – they offer a Diploma of Law that allows you to practice law in NSW.
    http://sydney.edu.au/lec/future/

    Re the need for higher education – we need less of it, not more. As recently as the 1970′s, a person could leave school at 14 or 15 and find a junior level job with relative ease. Talented and/or ambitious people were able to work their way up the ranks. The system worked well. Our cultural assumption nowadays is that anyone who hasn’t been in an educational facility full-tim1e between the ages of 5 and 21 is a bit of a no-hoper.

  44. ozquoll
    August 5th, 2014 at 13:07 | #44

    Whoops, that was meant to be a reply to #16@ozquoll

  45. John Quiggin
    August 5th, 2014 at 13:44 | #45

    To various commentators, a lot has changed since the 1970s. Some of it is due to the rise of market liberalism, as I describe in Zombie Economics, but some of it reflects technological changes that have permanently changed the labor market.

    As an example, consider the entry level office jobs from which a 15 year old could work their way up to the top, as mentioned by Ozquoll. At least in the Australian Public Service, these disappeared around 1970, when graduate entry to the (then) Third Division began. They disappeared because even then, innovations like photocopiers had made them largely obsolete. Computers and word processors took the process a lot further

    Admittedly, there were some disasters along the way. I recall a project called MANDATA which was supposed to revolutions personnel, as it was then called. And the first WP function the bosses used was the keystroke count, which they tried to push up, producing an epidemic of RSI. Still, typing pools and office boys (these jobs were pretty tightly gendered) are gone for good.

    If you’re inclined to think this is all credentialism, I suggest you think about how you would react if you were offered the services of a 15-year old in your workplace, subject to the requirement of giving them enough real work (not makework or making coffee) to keep them busy for a full working week.

  46. John Quiggin
    August 5th, 2014 at 13:47 | #46

    Replying specifically to Ikonoklast, we could do a lot better on unemployment. But it remains true that, as things are set up now, 3.3 per cent graduate unemployment does not mean “employers have all the graduates they need”. Higher rates of unemployment (frictional and structural) are built into the system, even when employers are facing labour shortages.

  47. August 5th, 2014 at 14:08 | #47

    John Quiggin :
    … If you’re inclined to think this is all credentialism, I suggest you think about how you would react if you were offered the services of a 15-year old in your workplace, subject to the requirement of giving them enough real work (not makework or making coffee) to keep them busy for a full working week.

    There’s still the issue of whether that situation is itself a product of the same processes. If things really are distorted now and the distortions were undone or offset, would genuine opportunities of that sort arise under the corrected situation?

  48. Uncle Milton
    August 5th, 2014 at 14:52 | #48

    @John Quiggin

    Unlike the old days [get off my lawn], entry-level journalists all seem to have university degrees these days, including in “Communications”, whatever that means. Yet the quality of journalism has gone down. For one thing, very few of them can spell, although that might just be more apparent because sub-editors no longer seem to exist.

  49. Ikonoclast
    August 5th, 2014 at 14:54 | #49

    @John Quiggin

    “Higher rates of unemployment (frictional and structural) are built into the system, even when employers are facing labour shortages.” – J.Q.

    I don’t quite understand the how or why of this. I could make guesses about contributing causes but they would only be guesses. Are there any good links, descriptions etc. of what is going on?

  50. Watkin Tench
    August 5th, 2014 at 15:13 | #50

    Hmm. When I was a government employee I worked with dozens of tertiary trained people whose jobs had nothing to do with their quals and I was one myself.

    I’ve actually never met a person with my social science degree who has a job that relates to the degree. I would be surprised if we couldn’t slash tertiary places by at least 10% without harming the economy. Plenty of degrees are also padded with fat that is of no vocational use whatsoever, so some degrees should probably be cut down to two or two and a half years.

    To a large extent degrees are a signalling device to prospective employers – ie they show that you have at least some base level of self-discipline and intelligence and a capacity for tolerating tediousness. I think it would be nice if we could do this without saddling youngsters with a huge debt and unrealistic job expectations.

  51. ZM
    August 5th, 2014 at 15:29 | #51

    I think you are forgetting that education has other values as well as it’s training for jobs. Surely it is better if we live in a society with advanced technology and administrative complexity etc to educate more/all people to a level beyond what is taught at a usual state secondary school? Since we currently are overproducing/consuming material goods then education is a useful public good not requiring too many resources (although more now than it used to).

  52. J-D
    August 5th, 2014 at 18:44 | #52

    @John Quiggin

    A 15-year-old arriving in my workplace would have to be shown how to do things, but then the same applies to a university graduate. How many 15-year-olds would be capable of acquiring the necessary competence I don’t know, but then again the same applies to university graduates. Whether my workplace could function as effectively on the basis of recruiting 15-year-olds as on the basis of recruiting university graduates I don’t know. I’m not sure how the question could be settled, since I know we’re not going to try the experiment of recruiting 15-year-olds. (I don’t know, either, to what extent we do specifically recruit university graduates — I’m not in a position to know whether all my co-workers are university graduates.)

  53. Royce Arriso
    August 5th, 2014 at 18:50 | #53

    Ten storeys up, I run the joint/ You man the firm’s front door/ We’re nicely placed to make a point/ Of economic law/ For, if I choose to urinate/ And if my aim is true/ What I despatch, will very shortly/ Fall, alas, on you/ Which illustrates, if I’m correct/ The so-called ‘trickle-down effect’.

  54. August 5th, 2014 at 20:44 | #54

    @John Quiggin

    Well, at the very least there is cross subsidisation between different units at universities. Big first year units tend to be cheap to teach, and are used to subsidise other units.

