Economic policy

Spot the arithmetic error

John Quiggin10 Comments

This story in the Oz reports a decline in the return to education, but the argument is undermined by a problem with averages. Here are the crucial bits

THE gap in earnings between university graduates and people without a degree is closing, as the cost of getting a degree escalates.
…
While the proportion of the labour force aged 15 to 64 with a degree had almost doubled since 1993, the salary gap was closing against average earnings, he [Michael Gallagher] said.

The ratio of earnings for bachelor degree graduates to average earnings has fallen for both men and women but is more pronounced for women.

For example, between 1995 and 2001 it fell from 105.4 per cent to 93.9 per cent for women and from 96.8 per cent to 91.9 per cent for men.

Readers should not need a university degree to see the problem with this analysis, but I’ll spell it out over the page

Update Andrew Norton at Catallaxy has already made the same point

The issue of interest here is that described in the first sentence, the difference between earnings with a degree and without. But the actual comparisons are between new graduates and all workers, including those with degrees. This wouldn’t matter too much if the composition of the workforce were unchanged. But as noted, the proportion of workers with degrees has doubled.

In Australia, broadly speaking, the expansion in the number of graduates has just kept pace with the increase in relative demand for skilled workers, so that the premium for degrees has remained roughly constant, whereas in the US, it has risen a lot. The US evidence shows that all premiums, including those for experience, have risen. This is another point that needs to be taken into account to get the analysis right. If premiums for experience are rising the relative wage for all young workers, including recent graduates, is falling.

10 thoughts on “Spot the arithmetic error”

  1. If these ratios relate to starting salaries for graduates, as presumably they must, it certainly wouldn’t have hurt to make this clear. In any case, if Ms Illing had been on the ball she’d have pointed out that neither the ratios, nor the changes in them, invite any meaningful conclusion.

    Will you report her David Marr, Captain?

  2. And what none of this tells us is how a bright young school-leaver will fare economically over the next 10yr period, depending on whether they defer earning to attend university and incur HECS debts, or enter the training workforce immediately. Three years ago, when local industry was trying to sell the advantages of New Apprenticeships for YR12 students to my son and others, they estimated that by age 30, those who took up the offer and followed a paid pathway to a degree in electronic engineering(for which you needed a score of 98 to enter uni immmediately)would be better off by the price of a modest home in Adelaide at the time. The program was mothballed due to lack of takers, despite an estimated need for about 900 extra electronics engineers in SA over the next 10 yrs.

    We know about the shortage of nurses with qualifications creep these days, but how are our universities faring with GP supply?. Not very well if the complaints of Adelaideans in the growth northern and southern suburbs is anything to go by. New chums who want to see a local GP are told sorry the doctor’s books are filled and those lucky enough to be on the books have to book about 4-5 days in advance. It was interesting to note the complaint by the College of Surgeons this week that medical graduates are not up to standard with basic anatomy and physiology. They were advocating extra refresher course to bring them up to pace. Now as to the trades shortages, don’t ask.

    The answer of course to all of this from our education lobby, is a bigger pie rather than judicious reallocation of existing resources, despite record numbers of graduates being pumped out. Still we could always raise the PBS copayment schedule again, in a spirit of bipartisan cooperation, to help grease the wheels of the education caravan.

  3. or we could introduce a co-payment to see a GP…

    that would get rid of those pesky people who go to the doctor with a common cold, or worse for a chat…

  4. Another option would be to entice even more foreign doctors over here on temporary visas – thereby getting them in under the market blocking medical competency exams set by the AMA – the White Collar equivalent of the BLF.

  5. Actually, Tom, the exam is set by the AMC (Council). I would have liked your solution ten years ago, but now that my wife has successfully run the gauntlet, I have come to appreciate the need for the current high standards.

  7. FX – most of those who graduated in the last five or six years (since GP became a “specialty”) would do OK. The RACGP requires members to take refresher courses, and you can’t be a GP unless you’re a member. Funny how they hate to be compared to unions isn’t it?

  8. FXJ, I was only joking. The AMC is cruel. The specialist colleges are even worse, and unaccountable to boot.

  10. I suspect the figures cited in The Australian are actually worse than conceptually confused – they are wrong. They overstate first year graduate income in relation to AWE, which was according to the Graduate Careers Council of Australia 82% in 2003 – though this is slightly more than it was in 1995, the peak in the Mike Gallagher’s figure. (The GCCA compares a mean with a median – I am not sure what impact this would have.)

    They cannot be figures for recent but not straight out of uni graduates either. ABS Education and Training Indicators breaks down the figures to the 20-24 age group and we can calculate from this that recent graduates earn, on average, 1.28 times as much as someone with Year 12 but no further education. This number is much higher than the ratio in Gallagher’s figure.

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