sou · GYB388 · 2010-11-30 00:00:00 — The Swedish tertiary level graduation rate is above the average but clearly lower than in the other Nordic countries, particularly lower than in . This also suggests that late entry to the labor mar- ket is not solely explained by higher rates of participation in higher education in . This is an important observation since it indi- cates that there is no automatic trade-off between average gradua- tion age and the rates of participation in higher education. Policies aiming to lower the average graduation age in order to boost emp- loyment and productivity are more likely to be optimal in the absence of such a trade-off. Swedish tertiary graduates compared to graduates in other countries Bilaga 3 till LU2011 Figure 2.7 Graduation rates from tertiary education Tertiary type A graduation rate, in 2007 Education at a Glance 2009 Table A3.1 The tertiary level graduation rate is perhaps not the best indicator for the investments in tertiary level education. Education systems differ across countries so that roughly similar education may be classified as tertiary education in some countries and as secondary education in other countries. However, the also publishes estimates on the expected number of years in the education system. These numbers are based on calculating the fraction of each age cohort between 15 and 29 in education using data from the EU Labor Force Survey. In Figure 2.8 these fractions are added up across cohorts. In addition, the students are classified into a group that is in full-time education and a group that is simultaneously employed. The most natural interpretation of the figure is that it describes both the fraction of youth that participate in education and the number of years they spend in education. According to Figure 2.8, the Swedish youth spend a larger frac- tion of their lives in education than the average youth, but slightly less than the youth in , and . Another interesting observation is that student employment does not appear to be as widespread in as in some other coun- tries. Only of Swedish students are classified as employed while this fraction is over in and and close to in and . The low student employment rate in Bilaga 3 till LU2011 Swedish tertiary graduates compared to graduates in other countries seems a bit surprising. A partial explanation is that the data is from the first quarter of the year and excludes summer employment. Still according to SCB of Swedish uni- versity students were employed during the spring term of 2007. However, only of those who were employed, worked more than 20 hours per week. (UF 57 ) Figure 2.8 Expected years in education and not in education for 15–29 year-olds (2007) In education, not employed In education, employed Not in education, employed Not in education, unemployed Not in education and not in the labour force Source: Education at a Glance 2009: Indicators, Table C3.1a. Note: Persons in education include part-time as well as full-time students. Non-formal education or educational activities of very short duration are excluded. Data are collected as part of the annual Labour Force Survey and refer to the first quarter of the calendar year, thereby excluding summer employment. The labour force status catego- ries are defined according to () guidelines. Therefore, persons are classified as employed if they did any work for pay or profit for at least one hour during the reference week. One can also use data presented in Figure 2.8 to calculate employ- ment rates for the age group between 15 and 29.5 The point of this calculation is that late graduation is more costly if students do not 5 Given that the numbers were originally calculated by one year age groups and then added up without weighting by cohort size, these are not equivalent to the numbers that one would get by calculating employment rates for the whole age group between 15 and 29 years from a raw data of the Labor Sorce Survey. Employment rates calculated from a Labor Force Survey would automatically weight the age-specific employment rates by the cohort size. Swedish tertiary graduates compared to graduates in other countries Bilaga 3 till LU2011 work before graduating. graduation would be costless in terms of the aggregate employment rate if student employment and employment before entering into higher education were suffici- ently common to compensate for the delay (although productivity differences have to be properly accounted for). Figure 2.9 displays the youth employment rates in the countries. The ranking of the countries depends on whether the students who are employed while enrolled are included as emplo- yed or not. If one excludes the students, the employment rate of Swedish youth was slightly over 40 percent in 2007 which is close to the average employment rates among the countries with available data. This fraction is also close to the employment rates in or , but clearly larger than in and smaller than in . As already noted, at least in these data, student employment is less common in than in other OCED countries. Including employed students increases the employment rate in to about 50 percent of the age group. However the increase in other countries is much larger and the employment rate in is therefore clearly below the average if student employment is included in the comparison. Figure 2.9 Employment rate, 15–29 year-olds (2007) Employment rate, students Employment rate, students Source: Own calculations based on data in Education at a Glance 2009: Indicators, Table C3.1a. Bilaga 3 till LU2011 Swedish tertiary graduates compared to graduates in other countries 2.4Timing of education and work Even if the total investments in education do not seem to be parti- cularly high in , timing of education appears to be different in than in the other countries. This can be seen in Figures 2.10a and 2.10b that display the fraction of the cohort in education by one-year