Forecasting for our universities

Labor begins its higher education “revolution” with an almost blank slate. Having promised little during the 2007 election campaign, few previous commitments constrain the government. For once, higher education’s political unimportance could end up being to its advantage. Unencumbered by the popular but often bad policies parties use to win elections, Labor can take a fresh look at our high education system.

Labor is, however, rather sketchy on why we need a higher education revolution; themes over the last two years have included under-funding, access, and its broader productivity agenda, including skills shortages. The last point is a good way into the policy debate.

Among graduate occupations, over the last few years Australia has experienced shortages of accountants, nurses, pharmacists, physiotherapists, dentists, engineers and secondary school teachers in some subjects. In other fields, however, there is an over-supply of graduates. About a quarter of graduates work in jobs that do not normally require a university qualification. The problem is not too few graduates overall, it is too few graduates in specific fields of study (PDF 394KB).

This mismatch is the product of a highly-centralised allocation of university places between disciplines and institutions. Except for full-fee students, market forces play little role in determining what universities teach. We are very reliant on good analysis by the central bureaucracy, and follow-up policy action to encourage universities to shift their places to meet current or emerging needs. Unfortunately, the education department appears to do very little of the necessary analysis. It often acts on workforce shortages as they emerge, but this a reactive process, not forward planning.

In their defence, forecasting future graduate labour force needs is inherently difficult. Neither demand for workers, nor their supply, is easily predicted. University-qualified workers move in and out of the labour force, between countries, and from occupation to occupation. Some graduate shortages, however, are at least partly due to policy failings.

For example, in several occupations now suffering labour shortages we know that a market system would have delivered a better result. We can see from university application statistics that more students would have enrolled, had they been given the chance, and we know the universities were able to offer more places, because they gave them to international students.

Abolishing centralised allocation of university places, in favour of a student-demand driven system, should be the first stage of the higher education revolution.

But a student-demand driven system won’t produce the results we want unless demand translates into supply. Under-funding of some disciplines is an obstacle to universities offering additional places to Australian students who want them. Though we lack a sector-wide study of costs, last year Access Economics reviewed 22 disciplines (PDF 247KB) at six universities. In half of those disciplines, the average annual cost of educating a student exceeded the Commonwealth subsidy and the student contribution amount combined. Universities balance the books in those disciplines through money from other sources, most commonly international full-fee paying students.

Universities do not respond to these poor incentives the way profit-making companies would, by slashing student numbers, but no institution can ignore the financial implications of taking additional Commonwealth-supported students.

Under the centralised system, an unusually low number of universities applied for new government places in the last round of allocations. If current funding rates persist, we would probably see similar supply constraints under a market system.

According to conventional wisdom in the higher education sector, under-funding can be resolved with more government money. In theory, of course, the government could give universities enough extra funding as to make enrolling Australian students attractive and enrolling international students unnecessary, at least for purely financial reasons.

But to offer this as the “solution”, we need to explain why tying the fortunes of universities to the Commonwealth’s overall budgetary situation won’t in the future have the same results it has had in the past. The last few months haven’t been encouraging for people hoping to find such an argument. Despite an already enormous budget surplus, the federal government has decided that more spending would be inflationary. As a result, universities aren’t likely to get anything out of the May 2008 Budget.