Postgrad fees: do rising costs deter poorer students?

Posted by Phil Wales, LSE and SERC

When undergraduate tuition fees were announced in 2010, many people worried that fees would put off those from poorer backgrounds from going to university. For those already at university and thinking about graduate study, fees have been a reality for years. What many people haven’t noticed, however, is the very rapid rise in the cost of postgrad courses:  fees have increased by an average of 31.8 per cent between 2003-04 and 2008-09, from £3,232 to just over £4,261, well above inflation.

Students from poorer backgrounds are under-represented in postgraduate study, something many policymakers worry about. So have rising fees put off poorer students from further study? Yes, according to new research soon to be published by SERC.

The findings, which I presented at the Royal Economic Society Annual Conference last month, draw on a rich new dataset of postgraduate tuition fees by institution, subject and time. Using micro-data from the Higher Education Statistics Agency (HESA), I find that a rise in postgraduate fees of 10 per cent leads to a reduction in the probability of students progressing directly on to a postgraduate degree of between 1.7 per cent and 4.5 per cent.

Moves to postgrad study are heavily weighted towards students from higher socio-economic backgrounds. Students from managerial or professional backgrounds, for example, account for 60 per cent of those progressing, while students from the lowest socio-economic groups - routine occupations, never worked and long-term unemployed – account for no more than 4 per cent. 

Even after controlling for a wide range of other characteristics, students from poorer backgrounds remain significantly less likely to progress than their wealthier peers. Notably, attendance at a private school prior to university significantly increases the likelihood of progression by between 0.9 per cent and 2.4 per cent.

It's interesting that students from non-white backgrounds were also significantly more likely to remain in higher education: Black and Asian students are 5.5-6.6 per cent and 5.2-6.8 per cent more likely respectively to progress to a further degree than equivalent white students. 

Not surprisingly, I find that first degree results make a big difference, with those earning firsts or 2:1s over 10% more likely to do further study than those with 2:2s or below. Men are also about 3 per cent more likely than women to stay on.

The research makes the case for several important policy changes. Firstly, a systematic effort is needed to monitor all postgraduate tuition fees in the UK. The absence of a database of fees by subject, institution and qualification level has presented a significant barrier for research and is an essential pre-requisite for efforts to effectively monitor access above undergraduate level. 

Secondly, there is a need to re-examine how public support for postgraduate study is allocated. The results suggest that students from poorer backgrounds are under-represented in postgraduate study and that the jump from undergraduate to postgraduate study presents an additional barrier. Policy makers should reconsider the funding arrangements for postgraduate study – and in particular, the extent of public support for students from low income backgrounds who aspire to study beyond undergraduate level.

Home-ownership and entrepreneurship

It's sometimes argued that housing wealth provides a source of equity for entrepreneurs that helps explain why business start-ups may be higher in areas with high house prices. But these arguments ignore the fact that home ownership (especially if it comes with lots of leverage via a high loan to value mortgage) is risky and that homeowners might therefore avoid other risky activities (like entrepreneurship). An interesting new paper by SERC colleagues Philippe Bracke, Christian Hilber and Olmo Silva suggests that this is indeed the case - purchasing a home reduces the likelihood of starting entrepreneurial activity by 20-25%.

This effect is larger when focusing on entrepreneurs who employ dependent workers or who hold managerial and professional positions. This suggests that home ownership is negatively linked to 'genuine entrepreneurship' – and thereby to firm creation, innovation and ultimately economic growth – and not to 'self-employment out of
necessity' or as a 'last resort option'.

Previous research in this area has highlighted a positive correlation between home ownership and entrepreneurship. But this paper improves on that research by following households over time using monthly data from the British Household Panel Survey (BHPS) covering the period between 1991 and 2008. In the cross-section this data also shows a positive correlation between home ownership and various measures of self employment. However, once they follow people over time to control for hard to observe characteristics
such as innate entrepreneurial spirit, risk tolerance or persistent wealth they find that becoming a homeowner significantly reduces the propensity of becoming an entrepreneur. Moreover, this negative link is much stronger when focusing on homeowners with mortgages, but weaker for those with low loan to-value (LTV) mortgages. This implies that leverage may sharpen the trade-off between becoming a homeowner and starting a business. The negative link between home ownership and entrepreneurship remains strong and significant for 24 to 42 months after purchasing a house – when leverage is highest – and wanes thereafter.

These findings highlight the dangers in making simplistic links from area differences in the 'availability of firm finance' (in this case via home ownership) to area differences in entrepreneurship.

