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Measuring the value of externalities from higher education

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Abstract

This paper takes an innovative approach. We have used the idea of converting international evidence of the size of higher education externalities as a proportion of GDP into Australian-specific dollar equivalents and added these estimates to estimates of lifetime fiscal returns to graduates. This allows us to estimate the expected spillovers over a graduate’s lifetime, an opportunity that has so far not been taken elsewhere. We conclude that an additional year of higher education in an Australian context, valued at the time of a student’s enrolment, lies between $10,635 and $15,952 in 2014 terms. We also acknowledge that it is difficult and inappropriate to apply estimates of average externalities to issues related to public sector pricing. However, having some idea of the boundaries of the potential sizes of higher education spillovers is a valuable and interesting exercise.

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Notes

  1. These typically take the form of expected higher lifetime incomes for graduates relative to those of non-graduates. See Borland (2002); Daly and Lewis (2010).

  2. This conclusion follows only if the consequences of public sector involvement improve the situation from a societal perspective. It is possible that there is also “government failure”, which could mean that misguided or poorly designed policy attempts to reduce the negative impact of market failure make the society worse off.

  3. Meaning, in our context, that a tuition price change for university services will be associated with a non-zero price elasticity of demand.

  4. See Spence (1973); Blaug (1976).

  5. See Hungerford and Solon (1987), Brown and Sessions (1999) and Chevalier et al. (2004).

  6. Barr (1993, page 719).

  7. Barr (1993, page 720).

  8. These should be considered the most thorough empirical treatment of non-pecuniary education externalities in the international research arena.

  9. See Daly and Lewis (2010).

  10. An average estimate derived from McMahon’s consideration of a large number of studies.

  11. Econometric specification of this earning function takes the following form:

    $$lnI_{i} = \beta_{0} + \beta_{1} experience_{i} + \beta_{2} experience_{i}^{2} + u_{i} ,$$
    (1)

    where I i is the annual earnings of individual i, and experience i is the potential length of time a graduate has been employed

  12. We use a real discount rate of 5 per cent per annum to derive their respective present values.

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Acknowledgments

We are grateful to the Australian Research Council for financial support with Linkage grant number LP 110200496. A version of this paper was originally prepared for the Higher Education Base Funding Panel on behalf of the Australian Government Department of Education, Employment and Work Place Relations, and we are grateful for their permission to publish the research. We acknowledge also the valuable input of several referees, one of whom made exceptionally productive suggestions. This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported in this paper, however, are those of the authors and should not be attributed to any Australian Government Departments or the Melbourne Institute. Errors, omissions and the views expressed are those of the authors only.

Author information

Authors and Affiliations

  1. Crawford School of Public Policy, The Australian National University, J.G. Crawford Building, Lennox Crossing, Canberra, ACT, 0200, Australia

    Bruce Chapman & Kiatanantha Lounkaew

  2. Faculty of Economics and Institute for Social and Economic Studies, Dhurakij Pundit University, 110/1-4 Prachachuen Road, Laksi, Bangkok, 10210, Thailand

    Kiatanantha Lounkaew

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  1. Bruce Chapman
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  2. Kiatanantha Lounkaew
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Correspondence to Kiatanantha Lounkaew.

Appendices

Appendix 1

See Table 4.

Table 4 Estimates of education externalities
Full size table

Appendix 2

Figure 2 below illustrates several elements pertaining to the calculation of private rates of return as well as the value of fiscal externalities. In the figure, Y represents gross earning and T represents tax paid by each level of education.

Fig. 2
figure 2

Illustrating calculations of fiscal externalities

Full size image

Where:

  1. (a)

    is the total opportunity cost of government in terms of foregone tax income;

  2. (b)

    is the total after-tax earnings in the first 4 years upon completing Y12;

  3. (c)

    is the total private costs of pursuing university study;

  4. (d)

    is the total additional tax paid by a university graduate;

  5. (e)

    is the total additional after-tax earnings of university graduate;

  6. (f)

    is the total tax paid for 4 years after completing Y12 until retirement; and

  7. (g)

    is the total after-tax earnings from 4 years after completing Y12 until retirement.

With the figure, private benefits and fiscal externalities can be calculated as follows:

  1. 1.

    Private benefit = (e)–(b)–(c); and

  2. 2.

    Fiscal externalities = (d)–(f)–(a).

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Chapman, B., Lounkaew, K. Measuring the value of externalities from higher education. High Educ 70, 767–785 (2015). https://doi.org/10.1007/s10734-015-9866-x

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