The Impact of Higher Education in WalesWales Millennium Centre

Cardiff, 9th March 2011

Kristinn HermannssonKaterina Lisenkova

Peter McGregorKim Swales

Fraser of Allander InstituteDepartment of EconomicsUniversity of Strathclyde

Introduction and overview

1. What kinds of impacts do HEIs have?

2. Demand-side impacts: expenditure

3. Supply-side impacts 1: graduates

4. Supply-side impacts 2: technology spillovers

5. Conclusions and further research

Impacts of HEIs on their host regions

Demand Side Impacts

Expenditures on inputs

Overseas students

Higher Education Institutions

Supply side Impacts

Human capitalSkills

ResearchConsultancy/Advisory

OtherKnowledge exchange

Impacts on the Regional

Economy

Cultural Impacts

Cultural outreach(Political stability)

(crime)

EnvironmentalImpacts

Direct effects(pressure forSustainable

Development?)

DistributionalIncome by household

(Poverty reduction)(equity)

Wider regional impacts

Types of impacts?

• Existing literature on regional impacts of HEIs falls into two forms:

– Expenditure impacts of HEIs (and their students) HEIs as purchasers of goods

employers of labour

Source of demand in the region

– “Knowledge economy”, with focus on technology spillovers HEIs as a source of innovation

TFP growth

impacts supply in region

Types of HEI impacts in regionalliteratureDemand-side

impactsSupply-side

impacts

• Explore expenditure impacts of HEIs and students

• Employ “multiplier analysis” (e.g. Input-output tables and models)

• Focus on demand impacts within the host region

• Assume passive supply side• So cannot accommodate

supply-side impacts emphasised by “knowledge economy” (or any others)

• Contribution of HEIs to “knowledge economy”

• Mix of micro-econometric analyses and case studies

• Spatial effects are often included

• No means of assessing system-wide impacts

• No comprehensive account of the supply-side impacts of HEIs

Problems and gaps?• Two disparate literatures in terms of their vision of

regional economies• Not comprehensive in terms of their coverage

– The most obvious omission is lack of a quantitative estimate of the system-wide impact of graduates on host region (but social and private non-market too)

• Nor is the problem simply at the regional level– Many micro-econometric studies of graduate earnings

– Macro growth models (with measure of human capital) = total returns

– Macro less micro = social returns

– But no micro-to-macro

Measuring HEI Impacts• Develop a single framework in which to explore the impacts of

HEIs on both demand and supply sides of economy:– Accommodate multi-sectoral expenditure impacts, but

Will emulate regional HEI-disaggregated IO if supply conditions passive

And can identify demand impacts even if supply side constraints

– Can accommodate all supply-side impacts of HEIs (provided evidence), in a “micro-to-macro” approach:

Knowledge spillovers, but system-wide impacts

Impact of graduates through their direct impact on productivity on host region

(Other social impact and non-market private benefits on regions and nation)

– Framework we propose here is HEI-disaggregated computable general equilibrium model (CGE) for Wales

Measuring HEI impacts• BUT:

– Here want to explore expenditure impacts of HEIs: By individual HEI (and students) Use this analysis to explore “policy scepticism” that has developed around

expenditure impacts More convenient to use HEI-disaggregated IO analysis for this Reasonable approximation under passive supply conditions (short-run? long-run?)

– However, for supply-side HEI impacts need to build in the supply side of the regional economy

HEI-disaggregated social accounting matrix Calibrate CGE model of Wales Simulate supply-side impacts: graduates; technology spillovers

Introduction and overview

1. What kinds of impacts do HEIs have?

2. Demand-side impacts: expenditure

3. Supply-side impacts 1: graduates

4. Supply-side impacts 2: technology spillovers

5. Conclusions and further research

Expenditure impacts of HEIs

• We attempt to ensure comparability by constructing an HEI-disaggregated input-output table for Wales and treating each HEI as a separate sector within the table

