Canadian Centre for Policy Alternatives–BC Officependakur/allen.pdfBob Allen has published three...

March 1999CAW 567

Canadian Centre for Policy Alternatives–BC Office815–207 West Hastings St, Vancouver, BC V6B 1H7

Tel: 604-801-5121 Fax: 604-801-5122email: [email protected]

www.policyalternatives.ca

AcknowledgementsThe author would like to thank the following people for their advice, feedback and editorial assistance: Randall Brown,Paul Burns, Ed Finn, Dean Goard, Colleen Hawkey, Seth Klein, Arlene McLaren, Mongi Mouelhi, Gideon Rosenbluth, AnnySchaefer, Karl Skof, Jim Soles, Walter Sudmant, and Skip Triplett.

The contents and opinions contained in this paper, however, are those of the author, and do not necessarily reflect theviews of the CCPA.

Layout: Shannon Daub

We gratefully acknowledge the financial support for this paper of the Province of British Columbia through the Ministryof Advanced Education, Training and Technology, and the Ministry of Education.

About the AuthorBob Allen is Professor of Economics at the University of British Columbia, where he has taught since 1975. He receivedhis Ph.D. ␣ from Harvard University. Bob Allen has published three books and numerous articles in professional journals.This research has focused on economic growth and technological change in North America and Europe. Bob Allen isa research associate with the Canadian Centre for Policy Alternatives–BC Office, and a Fellow of the Royal Society ofCanada.

ISBN# 0-88627-949-6 Cost: $4.00

Contents

Executive Summary .......................................................................................................................................................................................... i

Part I:␣ Introduction ........................................................................................................................................................................................... 1

Part II:␣ The Educational Challenge ............................................................................................................................................................. 2

Part III:␣ The Economic Returns of Educational Investment .............................................................................................................. 3

Part IV: The Provincial Response ...............................................................................................................................................................10Elementary and Secondary Education ............................................................................................................................................ 11Post-Secondary Education .................................................................................................................................................................. 12

Part V:␣ Who Should Pay? ...............................................................................................................................................................................17

Part VI:␣ Responsiveness of Colleges and Universities to the Economy ....................................................................................... 19

Part VII:␣ Education and Inequality ............................................................................................................................................................21

Part VIII:␣ Impact on the deficit ....................................................................................................................................................................22

Part IX:␣ Conclusion..........................................................................................................................................................................................23

Endnotes ............................................................................................................................................................................................................25

References .........................................................................................................................................................................................................26

Executive Summary i

Executive Summary

the needs of population growth, which has been higher

here than anywhere else in Canada. Pupil-teacher ratios

in elementary and secondary schools are higher here

than in many provinces, so there is a case for more

spending to reduce class sizes and drop-out rates.

Post-secondary participation rates (at both the

vocational/career and university levels) are near the

Canadian average when participation is measured with

enrolment. When program completions are the measure,

BC␣ does badly at the university level, since this province

awards fewer bachelor degrees relative to its population

than does any other province. The number of degrees

awarded is far below the growth in demand for

university graduates, so there is a strong case for

expanding the universities and university colleges at the

third and fourth year levels.

Class sizes have grown substantially at the province’s

universities because enrolment has been increased

without significant corollary increases in the number of

full-time faculty. An increase in the number of full-time

faculty would cut class sizes, providing better education

for all undergraduates, and improving completion rates.

BC␣ has frozen tuition fees for post-secondary programs

at low levels. This is a desirable policy in many respects,

since it promotes economic development and greater

access, while reducing inequality. However, the provincial

government must significantly increase educational

spending in order for these objectives to be realized.

BC␣ should increase spending on education even if

greater spending leads to a deficit or postpones tax

reductions. Education is too good an investment to pass

up. It is only sound business to borrow money at 5%

in order to realize a profit of 10%, 15%, or even 25%.

The economy of the twenty-first century will require a

highly educated work force, and, indeed, the Canadian

economy has been shifting in this direction since the

1960s. The expansion of colleges and universities has

increased the supply of educated workers, while

demand for their skills has grown at least as rapidly.

Data from the 1990s indicate that further expansion of

the educational system is warranted. The test is whether

the social rate of return exceeds the cost of borrowed

funds. Education involves the cost of building and

operating schools, the student’s cost of books and

supplies, and the wages students forgo by studying

instead of working. The principal economic gain from

this investment is the higher wages that graduates and

program completers earn as a result of their studies.

Juxtaposing these figures gives the social rate of return,

which shows the combined profitability of education to

the student and the Treasury (and thus all citizens).

Social rates of return are extremely high for finishing

high school or acquiring a trade certificate, for college

career programs, and for university degrees. The

profitability of completing high school with either a

diploma or trade certification is in excess of 25% in most

cases, while the profitability of a college career diploma

or undergraduate degree is generally a further 10-15%.

Undergraduate degrees in all fields of study are highly

profitable for women, and most fields are also profitable

for men. Since these rates of return exceed the cost of

government borrowing (5%), it is profitable for the

province to borrow money to make these investments.

Interprovincial comparisons throw more light on the

matter. In the 1990s, BC␣ has increased its spending on

education by a greater percentage than has any other

province. Much of this increase, however, has simply met

The Education Dividendii

Canadian Centre for Policy Alternatives 1

Part I:␣ Introduction

the history of British Columbia. Since the latenineteenth century, BC has grown rich onnatural resources. Fish, timber, coal, and met-als were harvested and mined in this province,processed and shipped around the world. Butthe settlement of British Columbia is nowcomplete; there are few new resources to ex-ploit. Technical progress in the resource in-dustries is leading to fewer jobs and economicdislocation. A new basis must be found foreconomic advance in the new millemium.

In fact, the economy of British Colum-bia—like that of the rest of Canada and, in-deed, the industrialized world—has beenevolving away from resource extraction and,more generally, manufacturing for some time.By embracing that possibility, BC␣ can assurea high standard of living for its people.

What must BC␣ do to respond to the chal-lenge of the new world economy?␣ Further in-vestment in the educational sector is necessary.This paper establishes that the social rate of re-turn to educational investment is very high inthis province. This result applies to high school,to most college and university programs, andto trade programs under some circumstances.Compared to other provinces, BC␣ has investedmore heavily in these areas than have otherprovinces in the 1990s, but much remains tobe done, as interprovincial comparisons show.

Most provinces, most notably Ontario,have responded to the need for more educationspending by increasing the tuition fees paid bystudents. But raising tuition is intrinsically aninefficient approach for meeting the educationalneeds of the next century. Rather, the federaland provincial governments must increase theirspending on education. Moreover, spendingmust be increased even if it raises the provincialgovernment deficit or postpones tax reductions.

Education is widely seen as the basis for sus-tainable economic development in the twenty-first century. The popular press emphasizes theshift from a resource or manufacturing economytowards a “knowledge-based” economy. Econo-mists have increasingly emphasized the impor-tance of “human capital accumulation” as thesource of prosperity. Natural resources becomedepleted; capital runs into diminishing returns.Only knowledge can be indefinitely enlarged,and only economic development based onknowledge can proceed without limit.

Many kinds of knowledge will be re-quired in the next millenium. Technicalknowledge is required to invent new productsand produce them cheaply, but the requiredknowledge extends far beyond that. In a worldof rapidly changing technologies, specificskills, whose application is limited to a nar-row range of tasks, will quickly become out-moded. Specific skills can be the source ofshort-term wealth, but a change in technol-ogy renders them obsolete and valueless.

A broad education that enhances theabilities to read, to write, and to do mathemat-ics will successfully lay the base for acquiringthe sequence of specific skills needed to stayahead in the changing economy. As the worldeconomy becomes more integrated, many jobswill involve dealing with people from differ-ent cultures and working with people in dif-ferent economic and social systems. In addi-tion to the abilities to communicate, compute,and analyze, the ability to negotiate culturesand economic systems will contribute to fu-ture prosperity. A broad education will alsocreate better citizens and help people realizethe full potential of their talents and abilities.