age groups. The Swedish youth are first compared to the other Scandinavian countries and the Netherland and then to the large EU countries and to the US. In both figures the fraction in education includes both full-time and part-time stu- dents. In all the countries displayed, except in the UK, almost the entire cohorts are in school up to age 17. This mainly reflects high secondary level participation rates. After age 17 the fraction of the cohort in education rapidly declines in so that participation rates in at ages 19 and 20 are lower than in any other country in this comparison, even lower than in the UK. A similar, but not quite as large, decline also occurs in and . In the Finnish case, compulsory military service explains a large part of low participation rates around age 20, but in the share of the male cohort serving in the armed forces is too small to explain the pattern. Still, the decline in the fraction of the cohort in education is particularly large in . In all the Nordic countries the fraction of the age cohort in education increases between ages 20 and 22. This mainly reflects the fact that the entry into tertiary education typically occurs only after a couple of gap years. In the fraction in education inc- reases until age 22 and remains at a comparatively high level there- after. Comparison of employment rates in one-year age groups indicates that the time gap between finishing secondary education and entering into the tertiary level is specifically important in . This again suggests that if one would like to reduce the average tertiary-level graduation ages, the efforts should focus on factors related to the delay in the entry age. Swedish tertiary graduates compared to graduates in other countries Bilaga 3 till LU2011 Figure 2.10a Fraction of age cohort in education Fraction of cohort in education incl. Figure 2.10b Fraction of age cohort in education Fraction of cohort in education incl. Source: Employment Outlook , Activity status by single year of age in countries, 2006 (2005 for the ), Secretariat calculations based on Labour Force Survey (EULFS). If the students do not enter directly to tertiary level education, an interesting and policy relevant question is what they do in the meantime. If most students are employed during these years, the aggregate employment would not necessarily be affected by a reduction in the entry age. An increase in the employment rate due to earlier graduation would be partially offset by a decrease in employment rate around age 20. A delay in starting tertiary educa- tion might still have efficiency effects if tertiary-level graduates are more productive after tertiary education than before entering terti- Bilaga 3 till LU2011 Swedish tertiary graduates compared to graduates in other countries ary level education. And, if the gap years imply that students are unemployed or perhaps preparing for the university entrance exa- minations, the gap years could be regarded as a sign of inefficiency. Figures 2.11a and 2.11b display employment rates in various countries by one year age groups (excluding those employed while enrolled). These figures indicate that employment rates are compa- rably high in around age 20 and decrease later to the level in and the . Overall these figures show that the pattern of employment rates in differs from that observed in other countries, which is consistent with the delay in entry into tertiary level education. Figure 2.11a Employment rates by age Swedish tertiary graduates compared to graduates in other countries Bilaga 3 till LU2011 Figure 2.11b Employment rates by age Source: Employment Outlook , Activity status by single year of age in countries, 2006 (2005 for the ), Secretariat calculations based on Labour Force Survey (EULFS). The also calculates the fraction of the age cohort that is neither employed nor enrolled in school. This NEET rate shows a very distinct pattern in . At age 19 about 20 percent of the Swedish youth are neither in education nor employed. This number is clearly highest among the countries in this comparison. By age 22 it declines below the level observed in the large European coun- tries and the US but remains higher than in most Scandinavian countries. Bilaga 3 till LU2011 Swedish tertiary graduates compared to graduates in other countries Figure 2.12a Not enrolled and not in employment by age Figure 2.12b Not enrolled and not in employment by age Source: Employment Outlook , Activity status by single year of age in countries, 2006 (2005 for the ), Secretariat calculations based on Labour Force Survey (EULFS). 2.5Summary of the international comparison To summarize the results from international comparisons presen- ted in this chapter, one could note that the graduation age from university-level studies is indeed very high in . However, the average graduation age is also high in other Scandinavian coun- Swedish tertiary graduates compared to graduates in other countries Bilaga 3 till LU2011 tries and particularly so in and . High average gra- duation age in does not appear to be due to an unusually high fraction of a cohort pursuing university-level studies nor to unusually long duration of studies. Instead, the main reason for the high average graduation age in appears to be that the Swedish youth enter into university-level education later than the youth in other comparable countries. A delay in average graduation age of 2–3 years compared to the average of the other countries in this comparison can be explained by a 2–3 year difference in the entry age. This also implies that policies aiming to lower the ave- rage graduation age should probably put the main emphasis on lowering the entry age rather than on speeding up the studies of the enrolled students. 