• Use the data base to explore some of the key characteristics of Welsh HEIs

• Attempt to address policy scepticism through new IO attribution analysis: – balanced expenditure multipliers (“extract” that part of HEI impacts

attributable to public funds)

Expenditure impacts of HEIs (2006)

Institution

Income Employment Students

Total % Welsh Assembly

Government

Income per staff

Share of wages in

expenditure

Income per

student £

Share non-

Welsh

UW, Aberystwyth 77 53% 48,091 58% 9,764 71%

UW, Bangor 96 55% 63,897 59% 12,586 55%

Cardiff 329 50% 71,085 58% 14,604 61%

UWI Cardiff 59 65% 57,294 62% 7,624 43%

Glamorgan 92 71% 58,400 60% 6,744 33%

UW, Lampeter 13 61% 58,735 60% 5,384 74%

UW, Newport 36 78% 54,002 63% 6,946 29%

NEWIHE 27 78% 62,025 57% 6,692 42%

RWCMD 8 80% 54,475 65% 13,417 59%

SIHE 25 79% 52,896 60% 5,635 30%

UW, Swansea 117 53% 61,770 63% 10,784 47%

Trinity UC 12 68% 44,716 59% 7,103 15%

Total/average 890 58% 61,786 60% 10,058 49%

Expenditure impacts of HEIsConventional IO Type 2 Impacts

Income Output £m GDP £m Employment FTEs (000's)

UW, Aberystwyth 77 144 82 2.5

UW, Bangor 96 181 105 2.8

Cardiff 329 576 325 8.1

UWI Cardiff 59 107 63 1.7

Glamorgan 92 176 103 2.7

UW, Lampeter 13 24 14 0.4

UW, Newport 36 68 41 1.1

NEWIHE 27 53 30 0.8

RWCMD 8 15 9 0.2

SIHE 25 46 27 0.8

UW, Swansea 117 221 132 3.4

Trinity UC 12 23 13 0.4

Total 890 1,635 944 24.9

% of WAL total output/GDP/employment 1.84% 2.33% 2.12%

Expenditure impacts of HEIsConventional IO Type 2 Impacts (£ million)

Expenditure impacts of HEIsConventional IO Type 2 Multipliers

Expenditure impacts of HEIsBalanced expenditure Multipliers

Expenditure impacts of HEIsAttribution of expenditure impacts for aggregate sector

Generic public sector impact Net impact Gross impact

Institutional spending 513 294 807

Knock on impacts 504 298 802

Switching impact 15 15

Institutional impact total 1,017 608 1,625 – % of total impact 63% 37% 100%

Exogenous student spending 52 547 599

Knock on impacts of student's consumption 8 89 98

Switching impact -42 -42

Student's consumption impact total 60 594 655 – % of total impact 9% 91% 100%

Total impact attributable to HEIs 1,077 1,203 2,280 – % of total impact 47% 53% 100%

Expenditure impacts of HEIsTraditional and balanced-budget impacts of UW Newport by sector

Expenditure impacts of HEIs(Balance exp mult as % of Type 2)

% of public funding

Expenditure impacts of HEIsType 2 IO Multipliers including student expenditure impacts

Expenditure impacts of HEIsBalanced expenditure multipliers including student expenditure impacts

Expenditure impacts of HEIs

• Welsh HEIs’ expenditures have a non-trivial impact on demand:– Allowing for public funding does reduce multiplier impacts relative to conventional

IO estimates– But “policy scepticism” (at least in extreme form) rejected

• Attribution of impacts for aggregate sector– HEIs dependent on public funding

63% ‘generic’ public sector impacts, 37% ‘net’ impact

– Student’s consumption impacts mostly exogenous 9% ‘generic’ public sector impacts 91% ‘net’ impact

– In total: 47% ‘generic’ public sector impacts, 53% ‘net’ impact

• Institutions differ– Swansea 42% ‘net impacts’ (from institutional spending), RWCMD 16% ‘net impacts’

