Monday 24 October 2016

OECD study raises questions about education spending

Published 23/08/2015 | 02:30

It should be stated unequivocally at the outset that education pays: there is a very strong correlation between years spent studying and lifetime pay levels
It should be stated unequivocally at the outset that education pays: there is a very strong correlation between years spent studying and lifetime pay levels

Last week was one that young people involved in the CAO offers process - and their fretting parents - are unlikely ever to forget.

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In many ways, the move into third-level education marks the beginning of adulthood. The decisions taken and offers made will, to a considerable degree, have a major impact on the entire working lives of those concerned and hence on many other aspects their lives.

But as many of those commenting on the CAO in the media point out (in part, one suspects, to calm the frazzled nerves of all those dealing with offers), it is not the end of the world if last week did not deliver the hoped-for outcome.

In the context of all the discussion last week about CAO offers, a study published last month by Guillermo Montt of the OECD raises some highly relevant issues*.

Among other things, it looks at the extent to which people who have studied or acquired skills in one field, but end up working in another field altogether - known in the jargon as "field-of-study mismatch".

As we all know from friends and acquaintances, this is hardly uncommon. It is, however, a subject that has until now received relatively little attention from an economy-wide perspective.

But as the new study finds that Ireland has a higher-than-OECD-average level of this kind of mismatch, there is all the more reason to consider whether we have problems that need to be addressed.

It should be stated unequivocally at the outset that education pays: there is a very strong correlation between years spent studying and lifetime pay levels (there is, too, a much higher likelihood of experiencing unemployment for those with less education than for those with more years of schooling).

Whether this remuneration-education correlation exists because of the increase in skills that comes with more swotting or because having a degree signals to employers some sort of ability is not entirely clear - but there is absolutely no doubt that a graduate pay premium exists everywhere.

If most people know intuitively that a graduate pay premium exists, the expectation that one will end up working in the field in which one has studied is probably even stronger. And yet, as the first chart indicates, in Ireland 42pc of people work in an area that does not match their qualifications. This is above the average from the OECD countries included in the Montt study.

Moreover, about half of these people are also defined as over-qualified for the jobs that they are doing.

Some field-of-study mismatch is to be expected in all economies all the time - we are a capricious species, which makes our world a messy place.

But other factors are also at play. One is structural. Employment prospects in different sectors rise and fall as demand for labour shifts. Another is cyclical. There is evidence that in times of recession, high unemployment leads to a higher level of mismatch.

Given all this, it should be said that moving out of one's field of study is not necessarily a bad thing.

A mathematics graduate taking up a job on the sell-side of a financial services firm might become 'mismatched' in the statistics - but could well be earning more than if she worked in number-crunching research part of the business.

Much also depends on what one studies.

General courses, such as arts degrees, offer numerous options as opposed to a defined career path - and as such it is not surprising that more people from an arts background end up working in a different field. As the second chart shows, 77pc of 'humanities, languages and arts' graduates are mismatched, far above the average.

More surprising, though, is Ireland's higher-than-OECD-average level of mismatch among those qualified in 'agriculture and veterinary' and 'science, mathematics and computing'.

From a policy perspective, it is potentially a greater concern that somebody learning specific skills, such as computing, does not use them than to find that a history graduate does not end up with his nose stuck in dusty archives for decades.

The OECD study highlights several general downsides of being a mismatched employee.

First, evidence indicates that on average those who are mismatched earn less. Past Ireland-specific ESRI research on new graduates by Elish Kelly, Philip O'Connell and Emer Smyth** found a 5pc penalty for field-of-study mismatched workers, compared with the well-matched.

Theory suggests that they will be paid less in part because it costs employers to train mismatched employees and that it is likely that they will be less productive than well-matched workers.

Second, mismatched workers are have a higher probability of finding themselves unemployed. The reason may be similar to that just given. Employers would be more inclined to lay off people with less job-specific skills.

Third, the mismatched are more likely to experience lower levels of job satisfaction, although that appears to be more for those who are over-qualified than out of their field of study.

The costs of mismatches to individuals aggregate into costs for the economy as a whole. A significant number of people working in a field unrelated to their field of study is bound to result in some productivity and output loss for the company and consequently the wider economy.

Moreover, as the State subsidises tertiary education, some of the investment will end up wasted if the skills passed on are not used. And as the OECD study estimates the total cost of field-of-study mismatch to be 0.8pc of GDP a year in Ireland - around €1.5bn annually - this is no piffling amount.

That it is almost twice the average 0.5pc in the surveyed countries means that there is a strong case, at first glance at least, for Jan O'Sullivan and Damien English at the Department of Education to take a closer look at the issues raised.

The OECD study concludes with some policy recommendations, including encouraging more general skills offered in education, further career guidance and information given to pupils, and a greater attempt to link education with future skill needs through forecasting. All are worth considering in an Irish context.



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