3An economic analysis of late graduation Many economic models of education treat education as an invest- ment in human capital. As investments in physical capital, invest- ments in education entail costs during the investment period that can be recouped later if productivity and earnings increase as a result of the educational investment. Rationally behaving profit maximizing investors invest in education as long as these invest- ments are profitable i.e. as long as the (discounted) life-time costs of educational investments are below the (discounted) life-time expected benefits from education. In countries like where education is free to the student, the costs of education are mainly opportunity costs, consisting of wages and other incomes that the students could have earned if they were not in school. The returns to the investments in educa- tion are typically measured as increases in wages over lifetime due to educational investments. In addition to the monetary returns, it is also possible that education creates non-pecuniary benefits in terms of more pleasant or interesting jobs, lower unemployment risk, higher social prestige or even better chances at the marriage market. These benefits may be hard to measure but nevertheless may be important for the investment decisions. Simple cost-benefit calculations suggest that investments in education should be completed early in life. There are two main reasons for this. If earnings opportunities increase with age and work experience, the opportunity cost of studying instead of working is lowest in the beginning of the career. Even more important is that the period when the returns to education can be captured is finite and typically ends around age 65. Completing education early in life increases the length of the period when the returns to investments are captured and therefore increases the present value of the return to education. This implies that invest- An economic analysis of late graduation Bilaga 3 till LU2011 ments in education that are profitable if made around age twenty may be no longer be worthwhile at age 40. 3.1Motivation for public involvement in individual choices regarding the level and timing of investments in education An individuals educational choices would be socially optimal if (i) the individuals making school choices acted rationally and made schooling choices based on expected (monetary) returns, if (ii) the individuals paid all the costs and received all benefits from invest- ments in education, and if (iii) the individuals could freely borrow the funds needed for investments without credit or other con- straints. In this case, there would be no need for the government to intervene with individual decision making. Socially optimal deci- sions would also not only imply that the choices of the educational level would be optimal, but also that the choices of when to invest would be socially optimal. Therefore, the government would have no reason to try to affect the timing of education either. However, conditions (i), (ii) and (iii) are unlikely to hold in reality and this motivates public interventions in private decisions regarding education. The arguments for public intervention on educational choices have been thoroughly analyzed in the litera- ture. Much less is known about whether private decisions on the timing of education correspond to the socially optimal timing. will discuss the incentives to invest in education early in life compared to the incentives to delay these investments. I will also discuss the possible differences in the privately and socially optimal timing. However, since the motivation for government involvement in the timing of investments are closely related to the motivation of intervening in the choices regarding the level of edu- cation it is useful to start by briefly reviewing the main arguments why the governments should try to affect the level of investments in education. Bilaga 3 till LU2011 An economic analysis of late graduation i) Are decision makers rational and acting based on expected returns? Even if one is willing to ignore non-monetary motives for invest- ments in education, lifetime income maximization is a very strong assumption. Essentially it requires that the youth making choices about their education can accurately predict their lifetime out- comes under several alternative education choices and make informed decisions based on this information. Not that much is known about how the youth who make edu- cational choices form expectations of outcomes related to different schooling options, or how they react to changes in expected costs and benefits. Manski (1993) discusses the problem in detail. Some of the few attempts to measure expected wages for alternative choices of education include Dominiz and Manski (1996) who measure the expectations using surveys to high school students and Brunello, Lucifora and Winter-Ebmer (2004) who provide similar survey-based evidence on wage expectations of college students. Neither of these papers link expectations to actual behaviour. The effects of monetary incentives on choices regarding educa- tion have been examined in only a handful of papers. (1997) examines the effects of changes in return to education on college entry and finds that a decrease in university enrolment in after the 1960s can be attributed to a dramatic reduction in the (after-tax) university wage premium. According to his study, the later rebound in enrolment can also be explained by an increase in wages of university graduates. The generosity of the study allowance scheme and unemployment are of comparatively less importance. If the youth cannot form unbiased expectations regarding the outcomes under different educational choices, there is hope to influence these choices by altering incentives. For the youth that make the decisions about education evaluating the effects of delaying entry into higher education may be even more difficult than evaluating the benefits of pursuing higher education overall. Incomplete information on the effects of the level or timing of investments in