Christopher Pyne's claim that graduates earn more is overblown

Updated

In a widely speculated move, the Government confirmed in the May budget that universities would be deregulated in 2016.

During the weeks before the budget, the Coalition weathered criticism that deregulation would lead to an explosion in university fees, and create a replica of the Ivy League system in the United States, depriving top students from lower socio-economic backgrounds of affordable access to the best universities.

Education Minister Christopher Pyne told ABC's Q&A a week before the budget was released that university students can afford to pay more for their education because they earn more than other people as a result of that education.

"University students who have a less than 1 per cent unemployment rate and who, over a lifetime, earn 75 per cent more than someone who doesn't go to university, can borrow every single dollar from the taxpayer to go to university," he said on May 5.

The claim: Christopher Pyne says university students have a less than 1 per cent unemployment rate and over a lifetime earn 75 per cent more than someone who doesn't go to university.

Christopher Pyne says university students have a less than 1 per cent unemployment rate and over a lifetime earn 75 per cent more than someone who doesn't go to university. The verdict: Of all university graduates, 3.3 per cent are unemployed. Some reports say university graduates earn about 75 per cent more than year 12 finishers, but others put the figure as low as 30 per cent. Mr Pyne's claim is overblown.

Since the budget, Mr Pyne has repeated the wage gap statistic, telling ABC's Lateline on May 20 that graduates earn "75 per cent more over a lifetime than people without a university degree" and that they earn "$1 million more than people who don't go to university".

The assumption that a university education is a lucrative investment has been a longstanding one. Does a degree really make that much difference?

ABC Fact Check finds out.

Mr Pyne's figures

Fact Check asked the Education Minister's office to explain what Mr Pyne meant in his statement on Q&A. No response was received on the question of the unemployment rate.

Interpreting Mr Pyne's statement on Q&A literally, it could mean that 1 per cent of people currently enrolled at a university - "university students" - are unemployed. Given the context of the discussion, and his subsequent comments, it is reasonable to interpret Mr Pyne's statement as meaning university graduates, rather than current students.

A spokesman for Mr Pyne said he based his earnings statistics on a March 2014 policy note, "Graduate Skills and National Productivity", published by the Group of Eight, a collection of representatives from the top Australian universities which will benefit most from the Government's planned changes to higher education.

The report uses 2011 census data to graph earnings by age for full-time workers with no tertiary education, vocational training, and a bachelor's degree. "At almost every point along the profile, graduate wages exceed school leaver wages by 75 per cent or more," the report said.

What is the unemployment rate for university graduates?

The Coalition's Budget 2014-15 Higher Education overview states that the unemployment rate for people who hold a university degree is 3.3 per cent.

The budget document relies on data collated by the Australian Bureau of Statistics in its Education and Work survey, published last year. It showed that in May 2013, 110,500 university graduates were unemployed.

Of all the people in the labour force who had a university qualification (3,325,700), that 110,500 makes up 3.3 per cent.

Of the total labour force (11,914,900), that 110,500 represents 0.9 per cent.

Of all the people who are unemployed (675,200), that 110,500 equals 16 per cent.

The ABS survey excludes those in the defence force, hospitalised, imprisoned and so on. The labour force also excludes those who are not actively looking for work, and those not available to start work.

The ABS told Fact Check that it calculates unemployment rates for sub-populations as the number of unemployed in that sub-population, divided by the number in the labour force in that sub-population, times 100.

"This is consistent with international definitions," an ABS spokeswoman said. "Other ratios can be derived, and when used the user should explain what the ratio is".

The ratio that unemployed university graduates comprise 1 per cent of the total labour force is relevant to the debate over the workplace benefits of higher education.

However, the accepted way to calculate the unemployment rate of university graduates is as a percentage of the number of university graduates in the labour force. This gives the 3.3 per cent figure.

How much more do university graduates earn?

The Group of Eight publication referred to by Mr Pyne's office is not the only research available addressing the wage gap between people who graduate from university and those who don't.

In the Higher Education budget overview, the Government said "Australian university graduates on average earn 75 per cent more than school leavers". The overview said the source for this figure was Department of Education estimates based on a 2012 report by the Grattan Institute, "Graduate Winners".

