Do we have an oversupply of degrees?

Education

Apr 19, 2021

A recent edition of ‘The Conversation’ carried an article, by Small, Shaw and McPhail, titled ‘1 in 4 unemployed Australians has a degree. How did we get to this point.’

The about three-fold increase in graduate numbers over the last 30 years has supported;

A much broader diversity of undergraduate students, particularly those from various equity groups,
The increase in the number of working Australians with a degree from 12.4% in 1993 to over 35% now.

The article then points out the increase in the unemployment rate of graduates during the pandemic.

We can applaud the increase in number of indigenous students and those with a disability, even if it is from a low base. There have also been increases, above the total average increase, of students from a low SES background and those from regional and remote areas.

I have a more sanguine view of the impact of increases for this second group as I suspect that their completion and employment rates are lower than that for the student population overall. Also, their participation in the elite discipline degrees will no doubt be lower. More importantly Universities are only a part of a response to inequality, which starts where you were born, the income and qualifications of your parents, where you go to school etc. There is still a great gulf in the performance of schools in low SES areas compared to those in high SES areas.

The main point the paper makes is that at November 2020 some 23.29% of the unemployed had a degree. This increased from 18.66% at May 2019. At the same time a total of 36.89% of the labour force holds a degree, thus graduates are still substantially less likely to be unemployed. I suspect that the increase in the proportion of graduates among the unemployed is a result of the effects of the pandemic which has disproportionately impacted the employment of young people.

In my view the more important point is that the full-time employment rate of graduates, 4 months after completion, is only 72.6%. This has fallen about 10% points since 2008. Three years after completion the full-time employment rate increases to 90.1% but this has been relatively stable over the same period. So, it is taking longer for graduates to find a full-time job and career.

Taking longer to find full-time employment is a general phenomenon among both graduate and non-graduate young people. This is the conclusion of a report by the Foundation for Young Australians (FYA), titled ‘The New Work Reality’. The report shows the proportion of 25 year olds with full-time jobs has declined from 57% in 2006 to 50% in 2016. Of those without full-time jobs, 25% are employed part time including those also studying, 10% are studying and not working and 15% are not working or studying.

At the same time the wage premium for graduates has also declined, mainly since about 2010 and there are an increasing percentage of graduates working in jobs that don’t require a degree. This percentage was over 30% in 2016.

So, the question arises, are we producing too many Higher Education graduates?

My first observation is that there are many graduate labour markets. For example, the labour market for engineering is very different to that for, say, the performing arts. On a utility basis such as relevant employment and wages, the general degrees have largely performed worse than the more specific vocational degrees. I do, however, find it a bit problematic and sad that we tend to judge higher education outcomes only on that basis. We don’t sufficiently value the intrinsic value of higher education for the individual and society generally.

Nevertheless, all the trends and forecast of the skill level requirements for jobs do support an increasing investment in Higher Education. The RBA, based on data put together by Coelli and Borland show that the proportion of total employment requiring level 1 skills (degree or above) has grown from about 15% to over 30% in the last 50 years.

Similarly, vacancy data from 2006 to now shows a growth in Skill Level 1, Level 2 (Advanced Diploma or Diploma) and Level 3 (Cert IV or III) vacancies over the period from 2006, but a decline in Skill Level 4 and 5 vacancies.

Workforce projections by the Australian Skills Commission (ASC) are for the period 2019-24. Some of the underlying assumptions would have changed due to the effects of the pandemic, but given the strength of the recovery to date I would judge the trends are about right. The projections show the growth of Level 1 Jobs is 11.8% and Skill Level 2-4 jobs (VET quals or equivalent) is about 7.2%.

So, the policy of increasing enrolments is right, at least in terms of direction.

There may, however be some structural and cyclical trends in the labour market which are impacting on graduate opportunities currently and for the future.

We generally use the unemployment rate to measure the utilisation level of the available workforce. The current view is that full employment might be when unemployment drops to about 4%. This would suggest a current underutilisation rate of about 2%. There are several other factors in estimating workforce underutilisation or spare capacity levels including the underemployment rate and participation rates that may be above or below historic highs.

It is difficult to pull these together but a surrogate measure may be to use hours worked per head of population of workforce age and compare that over time. This measure can be calculated from ABS data. The high point of monthly hours worked per capita over the last 20 years was just before the GFC and during the then resources boom. In 2008 we had an unemployment rate of just over 4%, which is around most estimates of NAIRU. Hence it is reasonable to assume that, at that stage we were at or about full employment. We can then compare subsequent workforce utilisation levels

Monthly hours worked per capita in 2008 was just over 90, at the bottom of the pandemic it was around 76. Before the pandemic it was 86 and is now 85. Based on the above the spare capacity of available labour of over 5% is suggested. Given that the timing of the decline in graduates in full time employment, 4 months after completion mirrors the decline in monthly hours worked per capita, the increased spare capacity of available labour is likely a factor in that decline.

In addition to the current spare capacity in the labour market there are indications that something structural may also be happening that is leading to the relative decline in full-time entry level jobs for many graduates of higher education and also VET. The issue is even more significant for those without post school qualifications. My conjecture is that it may be related to;

The decline in entry level opportunities provided by large organisations and the public sector. This may be the result of an increasing short term and cost reduction focus,
Many labour markets are international and especially base level (inc. professional) services can be sourced from lower wage countries,
Similarly, the impact of the replacement of base level services by technology,
The large Australian migration program, which has provided an alternative source of skilled and professional labour.

So, what may be some of the policy responses to encourage the increase of entry-level job opportunities for graduates of Higher Education and indeed VET. Without attempting to be comprehensive, some ideas come to mind;

We should support and so should Governments, through fiscal settings the RBA objective of achieving full employment,
Focusing on the individual and the educational institutions, we might better build enterprise (generic) skills (see also FYA), encourage broader based content in education programs which focus on related occupations and most importantly substantially increase work experience requirements and a connection with employers,
As part of this, we might foster the better linking of VET and Higher Education. VET is better placed to provide a whole range of practical skills and work experience and the further development of joint programs such as 1 or 2 year(in VET) plus 2 year(in Universities) programs, more integrated career paths and the more extensive recruitment of VET graduates by Universities,
Broadening the current VET reform agenda to include a specific focus on entry level opportunities for VET graduates,
A commitment to increased and more stable VET funding,
Review the labour market testing requirements of the skilled migration program to further enhance the training and employment of Australian workers,
Better use of the public sector as a provider of initial professional and skilled employment,
Attaching targeted employment and training programs to Government expenditure as already happens with apprentices,