Linking Higher Education to Labor Markets – Systemic Issues

Regional Higher Education ConferenceSTRATEGIC CHOICES FOR HIGHER EDUCATION REFORM

December 3-5, 2007Kuala Lumpur Convention Centre, Malaysia

Hong TanConsultant, World Bank

Goal of Presentation

Set higher education reform in the context of the labor market, globalization and the knowledge economy, and discuss three issues and their implications for policy:

Rising relative demand for skills - more educated workforce, and rising pay compared to less educated

Graduate unemployment – why so high, what underlies it, and what can be done to address it

Lifelong Learning – its critical importance, and implications for post-school education and training

Education and other ministries, as well as the private sector, all have key roles to play in reforms to address these issues.

Overview of Presentation

Globalization, K-economy and skills demand Rising relative demand for more educated workers

and rising relative wages (returns) for university graduates

Using labor market signals to guide policyGraduate unemployment

Distinguishing between normal job search and other causes, e.g. skills mismatch, poor workplace relevance of education, inadequate information

Labor market and education sector policy responsesLifelong learning

Continuing education and training, and in-service training to respond to change

Labor market, private sector, and education and training policy responses

Higher Education and the Labor Market

Households and

individuals

Universities

Education and

training institutes

Labor Market

Public/privateSector

employers

Higher Education and the Labor Market

Households and

individuals

Universities

Education and

training institutes

Labor Market

Public/privateSector

employers

Trade & K-Economy

Feedback from labor market signals

Annual Growth Rate of Highly Skilled Employment in Selected Countries, 1981-1996

(in %)

-2

0

2

4

6

8

10

Total Employment Professional and Technical

E1. Highly skilled occupations have

grown faster than less skilled

Globalization and K-Economy Driversof Demand for Higher Education

Globalization — Trade liberalization, cross-country production chains and imports of capital complementary with skills raise relative skills demand (Sanchez & Schady, Robbins)

Skill-biased Technical Change — imported technology transferred from advanced countries are skill-biased, and raise relative skills demand in developing countries (Berman, Machin)

More educated are better at change – in periods of change, education enhances “ability to deal with disequilibrium” and is in greater demand (Schultz, Welch)

ICT and Organizational change – diffusion of ICT and new forms of organization reduce demand for unskilled and increase demand for more educated workers (Bresnahan)

United States

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1965 1970 1975 1980 1985 1990 1995 2000

Rat

io o

f h

ou

rly

wag

es

College Plus/High School Wage Premium 1967-1997

Source: Murphy & Welch, Relative Wages in the 1990s, unpublished

Rising relative returns to higher education In 1960s and 1970s, cyclical pattern of college wage premiums

But college wage premiums risen continuously in past 2 decades

Source: Blom, Holm-Nielsen, and Verner, “Education, Earnings and Inequality in Brazil: 1982-1998” World Bank (2001)

In many developing countries alsoFor example, Brazil and Mexico

60

70

80

90

100

110

120

130

1982 1984 1986 1988 1990 1992 1994 1996 1998

Tertiary

Upper sec

Primary

Lower sec

BRAZILSimilar changes over time seen in Mexico with returns to higher education rising and that to primary education falling-- Lachler (1998), “Education and Earnings Inequality in Mexico”

Source: Riboud, Savchenko and Tan, “The Knowledge Economy and Education and Training in South Asia”, World Bank (2007)

And in South Asia as well…For example, India

For India, returns to secondary and tertiary education increased between 1983 and 2004. In slower growing SAR countries, e.g. Sri Lanka, trends in returns to higher education are less apparent.

India: Rate of return to education 1983, 1987, 1993, 1999, 2004Males

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

primary middle secondary higher secondary tertiary

NSS 1983 NSS 1988 NSS 1993 NSS 1999 NSS 2004

Suggesting rising returns trend is Demand-Driven

Labor supply-demand model The demand for higher education/skills has increased

faster than total labor demand, OR The demand for higher education/skills has increased

faster than supply of those skills

Evidence that demand-driven: Rising relative wages when relative supply of university

graduates is growing Secular rise in the employment share of workers with

higher education despite rising relative pay

Labor market signals for policymakers and education and training institutions

2. High Graduate Unemployment

Many developing countries encounter problems of high graduate unemployment in expanding tertiary education, raising questions about:

Over-investment in the tertiary education sector Skills mismatch – supply-demand gaps in types

of graduates produced by the HE sector and those needed in the labor market

Relevance – skills imparted are not relevant to the workplace (too theoretical, obsolete, or without skill sets wanted by employers)

Example - Graduate unemployment in Africa

In 1990s, policy concerns about rising mass unemployment / underemployment of educated youth and attendant political unrest led many to question expanding tertiary education supply:

Trade liberalization did not generate sufficient growth in formal sector employment to absorb new graduates

Public sector reforms resulted in reduced recruitment of graduates, removing government as a principal source of jobs

Economic reforms and privatization led to downsizing of many enterprises and employment opportunities

Universal primary education and easing restrictions on entry of private educational institutions led to increased enrollments in secondary and tertiary education

Most policy concerns unfounded Evidence from retrospective tracer studies

For 10 SSA countries, labor market experiences of graduates 2-16 years after finishing university revealed: Almost all graduates were in wage employment, earning

incomes substantially higher than secondary school leavers Unemployment rates between 1 and 5 percent, highest for

recent graduates and lowest for older cohorts Duration of job search for first job mostly less than 1 year,

longer in periods of slow economic growth Vast majority of graduates work full-time in jobs that afford

them continued education and in-service training Over 70% using skills & training from studies in their jobs, and

also working in their field of study BUT… Concerns over quality of university education - too-theoretical

and providing no work-related attachments

Samarra & Bennell (2003) “Where has all the education gone in Africa?”; Mugabushaka, Teichler & Schomburg (2003), “Employment experiences of African graduates in the 1990s”.

For secondary and tertiary graduates by age intervals

Graduate Unemployment Rates in EAP and SAR

Country Age intervals

15-19 20-24 25-29 30-34 35-39 40-49 50-59

Malaysia (2000)  

Secondary 14.5 6.0 2.4 1.2 1.2 1.0 1.1

Tertiary -- 12.7 2.9 0.4 1.6 0.3 0.8

Thailand (2002)  

Secondary 18.2 9.5 4.1 1.5 1.6 2.7 2.4

Tertiary -- 17.6 5.3 1.7 1.3 0.8 1.1

India (2000)  

Secondary 16.8 13.5 7.0 2.9 1.3 0.6 0.3

Tertiary -- 41.8 21.8 6.5 2.1 0.8 0.1

Unemployment as Job Searchin School-to-Work Transition

Time in the labor market in job search

Probability of unemployme

nt

0 1 3 years 5 years 10 years

0.20

0.10

0.04

School-to-Work Transitions in IndiaUnemployment rates by education and years of labor

market experience

More educated tend to have higher initial unemployment rates (UR), but UR falls faster with labor market experience More educated have more specialized skills and higher family income can afford to search longer, and gain more from search

Focusing on Numbers Unemployed Alone can be misleading

Example – Graduate Unemployment in Malaysia 1990-2004

1990

1995

2000

2004

0

10,000

20,000

30,000

40,000

50,000

60,000

Figure 5.2a Number of Tertiary Educated Unemployed

1990

1995

2000

2004

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Figure 5.2b Tertiary Educated Unemployment Rates

1990

1995

2000

2004

Number of unemployed graduates * Graduate unemployment rate

* Malaysia’s graduate supply rose with expansion of tertiary sector in early 1990s

Addressing Graduate UnemploymentShort-term Active Labor Market Policies (ALMP)

OECD and developing country experiences with ALMPs to address unemployment in different groups suggest: Employment services (career guidance, job search information) can

improve employment outcomes and is cost-effective Training and retraining programs have mixed employment and wage

outcomes and are expensive; positive outcomes when training is specialized and co-sponsored with employers within firms rather than pure classroom training

Wage and employment subsidy programs have mixed to poor outcomes and may involve substantial deadweight and substitution effects

Self-employment assistance to start small businesses have mixed results, but outcomes are improved when financial assistance is coupled with mentoring and technical support, and for better-educated individuals

Betcherman, Olivas and Dar (2004) “Impacts of ALMPs: New evidence from evaluations with particular attention to developing and transition countries”; Betcherman, Godfrey, Puerto and Straveska (2007), “A Review of Interventions to Support Young Workers”.

