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The social return on universities

By Peter Shergold - posted Friday, 11 May 2012

I was honoured recently to be asked to address the Passover Dinner of the NSW Jewish Board of Deputies. The celebration of Passover, it seemed to me, was an appropriate occasion to recognise the emancipatory impact of education and the liberating effects of knowledge. Most of us gathered that evening still perceive university as a gateway to lifelong learning. We judge the inclusiveness of society by the opportunity that we provide to our citizens to access its manifold benefits. We extol freedom of thought and speech, see academic learning as their cornerstones and imagine universities as the institutional protector of such liberal values.

Perhaps, though, in a Google world in which crowdsourced (and often unprovenanced) opinions become the source of wiki authority, our expectations have become too grand. Those we teach often make more material assessments. Students routinely work out if it's worth investing in a university degree.

There are now a range of websites that allow people to estimate the increased earnings value of a degree over a working life, apply an algorithm to compute the net present value of both financial and opportunity costs (using an online annuity calculator) and in quick-smart fashion assess the dollar return. "On average" asserts one such American site "getting a bachelors degree is just like paying $126,000 for the right to claim extra earnings with a net present value of $383,000". That is, ceteris paribus, spending time and money on university education is better than putting your dollars through a pokie but probably represents a lower return over 40 years than investing the money in a UniSuper balanced fund. (Thankfully in Australia the provision of low interest loans under HECS-HELP and FEE-HELP shifts the equation decisively in favour of undertaking a university education.)


Education, in this brave new world, often appears to be just another variety of commercial transaction. The unspoken premise is that the offerings of university have a utilitarian value, based on the acquisition of predominantly vocational skills which, through improving labour force productivity, offer private returns to the individual. Judged through instrumentalist eyes, one can make an economically rational decision on whether to go to university and, perhaps more importantly, which subjects to study.

Before we despair at the material values of Gen Y let's remember that they have learned what we have taught. Ministers and, indeed, Prime Ministers routinely quote figures from the ABS to show the earnings advantage of acquiring certification from vocational and higher education institutions. Universities seek to promote their quality in a competitive environment, often on the basis of rankings that reflect the increased salaries that their students achieve.

Of course, the private gains are matched by public benefits. Indeed estimating the relative returns to each are a crucial part of the evidence-base that informs government higher education policy. The graduate receives higher post-tax lifetime earnings as a result of increased salaries and lower levels of unemployment. At the same time the state benefits from larger tax receipts, lower welfare costs, higher labour force participation and greater workplace productivity.

In addition, university-led research makes a major contribution to innovation with benefits extending far beyond those that accrue to private sector funders. Lateral Economics, in a paper commissioned by Research Australia in August 2010, estimated the economic value of Australia's environment in health and medical research. Using a 50-year simulation analysis they calculated a positive revenue cost ratio of 1.66 and a health-based benefit cost ratio of 3.37. One might anticipate similar returns on university research in science and engineering. Even in arts and social sciences, where benefits are less quantifiable, it is reasonable to expect a positive turn on public funding.

Australia also gains trade advantages. Earnings from opening our universities to overseas students now earns the nation $15.8 billion, making education our third largest export industry. Governments, which tend to see public support for university education as an expenditure rather than an investment, need to acknowledge these economic benefits.

The real danger is not so much that students, universities and governments seek to monetise the value of higher education but that the framework of evaluation is generally conceived far too narrowly. A university does create financial value but at the same time it also builds social benefit.


The Higher Education Funding Council for England recently sought to demonstrate the wider public benefits of universities through their Service to Society. The report focuses on the role that they play in developing people so that they are better able to make a contribution to society, opening up knowledge, helping community problem solving, informing public policy, stimulating local development and building international connections.

More boldly, Universities UK contracted the New Economics Foundation to assess the social returns on investment in universities. The report, Degrees of Value, sets out the individual social outcomes that often accrue to university graduates beyond the financial rewards that they gain. These include being better able to manage finances, feeling healthier, being more tolerant, having greater capacity to form meaningful friendships, showing more political interest and exhibiting stronger independence.

These less quantifiable private benefits also contribute to public good. Social returns are achieved by the creation of a more civic and civil society, with higher levels of citizen participation, stronger interpersonal trust and more social cohesion. If you believe the methodological calculations the public value generated by these societal values is worth £1.31 billion. Frankly I find the audit of benefits persuasive but the accounting unconvincing: the value of social mobility, for example, still falls back on measuring the uplift in graduate wages as its key financial proxy.

One profound finding from such studies is that the social benefits of university education are significantly greater to the extent that access to university is sufficiently wide to create a fairer and more meritocratic society. Unfortunately in Australia it is students from higher income, less disadvantaged families who continue to be the most likely to gain the private benefits of education. The present level of participation by lower socio-economic status (SES) students, around 15 percent, has remained virtually unchanged through successive policies of successive governments.

Yet the greatest private, public and social benefits are achieved by increasing participation by lower SES students. Relative to their outcomes if they did not graduate from university, they gain more financially and socially – and so does society. Otherwise, as the Harvard sociologist Christopher Jencks mused back in 1972, the main function of a degree may be to "certify people who were different to begin with. Providing access to lower-income, disadvantaged students significantly increases social mobility, creating a more productive and cohesive community. Dollars invested in the success of a low-SES student provide a higher rate of private and public return that for their more advantaged colleagues.

I have no doubt that in time it will prove possible to measure more persuasively the value of equal opportunity in dollars. Yet many of us recognise that in doing so we risk losing something more powerful. What inspires, and what many of us seek to convey to students, is the importance of fairness and equity to the participatory ethos of a tolerant, open, respectful, engaged and democratic society. We know that widening access to university can help ensure that an accident of birth does not determine destiny.

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A shorter version of this article was published in The Australian Financial Review.

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About the Author

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW.

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