The advent of the knowledge-basedeconomy comes at an opportune moment in

This paper establishesthat the social rate ofreturn to educationalinvestment is veryhigh in this province.This result applies tohigh school, to mostcollege and universityprograms, and to tradeprograms under somecircumstances.Compared to otherprovinces, BC␣ hasinvested more heavilyin these areas thanhave other provincesin the 1990s, butmuch remains to bedone, even if it raisesthe provincialgovernment deficit orpostpones taxreductions.

The Education Dividend2

Part II:␣ The Educational Challenge

9.3% to 26.9%. For men, the proportion witha post-secondary certificate or diploma rosefrom 20% to 35.8%, and the proportion witha university degree increased from 12.3% to21.9%.␣ Clearly, Canadians have become muchmore educated in the last generation.

The immediate reason for the rise in edu-cational attainment was the expansion of en-rolment in schools, colleges, and universitiesin Canada; that is, the supply of labour wasincreasing. What of the demand?␣ If the de-mand for educated labour was not growing,then the additional college and universitygraduates would have been forced “down thejob ladder” and would have found work onlyat lower wages. However, between 1970 and1995, the average earnings of full-time work-ers with university degrees showed virtuallyno change with respect to the earnings of highschool graduates.1␣

For women, the premium earned by auniversity graduate declined from 42% to40%, while for men it rose from 18% to 21%;that is, essentially no change on average. Fur-ther, full-time workers with post-secondarycertificates or diplomas (i.e.,␣ completers ofvocation, technical and career programs) ex-perienced significant increases in earnings incomparison to high school graduates. In 1970,men or women with post-secondary certifi-cates or diplomas earned about the same in-comes as high school graduates, while in 1995the premium for a post-secondary credentialhad increased to 11-13%.

Despite the huge increase in their

A fundamental feature of the new worldeconomy is a rapid growth in demand for edu-cated workers and a concommitant fall in thedemand for less educated workers. Thesetrends have been apparent for the last few dec-ades and give every indication of continuingindefinitely into the future. Table 1 shows theeducational attainment of young Canadiansaged 25-29 in 1970 and 1995. These peopleare new entrants into the labour force, so theirexperience is a barometer of shifts in theeconomy.

From 1970 to 1995, the educational at-tainment of this group increased substantially.The fraction of women with a high school edu-

cation or less andwho were em-ployed full-timefell from 61.7%to 23.9%; formen, the corre-sponding dropwas 57.6% to34.3%. The pro-portion of fullye m p l o y e dwomen with apost-secondarycertificate or di-ploma rose from18% to 40.2%,while the propo-rtion with a uni-versity degree in-creased from

Women 1970 1995

high school or less 61.7% 23.9%

post-secondary non-completers 11.0% 9.0%

post-secondary certificate/diploma 18.0% 40.2%

university graduates 9.3% 26.9%

Men 1970 1995

high school or less 57.6% 34.3%

post-secondary non-completers 10.1% 8.1%

post-secondary certificate/diploma 20.0% 35.8%

university graduates 12.3% 21.9%

Table 1Composition of the Canadian Work-Force(full-time employees, aged 25-29)

Sources:1970: Statistics Canada, Census of Canada,microdata file.

1995: Statistics Canada, Survey of ConsumerFinance, microdata file

From 1970 to 1995,the demand for labour

was moving towardeducated workers. Theeconomy was ratifyingthe policy of Canadian

governments inexpanding post-

secondary education.


number, university and college graduates werenot being forced down the job ladder. Thedemand for labour, in other words, was mov-ing toward educated workers. The economywas ratifying the policy of Canadian govern-ments in expanding post-secondary educationfrom 1970 to 1995.

Is there scope for further expansion?␣Predicting the future is always difficult, butthe evidence of the mid-1990s suggests thatthe economy is demanding more highlytrained workers than the educational system

The benefit from this investment is theincrease in (pre-tax) lifetime earnings realizedby the student because of the education. (Uni-versities also contribute to the economythrough research, but those contributions arenot included here nor are the correspondingcosts of university research.)␣ Setting the stu-dents’ income gain against the listed costs pro-duces a rate of return called the “social rate ofreturn,” representing the profit of the educa-tional investment to society as a whole, i.e.,␣ tothe student and to the Treasury (and thus allcitizens) combined.

As a first step in assessing the wisdom ofspending more money on education in Brit-ish Columbia, social rates of return have beencomputed for four educational levels:␣ the lastyear of high school, a trade certificate, a col-lege diploma, and a bachelor degree. Separate

is producing; in particular, university gradu-ates and the completers of two-year collegeprograms are in high demand. Indeed, de-mand is high for graduates in most fields ofstudy at these institutions. Conversely, thereis very little demand for people who have notcompleted high school, so there are consider-able economic returns to raising the highschool completion rate. Finally, there are sig-nificant opportunities for improving the qual-ity of education by reducing class sizes at boththe K-12 and university levels.

Part III:␣ The Economic Returnsof Educational Investment

The conventional approach to test whetherexpansion of an educational system is war-ranted is to evaluate it as an investment deci-sion. When education is undertaken, costs areincurred. These include:

1. the student’s cost of books and supplies,2. the earnings forgone by the student

when he or she attends school insteadof working, and

3. the costs of constructing andoperating schools.The student’s cost of room and board is

not considered in this framework since the stu-dent would have to eat and sleep whether ornot he or she was in school. Tuition fees arealso excluded since they do not represent ad-ditional costs to society as a whole:␣ while theyare costs to the student, they are revenue forthe Treasury.

The economy isdemanding morehighly trainedworkers than theeducational systemis producing; inparticular, universitygraduates and thecompleters of two-year collegeprograms. Indeed,demand is high forgraduates in mostfields of study atthese institutions.


calculations are presented for men andwomen, since they realize different returns(education is a particularly profitable invest-ment for women) and in several versions re-flecting alternative interpretations of the dataand the investment decision.

The calculations have many limitations,among them these:␣ Calculating the profit offinishing high school is only a limited investi-gation of the economic value of elementaryand secondary education. A more extensiveinvestigation—such as computing the profit-ability of high school as a whole, or even el-ementary education—is no longer feasiblesince attendance is compulsory, so there arefew data on the earnings of the uneducatedand their experience is probably not indica-tive of that of the majority. Research from ear-lier in the twentieth century, when high schooleducation was not the norm, shows it to havea high rate of return, however. In BC␣ today,the main question relating to extending el-ementary/secondary education is whether highschool completion is a good investment forthose who drop out, and that is a questionaddressed here.

Likewise, it ought to be noted that thesocial rate of return computed for universitiesis an incomplete assessment of their economiccontribution, in two respects. First, no calcu-lations are presented of the profitability ofgraduate degrees, although calculations pre-sented elsewhere (Allen 1998c) indicate thatthey also are profitable. Second, the researchof universities is not evaluated here. Univer-sity research contributes new technologies,better methods of social and economic organi-zation, and improved cultural understandingthat raise the income and the quality of life ofCanadians. These benefits are not included inthe social rates of return to be presented.

Before presenting the social rates of re-turn, I will review the data that go into thecalculation. I start with the benefits, i.e.,␣ the

increase in pre-tax earnings from acquiringmore schooling.

Earnings increases were computed fromtwo Statistics Canada microdata files—the BCindividual file from the 1991 Census ofCanada (this income information applies to1990) and the Canada-wide sample from the1996 Survey of Consumer Finances. The ad-vantage of the census sample is that it is con-fined to BC␣ and includes information on somevariables (like field of study) that are not avail-able in the Survey of Consumer Finance. Thedisadvantage of the census sample is that it isnine years old. The results of the 1996 censusare still not available, so data from the 1996Survey of Consumer Finances were used toget more recent information on the labourmarket. This is a much smaller survey thanthe census, and the BC␣ portion of the sampleis not large enough to reliably measure thereturns to education in BC, so the full Canadasample was used.