  55. conrad
    August 6th, 2014 at 09:40 | #55

    @Uncle Milton

    At least in Aus, Open Universities is basically an education broker, where they group courses run by universities (who generally run them) and then resell them.

    Apart from this, there is some strange belief by many people that online courses are a lot cheaper to run than non-online courses. This is not true for many courses (probably most) if you want them to be of the same standard as non-online ones. Indeed, many online courses would be more expensive to run, and the reason they arn’t is because everyone cuts corners with them (and they will hence get a bad reputation given that many places are piling into them). This is because you still need to create the course, create assessment, have people to run it and so on, and trying to do this for things like activity based learning is expensive, and indeed very difficult (almost impossible) for most universities still trying run things through web technology suitable for 1992 like Blackboard. So you are just stuck with courses where people are supposed to “discuss” things you really need to do to learn and the actual way the material is presented is often very poor.

  56. derrida derider
    August 6th, 2014 at 13:40 | #56

    To various commenters who prefer anecdotes to data when they assert that the gains from education are all credentialism (ie screening and signalling effects), can I suggest you try having a look at just a couple of the many systematic studies by economists of exactly this question in the last four decades? Go looking at the bibliography in John’s linked paper, or for a more ‘big picture’ but cliometric approach try Katz and Goldin’s “The Race Between Education and Technology”.

    Yes, commonsense suggests that it’s mostly credentialist screening, and that’s actually what quite a few of the older studies originally set out to prove. But to many people’s surprise the hard data says that in this case commonsense is mostly (not entirely) wrong. And the reason it is wrong is precisely what John said – because work has changed in ways that draw on skills got by education.

    Now of course one of the things that has driven those changes in the nature of work is the availability of educated people, but that doesn’t change the fact that productive workplaces mostly now need pre-educated people.

  57. John Quiggin
    August 6th, 2014 at 13:46 | #57

    Whether my workplace could function as effectively on the basis of recruiting 15-year-olds as on the basis of recruiting university graduates I don’t know. I’m not sure how the question could be settled, since I know we’re not going to try the experiment of recruiting 15-year-olds.

    It’s not an untried experiment, it’s a policy with a proven track record of failure (it worked 100 years ago, to be sure, but it was already failing 50 years ago). That’s why employers have universally abandoned it,. The exceptions are the fast food industry and similar, who design work processes specifically to take advantage of the availability of young people willing to work part-time, for low wages, and with no expectation of, or desire for, a career path.

  58. August 6th, 2014 at 21:23 | #58

    derrida derider :
    To various commenters who prefer anecdotes to data when they assert that the gains from education are all credentialism (ie screening and signalling effects), can I suggest you try having a look at just a couple of the many systematic studies by economists of exactly this question in the last four decades? Go looking at the bibliography in John’s linked paper, or for a more ‘big picture’ but cliometric approach try Katz and Goldin’s “The Race Between Education and Technology”.

    First off, I for one never asserted that, but rather I hypothesised it. That’s where anecdotal evidence most often really is helpful – in raising questions rather than answering them. By and large it should only be used elsewhere – carefully – if no better data is available.

    But here’s the thing. Better data is not available. Look again at the hypothesis and at the data sets you just suggested:-

    - Hypothesis: that there may come a point beyond which there is no net overall gain from having more graduates around and maybe even from having more people with a secondary education around, so that the gains to people like that are generating even more costs elsewhere, and that we may have reached such a point here in Australia in the last decade or two.

    - Data suggested: “the many systematic studies by economists of exactly this question in the last four [emphasis added] decades”.

    By the very nature of the beast, many and perhaps even most of those studies cannot test the hypothesis, as they were necessarily studying data to which the hypothesis did not apply – anything three or four decades ago wouldn’t pick up any effect that hit later. Of the rest of the studies, they are necessarily of limited value because – again, by the very nature of the beast – a full test could only show really solid data after enough time to track most of its subjects’ careers, i.e. rather longer than we have had. And that’s before we even ask if those studies really were testing for those overall gains, rather than merely gains to those with those educations which would not pick up any issues of externalities and the like (e.g., educations that were free at point of sale threw their costs on to the rest of the tax base).

    Yes, commonsense suggests that it’s mostly credentialist screening, and that’s actually what quite a few of the older studies originally set out to prove. But to many people’s surprise the hard data says that in this case commonsense is mostly (not entirely) wrong. And the reason it is wrong is precisely what John said – because work has changed in ways that draw on skills got by education.
    Now of course one of the things that has driven those changes in the nature of work is the availability of educated people, but that doesn’t change the fact that productive workplaces mostly now need pre-educated people.

    But that comes back to my point about that very situation itself possibly being a distortion (according to the outworkings of the hypothesis above), which in turn means that if the hypothesis were true and corrective action were taken, not only would there be a downwards shift in supply of people with that sort of education but also there would be a downwards shift in demand for them, in such a way that once everything settled out there would be an overall improvement. We can’t simply pray in aid one aspect of the (possibly) distorted situation as a reason for perpetuating that very situation. Of course, that raises the questions of trajectories away from the current situation that would have to avoid dislocations, dislocations that kept some of it in a way that would act as a poison pill, and of how to redress the inequities of having some educated people getting disproportionately more than other people who weren’t as educated but who might as well have been – but those are follow on questions, and do not relate to whether the hypothesis is correct or not. That is indeed a question to be settled by data, so on the one hand we should seek it as we don’t have it, and on the other hand we may have to try out policies even with imperfect information – and we cannot avoid that by pursuing even current levels of education, let alone more, precisely because we do not have solid data after all.

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