Tuesday, 30 December 2014

Access to higher education and the value of a university degree

Governments sometimes promote reforms, normally with little thought as to what the actual outcomes will be, that increase access to education for a large share of the population. These reforms may lower the returns to education by altering returns to skills, education quality, and peer effects. In a new column at VoxEU.org examines Nicola Bianchi the case of a 1961 Italian reform that increased enrolment in university STEM majors among students who had previously been denied access. The reform ultimately failed to raise their incomes.

Bianchi writes,
In a recent working paper, I illustrate the effects of a 1961 Italian reform that led to a 216% increase in enrolment in university STEM (Science, Technology, Engineering, and Mathematics) programmes over a mere eight years (Bianchi 2014). I find that:
  • The reform increased enrolment in university STEM majors among students that had been previously denied access, but ultimately failed to raise their incomes.
  • The enrolment expansion lowered the value of a STEM education by crowding out university spending and generating negative peer effects.
  • Due to lower returns to a university STEM degree, some students with the potential to succeed in STEM turned to other university programs.
He continues
Italian high schools offer different curricula. Until 1960, a student who graduated from a university-prep high school (licei) could enroll in university in any major. A student who graduated from a technical high school for industry-sector professionals (istituti industriali) could enroll in only a few majors and most often did not enroll in university at all. In 1961, the Italian government allowed graduates with a technical diploma to enroll in university STEM majors for the first time. Technical graduates embraced this opportunity to the extent that freshman enrolment in STEM programs had increased by 216% by 1968 [...]

To analyze the effects of this reform, I collected high school records, university transcripts, and income tax returns for the population of students that completed high school in Milan between 1958 and 1968. I chose Milan because it is Italy’s commercial capital and second largest city. It has the thickest market for university graduates and university-type jobs, and is believed to be the place where a university graduate can earn the highest returns.
The reforms resulted in higher university access but a lower value of education.
The reform was successful in increasing university access among students with a technical diploma. After 1961, many technical students enrolled in university and completed their degrees. However, I find little evidence that technical students gained positive returns to university STEM education. This is an important result for two reasons:
  • STEM degrees were leading to high-paying occupations and
  • the outside option of technical students was to enter the labour market with just a high school diploma.
To explain these findings, I lay out a simple framework in which enrolment expansions affect returns to education through three main channels:
  • higher supply leads to lower wages,
  • higher enrolment crowds university resources and decreases the quality of education,
  • learning is lower in classes with students from different types of high school.
Thanks to the reforms you got crowding of university spending, peer effects, and changes in major choices.
Several findings suggest that the enrolment expansion following the policy implementation lowered the returns to a STEM degree. To analyze changes in the value of a university education, I focus on the students who were not directly affected by the reform – the graduates from university-prep high schools. Among these students, returns to STEM education declined after 1961 to the point of erasing the pre-reform income premium associated with a STEM degree.

This decline can be partially explained by a lower amount of skills acquired in STEM majors after 1961. I find that human capital (measured by absolute grades) decreased more in STEM courses in which resources became more crowded and in which the entry of technical students had greater disruptive potential. Overall, lower resources per student can explain 31% of the income decline, while the change in class composition can explain another 37.3%. The remaining share can be attributed to higher supply of workers with a university STEM education or possibly other minor channels of general equilibrium effects.

By decreasing the value of STEM education, the reform might have deprived STEM majors of talented students. After 1961, many more students with a university-prep diploma decided to enroll in university majors that were still not accessible to technical students. This effect was concentrated among the students with higher high school grades.
Policy conclusions?
There are instances in which students should invest more in education. For students who do not have the resources to pay for education, public intervention is needed to improve access, but should just ease the financial constraints of students under-investing in education. Public intervention, should not take the form of greatly expanded education provision by state-controlled universities. The inefficiencies in the public provision of education might be magnified by enrolment expansions and might limit the benefits for targeted students.

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