By Andreas Schleicher – Director, Directorate for Education and Skills, OECD
– On average, individuals benefit from tertiary education degrees – adults with a Master’s degree earn 88% more than high school graduates across OECD countries.
– There are significant variations in governments’ approach to financing higher education as some rely on tax revenues while others depend on private funds by families and students. In many countries, students can utilise different financial support including loans, grants and scholarships, but a question remains as to what is effective to encourage low-income students’ mobility into tertiary education without increasing debt for the graduates.
– Governments need to improve the accessibility to information on the benefits of tertiary education and prospective post-study job opportunities.
A century ago, people hotly debated what share of the population should complete high school. However, school attainment continued to rise and today just 14% of the youth population in OECD countries has not completed high school (and those who have not face large labour-market penalties).
These days, the same debate centres around the share of the population that needs a post-secondary qualification – and who should pay for that. But people vote with their feet. This year’s edition of OECD’s Education at a Glance shows that in 2000, slightly more than a quarter of 25-34-year-olds had a tertiary degree and this has risen to nearly half today. A tertiary degree is not always a university qualification, though; in some countries, advanced vocational qualifications are a popular alternative.
The rise in knowledge workers has not led to a decline in their pay
As Education at a Glance 2022 shows, the increase in knowledge workers has not led to a decline in their pay, which is what we have seen at the low end of the skills spectrum. On average across OECD countries, adults with a Master’s degree now earn 88% more than high school graduates, and in Chile almost five times as much. Some interpret the fact that the earnings advantage is higher among older cohorts as evidence that rapidly rising qualifications among younger cohorts have led to an over-supply. But that’s not borne out by the evidence. The data show that the earnings advantage among younger adults has remained stable over the last years. The more likely explanations are increased benefits among older workers due to growing work experience and responsibilities and that tertiary attainment is often a prerequisite for moving up the career ladder.
Has the earnings advantage become too high?
Is the earnings advantage a fair reflection of people’s investment in education or should governments do something to reduce them? The OECD Risks That Matter Survey asked respondents whether they thought governments should reduce income differences between the rich and the poor by collecting taxes and providing social benefits. On average across countries participating in this survey, 65% of respondents without a university-level qualification said that governments should do more, or much more to reduce income inequality (the possible response options were “much less”, “less”, “about the same as now”, “more” and “much more”). Interestingly, even among respondents with some university-level education it was still 61% (see Figure 1).
Figure 1: Relative earnings of tertiary-educated workers and share of adults without university-level education supporting more redistribution to reduce income inequality (2020)
Earnings of full-time full-year workers without tertiary attainment = 100
There also seems to be some relationship between the size of the income differences and the propensity of people to say governments should do something about this. In Denmark and France, where the earnings premium of tertiary education is relatively low, adults without university-level education were among the least likely to reply that government should be doing more to reduce income differences. Canada, Finland, Germany, the Netherlands, Norway and Switzerland also fit into this pattern, with relatively low earnings differences and less support for government intervention to reduce income gaps. These countries tend to already have relatively high levels of income redistribution and/or relatively low levels of pre-tax income inequality, combined with relatively high earnings for workers without a tertiary degree. The opposite pattern is observed in Chile, Israel, Lithuania, Mexico, Poland, Portugal, Slovenia and the Republic of Türkiye.
Averages can hide important variation
As always, averages can hide important variations. As Education at a Glance 2022 highlights, the labour-market rewards depend on what people actually studied. Among the 17 OECD countries with available data, STEM fields (i.e. science, technology, engineering and mathematics) tend to be associated with the highest earnings. In contrast, degrees in education, the arts and humanities (except languages), social sciences, journalism and information yield relatively low earnings. Even within related fields there can be huge variation. Workers with a medical or dental degree earn 50% more than those with a degree in nursing, except in Germany and Latvia. In Norway, workers with a tertiary degree in nursing even earn slightly less than workers with upper secondary attainment. Maybe the COVID-19 pandemic will make us reconsider this.
Gender is another relevant dimension. On average across OECD countries, tertiary-educated full-time full-year female workers in 2020 earned just 77% as much as their male counterparts. Differences in the choice of field of study between men and women contribute to the gender pay gap. However, even when comparing workers with a tertiary degree in the same field of study, women’s work is still less well remunerated than men’s.
Who should pay?
Giving strong returns, it is not surprising that both individuals and governments have generally increased their investment in tertiary education, and expenditure at the tertiary level of education tends to increase much more quickly than at lower levels of education. That brings up the question of who should pay for all this, and this year’s edition of Education at a Glance devotes considerable attention to this.
