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The Impact of Higher Education in Wales Wales Millennium Centre Cardiff, 9 th March 2011

The Impact of Higher Education in Wales Wales Millennium Centre Cardiff, 9 th March 2011. Kristinn Hermannsson Katerina Lisenkova Peter McGregor Kim Swales Fraser of Allander Institute Department of Economics University of Strathclyde. Introduction and overview.

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The Impact of Higher Education in Wales Wales Millennium Centre Cardiff, 9 th March 2011

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  1. The Impact of Higher Education in WalesWales Millennium Centre Cardiff, 9th March 2011 Kristinn Hermannsson Katerina Lisenkova Peter McGregor Kim Swales Fraser of Allander Institute Department of Economics University of Strathclyde

  2. Introduction and overview • What kinds of impacts do HEIs have? • Demand-side impacts: expenditure • Supply-side impacts 1: graduates • Supply-side impacts 2: technology spillovers • Conclusions and further research

  3. Impacts of HEIs on their host regions Demand Side Impacts Expenditures on inputs Overseas students Impacts on the Regional Economy Supply side Impacts Human capital Skills Research Consultancy/Advisory Other Knowledge exchange Higher Education Institutions Cultural Impacts Cultural outreach (Political stability) (crime) Environmental Impacts Direct effects (pressure for Sustainable Development?) Distributional Income by household (Poverty reduction) (equity) Wider regional impacts

  4. Types of impacts? Existing literature on regional impacts of HEIs falls into two forms: Expenditure impacts of HEIs (and their students) HEIs as purchasers of goods employers of labour Source of demand in the region “Knowledge economy”, with focus on technology spillovers HEIs as a source of innovation TFP growth impacts supply in region

  5. Types of HEI impacts in regionalliterature Demand-side impacts Supply-side impacts • Explore expenditure impacts of HEIs and students • Employ “multiplier analysis” (e.g. Input-output tables and models) • Focus on demand impacts within the host region • Assume passive supply side • So cannot accommodate supply-side impacts emphasised by “knowledge economy” (or any others) • Contribution of HEIs to “knowledge economy” • Mix of micro-econometric analyses and case studies • Spatial effects are often included • No means of assessing system-wide impacts • No comprehensive account of the supply-side impacts of HEIs

  6. Problems and gaps? Two disparate literatures in terms of their vision of regional economies Not comprehensive in terms of their coverage The most obvious omission is lack of a quantitative estimate of the system-wide impact of graduates on host region (but social and private non-market too) Nor is the problem simply at the regional level Many micro-econometric studies of graduate earnings Macro growth models (with measure of human capital) = total returns Macro less micro = social returns But no micro-to-macro

  7. Measuring HEI Impacts Develop a single framework in which to explore the impacts of HEIs on both demand and supply sides of economy: Accommodate multi-sectoral expenditure impacts, but Will emulate regional HEI-disaggregated IO if supply conditions passive And can identify demand impacts even if supply side constraints Can accommodate all supply-side impacts of HEIs (provided evidence), in a “micro-to-macro” approach: Knowledge spillovers, but system-wide impacts Impact of graduates through their direct impact on productivity on host region (Other social impact and non-market private benefits on regions and nation) Framework we propose here is HEI-disaggregated computable general equilibrium model (CGE) for Wales

  8. Measuring HEI impacts BUT: Here want to explore expenditure impacts of HEIs: By individual HEI (and students) Use this analysis to explore “policy scepticism” that has developed around expenditure impacts More convenient to use HEI-disaggregated IO analysis for this Reasonable approximation under passive supply conditions (short-run? long-run?) However, for supply-side HEI impacts need to build in the supply side of the regional economy HEI-disaggregated social accounting matrix Calibrate CGE model of Wales Simulate supply-side impacts: graduates; technology spillovers

  9. Introduction and overview • What kinds of impacts do HEIs have? • Demand-side impacts: expenditure • Supply-side impacts 1: graduates • Supply-side impacts 2: technology spillovers • Conclusions and further research

  10. Expenditure impacts of HEIs We attempt to ensure comparability by constructing an HEI-disaggregated input-output table for Wales and treating each HEI as a separate sector within the table Use the data base to explore some of the key characteristics of Welsh HEIs Attempt to address policy scepticism through new IO attribution analysis: balanced expenditure multipliers (“extract” that part of HEI impacts attributable to public funds)

