Student protests about cuts in higher education have recently made front page news. It raises important questions such as
- How should university education be funded?
- What proportion of school leavers should we encourage to take a traditional three year degree?
- Does the state have a responsibility to pay for higher education or should students bear part of the cost?
External benefits of higher education. A more skilled workforce enables a more productive economy with a greater rate of labour productivity and innovation. In a free market, higher education would be under-consumed as students are unable or unwilling to finance their education. (Diagram of positive externalities for more theoretical justification)
International competition. Some of the most successful economies have a higher rate of tertiary education than the UK.
In 2000, the UK had the 3rd highest graduation rate in the OECD with 37% of young people getting a degree, above OECD average of 28%. By 2008, this had fallen to 15th in the OECD rankings with 35% of young people getting a tertiary education.The level of public investment in higher education is 0.7%, below the OECD average of 1%. (Source: Graduation rates at Guardian)
Equality. Making students pay higher fees will tend to discourage those on low incomes, especially those who have parents just above means tested line. Higher fees could make higher education more elitist.
However, other economists question the extent to which higher education raises productivity and the extent to which it is merely a signal of greater ability.
Signalling Function of Higher Education. Richard Blundell and colleagues in the February 2000 Economic Journal, argue that there is evidence that higher education acts mainly as a signal. See Post on signalling in education. Also, with the expansion in student numbers, a degree becomes a weaker signal to employers because more people have a degree, and the signal become diluted.
If higher education is mainly a signal, then there is a strong justification for making students pay part of the cost. A degree enables a student to earn a higher salary, so making them pay back part of cost, when they are earning a higher salary seems to be fair.
If higher education is mainly a signal, then why do we seek to get 50% of school leavers to take an expensive three year degree? Perhaps there would be a greater benefit to encouraging school leavers to take more practical, vocational degrees to deal with shortage of professions like nursing, plumbers, electricians.
Opportunity Cost. There is an assumption that higher rates of higher education are good. But, like everything there is an opportunity cost. If we provide free education to 50% of school leavers, it means less funds for investing in other areas of education or public goods like transport infrastructure.
Signalling vs Productivity. A key issue is the extent to which degrees raise labour productivity and the extent to which it is merely a signal. This is something which is likely to vary from degree to degree. Also, it may depend on the student; less academic students may get less from studying for three years.
Higher education will definitely play a key role in the long term strength of the economy. The OECD report mentioned above, suggested that in the economy, there was increasing demand for graduates.
However, just because higher education can have significant external benefits doesn't mean that it is the optimal choice for everyone. There may be a greater return from investment in vocational training in professions where there are labour shortages such as nursing, plumbers, electricians. If education does perform a signalling role