In fact, high rates of labour mobilitywithin Canada imply that wages and salariesare similar across the country, so the Canada-wide results are indicative of the BC␣ situation.Use of the Canada-wide results can also bejustified on the grounds that they representthe full range of opportunities available tochildren growing up in BC. In any event, thetwo data sources point to similar conclusionsabout the returns to education.

Earnings depend on age as well as educa-tion. Generally, earnings increase with age, butat a diminishing rate. Earnings peak betweenthe ages of 40 and 50 when allowance is madefor people retiring or not working. The ageeffect can be captured by estimating “age-earn-ings profiles” (equations in which earnings area function of age and age squared). These equa-tions show the average earnings experience ofpeople with different educational levels. Thereis considerable variation from person to per-son in earnings around these trends.


Figures 1 and 2 show age-earnings pro-files for women and men estimated from thecensus data. Income increases with educationat almost every age. The main exception tothat generalization is among people in theirearly and mid-20s, where university graduatesearn less than most others. This finding par-allels the popular notion that university edu-cation does not prepare young people for high-paying jobs, but also sets that view in a broaderperspective:␣ The earnings of university gradu-ates increase rapidly with age, so that they arethe highest income earners by their late 20s /early 30s.

Why do earnings increase with educa-tion?␣ One possibility is that more highly edu-cated workers are more able and would haveearned more than less-educated workers, irre-spective of educational attainment. In thatcase, educational attainment is only a proxyfor ability, and it is ability rather than educa-tion that determines earnings. Themeritocratic organization of education lendssome credence to this view. Many studies,however, have called this proposition intoquestion.2␣ A variety of statistical schemes havebeen devised to hold ability constant andmeasure the effects of education on earnings.They arrive at results that are the same as thosediscussed here where ability is ignored.

It appears that the link between abilityand education is broken by three factors: 1)location and social class play major roles indetermining who gets educated; 2) the abilityto get good grades is not the same as the abil-ity to make money; and 3) the most scholasti-cally able people continue their educationbeyond the bachelor’s degree and so are notincluded in the sample of university gradu-ates analyzed here. The higher earnings ofmore highly educated people are thus the re-sult of education.

There are three kinds of costs associatedwith education:

1. books and supplies

I assumed that elementary and secondary stu-dents incur no costs for books and supplies,while students in post-secondary programsspend $1,000 per year on these items.

2. forgone earnings

When people devote their time to schooling,they lose the income that they might haveearned instead, and those forgone earningsare a measure of the value of the time de-voted to education. In computing rates ofreturn, a specific time path of work and studymust be postulated. I concentrate here onfull- time students since the time path is welldefined; in particular, I assumed that post-secondary students did not work for the eightmonths of the year they were studying.3␣ Thecost of their time is therefore two-thirds ofthe average annual earnings of a high schoolgraduate. In analyzing the decision to com-plete high school, I assume that the averageearnings of a non-completer would be$5,000, which is generous in view of the av-erage earnings of high school graduates intheir late teens.

3. cost of building and operating schools,

colleges, and universities

The third cost of education is the cost incurredby the government for the schools, colleges,and universities. These costs include operat-ing costs and capital costs. I begin with theformer.

The operating cost of a year of highschool was computed from the operating costsand number of students in BC␣ public schoolsin 1996/7. Following Vaillancourt,4 it wasassumed that a year of primary education cost75% of a year of secondary education.

The costs of technical/vocational certifi-cates and college career diplomas were com-puted from Statistics Canada’s figures on thetotal expenditures of BC␣ colleges and institutes


in 1994-5,5 and the details of provincial fund-ing for these programs.6␣ College expendituresexceeded provincial funding mainly by anamount equal to tuition fees and income fromancillary operations. Provincial funding perfull-time equivalent student (FTE) in eachprogram was increased by the ratio of totalcollege spending (exclusive of debt charges andcapital spending) to total provincial fundingin order to determine the total operating costper student in each program.

The operating cost of university programs

was calculated from Statistics Canada’s sum-mary of the costs of BC␣ universities. The costof research was estimated using the Hettich(1971) formula and deducted from total oper-ating cost to determine the operating cost as-signable to teaching.7 This was then dividedby the number of weighted full-time equiva-lent students (WFTEs) to determine the costper WFTE, and program costs were calculatedfrom the number of WFTEs per program.

The weights used in computing WFTEsare intended to represent the relative costs of

$0

$10,000

$20,000

$30,000

$40,000

$50,000

15 20 25 30 35 40 45 50 55 60 65

Age

High school dropout High school grad Trade Certificate College Bachelor

Figure 1: Earnings, Age, and Education for Men in BC(Source: census data—1990)


different university programs. The base caseis first or second year arts, which receives aweight of 1.0. Upper level arts, commerce, andeducation students receive a weight of 1.5 onthe grounds that instruction costs 50% moreper FTE than first or second year Arts. A year’sinstruction in most undergraduate science andhealth programs receives a weight of 2.0.Weights range up to 5.0 for a year of medi-cine and 6.0 for a year of study towards a Ph.D.

In this study, an undergraduate arts, edu-cation, or commerce degree was taken to equal

five WFTEs (two years at 1.0 and two years at1.5), while an undergraduate science or healthdegree equals eight WFTEs (four years at 2.0each). The average undergraduate was as-sumed to be half in arts and half in science.Program costs were thus calculated as 5.0 or8.0 multiplied by the cost per WFTE.

While operating costs were calculatedfrom data for BC in the 1990s, capital costswere calculated from Canada-wide data, sinceprovincial data are lacking. Capital costs aredefined to be interest (taken here to be 5%)

Figure 2: Earnings, Age, and Education for Women in BCSource: census data—1990

$0

$5,000

$10,000

$15,000

$20,000

$25,000

15 20 25 30 35 40 45 50 55 60 65

Age

High school dropout High school grad Trade certificate College Bachelor


and depreciation (2%) on the capital stock.Statistics Canada has prepared capital stockestimates for Canadian elementary and sec-ondary schools, non-university post-second-ary institutions, and universities. Capital esti-mates calculated in a variety of ways are avail-able. Here I have relied on the constant price,net capital stock series using delayed depre-ciation. This is one of the highest series—hence implying low rates of return to educa-tion—and gives a better representation of thedepreciation of educational buildings andequipment than the others.

The interest and depreciation on thecapital stock for the three levels of educationwere divided by the Canada-wide number ofelementary and secondary students, technical,vocational, and apprenticeship full-timeequivalent students, and university WFTEs.These costs were then applied to the

corresponding provincial figures.Table 2 shows the costs per full-time stu-

dent that were used in the rate of return cal-culations. In view of the disparate sources ofinformation, it is impressive that costs wereso similar across educational levels. One couldnuance the calculations further (for instance,using college costs of a bachelor degree insteadof university costs), but the figures are all suf-ficiently close that no new insights wouldcome from such substitutions.

The costs were combined with the age-earnings profiles to compute rates of returnto education. It was assumed that incomeswould grow in the future at a rate of 2% peryear due to inflation, plus 1% per year due toeconomic development. The latter assumptionis standard in OECD investigations.8␣ Theresults, using both 1990 and 1996 data, areshown in Table 3. Rates of return decline witheducational levels but are generally high—considerably higher than the yield on long-term government bonds, which is about 5%.This shows that education is a good invest-ment for the BC government.

Completing high school in some fash-ion gives the highest rate of return. Finishinggrade 12 and graduating is associated withrates of return of 18.8% - 31.8%. Even higherreturns are realized by people who obtain atrade certificate instead of completing grade12. That course produces returns of 28.4% -39.8%. Thus, completion of secondary edu-cation with either a diploma or a trade cer-tificate is the best educational investment thatone can make.

