Impact of HEIs on Regional Economies: Illustrative CGE Analysis of Scottish HEIs' "Demographic Challenge

1. European Regional Science Association 27-31 August 2008, Liverpool Special Sessions on The Impact of HEIs on Regional Economies The overall regional impact of Scottish HEIs: An illustrative CGE analysis of the impact of their “demographic challenge” Kristinn Hermannsson Katerina Lisenkova Peter McGregor Nikos Pappas Kim Swales Fraser of Allander Institute, Department of Economics, University of Strathclyde; Centre for Public Policy for Regions (CPPR), Universities of Glasgow and Strathclyde

2. Introduction • One major gap we are tackling in our project is the macroeconomic or system-wide impact of HEIs on the host region: especially the neglect of the supply side. • HEI-disaggregated input-output (IO) analyses are a useful contribution • Extremely useful databases created; results transparent • But, as the best practitioners (many of whom are on our team!) recognise, these studies: • Embody a restrictive view of host region’s economy (excess capacity, significant unemployment) – passive supply side • Focus on the demand-side effects and are “one-shot” in nature • We develop a CGE approach, but here focus simply on the demand effects implied by the “demographic challenge” facing Scottish HEIs.

3. The “demographic challenge” for HEIs • Demographic changes in the UK are projected to result in a fall in the number of students • Recent Universities UK report makes projections of likely numbers of students • We provide a CGE analysis of likely impacts on Scottish economy of Universities UK scenarios

4. Age Participation Index

5. In 2007 71% of the first year full-time UK-domiciled undergraduates were aged 18-20 -11.0% -16.9%

6. UUK projections • Two types of projections in UUK report: • Baseline projection – based on demographic factors • Projected age/gender/ethnicity composition of the UK population • Projected population of EU countries • Projected number of non-EU students • Projected conversion rate from undergraduate to postgraduate study (increasing in line with recent trends) • Three scenarios – take into account how HEIs may react to these changes

7. Projected total number of students (FTE*): UUK baseline -6.8% -11.4% Source: Universities UK, own calculations *FTE – full-time equivalent; part-time students added with coefficient 0.5

8. Projected total number of students (FTE): baselines? Alternative baseline is proportional to the population of 18-20 year olds Source: Universities UK, own calculations

9. Description of scenarios Scenario 1Slow adaptation to change Scenario 2Market-driven and competitive Scenario 3Employer-driven flexible learning Participation of young people As now but with some switch from full-time to part-time Reduced participation in full-time but increased participation in part-time Substantial reduction in full-time, but on headcount basis participation at current level Participation of older people Modestly increased Substantially increased Substantially increased Modestly change, mainly through increased influence on the curriculum Increased but not necessarily primarily with publicly funded HEIs Substantially increased – employers are the primary drivers of large proportion of public funding Employer engagement Competition (UK) Increased competition amongst publicly funded providers Significant expansion of the range of private providers – fierce competition for UK students Highly stratified and polarised system with only limited competition UK HEIs compete effectively despite increased competition UK HEIs compete less well With the exception of elite HEIs, UK HEIs compete less well. However, they engage with technology-based borderless education Competition (int-l) Technology-based learning Some increase in e-learning, but face-to-face learning is the predominant mode Substantial increase in e-learning E-learning is the predominant mode Flexible academic workforce. Increased movement between academia and business. Significant part of academic staff becomes self-employed, contracting work at several HEIs Academic staffing As now with academic staff undertaking teaching and research Two streams: one – research and teaching in large HEIs, the other – teaching in small HEIs

10. Projected total number of students (FTE): all scenarios Source: Universities UK, own calculations

11. Two types of impact of declining number of students • Loss of income by HEIs • Some sources of HEIs’ income depend on number of students • An assumption is that per student funding will stay at the 2005 level (HESA data) • Different types of funding depend on number of each type of student • Loss of non-Scottish student’s expenditures • A decline in the number of non-Scottish students will lead to lower demand in other sectors

12. Sources of Scottish HEIs income • Funding Council grants • Recurrent grants (Teaching) –proportional to the number of Scottish students (FTE) • Recurrent grants (Research) • Recurrent grants (other) •  Tuition fees & education grants & contracts • Home & EU domicile • Full-time fees – proportional to the number of full-time home and EU students • Part-time fees – proportional to the number of full-time home and EU students • Non-EU domicile – proportional to the number of non-EU students (FTE) • Research grants & contracts; Other income

13. AMOS-HEI: a CGE model of the Scottish economy • Effectively a regional, empirical, general equilibrium variant of the Layard, Nickell and Jackman (LNJ) model. So the supply side is crucial (and, of course, non-passive) • Multisectoral CGE calibrated on 2006 Scottish Social Accounting Matrix, with HEIs as one sector: • 25 sectors, cost minimisation • 3 domestic transactor groups • Goods markets modelled as competitive, with equilibrium relative prices determined simultaneously by demand and supply • Demands fairly conventional • Trade flows sensitive to relative prices • Labour market imperfectly competitive, though unified • characterised by regional bargaining - wage curve (w, u negatively related) - LNJ variant

14. AMOS-HEI (continued) • Second element of flexibility - population is • Fixed or Harris-Todaro (w, u positively related) - LNJ variant • When combined with wage curve the two relations tie down w, u • Final element of flexibility relates to treatment of capital stocks, which are • either fixed (total and composition) • or gradually adjusted to optimal level, driven by gap of rental rates and user costs • Dynamics in model are recursive: sectoral capital stocks updated each period through investment functions; population updated via the migration function • Financial markets fully integrated and not modelled explicitly • How does AMOS-HEI relate to IO models of HEI impacts? • Full specification of the supply side • Can therefore capture heterogeneity among regions (e.g. supply constraints?) • Relative prices (competitiveness) endogenously determined • But, if supply-side is passive, AMOS-HEI converges on comparable IO models

15. Impact of the loss of income by HEIs: baseline

16. Impact of the loss of income by HEIs: all scenarios

17. GDP impact of the fall in student numbers: baseline

18. GDP impact of the fall in student numbers: baseline

19. GDP impact of the loss of income by HEIs : all scenarios

20. Employment impact of the fall in student numbers: baseline

21. Employment impact of the loss of income by HEIs : all scenarios

22. Sectoral impact (excluding HEI): baseline, 2006 % change

23. The impact of meeting Universities Scotland’s claim for a 15% real increase in government expenditure on HEIs. (Assuming no supply-side impacts.) (Externally funded by UK Government; internally funded through cutting other Scottish government expenditures)

24. Conclusions and future research • Explore UUK scenarios in more detail, providing sensitivity analyses of their demographic and scenario projections • Capture the supply-side impacts of HEIs • Need to generate new micro-econometric evidence on both skill and spillover impacts; • student and graduate migration flows, and incorporate these into the CGE • Extension to other countries of the UK • Then extend to close other gaps in our knowledge • disaggregation of HEIs? • interregional context • wider impacts of HEIs