  11. Expenditure impacts of HEIs (2006)

  12. Expenditure impacts of HEIs Conventional IO Type 2 Impacts

  13. Expenditure impacts of HEIs Conventional IO Type 2 Impacts (£ million)

  14. Expenditure impacts of HEIs Conventional IO Type 2 Multipliers

  15. Expenditure impacts of HEIs Balanced expenditure Multipliers

  16. Expenditure impacts of HEIs Attribution of expenditure impacts for aggregate sector

  17. Expenditure impacts of HEIs Traditional and balanced-budget impacts of UW Newport by sector

  18. Expenditure impacts of HEIs (Balance exp mult as % of Type 2) % of public funding

  19. Expenditure impacts of HEIs Type 2 IO Multipliers including student expenditure impacts

  20. Expenditure impacts of HEIs Balanced expenditure multipliers including student expenditure impacts

  21. Expenditure impacts of HEIs Welsh HEIs’ expenditures have a non-trivial impact on demand: Allowing for public funding does reduce multiplier impacts relative to conventional IO estimates But “policy scepticism” (at least in extreme form) rejected Attribution of impacts for aggregate sector HEIs dependent on public funding 63% ‘generic’ public sector impacts, 37% ‘net’ impact Student’s consumption impacts mostly exogenous 9% ‘generic’ public sector impacts 91% ‘net’ impact In total: 47% ‘generic’ public sector impacts, 53% ‘net’ impact Institutions differ Swansea 42% ‘net impacts’ (from institutional spending), RWCMD 16% ‘net impacts’ Studentsmatter ‘Net impact’ of student’s consumption spending sometimes 3x the institutional ‘net impacts’

  22. Introduction and overview • What kinds of impacts do HEIs have? • Demand-side impacts: expenditure • Supply-side impacts 1: graduates • Supply-side impacts 2: technology spillovers • Conclusions and further research

  23. The impact of graduates on the Welsh economy Projections of graduates (with unchanged participation in key age cohort) Wage premium (assume constant) From wage premium to productivity (signalling) From productivity to system-wide impacts

  24. Future composition of the labour force Projecting future number of graduates by age in the labour force Based on “UK net retention rate” (calculated from HESA DLHE data set for 2006-07) “UK net retention rate” –takes into account net flow of graduates from other UK regions – was 76-78% Retention rate is very stable over time (2002-2007) Apply it to the total number of graduates According to this calculations about 16,000 new graduates entered Welsh labour force in 2006 For consecutive years total number of new graduates is adjusted proportionately to the number of people aged 20-25 Graduates are distributed among age groups proportionally to the number of HE leavers in each age group in 2006

  25. Share of graduates in total labour force

  26. Long-run skill-adjusted labour force increase in Wales Signalling 10% 30% 2.8% 4.1% 45% Wage premium 60% 5.2%

  27. Increase in GDP due to rise in skill-adjusted labour force in Wales

  28. Increase in employment due to rise in skill-adjusted labour force in Wales

  29. Introduction and overview • What kinds of impacts do HEIs have? • Demand-side impacts: expenditure • Supply-side impacts 1: graduates • Supply-side impacts 2: technology spillovers • Conclusions and further research

  30. Supply-side Impacts of HEIs on TFP. (Based on Harris et al (2010)) The impact of HEI-firm links on firm-level TFP in the GB The model logYi = α + βElogEi + βKlogKi + βxXi + βATTHEIi + εi βATT is a measure of the impact of HEI collaboration on TFP Collaborating with HE is associated with TFP that is 12% higher In 2006 (CIS data) 38.3% of Welsh firms (in GVA terms) collaborated with HEIs For the economy as a whole the impact is 4.58% (i.e. 38.3% of 12%)  This estimate is effectively a measure of the impact of a “hypothetical extraction” of HEIs on TFP (104.58 too 100 or 4.38% reduction in TFP)

  31. The impact of HEIs on TFP. Based on Harris et al (2010) Long-run percentage change. TFP shock of 4.38%.

  32. The impact of HEIs on TFP

  33. The impact of HEIs on TFP

  34. Introduction and overview • What kinds of impacts do HEIs have? • Demand-side impacts: expenditure • Supply-side impacts 1: graduates • Supply-side impacts 2: technology spillovers • Conclusions and further research

  35. Conclusions Welsh HEIs’ expenditures have a non-trivial impact on demand: Allowing for public funding does reduce multiplier impacts relative to conventional IO estimates But “policy scepticism” (at least in extreme form) rejected However, supply-side impacts (with unchanged HE policy) potentially much bigger: Through human capital embodied in its graduates Welsh HEIs exert significant impact on GDP and employment Similarly, significant impacts of HEIs interaction with enterprises’ on total factor productivity Wider impacts of HEIs: Social returns to HE: measurement difficulties and controversial - McMahon (2009) US: equivalent to 90% of private return Non-market private returns to HE: measurement issues (122% of private return) We have conducted some indicative analyses (not reported here) Potentially important for policy, and appropriate mix of private-public funding Interregional extensions (not reported here) Integrated regional economic and HEI system Initial estimates – no very big “spillovers” from Welsh HEIs to other regions

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