The returns to acquiring a trade certifi-cate after one has received a high school di-ploma are considerably less and also variable.The 1990 data showed a very respectable re-turn for men of 14.0%, but that fell to only1.4% in 1996. Fluctuations like this may re-flect changes in the construction labour mar-ket. The returns to women for trade

operating capital total

grade 12 5,588 324 6,042

trade/vocational 7,720 566 8,286

college career 9,074 566 9,640

university-arts 6,130 790 6,920

university-science 9,808 1,264 11,072

university-average 7,969 1,027 8,996

Table 2: Institutional Costs ofEducation per Full-Time Student per Year(Dollars per Student)

Notes: Costs include capital costs (interest anddepreciation on the capital stock) and operatingcosts. The latter include provincial governmentfunding, tuition income, income from ancillaryenterprises, and any other sources of operatingincome for colleges and universities.

University costs are built up from the cost perweighted full- time equivalent student (WFTE).Operating cost per WFTE was $4904 and capitalcost was $632 for a total cost per WFTE of $5536.First and second year arts and commerce wererated at 1.0 WFTEs and third and fourth year at1.5 WFTEs. All years in science, engineering, andhealth were rated at 2 WFTEs each. The universityaverage is assumed to be half arts and halfscience, i.e.,␣ 1.625 WFTEs.

Source: See text.


certificates (mainly one year secretarial pro-grams and hair dressing certificates) give amodest return of 5.8% or 4.7%, dependingon the data source. These are marginalinvestments.

College and university give much higherreturns than do trade certificates earned af-ter high school graduation. For men theprofit rate was 7.6 - 10.1% for a college di-ploma, and for women it rose to 13.6% -16.0%. University bachelor programs alsogive very high returns. For men, they rangedfrom 9.3% to 11.0%, while they were 11.0%to 15.3% for women. Women generally re-alize higher returns than men for post-sec-ondary education—a typical finding in suchinvestigations.

One issue that has attracted much at-tention in recent years is the relative impor-tance of general education and specific skillstraining. A popular notion is that specificskills training is important in getting a goodjob, while general education (for instance,university programs in humanities, the so-cial sciences, and education) is poor prepa-ration. As noted, Figures 1 and 2 show whypeople might believe this—the average earn-ings of univesity graduates in their twentiesare less than those of nonuniversity gradu-ates—but also calls the relevance of that factinto question by showing that universitygraduates earn high incomes later in life. In-deed, their incomes are high enough to jus-tify investing in their educations. The lessimpressive returns on trade certificates forthose who already had high school diplomascasts further doubt on the popular view. Ul-timately, a balance of general education andskills training is needed.

The value of different degrees can alsobe investigated using the information in thecensus on field of study. Instead of comput-ing rates of return to university degrees as awhole, returns for each field can be computed

men women

1991 1996 1991 1996

grade 12 18.8% 31.8% 29.8% 25.6%

trade/no high school 28.4% 32.4% 39.8% 37.9%

trade/high school grad 14.0% 1.4% 5.8% 4.7%

college-career 10.1% 7.6% 13.6% 16.0%

university 9.3% 11.0% 11.0% 15.3%

Table 3: Social Rates of Return to Education

Notes: The rates of return were based on the following comparisons:

Grade 12—Earnings of a high school graduate (grade 12) with nofurther education compared to a grade eleven completer with nofurther education.

trade/no HS grad—Earnings of someone with a trade certificate butwith no further education compared to a grade eleven completerwith no further education.

trade/ HS grad—Earnings of someone with a trade certificate butwith no further education compared to a high school graduate(grade 12) with no further education.

college career—Earnings of someone with a college career diplomabut with no further education compared to a high school graduate(grade 12) with no further education.

university—Earnings of someone with a bachelor degree but withno further univiersity education compared to a high schoolgraduate (grade 12) with no further education.

men women

1991 1996 1991 1996

fine arts n/a n/a 6.5% 11.9%

humanities none none 6.9% 12.2%

social science 13.2% 11.6% 13.4% 17.6%

commerce 11.4% 10.4% 12.9% 17.2%

agriculture/biology 4.9% 5.0% 7.1% 11.7%

engineering 14.3% 12.3% 10.7% 14.6%

other health 5.6% 5.6% 15.0% 18.1%

nursing n/a n/a 11.5% 15.3%

physical science 7.7% 7.4% 11.4% 15.3%

education 5.5% 5.6% 11.8% 17.6%

hummanities/education 8.1% 7.7% 7.6% 9.6%

Table 4: Social Rates of Returnto University Fields of Study

Notes: For all fields except humanities/educ, the rates of return arebased on the earnings of someone with a bachelor degree inthe indicated field but with no further univiersity educationcompared to a high school graduate (grade 12) with nofurther education.

For humanities/educ, the rates of return are based on theearnings of someone with a bachelor degree education butwith no further univiersity education compared to a highschool graduate (grade 12) with no further education. It ispresumed that the university program takes five yearsinstead of four.


(Table 4). All degrees—even the least practi-cal, such as fine arts—are profitable forwomen, and in fact the variation from field tofield is comparatively small.

For men, the variation across fields isgreater. Most fields are profitable, includingthose in which men concentrate—social sci-ences, commerce, engineering, and physicalsciences. There are so few men in fine artsand nursing that reliable rates of return can-not be computed. A humanities degree does

not generate more income for men than ahigh school diploma unless the humanitiesdegree is followed by other training. An im-portant example is humanities followed byeducation, a popular combination. A manwho gets a B.A.␣ degree in literature and thena one-year B.Ed.␣ degree—a program whichwould prepare him for teaching highschool—earns a high rate of return. Combi-nations involving law degrees imply evenhigher rates of return.

Part IV: The Provincial Response

We have shown that the rate of return frominvesting in education is high for high schoolcompletion or trade certification, college ca-reer programs, and university programs. In-deed, the prospective rates of return for mostprograms substantially exceed the cost of bor-rowing (5%) for Canadian governments.Moreover, the rates of return have generallyrisen in the 1990s, indicating that the eco-nomic demand for educated workers has beenincreasing in this decade.

The appropriate response to these highrates of return is to increase spending on edu-cation to meet the demands of the evolvingeconomy. All Canadian governments face thischallenge, since the mobility of labour aroundthe country means that the wage and salarystructures are similar everywhere—hence therates of return to educational investment arealso similar. And yet most governments havefailed to meet the challenge.

The federal government has cut trans-fers to the provinces, effectively reducing itsspending on post-secondary education. (Highprofile programs like the Millennium Schol-arship Fund and registered educational sav-ings plans may help some students, but donot translate into more spending on

education.)␣ Some provinces, such as Ontarioand Alberta, have cut spending on educationand encouraged colleges and universities tomake up the loss by raising tuition fees. Suchactions are essentially a tax on students anddo not automatically translate into more pro-fessors and more classrooms.

The appropriate response to a high de-mand for education is not to ration a limitedcapacity to teach by raising its price, but ratherto increase the capacity and maintain a lowprice so that many students will attend. Sucha course of action obviously requires that gov-ernments spend more money on education.

British Columbia stands out for havingincreased educational spending during the1990s far more than did any other province.Table 5 shows the relative increase in educa-tional spending by provinces in the 1990s.From 1990/1 to 1996/7, BC’s␣ spending onelementary and secondary education increasedby 37.5%. This was much more than the sec-ond-place province (Saskatchewan at 18.9%)and very much more than most provinceswhere spending on average increased by lessthan 10%. In the case of colleges and univer-sities, BC’s spending rose by 59.7% from 1990to 1998—way ahead of Quebec, which was

We have shown thatthe rate of returnfrom investing in

education is high forhigh school

completion or tradecertification, college

career programs, anduniversity programs.

Indeed, theprospective rates of

return for mostprograms substantially

exceed the cost ofborrowing (5%) for

Canadiangovernments.


in second place with a 30.8% increase. BC␣ hasaccounted for a disproportionate share of theincrease in educational spending needed toprepare the country for the next millennium.

