Study finds that 'education pays'

* 'Higher education' refers to universities, polytechnics and continuing education centres of universities. The secondary level includes all other educational institutes. Some of the grants are subject to a parental income test and can be either bigger or smaller than the sums given.

Source: Social Insurance Institution of Finland (Kela).

The grant and the housing subsidy are just sufficient to cover normal living costs. However, many students take a part-time job, a study loan etc to improve their income. The Students Union of the University of Helsinki (Helsingin yliopiston ylioppilaskunta, HYY) published in August 2003 a survey on work done by students. It found that 64% of students at the university supplement their income by working during the academic year. The students' gross income is an average EUR 9,430 a year. There is however a major difference in the earnings of men and women. While male students earn an average EUR 823 a month, the female students earn an average of only EUR 608. Although most students work part-time to earn extra money, student grants are still the most important source of income for most students. About 78% of students receive grants, the maximum sum being EUR 259 a month. In addition there is a housing supplement of up to EUR 171.55 a month. Although the working possibilities for students in Helsinki are better than in many other parts of the country, 41% of students at the University of Helsinki are still classified as low-income. The share is just 5% in the whole population. The problem is that students are forced to go to work, but they can not work too much, as they might then lose some grants.

At present, the average time spent at university is seven years and the average age of obtaining a master’s degree is 28. This has raised much discussion in Finland, as the government is aiming to raise the labour participation and employment rates and believes that students should enter the labour market at a much younger age. Both restrictions and incentives have been suggested to make studies more effective. A working group at the Ministry of Finance proposed in March 2003 that students should no longer receive student grants, but state-guaranteed loans that would be linked to progress in studies. The size of the loan would reflect living expenses, and the interest expenses would be tax-deductible. The report concluded that the accumulation of a loan would encourage students to graduate faster and join the workforce. Another working group (at the Ministry of Education) proposed in December 2003 time limits for university studies. Tuition would continue to be free for full-time students studying for a degree. However, mandatory fees are planned for supplementary studies undertaken when a person is already at work.

Wage level and unemployment risk

When wage levels are estimated by age, gender and education, it turns out that the effect of education is about 6.6% on men’s wages and about 5.5% on women’s wages. These estimates are provided in a study conducted by the Government Institute for Economic Research (Valtion taloudellinen tutkimuskeskus) (by Jaakko Kiander, Outi Kröger and Antti Romppanen) - see figures 1 and 2 below. This same simple method has been used widely in studies all over the world during recent decades, and such figures are considered as the 'return of investment' on education.

Figure 1. Annual pay of women by age and education in Finland, 2001

Source: Government Institute for Economic Research.

Figure 2. Net income profiles of the high and low educated in Finland

Source: Government Institute for Economic Research

However, Roope Uusitalo and Ulla Hämäläinen state that these figures only show the effect of one additional year of education on the gross wage, not the whole rate of return of education as a whole. Because taxation and income transfers affect the outcome, it is better to look at the net income instead of gross wages only. As the well educated also tend to live longer and to stay longer in working life, this strengthens the income effect of education over the life cycle.

The strongly progressive nature of Finnish income taxation smooths out the effect. Furthermore, direct income transfers narrow the net income differences. Hämäläinen and Uusitalo found that, measured by net income differences, the rate of return on academic education is 14% in Finland. Figure 3 below indicates that net income is at first lower for those studying longer, but higher educated people catch up lower educated people in terms of accumulated income at the age of 33, and their life-long income then becomes considerably higher. The higher educated also tend to retire later and live longer than the lower educated.

Figure 3. Net income profiles of the high and low educated in Finland

Source: 'Koulutus kannattaa - laski sitä miten päin vain', Roope Uusitalo and Ulla Hämäläinen, in Talous ja Yhteiskunta No. 4/2003.

A smaller risk of unemployment is one of the economic incentives for higher education. The unemployment rate of people with a high level of education remained quite low even during the years of deep economic depression in Finland over 1992-6, while the unemployment rate of the lower educated rose as high as almost 22% - see table 3 below. When the differences in the risk of unemployment are taken into account, the rate of return on education rises as high as 17%. As the rate measured by wage differences alone is 6%, it seems that employment security is a very important element in the comparison.

Table 3. Unemployment rates by education in Finland, 1990-2001

.	Basic level	Secondary	Lower tertiary	Upper tertiary	All
1990	4.3	3.3	1.3	0.6	3.2
1991	8.5	7.3	3.3	1.3	6.7
1992	14.6	13.1	6.6	2.9	11.8
1993	20.3	17.9	10.5	5.0	16.5
1994	21.7	17.8	10.7	4.5	16.7
1995	20.7	16.5	9.8	4.4	15.5
1996	20.2	15.5	9.4	3.8	14.6
1997	17.6	13.7	7.7	4.2	12.7
1998	16.1	12.2	7.2	3.0	11.4
1999	15.2	10.9	5.9	2.8	10.3
2000	14.8	10.4	5.6	3.2	9.8
2001	13.9	9.7	5.3	3.0	9.2

Source: Government Institute for Economic Research.

Commentary

The share of people with a higher education in the population has increased considerably within a few generations. The above analysis shows that the economic incentives for education are quite good in Finland. Education pays even when only the wage level is taken into account. When the lower risk of unemployment and income during studies are taken into account, the rate of return of investment in education looks considerable. In addition, there are also non-economic incentives such as social respect or interesting work that might also be very important reasons for studying.

A new problem, especially among higher educated women, is the difficulty of obtaining open-ended employment contracts (FI0310202F). Temporary work reduces the return on education, as unemployment risk rises and wage development is typically weaker than in open-ended jobs. There are also professions that require a long education but do not bring high salaries. Teachers are one such group and also a typically female-dominated profession. Doctors working for in public sector managed to raise their pay through a long strike in year 2001 (FI0108198F), and one reason for their success might have been a serious shortage of doctors, especially in provincial healthcare centres.

It seems clear that for women the return on education is not as high as for men at present. However, women are already in the majority in universities. It will be interesting to see how this fact affects both the wage level of women and the wage level of the highly educated in the future. When ageing of the population and especially the forthcoming retirement of major age cohorts lead to shortages of labour, this might lead to changes in the relative wages in society, if supply and demand play any role in wages. Furthermore, new wage formation systems in the public sector as well as outsourcing and privatisation might lead to changes in the rate of return on education, as at the moment there are many low paid women with a higher education working in the public sector. (Seija Parviainen, Labour Institute of Economic Research)