Thursday, May 10, 2007

A sting in the tail for university business faculties

A useful piece by Catherine Armitage in The Australian yesterday discussed the $1.7 billion extra being paid to universities from the budget on top of the $5 billion endowment fund for capital works. The capital works endowment fund is worth annually the interest cost foregone on this allocation or around $250-$300 million. The $1.7 billion figure comprises the more crucial increase in publicly-funded university benefits.

Of this increase $557 million will go in higher funding per student place over 4 years. This almost meets the AVCC's call for an increase of $500 million per student place over 3 years.

The biggest increases go to mathematics and statistics and clinical psychology ($2729), followed by allied health ($1889) and medicine, dentistry and veterinary science ($1081).

The losing discipline group is my area of business (accounting, administration, economics and commerce) which loses $1030 per place. It now receives $1674, equal to law. With levels of per capita support of only $1674 annually universities teaching these discipline areas have been partly privatised.

Education Minister Bishop is quoted as saving “the change reflected the higher salaries that graduates in those disciplines received over a lifetime. Universities were free to decide whether they would raise the fees for these disciplines”.

These per capita funding levels therefore seemed to be based on equity considerations with respect to future salaries. The theory is that if these future salaries are judged to be high then students can take on more HECS debt to fund their programs.

Economics units increase in cost by $1030 annually while the costs of possibly substitute areas decrease by up to $2729 annually. Assuming these changes are translated into offsetting moves in HECS fees – there is every indication they will - disciplines like economics, that have been doing well but not that well with their enrollments Australia-wide, face a hefty, relative price increase for their programs.

For particular universities such as my own which recruit among their students many with low family incomes this change can be expected to have significant effects on enrollments.

Moreover, the change seems to be equity not efficiency-driven. High salaries for graduates from the business areas reflect skill shortages that are not experienced in some of the other areas receiving much higher per capita funding. In some of these latter areas enrollments are currently declining. In economics it is now extremely difficult to recruit research ot teaching staff. In areas such as finance it is becoming almost impossible to recruit local postgraduate students. Employers from the public and private sectors are desperate for graduate students in economics and accounting.

The current per capita funding moves will thwart the market-driven processes that are acting to increase numbers of students studying in these areas. The moves will reduce the net economic benefits generated by universities for the community.

Business graduates generate over 3 times the economic benefits from an undergraduate degree than are generated by tertiary undergraduates overall. Moreover, student/staff ratios in business areas are often among the highest in a university.

I am not opposed to areas such as mathematics and statistics achieving increased funding and generally receiving subsidy support. I do think however that this support should be additional to pre-existing levels of support to other areas. This would alter relative prices between business and non-business degrees but by less than has occurred with the present policy.


taust said...

is there any data to support the view that the cost of tertiary education has a significant effect on the decision of a low soci-economic status student to study at uni?
If I have remembered correctly the imposition of fees for uni students had negligilbe effect on admission rates for low soci-economic people.
If the return on 'business' degrees is so much higher than on other types of degree would this not support the view that the price of business degrees should be higher than degrees with a lower return?

Matt Canavan said...

Good points Harry. It is a bit scary that the government tries to so heavily micromanage education choice.

Of course, in the long run none of these changes will matter, since the higher (lower) course costs will simply be offset by higher (lower) final salaries.

rabee said...


I'm kind off confused.

How does funding work if universities set higher fees for economics? Do students simply get higher HECS debts?

BTW, I can see business deans favoring foreign fee paying students if universities don't set higher fees in business.

hc said...

Matt, I don't think you are right that higher personally-borne training costs will be automatically offset by higher wages. There will be some effect if there is a reduction in supply of business graduates.

Rabee, I am often confused by the economics of universities. It is almost shameful.

My reading from the Australian today (link provided) and asking around was that a large part of the unfunded expense will be met by an increased HECs charge.

On your BTW I think that was the main force of criticism this morning to the Minister. She has said that the universities must met their subsidised places first and then can take as many full-feers as they want.

Andew Norton said...

Harry - I am confident that this will have little or no impact. The research to date shows that cost has had no observable impact on low SES attendance and that relative price shifts (a large one occurred in 1997) have had no effects either.

The reasons are fairly simple. The fees charged are still a small percentage of lifetime earnings (another $3,000 or so in this case). This is what people look at, not how much their parents earn. And courses are chosen on the basis of interests, intellectual and career. The idea that someone would commit themselves to a lifetime in a field that interested them less to save $3,000 is not plausible.

hc said...

Andrew, These are relative price shifts between clusters and they are much greater than $3000. Economics loses $1030 and disciplines like maths and stats gain $2729. The net change per year is $3759 or $11277 over a 3-year degree.

Stigler once wrote a humorous article that 'all demands were price-inelastic'. Most people deny the reality of the effects of relative price changes but they almost always bite. They can certainly be expected to with changes of this order. Empiricakl studies often involve data and other issues that cloud the recognition of price changes.

By the way my view was that demands by all students will be expected by relative price changes - not only low SES. Demands by the latter are likely to be more price elastic

Conrad said...

Harry & Andrew,

I think the reason there are a fair number of students who don't care about price is not because they have thought about lifetime earnings, but because many haven't had the slightest thought about earnings or costs and the tradeoff between them. Perhaps this is less so in business, but you should try talking to some students doing other undergraduate degrees. I'm sure if you had the individual differences data around there would be a large chunk of people who are basically inelastic to price changes (excluding amounts hugely higher than now -- but that is probably due to upfront costs, not any evaluation of life-long earnings -- often because their parents are big contributers), because of this. It would make a nice graph.