More youngsters will stay at school simply because there are fewer jobs for those who leave early.

Getting a degree is an excellent investment

Ross Gittins
February 14, 2009

IF RECESSIONS are anything to go by, one thing we can expect this time is a rise in the year 12 retention rate. More youngsters will stay at school simply because there are fewer jobs for those who leave early. Similarly, more youngsters are likely to go on from school to university.

But is this a good thing? Depends. It's not good if the youngsters do not want to be there, are not given subjects to study they find interesting and end up disrupting those who do know why they are there.

If those who stay on do develop an interest in what they are studying, if they can see the wider possibilities that further education opens up, they and the economy will end up better off. That requires maturity, so maybe it is not so bad to keep youngsters in the system until they have had time to think things through.

But the trouble with education beyond the minimum leaving age is that it involves exercising a discipline that is hard enough for oldies, let alone young people — delayed gratification.

There is more to further education than making money, but for most people money is a big part of it. If they can find a job, young people are tempted to leave education early because they cannot wait to start earning — and spending — their own money.

What is much harder for a young person to see is that if only they delay their entry into the working world for a few years until they have gained more education, the money they will earn over their lives is likely to be a lot greater.

If you were to do an economics, commerce or business degree, one of the many things they would teach you is how to estimate the monetary benefits of getting such a degree. The method is explained in a book by Jeff Borland, professor of economics at the University of Melbourne, Microeconomics: case studies and applications. It is a great little book I recommend to university students having trouble seeing the practical relevance of all the dry micro theory they are being taught.

"The golden rule for optimal decision-making is that a decision-maker should only take an action if the addition to benefits (marginal benefit) from that action is at least as great as the addition to opportunity costs (marginal cost)," Professor Borland writes.

That is, most decisions involve costs as well as benefits, and you have to weigh them against each other to see if there is a net benefit. And if you are deciding whether a degree is worth it, you have to take account only of those costs and benefits peculiar to the decision to go to uni — that is, the marginal costs and benefits.

So you do not just find out how much graduates typically earn, you also have to find out the typical earnings of non-graduates because it is only the difference between the two that is relevant.

When you measure the costs involved, you look at the cost of the higher education contribution scheme (HECS), any incidental fees and the purchase of textbooks, but you ignore the living costs you incur while doing your degree. Why? Because you will have living costs whether or not you go to university. But the costs you have to take account of are not just those you pay out in cash. It is the opportunity cost that matters. And the big opportunity you forgo by going to university full time is the money you could have earned from a full-time job.

This turns out to be by far the biggest cost: the income you give up while you are studying (a fact those youngsters desperate to quit education and start earning intuitively understand).

Here you find out the typical earnings of a young person without university qualifications and subtract the typical earnings of students from their part-time jobs.

It turns out that acquiring a degree is like making an investment: the costs are up front, whereas the benefits do not start until you have graduated and are employed, but then they flow every year of your working life.

Another thing you learn at university is that, if you have money coming in and going out over a many years, you need to put all the flows onto a common basis so they can be validly compared.

In 2000, Professor Borland examined the case of a student aged 18 who took three years to complete a degree. He found this would add an average of $450,000 to a graduate's lifetime earnings, compared with an opportunity cost of $50,000.

This is a gain of more than $15,500 a year (in dollars of year 2000 purchasing power) for every year until retirement.

It is equivalent to a 14.5 per cent a year return on the initial investment for every year spent working.

Not many investments are paying that well.