While BC␣ has increased educationalspending significantly, the extra spending hasnot made BC␣ the nation’s educational leader.A variety of indicators show that the qualityand quantity of education provided inBC␣ leave much to be desired. There are tworeasons why increased spending has not madeBC␣ number one in education. First,BC␣ started off the 1990s significantly behindother provinces. The lag shows up in such in-dicators as student-teacher ratios in the pub-lic elementary and secondary schools, and inpost-secondary participation rates. Second,throughout the 1990s, BC’s economy has at-tracted migrants here from other provinces andcountries. As a result, the BC␣ population (in-cluding the school age population) has grownmuch faster than elsewhere. Much of the ex-tra spending on education has been requiredto service the rapidly expanding population,rather than pushing BC␣ performance abovethat of other provinces.

It is ironic that economic success hasmeant that increased educational spending hasnot made up for the shortfalls in the prov-ince’s educational system. Further spendingwill be required to do that.

Elementary andSecondary EducationThese themes are illustrated by the history ofpupil-teacher ratios in the public elementaryand secondary schools. Class size has been amajor issue for many parents, who know thattheir children will receive more personalizedinstruction if classes are small. In 1990/91,BC␣ had an unimpressive student-teacher ra-tio (Table 6). There were 15.26 pupils pereducator in Canada as a whole, while inBC␣ the ratio was 16.12. The ratio was slightly

higher in Saskatchewan (16.15) and NewBrunswick (16.27) and notably higher in Al-berta (16.77) and Prince Edward Island(16.88). The largest provinces, Ontario(14.84) and Quebec (14.56), had appreciablyfewer students per teacher.

In the 1990s, BC␣ increased its educa-tional spending significantly, as already noted,and the number of public school teachers (ona full-time equivalent basis) increased from31,147 to 34,711 between 1990/91 and 1996/97. In contrast, the number of teachers de-clined in seven provinces and rose minutelyin the two showing increases.9␣ Despite thegreater number of teachers, the student-edu-cator ratio in BC␣ rose to 16.85. BC improvedits standing relative to the rest of the country,however, since the national ratio rose from15.26 to 16.13.Relative to theother provinces,BC␣ did not dobadly in the 1990s,but classes none-theless got larger.The recent agree-ment between theBC␣ Teachers’ Fed-eration and theBC␣ government,however, promisessmaller classes fork i n d e r g a r t e nthrough gradethree.

The reasonthat the pupil-teacher ratio in-creased inBC␣ despite the in-crease in thenumber of teacherswas a vast increasein the number of

British Columbiastands out for havingincreased educationalspending during the1990s far more thandid any otherprovince. While theprovince ␣ hasincreased educationalspending significantly,the extra spendinghas not made BC␣ thenation’s educationalleader. A variety ofindicators show thatthe quality andquantity of educationprovided in BC␣ leavemuch to be desired.

elementary/ secondary

college/ university

Newfoundland 0.3% 23.6%

Prince Edward Island 4.8% 16.0%

Nova Scotia 2.1% 13.4%

New Brunswick 10.9% 28.2%

Quebec 8.1% 30.8%

Ontario 16.4% 21.7%

Manitoba 6.6% 28.3%

Saskatchewan 18.9% 15.7%

Alberta 9.0% 8.7%

British Columbia 37.5% 59.7%

Table 5: Relative Increasesin Educational Spendingby Province, 1990s

Sources and notes:

elementary and secondary:␣ Inter-ProvincialEducation Statistics Project (1998).␣ ”Summaryof school statistics from the provinces andterritories:␣ final edition,” Table 6. NewBrunswick figure for 1996/7 converted to a12 month basis. Elementary and secondaryexpenditure increase computed from 1990/91to 1996/97.

colleges & universities: Statistics Canada.Expenditure increase computed from 1990 to1998.


students. In BC,␣ enrolment rose 16.5%, fol-lowed by Alberta at 9.6%, and Ontario at7.0%. In the other provinces, enrolment ei-ther declined or rose only slightly. Over thisperiod, the increase in enrolment inBC␣ accounted for about one-third of the na-tional total.10␣

The enrolment changes reflected popu-lation changes, which in turn mirrored eco-nomic growth since people moved to the newjobs. The job growth of the BC economy,which attracted migrants, prevented the in-crease in provincial spending on elementaryand secondary schools from lowering the pu-pil-teacher ratio. Thus, BC’s economic suc-cess worked against educational improvement.

Pupil-teacher ratios reflect policy deci-sions as well as demographic and economictrends. While BC␣ increased the number ofteachers, Alberta and Ontario reduced theemployment of teachers despite the significantincreases in student enrolment in those prov-

inces. These reductions areconsequences of the tax-cutting and spending-cut-ting policies followed bytheir governments. The re-sult has been sharp rises inpupil-teacher ratios. Who-ever has an advantage inAlberta, it is not childrenin the classroom.In addition to pupil-

teacher ratios, high schoolcompletion rates need to beaddressed. As noted earlier,high school completioncommands a very high rateof return—the counterpartto the limited employmentopportunities of highschool non-completers. Bysome measures, BC␣ is do-ing very badly in terms of

high school completion. According to Statis-tics Canada’s computed secondary schoolgraduation rates, BC␣ vies with Alberta for theworst record in Canada.11␣ The census and thelabour force survey, however, show BC␣ in abetter light, with a slightly better than aver-age completion rate.

These surveys, however, still show aboutone-fifth of British Columbians of age 20without a high school diploma. Some of thesenon-completers may eventually finish or ac-quire an equivalent credential or trade certifi-cate, but non-completion represents a seriouslimitation of anyone’s life prospects and a lossto the provincial economy. The rate of returnto completing high school is so high that manythousands of dollars could be profitably spenton each drop-out to help him or her com-plete school or acquire a trade certificate. In-deed, the provincial government has recentlyeliminated tuition fees for adults completingtheir high school educations –– a wise invest-ment according to the above calculations.

Post-Secondary EducationThe situation in post-secondary education hasmany parallels with the K-12 system. As withelementary and secondary schools, spendingon colleges and universities increased muchmore rapidly in BC␣ than elsewhere in Canada(Table 5), and enrolment expanded. BC hasalso witnessed impressive growth in the vari-ety of both trades and college programs–fromapprenticeship programs, to First Nations’institutes, to training programs for full-timeworkers–thereby offering British Columbiansincreased choice and flexibility in the post-secondary system.

Increased post-secondary enrolmentoverall, however, has not been much greaterthan population growth—the number of 18-24 year olds increased by 17.6% between 1990and 1998—with the result that participationrates did not rise sharply.

1990/91 1996/97

Newfoundland 15.32 14.48

Prince Edward Island 16.88 16.91

Nova Scotia 15.91 17.47

New Brunswick 16.27 17.01

Quebec 14.56 14.73

Ontario 14.84 16.23

Manitoba 14.74 15.49

Saskatchewan 16.15 16.80

Alberta 16.77 18.29

British Columbia 16.12 16.85

Canada 15.26 16.13

Table 6:Student Educator Ratios,elementary/secondary schools

Source: Inter-Provincial Education StatisticsProject (1998).␣ ”Summary of SchoolStatistics from the Provinces andTerritories:␣ Final Edition,” Table 11.


This result is important because, by somemeasures, BC␣ has very low post-secondaryparticipation rates. Statistics Canada publishesfigures on total enrolment and degreesawarded for each province. For inter-provin-cial comparisons, these data must be stand-ardized for differences in the provincialpopulations. This standardization is accom-plished by dividing total enrolment of peopleof all ages in colleges and universities by thepopulation aged 18-24, since members of thatage group are most likely to attend these pro-grams.