• Students matter– ‘Net impact’ of student’s consumption spending sometimes 3x the institutional ‘net impacts’

Introduction and overview

1. What kinds of impacts do HEIs have?

2. Demand-side impacts: expenditure

3. Supply-side impacts 1: graduates

4. Supply-side impacts 2: technology spillovers

5. Conclusions and further research

The impact of graduates on the Welsh economy

• Projections of graduates (with unchanged participation in key age cohort)

• Wage premium (assume constant)

• From wage premium to productivity (signalling)

• From productivity to system-wide impacts

Future composition of the labour force• Projecting future number of graduates by age in the labour force

– Based on “UK net retention rate” (calculated from HESA DLHE data set for 2006-07)

– “UK net retention rate” –takes into account net flow of graduates from other UK regions – was 76-78%

– Retention rate is very stable over time (2002-2007)– Apply it to the total number of graduates– According to this calculations about 16,000 new graduates entered Welsh labour

force in 2006– For consecutive years total number of new graduates is adjusted proportionately

to the number of people aged 20-25• Graduates are distributed among age groups proportionally to the number

of HE leavers in each age group in 2006

Share of graduates in total labour force

Long-run skill-adjusted labour force increase in Wales

30%

45%

60%

Signalling 10%W

age

prem

ium

2.8%

4.1%

5.2%

Increase in GDP due to rise in skill-adjusted labour force in Wales

Increase in employment due to rise in skill-adjusted labour force in Wales

Introduction and overview

1. What kinds of impacts do HEIs have?

2. Demand-side impacts: expenditure

3. Supply-side impacts 1: graduates

4. Supply-side impacts 2: technology spillovers

5. Conclusions and further research

Supply-side Impacts of HEIs on TFP. (Based on Harris et al (2010))• The impact of HEI-firm links on firm-level TFP in the GB• The model

logYi = α + βElogEi + βKlogKi + βxXi + βATTHEIi + εi

• βATT is a measure of the impact of HEI collaboration on TFP• Collaborating with HE is associated with TFP that is 12% higher• In 2006 (CIS data) 38.3% of Welsh firms (in GVA terms) collaborated

with HEIs• For the economy as a whole the impact is 4.58% (i.e. 38.3% of 12%) • This estimate is effectively a measure of the impact of a “hypothetical

extraction” of HEIs on TFP (104.58 too 100 or 4.38% reduction in TFP)

The impact of HEIs on TFP. Based on Harris et al (2010)

Long-run percentage change. TFP shock of 4.38%.

GDP 6.37

Consumption 1.79

Investment 3.01

Total Employment 1.61

Unemployment Rate -14.47

Nominal wage -0.71

Real wage 1.52

CPI -2.26

Export RUK 6.14

Export ROW 6.14

Capital Stock 2.96

The impact of HEIs on TFP

The impact of HEIs on TFP

Introduction and overview

1. What kinds of impacts do HEIs have?

2. Demand-side impacts: expenditure

3. Supply-side impacts 1: graduates

4. Supply-side impacts 2: technology spillovers

5. Conclusions and further research

Conclusions• Welsh HEIs’ expenditures have a non-trivial impact on demand:

– Allowing for public funding does reduce multiplier impacts relative to conventional IO estimates

– But “policy scepticism” (at least in extreme form) rejected

• However, supply-side impacts (with unchanged HE policy) potentially much bigger:– Through human capital embodied in its graduates Welsh HEIs exert significant impact on GDP and

employment– Similarly, significant impacts of HEIs interaction with enterprises’ on total factor productivity

• Wider impacts of HEIs:– Social returns to HE: measurement difficulties and controversial - McMahon (2009) US: equivalent to 90% of private return

– Non-market private returns to HE: measurement issues (122% of private return)

– We have conducted some indicative analyses (not reported here)

– Potentially important for policy, and appropriate mix of private-public funding

• Interregional extensions (not reported here)– Integrated regional economic and HEI system

– Initial estimates – no very big “spillovers” from Welsh HEIs to other regions