education also implies that choices could be poten- tially influenced by providing information about average outcomes on educational choices to the youth making decisions about edu- cation. The analysis gets a fair bit more complicated if one deviates from standard economic analysis where the decisions are based on An economic analysis of late graduation Bilaga 3 till LU2011 maximising expected benefits by maximizing the discounted sum of lifetime earnings with a discount rate and stable prefer- ences. If someone had a high preference for leisure (perhaps ) when young s/he might well choose to spend time travelling before entering into higher education. Even if postponing higher educa- tion would be costly in terms of monetary costs and rewards, the society could not make welfare improving interventions to private decisions. ii) How different are private and social returns? If schooling has external effects, private decisions on investments in education are not socially optimal. No matter whether the deviation between private and social returns to education are caused by public policies that distort private decisions away from the socially optimal level (e.g. through progressive taxes) or whether the education has intrinsically external effects (e.g. by reducing crime), this creates an argument for public interventions. It has long been argued that schooling has positive effects also on others than the individual pursuing education. Positive external effects may occur if schooling improves the workings of the democracy or reduces crime. Positive externalities also arise if edu- cation spurs innovation and growth and if the benefits from these innovations are not fully captured by the innovators. Since gov- ernments subsidize education in all developed countries, one can deduce that the positive external effects are perceived to be impor- tant. Schooling may also have negative externalities. The best known example in the signalling model by (1974) where the schooling investments are not productive but only produce a signal that the employers use in selecting employees to demanding jobs. If the signalling model is true, additional investments in education are privately beneficial but socially wasteful. A gain by a person who receives extra education is offset by a loss by someone else who is not selected to a good job. Solid empirical evidence on external effects of education has turned out to be hard to find. Some studies have made attempts to measure external effects by examining the effect of the average education level in a certain area (e.g. Rauch, 1993; survey by Moretti 2004). These studies have reported positive estimates on external effects though the comparability of areas with different education levels is clearly problematic. There is also some evidence Bilaga 3 till LU2011 An economic analysis of late graduation on the negative external effects noting that earnings depend not only on ones own absolute level of education but also on the rela- tive level of education. investments in education by one per- son have negative effects on other persons whose relative position is weakened (Kroch and 1994; and Uusitalo, 2008). Also, the society affects the costs and benefits of education in several ways. In most countries education is free or at least heavily subsidized by the society. The students also get direct support in terms of interest subsidized loans and student allowances that lower the costs of education and make private investments more profitable. On the other hand, progressive taxation decreases the private returns to investments in education by taxing away a part in the wage increase due to education. The estimates the effects of government intervention by calculating the social and private returns to education separately. In these calculations the external effects refer to the effects of educa- tion on tax revenue and to the direct costs not paid by the students themselves. A similar calculation can easily be performed by com- paring the social and private returns to the timing of education. I will present results of such calculation in the next chapter after first surveying existing evidence on the returns to early vs. late gradua- tion. iii) Constrained choices A common argument for public support for education is that the youth are credit constrained and cannot invest in education as much as if credit was freely available. Human capital cannot be offered to private banks as collateral for the loans. A similar argu- ment could possibly be made for the timing of investments. Working while enrolled at university may be necessary if the stu- dents cannot get large enough loans to cover their expenses while at school. Empirical relevance of credit constraints is questionable at least in countries that have well developed student support systems and where tuition fees are negligible. Note also that removing credit constraints calls for government guaranteed loans rather than direct grants. important constraints for investments in education are admission requirements by universities. In the countries where An economic analysis of late graduation Bilaga 3 till LU2011 direct costs of education are small university slots are almost always in excess demand. Entry requirements create important constraints that cannot be ignored when evaluating the effects of delayed entry into university level education. This is clearly a diffi- cult question that is hard to fit into economic models. I will return to this issue when discussing potential policies for lowering the average graduation age. 4Empirical research on economic incentives affecting the graduation age I will discuss specific policies that the government might use to induce earlier graduation in the final chapter. Before that, it is use- ful to analyse what kind of financial incentives already exist in the current education systems, and how they might affect the gradua- tion age.