In some countries, such as Australia, Canada, Japan, Korea, and the United States, the costs of tertiary education are high, often requiring a significant investment of an individual’s personal funds, either in up-front payments or loan repayments later on. But even in countries where the direct costs of tertiary education to an individual are much lower, such as Finland, Norway, and Türkiye, the time invested in pursuing a degree – and the opportunity cost of foregone earnings while an individual is in school – can be a major factor.
Meeting the demand while maintaining high quality creates pressure on budgets and pushes countries to increase their current level of spending or the efficiency of their expenditure on education. Interestingly, countries have very different approaches to sharing the costs of university education among governments, students and their families, and other private entities.
For example, the Nordic countries in Europe pay for universities through the public purse and often generously subsidise the living costs of university students. It makes sense for them because participation is almost universal and they have a steeply progressive tax system so that they can recuperate the funds from graduates who typically end up as the better earners.
Other European countries like France or Germany, too, say tertiary education is important, but their governments put in much less public money nor allow their universities to charge tuition. They tend to end up limiting access, often with the effect that all workers end up paying for the university education of the rich parents’ children. That is, because wherever access is limited, it tends to be the wealthiest and not the smartest students who get the best places, whatever the source of funds.
The third alternative is to allow universities to charge tuition. Some argue that tuition puts up barriers to social mobility. But interestingly, the data show no cross-country relationship between the level of tuition countries charge and the participation of disadvantaged youth in tertiary education. In fact, social mobility is worse in Germany, which pays for almost all university education through the public purse than it is in the United Kingdom, which has the highest share of private financing among OECD countries.
But while a policy that includes tuition seems a sensible approach to sustainable higher education financing, getting tuition right is not that simple. If countries put the burden for tuition entirely on the shoulders of families, they risk not attracting the brightest but the wealthiest children to attend, which means not making the most out of the country’s talent. Even if countries rely mainly on commercial loans which students have to repay once they finish their studies, they still leave students and families with the risk, because the promise of greater lifetime earnings of graduates is a statistical one, and there is a very wide spread in actual earnings. Some countries have tried to square that circle with a combination of income-contingent loans and means-tested grants. That provides risk-free access to financing for prospective students with governments leveraging, but not paying, for the costs. But even the best loan system is often not sufficient. There is ample evidence that youth from low income families or from families with poorly educated parents, and also youth who just don’t have good information on the benefits of tertiary education, underestimate the net benefits of tertiary education. That’s why some countries complement loan schemes with means-tested grants or tuition waivers for vulnerable groups. This is a good investment of public money, simply because people with better education will pay much more in taxes than what their education costs.
A question that many educational systems face is whether financial support for students should be provided primarily in the form of loans or in the form of grants and scholarships. On the one hand, advocates of student loans argue that they allow for scaling up of the number of students that can benefit from the available resources. If the amount spent on scholarships and grants were used to guarantee and subsidise loans, the same public resources could target a larger number of students, and overall access to higher education would increase. Loans also shift some of the cost of education to those who benefit most from higher education, individual students, reflecting the high private returns of completing tertiary education. On the other hand, student loans are less effective than grants in encouraging low-income students to access tertiary education. Opponents of loans argue that high levels of student debt at graduation may have adverse effects for both students and governments if large numbers of students are unable to repay their loans. A high share of graduates with debt could be a problem if employment prospects are not sufficient to guarantee student loan repayments.
Some concluding thoughts
Clearly, both individuals and governments have strong reasons to continue to invest in advanced skills, and sharing the costs between individuals and taxpayers seems the most sustainable approach to finance a further expansion of higher education when public finances are constrained. But while the returns to tertiary education degrees are high on average, they vary hugely across fields of study, types of degrees, institutions and the subsequent employment opportunities of the students. Income-contingent loan systems seem a sensible and effective approach to help students manage that risk and such systems have been implemented successfully across OECD countries. But even here, governments can do better with designing loan repayment schemes so that middle income workers – such as teachers, health professionals, public sector workers – don’t end up paying more for their education than better earners such as lawyers and bankers, as is currently the case.
Governments and universities can also do better with aligning course offerings with societal demand. That may also mean to think more carefully about fee structures, ensuring that these better reflect the cost of provision and the value to students.
But the real question is the one relating to the costs of higher education studies. Looking at the data from Education at a Glance 2022, it is simply bewildering how much the cost of higher education varies between countries, the university and the person. Somehow, students have to find their way through this fragmented market, often with insufficient information, or suffer the consequences in terms of unsustainable debt. At the very least, governments could do a much better job sharing information about the quality of university studies and the labour-market opportunities associated with prospective studies, in ways that everyone can understand.
- Website| Education at a Glance 2022
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- Blog | What you study can affect what you earn: Here’s why that matters during COVID
- Blog | Finished school? What’s next?