On the subject of free University education: a (poorly written) Economics essay.

FOREWORD: I had to write a piece of non-assessed coursework for one of my Economics modules last semester. In lieu of me actually writing anything original for this blog, I’m just going to post it. (I’d promise to try harder with this blog, but we all know that however well intentioned the statement would be, I’d almost certain fail to actually do it.) I started late and didn’t properly plan it. Consequently, it isn’t in what I would consider my usual writing style. Also the conclusion (if that’s what it could be called) reads horribly. Lastly, there was a limit of 1,000 words (which I think I overran anyway), so I haven’t developed any of the points as I’d have liked. I have tweaked it for here, purely in the sense that it reads a little more ‘bloggy’ now, and also some of the economics terms have a little explanation – something that took all of 10 minutes. I was going to expand it and make it a more substantial piece of writing, but I’ve been sitting on it for nearly a month now and haven’t. I guess I just as well post it as is. In any case, this foreword is rapidly becoming longer than the piece itself. Enjoy.

The question: “Critically evalutate the statement ‘University fees should not be abolished’”

The subject of university tuition fees – and who should pay them – is one of the most contentious issues in contemporary politics, and as such is a very important economic problem. While the question is usually presented as ‘should fees be abolished’, it could perhaps be more accurately posed as ‘who should pay for them’. Of course there is no such thing as a free lunch, so while abolishing tuition fees will mean the students will not have to pay, the cost of running the universities will have to be passed on to someone else.

Those on the political right tend to advocate putting that cost firmly in the laps of the students. There are various different arguments for subsidies and bursaries, and different ideas on when the payments should be made, but the bulk of the right-wing voices agree that the cost should, ultimately, be paid by the student. By contrast, those politically left-wing tend to be of the opinion that university education should be equally available to all and, as such, should therefore be free for students. As with any worthwhile debate, both sides have merit.

Perhaps one of the most common arguments for providing free access to university is that, in the economic long-term, it will create a more educated – and thus more efficient – workforce. A higher graduate population is referred to as an increase in ‘human capital’, which is cited as the “most fundamental source of economic growth”. Therefore the more people we have going to university (something that could be achieved by lowering, or indeed abolishing tuition fees), the greater our economic success. Similarly, if students do not have the personal expenditure attached to a degree – be it at point of entry or further down the line – then they will be in a much more financially secure position. This greater spending power could also benefit the level of GDP.

However, much of the debate centres on who will pay for this ‘free’ education. The counter argument is that, for university education to be free, the government must pay for it. No private firm would fund ‘free’ universities for the simple reason that there would be no profit. You don’t need a degree in Accounting and Finance to realise that a business that makes no profit is a poor one. [that’s what I meant when I said I’d added things to make it more ‘bloggy’ – worth it, wouldn’t you say?] In other words, to provide free university, taxes must rise. As tax levels rise, consumers’ Marginal Propensity to Consume is lowered, due to a fall in their disposable income. This, if not coupled by a proportionate rise in Government Spending, will cause GDP to fall. While one could argue that the whole point of raising taxes would be to fund the universities, and this in turn would be reflected in the government spending, the increase is not always a proportionate one.

Another argument against making the government (and thus, by proxy, the taxpayer) fund universities, is that certain sectors of society would pay for a service that they would not use. Conversely, those who pay lower levels of tax (or none, depending on how the system was set up) could benefit from the abolition of fees and give their children university education by free-riding.

Education is used as a signal to employers. So-called ‘high-ability’ individuals (i.e. those who went to higher education) are selected by employers because they have shown the ability to pick up new skills and are thus more desirable. This distinguishes them from ‘low-ability’ individuals, who have no higher qualifications. From an employer’s point of view, having a more skilled workforce can improve productivity and thus increase marginal revenue.

It should be noted however, that this increase productivity will be countered, at least in part, by the ‘high-ability’ workers demanding higher pay. These workers will only take the job if the pay they receive as a result of having the degree (i.e. the difference between their pay and that of a low-ability worker) is higher than the initial cost of the degree itself.

With this in mind, University will only become a sensible option if the average salary of a post-degree job is higher than that of a non-degree job plus the expenses involved in applying to university. In addition to this, the employer will only pay the higher salary as long as such ‘high-ability’ workers are in comparatively low supply. Imagining a scenario where university becomes free, there will be a high incentive for workers to go through higher education and in so doing get a higher paying job. In the long run however, if a large enough portion of the workforce obtains a degree, then firms will no longer have to pay ‘high-ability’ workers considerably more than ‘low-ability’ workers, as the supply of the former will increase in comparison to the later. Assuming ceteris paribus [A Latin phrase sometimes used to mean ‘all other factors held constant’. Its something I manage to work into all my economics essays, mostly because it makes me feel clever], the price of a graduate worker will drop.

Employers have two choices. Either they can pay the ‘low-ability’ workers less than the ‘high-ability’ ones, or they can pay them both the same (i.e. an average). ‘High-ability’ workers will, by their nature, expect a higher wage and, while their numbers are comparatively low, the company is fine with doing this.

Imagine, for example, a firm where non-graduates earn £20k a year and graduates earn £40k. If the firm hires 10 people, 2 of whom are graduates, then the firm’s labour costs are:

(£20k x 8 low ability workers) + (£40k x 2 high ability workers) = £240k

The firms other choice, as mentioned above, is to pay both sets of workers the same – in this case £30k. If they choose to do this their labour costs are:

£30k x 10 workers = £300k

Given that £300k is more than £240k [it definitely is – I triple checked], it is within the firm’s interest to pay the two sets of workers differently.

However, this changes once the proportion of graduates in the firm increases. Imagine the 10-man firm now has 8 graduates, and 2 non-graduates. With the two-tier wage system, the labour costs are:

(£20k x 2 low ability workers) + (£40k x 8 high ability workers) = £360k

Whereas if the firm adopted the ‘average wage’ approach, their labour costs would only be £300k. Clearly, the firm will want to keep the labour costs down, so graduates and non-graduates will receive the same wage. If this is the case, going to university is of no benefit (we are of course assuming here that getting a job is the only benefit that university gives).

With this in mind, allowing all individuals access to university may not be the best thing for the economy. In the long run it could, somewhat paradoxically, lead to fewer individuals going – particularly if there are no auxiliary benefits to going – even if it is free. The economy would then suffer due to a lack of ‘high-ability’ workers. Furthermore, while the money used to fund the schools could be generated via tax, the economy could suffer through the decrease in consumers’ disposable income.

In summary, while the prospect of free university education for all seems both noble and sensible from a moral standpoint, from an economic one it seems less so. While an educated workforce is no-doubt beneficial to the economy, having too many skilled workers can in fact be a detriment. At best, higher taxes could cause a slowing-down of consumer spending. At worst, the over-population of skilled workers could lead to the eventual realisation that a university degree is of no benefit, followed subsequently by the loss of all skilled workers – either in the short to medium term through emigration, or in the long term through the lack of new university students.


Until next time