Local pay in the public sector

Local pay is back in the news again. Time for an up-dated version of a post from earlier in the year:

1. Public servants in poorer regions to get lower pay we are told by the Guardian. Misleading, at best, but captures the sentiment of many. In fact, what details we have suggest that this will be local, not regional and that pay will not be cut. Instead, once the pay freeze stops there will be higher wage increases in some areas than others. One way to do this would be to look at areas where it's difficult for the public sector to recruit high quality staff and allow wages to rise more there. Another would be to use finer grained data on (increases) in costs of living. Either of these would be better represented as 'public servants in high costs areas to get more pay'.

2. The most direct impact will be to raise the quality of public good provision in high cost areas. Colleagues at CEP, for example, suggest that low public sector wages in high costs areas lead to worse outcomes in the NHS. More preliminary evidence finds the same effect for schools and policing. Of course, addressing this through higher pay increases in high cost areas raises the possibility that these services would deteriorate in the poorer areas. Again, evidence from the NHS suggests this may not be a major concern because the effect is 'non-linear'. The bad effect of national wages in high cost areas are not offset by better outcomes in low cost areas (probably because higher quality staff in the high cost areas move to the private sector, rather than moving to the public sector elsewhere in the country).

3. What about the indirect costs on the local economies of disadvantaged areas? Here, we have very little evidence. In the short term, you could argue that the major issue in these areas is demand rather than supply. But these are not short term changes we are talking about - the differentials will tend to emerge only in the long term (as small differences in pay increases work through). It's also reasonable to suggest that longer term higher public sector salaries do create a local distortion that works against the private sector. Here there is a clear tradeoff. Higher public sector wages provide a demand stimulus to local service sectors. This likely offsets the distortion on the supply side (which comes from the fact that they have to pay higher wages to compete with the public sector). On the other hand, manufacturing (and other tradable) industries which don't serve local markets lose out because they don't benefit from the demand stimulus, but do get hit by the supply side distortion. Preliminary evidence from my own research on public sector employment suggests that these effects can be economically important. In short, high public sector pay may 'distort' local economies (towards local services away from manufacturing) and make them more 'dependent' on the public sector than they would otherwise have been. [Update]: I am not saying which of these costs-benefits dominate. Indeed, we have very little evidence on which to base such a judgement - despite persistent claims by people on either side of the debate.

4. What about 'fairness'? Personally, I prefer to think in terms of equal reward for equal work - which means that wages should reflect the local cost of living (something this move tries to achieve). Others may have different views - although I am unclear in what sense equal pay is in any sense 'fair' in this specific context even if there may be other reasons for supporting it more generally (e.g. for male and female workers doing the same job at the same firm).

5. On the subject of fairness, it seems reasonable to think that the negative effects of national pay in high cost areas are disproportionately experienced by poorer families. Partly because they will be the ones earning this pay, partly because they can't opt out of poorly performing public sector services. Again, personally, I think this is a bad thing [Update: to clarify - the poor being hit hardest is a bad thing]

6. [Update:] One frequent reaction is that this is 'only an issue' for London and the South East. I would suspect that this is not the case and that recruitment difficulties occur in other higher cost areas. But even if this is 'only' an issue for the 'south' it's worth remembering that a large proportion of the population live in those areas.

7. [Update:] If local pay did change to reflect local costs, this might strengthen the argument for moving public sector employment out of London and the SE because it increases the cost advantages.



On balance, I think the case for local pay looks strong although, as the reaction of many make clear, the politics are likely to be nasty

Obliquity vs spatial equilibrium

Have just finished John Kay's highly enjoyable Obliquity: "in many spheres of life [...] our goals are best achieved when we approach them indirectly."

I am thinking of appropriating the term to make the case for expanding successful areas - e.g. through increasing the supply of housing - to help those currently stuck in less successful areas. A little more user friendly than appealing to the 'underlying adjustments that occur to re-establish spatial equilibrium.'

Business Improvement Districts

Some lessons for Portas Pilots and other attempts to 'turn around' UK high streets from an interesting piece in the Journal of Urban Economics on which businesses choose to take part in Business Improvement Districts: "Business Improvement Districts (BIDs) provide supplemental services to urban commercial corridors using funds from member assessments. They have become a very popular urban revitalization tool, but their formation is still largely unexplained. [...] I find that BIDs are more likely to form when there is more commercial space over which the BID benefits can be capitalized and when there is homogeneity in service and spending preferences across properties. BIDs also tend to form in neighborhoods that possess signs of appreciation and growth. Generally, BIDs are more likely to form in neighborhoods with higher valued properties with the exception of very wealthy areas. The BID boundary, however, is comprised of relatively less valuable properties."

In other words BIDs are most likely to form in established neighbourhoods showing some appreciation (so not great for turning round decline); a critical mass of more valuable properties are needed to ‘anchor’ the bid; and property homogeneity helps (because know you are going to get the kind of services you want).