Similar research has also been published by the National Centre for Social and Economic Modelling (NATSEM), the Centre for Labour Market Research (CLMR) and the Australian Council of Educational Research (ACER).

Here's what the research shows:

The Grattan Institute report

The Grattan Institute research relied on data compiled by the Australian Bureau of Statistics from the 2006 census and focused on earnings for bachelor degrees, because those students "typically receive tuition subsidies".

"For women, the median bachelor-degree holder earns roughly $800,000 more in a lifetime than the average year 12 graduate who completes no further study," the Grattan report concludes.

"For men, the lifetime income gap between a bachelor degree and year 12 is $1.1 million."

The report calculated that over a lifetime:

a male with year 12 equivalent earns $1.7 million, while a female earns $1 million

a diploma or advanced diploma male earns $2.3 million and female equivalent earns $1.4 million; and

a male with a bachelor degree earns $2.81 million while a female earns $1.8 million.

The Grattan report states: "In percentage terms... the median man with a bachelor degree earns 65 per cent more over a lifetime than a median year-12 completer who does no further study. For women the difference is nearly 80 per cent."

Fact Check spoke to report author Andrew Norton. Mr Norton said an unweighted average of the median male and female earnings detailed in his report was about 73 per cent.

He said using the 2011 Census data would produce a similar result. On the 2011 numbers, male graduates with a bachelor degree earned 69 per cent more than male school leavers, while women earned 79 per cent more. The unweighted average was 74 per cent.

The NATSEM report

The National Centre for Social and Economic Modelling at Canberra University published a report called "Smart Australians" in October 2012, which used annual employee incomes to analyse whether a graduate degree had a material effect on wages for people aged between 25 and 59.

NATSEM did not use Census figures, but the ABS 2009-10 Survey of Income and Housing. It cautions the figures are "synthetic estimates", and are expressed in 2011-12 dollar terms.

It found that graduates with bachelor degrees earned more than all other education categories in the early stages of working life.

"The gap between those with a higher education and those with lower education continues to widen across the life cycle, with people holding a postgraduate degree surpassing those with a bachelor degree at around age 35–39 years," the report says.

The earnings gap then increases again with a steep rise in income as more educated people climb the professional ladder in their 40s and early 50s.

"Average salaries of their peers with lower educational attainment only marginally increase, largely remaining flat over their working life," the report says.

It goes on to report that across lifetime earnings:

a male with a postgraduate degree will earn $3.78 million, and a female $2.49 million;

a male with bachelor degree will earn about $3.66 million and a female $2.14 million;

a male with a diploma will earn about $3.08 million and a female $1.7 million;

a male with a certificate qualification will earn about $2.49 million and a female $1.34 million;

a male with year 12 will earn $2.55 million and a female $1.52 million;

a male with year 11 or less education will earn $2.13 million and a female $1.26 million.

That equates to a person with a bachelor level qualification earning 40 per cent more than a year 12 school leaver.

ACER report

The wage gap differential is smaller still in a study completed for the Department of Education, Employment and Workplace Relations in 2008 by independent research and advisory body, the Australian Council of Educational Research. It used a Longitudinal Surveys of Australian Youth study, which found a bachelor degree qualification increased earnings by about 30 per cent.

The study followed students for 10 years, from the age of about 14, to about 24. Accordingly, the earnings information on graduates is only based on a small number of years after graduation, rather than over a lifetime.

CLMR report

A fifth report, from the Centre for Labour Market Research looks at the issue in a different way. It assesses the rate of return on a graduate's investment in a university education.

The rate of return is calculated by comparing an annual wage of a graduate and a non-graduate over a working lifetime. This is financial benefit of the degree, taking into account the cost of attending university (which includes tuition fees and other study expenses as well as the loss of income while studying).

The CLMR, a consortium of The University of Western Australia, Curtin University, Murdoch University and the University of Canberra, used income data sorted by age, degree discipline and gender, from the 2006 census.

The 2010 report, titled "The Private Rate of Return to a University Degree in Australia", said an annual rate of return on investment in education by the average university graduate was about 14 per cent, which means they earn about 14 per cent more each year than a non-graduate, taking into account their education costs.