The ratio of college-career students to the18-24-year-old population in BC␣ is the thirdlowest in Canada (Table 7). This comparison,however, is unfair to British Columbia becauseof inconsistencies across provinces in classify-ing students in “trade/vocational” programs,on the one hand, and “college career”

programs, on the other. In BC␣ the former gen-erally refers to programs lasting one year orless, while the latter are two-year programs.Consistent inter-provincial comparisons canonly be made by combining the two catego-ries, as in Table 7.12 (In these comparisons,trade/vocational enrolment is confined to whatStatistics Canada calls “pre-employment vo-cational programs” and does not include in-struction in English or adult basic education,i.e.,␣ high school equivalency programs.)␣ Bythis measure, BC␣ is in the middle of the packwith a participation rate not far below On-tario’s.

How BC␣ stacks up against other prov-inces in terms of university participation alsodepends on the measure chosen, but the re-sults are less reassuring than those for voca-tional and career instruction␣ (Table 8). Bach-elor degrees are the output of undergraduate

career vocational & career

Newfoundland 103 217

Prince Edward Island 106 192

Nova Scotia 88 121

New Brunswick 71 302

Quebec 140 252

Ontario 155 220

Manitoba 36 90

Saskatchewan 32 122

Alberta 94 189

British Columbia 53 198

Table 7: Vocational and College-Career Participation Rates, 1995/6per thousand people aged 18-24

Notes:␣ Career enrolment is FTEs in which a part-time student is counted as one third of afull-time student. Vocational enrolment isfull-time only in pre-employment vocationalprograms.

Rates computed by dividing enrolment bythe population (in thousands) aged 18-24.

Degrees UniversityUniversity +

College-Univ. Transfers

Canada 46 219 261*

Newfoundland 35 214 214

Prince Edward Island 34 196 196

Nova Scotia 66 325 325

New Brunswick 46 239 239

Quebec 44 236 374*

Ontario 54 235 235

Manitoba 46 208 208

Saskatchewan 42 241 241

Alberta 37 197 224

British Columbia 30 164 211

Table 8: University Participation Rates, 1996/7per thousand people aged 18-24

Notes:␣ Enrolment is FTEs in which a part-time student is counted asone- third of a full-time student. University enrolmentincludes university college programs.

The Canada and Quebec figures marked with * are probablynot comparable with the others due to classification ofCEGEP students (Quebec’s post-gr.11 junior college system).

Rates computed by dividing degrees and enrolment by thepopulation aged 18-24.


education. When the provinces are comparedin terms of all bachelor degrees awarded di-vided by the population 18-to-24 years old,BC␣ comes in last by a wide margin. BC␣ awardsonly 56% as many degrees per 18-24-year-old as does Ontario, which is a suitable prov-ince for comparison, as will be shown shortly.

The provinces can also be compared interms of total enrolment relative to the 18-24-year-old population. When enrolment isrestricted to students at universities, BC␣ againcomes in last. However, in BC␣ many studentsreceive their first two years of instruction at acollege in a university transfer program. Al-berta has a similar but smaller system, andsmall numbers of students are educated in asimilar way in some other provinces. Addingthe university transfer students13 to those inuniversity raises BC’s university participationrate above those of Prince Edward Island andManitoba, and to within 11% of Ontario’s.

Why does BC␣ do badly when degreesare compared and not as badly when enrol-ment is the measure?␣ The answer is that afar lower proportion of students completeuniversity education in this province thanelsewhere. There are many possible reasonsfor this. First, the system isunbalanced:␣ There are too few third andfourth year undergraduate places in relationto first and second year. Expansion is neededat the third and fourth year level. Second,many students, especially in the colleges, arepart-time students, and it is possible thatpart-time students are less likely to completethan are full-time students. One reason thecolleges have been successful in expandingenrolment is their flexibility, including theirwillingness to accomodate part-time study.This flexibility is laudable and necessary, but

may result in fewer completions.␣The low university completion rate may

also be related to another failing of the uni-versities—the large size of their classes. In1980, BC␣ universities employed 3,163 full-time teachers who taught 36,453 students(full-time equivalents) and awarded 5,997undergraduate degrees. In 1997, the full-timeteaching staff had increased by 7% to 3,379,while enrolment had jumped by 66% to60,433 and the number of undergraduatedegrees had ballooned by 88% to 11,301.

Much of the deterioration was due to theSocial Credit restraint program of 1983-86,but the decline in full-time staff per studenthas continued in the 1990s, particularly whenthe provincial government forced universitiesto admit more students without providingmore funding. Between 1990 and 1997, thegrowth in undergraduate degrees outpaced thegrowth in full-time teachers by 25%, whilethe growth in enrolment exceeded the growthin full-time teachers by 19%.

Some of the rise in enrolment was metby hiring sessional lecturers and part-timeteachers. Unfortunately, the potential con-tribution of these people is limited, since theyhave no long- term relationship with the uni-versities. Much of the rise in enrolment hasbeen dealt with by increasing class sizes.(Large classes are not just a problem in el-ementary and secondary schools.)␣ Largerclasses are bad for students, since their expe-rience becomes more passive as they listen inhuge lecture halls rather than participate insmall group discussions.

Larger classes also make for an imper-sonal and less supportive learning environ-ment, which is again difficult for all studentsand is particularly trying for college transfer


students who face additional stresses from leav-ing home and the more personalized educa-tion offered in the colleges. Not only doesBC␣ need more third and fourth year univer-sity places, but it needs more spending perstudent to create a more successful learningenvironment. More funding is required toensure part-time students receive the supportthey need, and to boost completion rates, sothat the educational investments of studentsand the state are not lost.

There would certainly be jobs for moreuniversity graduates. While Ontario leads thecountry with 19.9% of its workers having uni-versity degrees, BC␣ and Quebec tie for sec-ond place with 18.8% of their workers hold-ing degrees (Table 9). The high level of em-ployment of university graduates inBC␣ reflects the demand for graduates in thisprovince rather than provincial training, whichtrails the rest of the country. Thus, much ofBC’s demand for university-educated work-ers continues to be met by interprovincialmigration.

The range across provinces in the pro-portions of employees with university degreesis quite broad and reflects differences in theireconomies. BC␣ is one of the growth centresin Canada for the knowledge-based economyof the twenty-first century.

In the 1990s, provincial demand has ex-ceeded provincial supply for trade/vocationaland college career graduates, and especially foruniversity graduates. Between 1990 and 1996,the employment of people who had completedtrade/vocational and college/technical pro-grams increased by 21.8 thousand per year,on average. Allowing for retirements and thefact that not everyone has paid work impliesthat 34,200 program completers were needed

each year to meet the growth in demand.14␣In the mid-1990s, somewhat more than30,000 people per year completed such pro-grams.15␣ Thus, the growth in demand ex-ceeded the growth in supply by a few thou-sand people per year.

At the university level, the gap wasmuch greater. Employment for people withuniversity degrees increased by 21,900 peryear from 1990 through 1996. Allowing forretirements and non-workers implies that29,000 bachelor degrees had to be awardedeach year to meet the growth in demand. In1995, BC universities awarded 11,142 bach-elor or first professional degrees (up fromabout 8,000 in the late 1980s). Thus, BC␣ isproducing less than 40% of the growth indemand for university- educated workers inthe province.

Percentage of employees with:

post-secondary certificate or diploma

university degree

Canada 32.3% 18.6%

Newfoundland 41.8% 13.2%

Prince Edward Island 33.3% 17.5%

Nova Scotia 38.3% 18.2%

New Brunswick 36.2% 15.5%

Quebec 30.0% 18.8%

Ontario 30.0% 19.9%

Manitoba 22.2% 11.1%

Saskatchewan 29.2% 14.3%

Alberta 31.9% 16.4%

British Columbia 31.9% 18.8%

Table 9: Educational Attainmentof the Work-Force, 1996

Source: Statistics Canada, The Labour Force, December, 1996.


