Using Rate of Return Analyses to Understand Sector Skill Needs. CEE DP 70

Policy-makers in almost all countries agree on one thing: namely on the importance of education and skills to ensuring future economic prosperity. A fruitful line of research has focused on determining the impact that acquiring education or training has on an individual's labour market productivity and earning prospects: this is known as rate of return analysis. The Centre for the Economics of Education (CEE) has undertaken extensive research in this area and provided evidence on the returns to a variety of qualifications in the UK (CEE Discussion Papers 4, 6, 35 and 47). The CEE has also investigated specific issues such as the return to basic skills (CEE DP 3), returns to the marginal learner (CEE DP 45), returns to NVQ2 (CEE DP 46), the returns to qualifications acquired in adulthood (CEE DPs 19 and 39) and the returns to training (CEE DP 36). In addition the CEE has researched the range of methodological issues pertaining to rate of return analysis (see CEE DP 5 and 16). In this paper the authors summarise current understanding on the returns to qualifications, focusing specifically on differences in the economic values of qualifications by sector. First they explain what they mean by rate of return analysis in section 2. In section 3 they then discuss how rates of return estimates might be useful for policy-makers, and in particular how those who are trying to understand and meet the skill needs of different sectors of the economy might use such information. In section 4 they describe how rates of return are actually calculated in practice, before going on to summarise the evidence base. They start with a discussion of aggregate supply and demand in section 5, before focusing on the rate of return to specific qualifications and types of education in section 6. They conclude with an analysis of what the empirical evidence implies for policy-makers working on sector skills issues (section 7). A complex picture emerges from the evidence base: (1) In the UK there has been a massive expansion in the supply of qualified labour; (2) Qualifications that are supposedly tailored to employers' skill needs, such as NVQs, are actually valued less highly in the labour market; (3) Newer vocational qualifications (particularly NVQ2) yield a zero or minimal return in the labour market, although they do increase an individual's likelihood of being in employment; (4) The return to lower level vocational qualifications varies substantially across sectors; (5) NVQ qualifications yield a respectably high return if they are acquired through a modern apprenticeship; (6) Rapid expansion of the supply of graduates has resulted in much more variation in graduate outcomes; (7) Much of the apparent fall in the return to a degree for very new graduates is concentrated specifically on graduates who fail to get graduate level jobs; (8) There is substantial variation in returns across different degree subjects, and by implication across different sectors of the economy; and (9) In particular, the return to arts and humanities degrees for very recent graduates appears to have fallen to zero. Additional tables are appended. (Contains 7 figures, 10 tables and 14 footnotes.) [Additional funding was provided by the Sector Skills Development Agency.]