Should young people be made to stay on at school longer?

The most important point I want to get across, however, is the fallacy that the better outcomes observed for those who complete high school should be taken to imply that we should try to keep others in school for longer.

It is a line that is pushed not only by governments from time to time, but also by groups such as the Business Council of Australia, which recently published estimates that increasing Year 12 retention rates from 80 per cent to 90 per cent would increase GDP by 0.28 per cent per annum by 2020. The implicit assumption is that if those who currently do not finish school were instead to go on and complete Year 12, they too would achieve outcomes similar to those observed for youth who currently do complete Year 12.

The most obvious problem with this argument is that those who complete Year 12 are inherently different from early school-leavers. They have higher ability in the sense that they have higher measured numeracy and literacy standards and do better on other measures of school performance. So much of the difference in outcomes between these groups is a result of difference in pre-existing abilities of those who complete high school relative to those who do not.

They also typically have other favourable characteristics. My own study, like others before it, confirms that early school-leavers, on average, come from lower socio-economic backgrounds, and do not have access to the same social capital networks of opportunity. Their parents are less wealthy, less educated and more likely to be unemployed or working in low-skilled occupations. Indigenous youth too are significantly less likely to complete high school and already face significant barriers within the labour market.

Given a positive correlation between pre-existing favourable characteristics and the years of schooling a young person is likely to complete, it is very difficult for researchers to get unbiased estimates of the true impact of additional years of schooling on outcomes such as employment and earnings. This is particularly so because many of these attributes, such as ability, are difficult to observe and control for.

Economists have gone to considerable lengths to overcome these difficulties, with particularly convincing evidence from studies using samples of genetically identical twins to control for, such background factors. The evidence is that extra years of education do improve individuals’ employment opportunities and earnings capacity, but the estimated effect is far smaller when attributes such as ability are controlled for.

Even these more sophisticated studies only provide estimates of the average effect of extra years of schooling for those who receive it. Except in the unlikely case that the effect of an additional year of schooling is the same for everyone (homogenous), it does not necessarily follow that those who currently leave school early would similarly benefit from staying on. This depends on whether or not years of schooling and ability are complementary. Conceivably it could be that it is those with lowest ability who would benefit most from extra schooling. Most likely, however, there are positive synergies between ability and further education, a point obviously accepted by society given our processes for selection into higher education.

My own research specifically looked at youth of below average academic ability and those least likely to complete Year 12 and estimated the benefit to them of an additional year of schooling. It used data on a cohort of youth who were in Year 9 in 1995 available through the Longitudinal Surveys of Australian Youth. Consistent with the preceding discussion, I find that the estimated benefits from additional years of schooling fall and are insignificant when controls for ability and socio-economic background are included.

In some models the effect of staying on in school is found to actually reduce earnings and employment opportunity, suggesting individuals would have benefited more from a year’s experience in the labour market rather than from remaining in school. Other research using this data has also found high positive returns from work experience. Importantly, I also find evidence of a strong synergy between ability and years of schooling - it is the combination of ability and extra years of schooling that provides young people with positive benefits, not just the years of schooling themselves.

I do not wish to claim that the estimates in my study are definitive. I test a range of different methodologies and obtain a broad range of estimates, most of which are imprecise in statistical terms. Moreover, they apply to just one cohort of young people who are observed only in the early stages of their working lives. However, to the best of my knowledge, it is the only study in Australia to have actually tried to estimate such an effect. I hope I have made clear that, despite what is commonly claimed, currently there is no other such empirical evidence to support a policy of increasing either the mandatory schooling age or attempting to further increase retention rates to Year 12.

Moreover, this assessment is based on point-in-time indicators of success, rather than cumulated earnings. The costs of additional years of schooling in terms of foregone earnings, direct education costs and any “psychic” loss of wellbeing arising from keeping young people in school when they are not happy there, have not been considered. If the effect on wages and employment opportunities is zero or marginal when observed in later years, the impact of remaining in school will clearly be negative in terms of a net cost-benefit analysis.

I am not advocating that young people who are unhappy in school or performing badly should simply drop out. However, in such situations, other alternatives such as reasonable job openings, traineeships and apprenticeships should not be ignored for the sake of accumulating years of schooling.

Policy needs to be based on sound empirical evidence, and strong supporting evidence should be demanded of a policy that would so significantly reduce young people’s choices in life. The returns to schooling differ across individuals because individuals are different. The objective of policy should be to ensure there are alternative pathways and institutional arrangements available to meet the varying needs, abilities and preferences of young people, and to make available the information they require to make informed decisions on what is optimal for them.