Addressing Graduate UnemploymentImproving workplace relevance of education

Universities and the private sector have a joint role in improving the workplace relevance of higher education:

Systematic and ongoing tracer studies of graduates and their labor market experiences for feedback on relevance of their training

Identifying and introducing programs in high-demand by the private sector

Incorporating soft skills and foreign languages in curricula Strengthening university career counseling for students Industry consultations and review of academic programs with

private sector input Providing student attachments to industry within sandwich

programs Private sector assignments for faculty as part of professional

development Industry lecturer programs

3. K-Economy and Lifelong Learning

The K-Economy and its speed of change means that knowledge and skills depreciate more rapidly. To compete effectively in this changing environment:

Workers need to upgrade existing skills and acquire new ones through continuing education and training over their work-life

Employers cannot rely solely on graduates and new hires for the skills they need, but must invest in the training of employees

Education and training institutions need to respond flexibly to this new skills demand from currently employed workers and firms

Governments can help by identifying and addressing market failures in training through training policies, deregulating training markets, and creating new pathways for lifelong learning.

Incidence of Post-School Training Household and LF Surveys in SAR Countries

Education Level INDIA SRI LANKA PAKISTAN

Lower Secondary 0.9 9.8 2.5

Secondary 4.0 17.4 4.3

Higher Secondary 8.3 25.0 6.4

Diploma 58.6 37.4 n.a.

Graduate 16.8 34.5 8.6

Post-Graduate 18.2 45.1 7.6

Source: NSS 2004 SL LFS 2002 PK LFS 2004

Percent of population age 15-64 years

Source: Riboud, Savchenko and Tan, “The Knowledge Economy and Education and Training in South Asia”, World Bank (2007)

Incidence of In-Service Training Firm surveys in selected countries

Percent of manufacturingsector firms providing formal in-service training

Source: Tan, Savchenko, Gimpelson, Kapelyushikov and Lukyanova, “Skill Shortages and Training in Russian Enterprises”, World Bank (2007).

Note: Estimates from ICA and BEEPS surveys

Incidence of formal training by country (%)

0 20 40 60 80 100

India

SriLanka

Bulgaria

Serbia

Portugal

Greece

Malaysia

Germany

Thailand

SouthKorea

Lithuania

Russia

Brazil

Spain

Chile

Ireland

China

In-Service Training: Some Stylized Facts

Training incidence varies by countries’ income level and growth performance

Within countries, uneven incidence across firms higher among larger firms, multi-national companies,

export-oriented firms, firms that introduced new technology, and higher-tech sectors

Educated workforce more likely to get training and more of it

Empirical evidence that formal in-service training increases wages and productivity

Important information failures, financing constraints and training externalities warrant public policy intervention

Addressing Lifelong Learning Needs Education and Training Institutions

Examples include: Collaboration with industry and private sector to develop

and deliver customized education and training programs Flexible part-time and evening offerings to accommodate

schedules of working students Deregulation of the tertiary sector to allow entry of

institutions offering non-degree specialized courses Open universities for education and training using distance

learning and ICT Certification system to recognize prior learning and better

articulate academic and vocational qualifications to provide alternative pathways to further education (e.g. Chile)

Addressing Lifelong Learning Needs Policies to build skills and capacity of enterprises

Examples include: Training levies to promote in-service training programs in

enterprises or groups of enterprises (as in Malaysia and Singapore)

Training and business development services (BDS) to small and medium enterprises most subject to financing, skills and capability constraints

Public-private partnerships of regional skills development centers to provide group-based training programs for firms

Joint university-industry R&D projects to develop and diffuse new products and processes, and training programs to use new technical know-how

World Bank Labor Market Policy Course2-Week Residential Course

JOBS FOR A GLOBALIZING WORLD

March 31 - April 11, 2008, Washington, DC

Audience: senior policy makers, technical staff from government agencies, researchers, employer groups, trade unions and NGOs

Cost: US$1,800 per participant includes tuition, training materials, and medical insurance and other conference costs.

Participants: responsible for own transportation, hotel and subsistence. Application deadline: December 31, 2007.

Registration is required.

http://www.worldbank.org/wbi/socialprotection/labormarket08

Thank You