[Update: Pre-publication version available here]

 

Local government pension schemes

Reporting of the (disputed) figures from the Tax Payer's Alliance on the health of local government pensions schemes reminded me of another issue debated at Wednesday's Work Foundation event on Local Economic Development: Should we be encouraging local government pension schemes to invest in local authority economic development projects? I can't be alone in wondering whether this is a 'very bad idea'.

The argument seems to go 'there's tons of money in these schemes, so why don't they invest some of it locally?' There are, unfortunately, two problems with that. While there may be 'tons' of money, they also have 'tons' of liabilities and at the moment the latter outweigh the former. To be fair, Local Authorities are trying to doing something about this, with the LGA pointing to a reduction in the nominal deficit of £37bn as a signal that the "ticking time bomb is already being defused". Even so, arguably not a good moment to reinforce the problems by handing over money to LA leaders to spend on local schemes which could, if history is any guide, deliver some spectacularly risky projects with low returns?

If you think otherwise, try reading Robert Peston on how error, neglect, government tax raids and rule changes did for the vast majority of final salary schemes. I am not sure we want to add further to that sorry list.

Local Economic Development in the UK

Some thoughts on LED policy in the UK following a Work Foundation event on Local Economic Development in the UK (I was on the panel, along with David Bailey from RSA, Neil McInroy from CLES and Lizzie Crowley from TWF):

1. There was broad agreement, not surprisingly, that we were seeing big changes to the institutional framework but less agreement whether on balance this involved more or less localism. The new system involves more local control over housing, transport and planning but more central control over industrial and skills policy (to the extent that Regional Development Agencies were actively involved in the latter). I am not sorry to see less local industrial policy (e.g. cluster policy, complex attempts to create innovation systems, targeting particular sectors etc) because I don't think the evidence on its effectiveness is compelling. I am more ambiguous on local versus central skills policy and broadly supportive on localising housing, transport and planning
2. That said, David Bailey made the point that while the old RDAs were criticised for not matching up to 'functional economic geographies' many of the new LEPs don't do any better. Directly elected Mayors for individual LAs are set to further exacerbate that problem. This is an issue that will eventually need to be tackled if new local arrangements are to work as well as they could (there's also the question of the resourcing of LEPs which remains a significant issue).
3. Assuming there is broad agreement that skills matter (and there was yesterday) what is the appropriate policy response? I think it's helpful to think about this in terms of attracting and retaining skilled workers versus 'producing' them. In terms of attracting/retaining it's clear that London and the South East have a massive advantage (indeed, this is what drives much of their superior economic performance). Clearly a lot of what drives this concentration are the opportunities in those areas, which (partly) arise because of the geographical concentration of all those high skilled workers. These kind of self-reinforcing mechanisms are very hard to counter which is why I tend to argue that places outside London and the South East should focus much more on amenities and costs of living - areas where they have strong policy levers (e.g. through the planning system)
4. In terms of 'producing' more skilled workers, I worry that there is way too much focus on higher level skills and not enough on the basics. I personally think the evidence is clear that early years and schooling should be central to any LED policy. Not only do these policies directly target one of the central problems faced by poorer families, but good local schools also help attract and retain already educated workers.
5. Aside from these broad suggestions, I have no idea whether skills policy needs to be individualised, localised or centralised. People appear to have strong views on this and I believe that the rest of the panel yesterday would argue for localisation (as would many LAs) but I don't know that we have strong evidence to support that position.
6. Another area of disagreement concerns the localisation of broader labour market policy. Again, I think that the other panellists yesterday would favour more local policy making in this area, but I remain to be convinced. Local policies have the scope to worsen, as well as possibly improve, flows off of benefits in to work. I haven't yet heard any LA coming up with a proposal of how it would share those risks with central government. In the absence of that, I have sympathy with DWPs position on localism (given that the policy is now highly individualised anyhow).
7. Finally, I suspect that the biggest disagreement of all is that I remain convinced that the focus should be on people, not place. I would be happy with better individual outcomes even if this means larger spatial disparities. Not a view shared by many constituency based policy makers.

Upwardly Mobile: Are you living in the wrong city?

I'm not a big fan of city-rankings. Part of the problem is the the most simple rankings usually only consider one or two aspects of cities, which don't capture the complex trade-off faced by households and firms. In contrast, once you consider a lot of factors, you need to somehow collapse these down to get one index. Then the problem is what weight should you give to each of the factors?

A piece in Atlantic City reports on a new app that would appear to get round these problems: "Upwardly Mobile, a new tool from Sunlight Foundation, can take your career information and your spending priorities and figure out where it makes the most sense to be a library archivist with children in daycare and cars to gas up."