It may be unreasonable for BC␣ to edu-cate all of the university graduates its economyrequires, since the population as a whole isgrowing through migration (including in-mi-gration of university-educated people) andsince the economy is peculiarly tilted towarduniversity graduates in its demand for labour.There is no reason, however, why BC␣ couldnot do as well as Ontario. If British Colum-bia awarded as many degrees as Ontario doesrelative to its population, then this provincewould be graduating 18,800 people per yearinstead of the current rate of 11,100. Expand-ing the university system to meet that goal isnot unreasonable, although BC␣ would still beproducing about 10,000 fewer graduates eachyear than its economy requires.

Such an expansion would have impor-tant benefits on a regional basis. The econo-mies of the lower mainland and greater

Victoria are doing muchbetter than the rest of theprovince, especially thosecommunities dependenton the traditional staples(forestry, fishing, and min-ing). The weakness inthose sectors is partly cy-clical but partly funda-mental. If resource-basedcommunities do notreorient their economiesto “value added” produc-tion, then technicalchanges in logging, min-ing and milling will resultin falling employment,and that has already beenthe fate of many towns andcities.

Young people inthese communities can no

longer count on high-paying work in forestry,fishing, or mining and will have to direct theirtalents elsewhere. Getting a university educa-tion and moving into the knowledge-basedeconomy is one option, but it has been a hardoption for people in these areas, since the prov-ince’s universities have been located in the bigcities. Colleges have provided an importantfirst entry into university courses, but they havenot solved the problem, as the low comple-tion rate in BC␣ university programs suggests.

The establishment of the University ofNorthern BC␣ and the creation of universitycolleges outside of the big cities are importantinitiatives with the potential to change the situ-ation, and they warrant expansion. Additionalfunding for the established universities to in-crease capacity at the third and fourth yearlevels and reduce the size of classes to create amore supportive learning environment are alsoimportant steps in graduating more students.Initiatives in this direction have the potentialto alleviate the unemployment problem inresource-based communities in the long run.

Inter-provincial and inter-temporal com-parisons indicate areas in which BC␣ shouldincrease its educational spending. The com-parisons also highlight a structural reason forincreasing spending, namely, provincial popu-lation growth: BC␣ needs to spend more moneyon education than other provinces just to serv-ice the influx of people moving here. If spend-ing on education is related to the size of theeconomy (its gross domestic product, orGDP), BC␣ needs to invest a larger fraction ofits GDP in education than do provinces thatgrow less rapidly. However, BC’s educationalinvestment rate is only equal to the Canadianaverage, and behind that of all provinces ex-cept Ontario and Alberta (Table 10).BC␣ needs to increase the portion of GDPspent on education to be Canada’s leader.

Canada 6.3%

Newfoundland 9.2%

Prince Edward Island 7.3%

Nova Scotia 7.1%

New Brunswick 6.7%

Quebec 6.9%

Ontario 6.1%

Manitoba 6.5%

Saskatchewan 6.6%

Alberta 5.1%

British Columbia 6.3%

Table 10:Educational SpendingRelative to GDP, 1996/97

Note: Educational spendingincludes elementary andsecondary spending bypublic schools andexpenditures on collegesand universities.

Source: Same as Table 5.


Part V:␣ Who Should Pay?

undesirable redistribution of income fromthe general taxpayer to the well-to-do sinceit is the children of well-off parents who dis-proportionately attend post-secondary insti-tutions, and 4) increased government expen-ditures cannot be justified if they will in-crease the province’s deficit.

In fact, none of these objections is per-suasive.

The argument that students are a heav-ily subsidized group ignores the fact that theypay for their college and university educationsin two ways. The most obvious is throughtuition fees at the time of enrolment. Theseamount to several thousand dollars per year,depending on the program. These fees (netof the subsidy in student financial aid)amount to less than one- third of the cost ofthe program—hence, the apparent subsidy.The second way students pay is throughhigher taxes after graduation. Most studentsattend college or university with the aim ofearning a higher income, and they are usu-ally successful, as shown earlier. Because theyearn higher incomes than they would haveotherwise, they pay more taxes in total (in-cluding income tax, property taxes, GST,PST, and excise taxes like those on alcohol,tobacco, etc.) than they would have other-wise. These higher taxes are in effect post-graduation payments to the government fortheir education.

College and university financing inCanada should be thought of as a joint in-vestment project between the student and thegovernment. The student’s investment in-cludes the earnings lost by studying ratherthan working, the cost of books and supplies,and the tuition paid. The government’s

There is a compelling case for spending sub-stantially more money on education in Brit-ish Columbia. Despite the slowdown of eco-nomic growth in the last year, the long-runprospects of the province remain bright, andeducational spending must be increased sim-ply to keep pace with the long-run growth inpopulation. The number of university gradu-ates (including those of university colleges)should be expanded by more than two-thirds,plus an increment for population growth.There is also a case for expanding vocationaland career programs, since they yield high ratesof return for certain groups. Spending per stu-dent could be increased in elementary andsecondary schools and at universities to reduceclass sizes. Such reductions might increasegraduation rates at both levels.

The practical question is: who should payfor this increased spending?␣ No one has seri-ously suggested that elementary and second-ary education be privatized so that parentswould have to pay, but the issue is hotly de-bated at the post-secondary level. At thepresent time, BC␣ pays most of the cost of theprovince’s colleges and universities, and stu-dents make a small contribution through tui-tion fees. According to the conventional analy-sis, students are a heavily subsidized groupsince their fees amount to a third or less ofpost-secondary expenditures.

This funding arrangement is being in-creasingly called into question on thegrounds that 1) all consumers of governmentservices (including students) should pay thefull cost of those services, 2) a less-subsi-dized, more market-oriented system wouldbe more responsive to the needs of theeconomy, 3) subsidies to students are an


investment includes the cost of building andoperating the colleges and universities, lessthe tuition received. The student’s returnfrom the investment is the higher after-taxincome he or she receives after graduation,while the government’s return is the highertaxes paid.

This framework has an immediate ap-plication to the question of students beingsubsidized. The present value of the extrataxes paid by college completers and univer-

sity graduates must be added to the tuitionfees to see whether the total exceeds the costof building and operating the colleges anduniversities.␣

Tables 11 and 12 show the details ofthis calculation. The cost of the programs,which is the government’s contribution toeducation and which is the sum which stu-dents ought to pay if they are to pay the fullcost of their educations, is taken from theearlier discussion of the social rate of return.

Tuition fees (net of stu-dent aid) are takenfrom an earlier study ofuniversities and a com-parison of BC␣ and Al-berta (Klein andWalshe 1999). The ad-ditional taxes paid byprogram completers af-ter graduation are cal-culated by applying aneconometric model ofthe BC␣ tax system tothe incomes reported inthe 1991 censusmicrodata file ofBC␣ residents. A smallreduction has beenmade since studentspaid less tax when theywere in school becausethey were working lessthan non-students.16

Justaxposing thepayments of studentsand the costs of the pro-gram shows that stu-dents at all post-second-ary levels pay the fullcosts of their programs,

student payments treasury cost

present value of extra taxes + tuition - less fore-

gone taxes= total ..

of degree

grade 12 23,355 + 0 1,564 = 21,791 6,042

trade certificate/no HS grad 26,075 + 1,390 - 1,564 = 25,901 8,286

trade certificate/HS grad 2,721 + 1,390 - 1,564 = 2,547 8,286

college career 23,894 + 2,780 - 3,127 = 23,547 19,280

university 65,829 + 11,480 - 6,254 = 71,055 35,984

Table 11: Payments for Education—Women (dollars)

Notes: Program definitions are shown in notes to Table 3.

present value of extra taxes—see text.

tuition—Tuition is net of financial aid subsidy. University figure from Allen (1998b, Table 5).Trade and college from Klein and Walshe (1999, p.␣ 21).

foregone taxes—University figure from Allen (1998b, Table 5). Grade 12, trade, and collegecalculated as one fourth and one half of the university figure.

