The Regional Economic Impact of More Graduates in the Labour Market: A ‘Micro-to-Macro’ Analysis for Scotland

Abstract

This paper explores the system-wide impact of graduates on the regional economy. Graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. While the detailed results vary with alternative assumptions about the extent to which wage premia reflect productivity, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most HEI impact studies.

The external benefits of higher education

“…HERMANNSSON et al (2014a) estimate that private market returns contribute 3.7% for regional GDP in the long run (baseline scenario). This suggests that non-market returns could contribute as much as 4.5% of GDP to the economy in the long run.…”

“…This approach was first introduced by HERMANNSSON et al (2014a) which used it to estimate macroeconomic effects of labour productivity increases in response to projected increases in the share of graduates in the labour force.…”

Will the regional concentration of tertiary education persist? The case of Europe in a period of rising participation

“…TEIs exert a range of supply-side impacts, enhancing the productive capacity of the local economy. An obvious channel is the human capital of graduates as gauged by higher wages (Blundell, Deardren, & Sianesi, 2005;Bradley & Taylor, 1996;Checchi, 2006;Harmon & Walker, 2003;Hermannsson, Lisenkova, Lecca, Swales, & McGregor, 2014;Psacharopoulos & Patrinos, 2004). Moreover, graduates produce externalities such as on the wages of non-skilled workers (Moretti, 2004a(Moretti, , 2004b.…”

How much does a single graduation cohort from further education colleges contribute to an open regional economy?

“…There is likely to be 3 some role for signalling, but of modest magnitude relative to overall impacts (Lange & Topel, 2006) 1 . These issues are discussed in detail in Hermannsson et al (2014).…”

“…We adopt an alternative 'micro-to-macro' approach which retains the strengths of aggregating human capital inputs using micro level data, but then applies an extensive structural model to simulate subsequent endogenous adjustments in the economy (Hermannsson et al, 2014;Giesecke & Madden, 2006). This identifies the link between the policy lever and the macroeconomic outcome.…”