Fact Check spoke to report author Professor Phil Lewis, an economics academic at the University of Canberra.

He estimated there was an average 30 per cent premium on incomes of graduates over their lifetime. However, he emphasised that the private rate of return was a more effective method of calculating the value of a university education. He said relying on lifetime earnings forecasts to calculate a wage gap is problematic given the number of variables involved.

He said even the rate of return calculations rely on various assumptions, not least which discipline the student is undertaking. The report says for males, the average rate of return is about 15 per cent per year of education, and 12 per cent for women. But for some degrees, such as arts, that annual rate of return is 3 per cent for males and 9 per cent for females.

"For the average student, the rate of return is quite good. But there is a whole crowd of people where that is not the case," Professor Lewis said.

Professor Lewis said that for about one in every five students, their degree is not financially worthwhile at the moment. If proposed changes to higher education made courses more expensive and introduced interest on HECS loans, he expects that figure could rise, possibly to one in three or worse. Although, he says the CLMR is yet to run the exact figures on that issue.

A brief recap of what the reports found

Of the five reports, the GO8, NATSEM and Grattan Institute reports examined the wage gap over a lifetime of earnings between someone with a bachelor degree and someone who had only finished year 12. The studies were based on different data sets provided by the ABS. The GO8 said data shows the wage gap was 75 per cent and Grattan found it was 74 per cent. The NATSEM report said it was closer to 40 per cent.

Of the remaining two reports, ACER only studied data from a short earnings period, rather than over a lifetime. It found the gap was about 30 per cent. The CLMR report used a different methodology and based its findings on the average annual return that a graduate receives from their university education. It found it was 15 per cent a year for men and 12 per cent for women.

Weighing the differences

University of Sydney economics professor Colm Harmon tells Fact Check that most studies tend to value education at a rate of return of 10 per cent for every year of education.

"The best evidence for Australia comes interestingly from work by, amongst others, the now Labor MP and former Professor Andrew Leigh. For Australia the estimate is that the return to education is indeed exactly in that ballpark of 10 per cent per year of [tertiary education], so this implies that the typical graduate will earn around 35 to 45 per cent more then their non-graduate peers," Professor Harmon said.

"The evidence by different subjects is more sketchy. If we look at international evidence from, say, the UK we find some interesting points. There is a big return to effort - getting distinctions or better - perhaps adds an additional 50 per cent to the dollar value over a lifetime compared to having lower grades. Similarly, there is perhaps less variation by degree type - in the UK law, economics and medicine graduates earn the most but all graduates earn more than non-graduates, even those who don't perform so well.

"So, the figure from the minister is... close to the truth for big professions such as law, economics or medicine. But on average, the value of a degree over the year 12 [student] is more like 30 per cent," he said.

"To an economist, the evidence is broadly that the rate of return is high from university, although not perhaps 75 per cent."

Bruce Chapman, the architect of the HECS system and director of policy impact at the ANU's Crawford School of Public Policy, tells Fact Check: "You're not going to be in a position to get one single number that everyone agrees on."

The verdict

Mr Pyne's statement about unemployment is supported by ABS statistics on the number of university educated graduates who are unemployed as a proportion of the entire labour force. However, because he used the term "unemployment rate", he should have quoted 3.3 per cent, which is the accepted statistic if measuring the unemployment rate of the university graduate subset of the labour force.

There are a number of variables in the way wage gaps between university graduates and non-graduates can be calculated.

Mr Pyne's statement on lifetime earnings reflects the information in the GO8 publication, which his office said was the basis for the statistics.

Estimates of expected lifetime earnings made by the Grattan Institute, based on the 2006 and 2011 Censuses, are very close to those used by the GO8. Research by NATSEM, based on numbers from different ABS data, puts the figure closer to 40 per cent.

If the methodology used is private rate of return based on each year of education, rather than differential between lifetime earnings of a graduate and a non-graduate, the average figure is closer to 37 per cent.

Mr Pyne's statement is overblown.

Sources

Topics: education-industry, access-to-education, work, unemployment, adult-education, education, educational-resources, university-and-further-education, liberals, federal-government, government-and-politics, budget, australia

First posted