In other words, you provide your personal weightings and the app then 'tells' you were to live. While that sounds great, there's still one major problem - in practice, would people have any idea what weight they should impose on the different components? Urban economists would tend to figure out the weights that people apply in practice by looking at the decisions they make about where to live. That is, they would tend to focus on 'revealed' preferences (revealed because economists are backing them out from actual decisions) rather than the stated preference (what people say they pay attention to). The economist approach may break down, however, if people don't have good information about other places on which to base their decisions.

That suggests that the raw information underlying this new app might be far more useful than the computer generated ranking. Of course, that's a lot of information to digest. This is why most people would use broad brush information to narrow down the possibilities and then look in detail at the various trade-offs they would face. Economists assume that this process - using price signals, information on amenities and personal intuition - is likely to get the trade-off roughly right. People often argue that economists assume to much but, at least when it comes to where to live, I'd still trust my personal decision making 'algorithm' over any computer.

Local mortgage schemes and affordability

Interesting piece from the Guardian talking about local mortgage schemes to address affordable housing problems. The article highlight the Manchester scheme which "will underwrite up to 20% of the mortgage [for first time buyers]. The process allows the buyer to obtain a 95% mortgage on similar terms to a 75% mortgage – but without the need to provide the substantial deposit usually required."

A crucial question, of course, is whether such schemes help with affordability. If the problem is that there are lots of empty homes in desirable parts of the city but no mortgage finance available, then such a scheme should help. Unfortunately, it's not apparent that this is often the case - as the article points out house prices are high relative to incomes for many parts of Manchester and housing is in short supply in many areas. This suggests that a big part of the problem is on the supply side of the market. If that's the case, then these kind of demand side measures will only truly help with affordability to the extent that they generate a supply response. In the absence of a supply response, demand side measures simply increase house prices further tending to exacerbate problems of affordability (for those not lucky enough to be covered by the scheme)

[Disclosure: I contributed to the Manchester Independent Economic Review and sit on the Manchester Economic Advisory Panel]

Land use regulation and house price volatility

In a few recent posts I have mentioned the link between higher house price volatility and non-responsive housing supply (e.g. due to restrictive land use regulations). Interesting to see that a recent Journal of Urban Economics paper by Haifang Huanga and Yao Tang suggests this link has become more pronounced in the US:

Abstract: "In a sample covering more than 300 cities in the US from January 2000 to July 2009, we find that more restrictive residential land use regulations and geographic land constraints are linked to larger booms and busts in housing prices. The natural and man-made constraints also amplify price responses to the subprime mortgage credit expansion during the decade, leading to greater price increases in the boom and subsequently bigger losses. Contrary to prior literature, our findings indicate a significant link between supply inelasticity and price declines during the bust, whereas Glaeser et al. (2008) found little evidence of such a relationship from an earlier downturn from 1989 to 1996."

[Preprint available here for those without journal access]

Bradford West a symptom of the North-South Divide?

Writing in yesterday's Guardian, Larry Elliot suggests that the result in Bradford West was a symptom of the North-South divide. I don't intend to comment on that particular hypothesis but I was struck by his broader point: 'Britain is not alone in having depressed regions, but nowhere else is the problem so big and the desire to fix it so small'.

Ignoring the hyperbole, is it true that regional problems in the UK are particulary pronounced? This is a surprisingly difficult question to answer because differences in area outcomes are driven by a complex interaction between the extent to which (i) areas drive outcomes (wages, employment) and (ii) individual characteristics determine outcomes. The UK has high individual income inequality and poor educational performance at the lower end of the skills distribution. Even in the absence of any particularly strong area effects on outcomes we could still see very high area differences if all of the high skilled, well paid people tended to live together in specific parts of the country (and vice-versa).

Indeed, evidence from recent SERC research suggests that this 'sorting' is a far more important driver of individual wage inequality than anything to do with areas. In short if regional disparities are more pronounced in the UK it likely to be driven by sorting combined with factors that exacerbate individual inequalities (e.g. pay structures and school performance) in the UK relative to elsewhere. Consistent with this, we see large within area disparities in the UK.

If the desire to tackle this problem has decreased under the coalition (and just as with the unique scale of disparities, that's a big 'if') is that desire so 'small' compared to other countries? It's hard not to think of Detroit, for example, as providing a pretty big challenge to this assertion. Interestingly, in the US, it is the case that a smaller proportion of the population live in areas that fall a long way below the national average. However, it's a long jump from that fact to concluding that this is because regional policy is so much more effective in the US. Indeed, a more likely explanation is that when things get bad in the US people tend to move away.

Could UK regional policy be better? Almost certainly (and true for Labour as much as the Coalition). Are we unique in the scale of our problems and our willingness to fix them? I don't think so ...