notes for Table 2.1
(average base funding level per student in selected countries)
a. Other currencies converted using OECD Purchasing Power Parities for 2009 (OECD 2011b). b. Source: State Higher Education Executive Officers 2010. Includes all two and four year public
institutions. Government contribution excludes state appropriations for research, agricultural extension and medical education. Student contribution is net tuition revenue; ie gross amount less state and institutional financial aid, tuition waivers or discounts, and medical student tuition and fees. FTE students include HDR and exclude medical students.
c. Source: College Board 2011. Student contribution is average published tuition for an
undergraduate student. Actual cost to student estimated at approximately $1,700 after netting for institutional, state and federal grant aid and federal tax benefits.
d. Source: Secretariat estimates using Jen and Bowermann 2011. Government contribution per FTE student calculated by dividing state appropriation by the FTE of students resident in Michigan (ie. out-of-state and international students who pay higher tuition fees are excluded) this differs from standard US figures which include all student FTE and are therefore lower. HDR students are included in above because of lack of separate accounting for them in data sources. Quoted student contribution rates are for resident students at undergraduate/postgraduate (including HDR) level. Michigan has no untied government research funding so base funding levels are more directly comparable with base funding plus research block grant funding in Australia.
e. Source: DEEWR estimates based on Higher Education Statistics Agency 2011 and Higher
Education Funding Council for England 2009. Government contribution is HEFCE teaching funds per UK and other EU student FTE. Teaching funds include ‘Widening participation’, ‘Teaching enhancement and student success’, ‘Other targeted allocations’ and ‘Other recurrent teaching grants’ funds, which in aggregate are 17 per cent of total teaching funding.
f. Estimate based on data in Danish Ministry of Education (2010) and personal communication with the Danish Ministry of Education. Estimate based on average taximeter payment of DKK70,000 plus annualised completion bonus of DKK14,000. Actual funding will be less than estimated base funding rates because funding is paid on completions rather than load: expected Bachelors completion rates are approximately 74 per cent (Danish Ministry of Education 2010, p. 92). g. Source: Tertiary Education Commission 2011. Based on government funding (EFTS: Vote
Education), Fee income (Domestic), EFTS (TEC funded). h. Secretariat, using DEEWR data.
Technical notes for Chapter 5
Below are further explanations of several of the terms and concepts used in Chapter 5.
externalities
An externality is a cost or benefit incurred by a third party (i.e. a party who is not the buyer or seller of a good or service) for which no compensation is paid. In the case of higher education, externalities are the benefits (or costs) experienced by the wider society, rather than just the individual studying. For the purposes of this report, the term ‘public benefit’ has been used to refer to externalities.
Public benefits
Public benefit is not necessarily an economics term, but has been used in this report to reflect terminology in existence within the higher education sector and community. Public benefits are defined as the positive externalities from higher education. Public benefits can be either pecuniary (financial) or non-pecuniary (non-financial).
The financial public benefits are primarily the additional taxation revenue gathered by governments as a result of higher wages earned by graduates. Graduates also generate increased productivity in the workplace, which provides a financial return to the government. Pecuniary benefits can be quantified in a relatively straightforward manner. For example, to estimate public benefits Professor Chapman calculated the additional taxation revenue generated over a graduate’s lifetime.
Non-pecuniary benefits of higher education are more complex and difficult to both define
conclusively and to then calculate. These benefits include lower crime rates or improved public health that are associated with higher levels of education. There have been numerous attempts to quantify these benefits, but it is not possible to be precise.
Private benefits
The private benefits of higher education are those captured by the graduate. They are primarily, but not wholly, the increased wages for graduates. They also include the ability to obtain a more fulfilling job, better personal and family health and higher levels of education for the children of graduates and improved life satisfaction activities. There is a range of evidence that supports a link between an individual’s level of education and higher wages. For the purposes of this report, the measure of private benefits was limited to higher wages but it should be borne in mind that this represents a conservative estimate. As with public benefits, private benefits are difficult to quantify.
Calculations used to estimate benefits
Public and private benefits can be calculated either as a rate of return or as a net present value. Both calculations can be used to make decisions about the value of an investment, and both are used in the wider literature on the benefits of higher education. In this report, both calculations have been used depending on the context.
Net present value
The net present value of an investment is the difference between the present value of future cash flows from an investment and the present value of the initial investment amount. The present value
A discount rate is applied because resources have alternative uses. These uses may include other forms of investment (such as research and development, physical infrastructure) or forms of current enjoyment due to higher levels of consumption. A discount rate is used like a shadow price for these foregone opportunities.
To calculate net present value a discount rate needs to be selected. The normal candidate is the real rate of return from alternate forms of investment, although there is a wide range in estimates of returns.
For higher education, the present value of private net benefits is the difference between the lifetime monetary gain from completing additional qualifications and the cost of making the investment in those qualifications.
Rate of return
In technical terms, the rate of return to an investment is the discount rate that makes the net present values of all cash flows equal to zero. In other words, it is the interest rate at which the sum of all future cash flows equals the initial cash investment. Simplified, the rate of return to an investment is the rate of profit that will be generated by a project, or the rate of return to the initial investment. In the case of higher education, the public rate of return is the return to society from the investment into more higher education. Similarly, the private rate of return is the return that students will obtain from their investment.
Pure human capital (PHC)/ability bias
The PHC is the assumed contribution of an individual’s education to their returns from higher
education after taking into account their innate ability. Some of the higher wages a graduate receives over a non-graduate may be due to a difference in innate ability and not related to differences in education. Therefore, it is possible that not all of the additional taxation revenue or public benefits generated by a graduate are due to the contribution of higher education. This needs to be considered when calculating the public benefits of higher education.
For the purposes of his research, Professor Chapman assumed that an individual’s higher education study contributes approximately 25 to 40 per cent of the higher wages that the individual achieves after graduation. This means that an individual’s innate ability is responsible for 60 to 75 per cent of their higher wages. These estimates were derived from the existing literature.
ability/motivation adjustment
The ability/motivation adjustment applied to calculations of public benefits is a result of the need to account for the ‘screening hypothesis’. This hypothesis states that education acts as a signalling device to employers. It indicates those people have higher ability/motivation, as indicated by their completion of higher education study, will potentially be more desirable employees. This needs to be accounted for by any calculation of public benefits, as it indicates that a proportion of the higher wages achieved by a graduate (and so taxation revenues that they provide) are due to employer biases towards more highly educated employees.
For the purposes of his report, Professor Chapman assumed that the signalling aspect of higher education accounts for about 10 per cent of all benefits generated by higher education. This figure is based on estimates within existing literature.