Treasury cost of degree—Table 2 assuming college career at two years and university at fouryears.

student payments treasury cost

present value of extra taxes + tuition - less fore-

gone taxes = total..of degree

grade 12 40,402 + 0 - 1,808 = 38,594 6,042

trade certificate/no HS grad 57,466 + 1,390 - 1,808 = 57,048 8,286

trade certificate/HS grad 17,064 + 1,390 - 1,808 = 16,646 8,286

college career 36,274 + 2,780 - 3,616 = 35,438 19,280

university 104,457 + 11,480 - 7,232 = 108,705 35,984

Table 12: Payments for Education—Men (dollars)

Note: See Table 11.


generally by a substantial margin. The notionthat students are a heavily subsidized groupis contradicted by the facts. It is not valid tosay that fees should be raised to eliminate asubsidy.

This conclusion, however, has an impor-tant corrollary. If fees are not to be raised, thencolleges and universities are dependent on theTreasury for their income. Consequently, boththe province and the federal government havean obligation to fund post-secondary educa-tion at an adequate level, since they receive

Part VI:␣ Responsiveness ofColleges and Universities to the Economy

more responsive to the economy than they arenow.According to this view, today’s publicly-funded universities do not have to respond tostudent or business demand because they arerun by the faculty, who perpetuate their powerand privilege and ignore the need for change.This line of analysis has been advanced by theWorld Bank, and Third World countries arebeing forced to put it into practice.17

This argument is vulnerable on manycounts. First, it ignores the fact that collegesand universities have changed their programsconsiderably in recent decades. They do notexhibit the rigidity that the argument pre-sumes. Indeed, their program mix is approxi-mately what the economy requires. Implicitin the World Bank argument is the proposi-tion that the equality of rates of return acrossprograms is the condition that indicates thecorrect mix. Earlier I showed that rates of re-turn to colleges and universities were similar,as were rates of return across most university

the taxes. The shortfall in places must be elimi-nated, the needs of population growth mustbe met, and funding levels per student mustbe increased to ensure reasonable class sizes.By prohibiting tuition increases, the provin-cial government assumes the responsibility ofproviding the income that higher tuitionwould generate. The federal government alsohas the obligation to increase tranfers to theprovinces to pass on to them the increasedincome tax and GST revenue generated frompost-secondary education.

A second argument in favour of shifting thefunding of colleges and universities to studentfees and corporate grants is to make the insti-tutions more responsive to the needs of theeconomy. Such a change in funding would ef-fectively privatize the colleges and universities.

The conclusion that privatizing post-sec-ondary institutions would make them moreresponsive to the economy is based on the fol-lowing reasoning:␣ If students had to pay thefull cost of their programs, they would thinkmore carefully about their choices and choosethe program most likely to maximize theirincomes. Programs that were economicallyrelevant would carry high rates of return; stu-dents would enter those, and they would ex-pand. In contrast, economically “irrelevant”programs would attract few students andwould contract. A greater reliance on corpo-rate donations for constructing facilities andoperating programs would reinforce thiseffect. Such changes would make universities


programs. Hence, the program structure ofBC␣ colleges and universities is about what themarket demands.␣

It is not clear that greater reliance on stu-dent demand and corporate donations wouldproduce a post-secondary education systemthat is more attuned to the needs of theeconomy. Popular opinion about the eco-nomic returns to education is wildly incon-sistent with the facts. An Angus Reid surveyof Ontario residents in May, 1998, found thatmost people believe that specific skills train-ing would generate the best employment pros-pects:␣ 37% thought that an apprenticeship ora high school diploma with job training wasthe best preparation for the future economy,while 35% thought a college career programin a technical area was best. Only about 25%thought that a university degree was the bestpreparation.18␣

These views are wholely at variance withthe labour market survey data discussed ear-lier in this paper. If student demand reflectspopular opinion—and how could the situa-tion be otherwise?—then student demand isa poor basis for allocating educationalresources.

Corporate funding is likewise an unsoundbasis for university finance. The problem is pre-cisely that the funding will reflect the needs ofbusiness. So far as research is concerned, theprojects funded will be those that address prac-tical business problems (rather than extend ba-sic knowledge) or that advance business ideol-ogy rather than support any kind of critique ofsociety at odds with corporate interests.

Corporate funding often implies thatresearch findings are proprietary informationthat cannot be freely disseminated, particu-larly if they threaten the funder’s interests,whereas the university’s goal is to share anddisseminate knowledge. So far as teaching isconcerned, the programs funded will be thosethat meet the short-term needs of business for

people trained in particular skills. Since thereis no guarantee that the graduates of theseprograms will remain with the employer whofunds the program, the employer has an in-centive to train the student in skills that areuseful only to the funding firm rather than ingeneral skills that would increase the value ofthe student to other employers. A concentra-tion on narrow, highly specific skills at theexpense of general skills is the likely result ofbusiness funding of teaching programs.

The World Bank critique of public col-leges and universities presumes that programmix is the main problem with post-secondaryeducation. In fact, the main problem has of-ten been the overall size of the system. So faras size is concerned, public financing has a fun-damental advantage over private financing—namely, that the government can borrowmoney less expensively than can private house-holds. If the government expands the systemuntil the marginal return equals the interestrate on government debt, the system will belarger than if private individuals financeexpansion.

The differing experiences of Canada andthe United States reflect these possibilities. InCanada, where the system is publicly funded,expansion has been more rapid than in theU.S.,␣ where private funding is more impor-tant. By the mid-1990s, Canadians were morelikely to receive post-secondary education thanwere Americans.19␣ The more rapid expansionof colleges and universities in Canada has beenimportant in closing the income gap betweenthe two countries.

The arguments in favour of privatizinguniversities, relying on corporate funding, andraising fees to make universities more respon-sive to the economy are unlikely to producepositive results in British Columbia. Publicly-financed institutions with low tuition rates willproduce faster economic growth so long as thegovernment adequately funds them.


Part VII:␣ Education and Inequality

Higher fees and less public funding of collegesand universities are also promoted as a way ofreducing inequality. The argument is that thepost-secondary students come from well-offfamilies, while much of the taxes collected inthe province come from lower-income house-holds. Funding public universities out of gen-eral revenue, therefore, is a transfer from thepoor to the rich. High fees would eliminatethat transfer and make the rich pay for theirchildren’s education.

While this argument had some merit inthe 1960s, it has much less merit today. Asthe figures in Table 1 show, for Canada as awhole 67.1% of the women aged 25-29 and57.7% of the men had completed a post-sec-ondary program and another 8-9% had somepost-secondary education. The argument thatonly the rich go to colleges or universitiesmight have been true a generation ago, butthe great expansion in post-secondary educa-tion since then has changed the terms of thedistributional debate.

In fact, low-cost public education is likelyto enhance equality. Low fees improve accessto post-secondary institutions by studentsfrom low-income backgrounds. The critics oflow fees counter that most students can af-ford to pay higher fees, so access will not bereduced by raising them. No doubt many stu-dents can afford to pay more, but some willbe denied access if fees are raised.

Colleges and universities financed bygeneral revenue can also improve equality bychanging the wage and salary structure of thelabour force. As argued previously, govern-ments can borrow money less expensively thanindividuals. If governments avail themselvesof that option, they will create a larger post-secondary education system than would bebuilt by institutions deriving their income

from student fees. A larger system means agreater supply of educated workers and, cor-respondingly, a smaller supply of less-educatedworkers. Consequently, the salaries of edu-cated workers will be less, and the wages ofuneducated workers more, than would be thecase with a high-fee, more exclusive privatesystem. A large public system will thereforepromote equality by equalizing the distribu-tion of wages and salaries.

Recent North American history illus-trates the force of this argument. Inequalityhas increased much more in the United Statesthan it has in Canada, and one aspect of theAmerican increase has been a steep rise in thesalaries of university graduates and a fall in theearnings of people with a high school educa-tion or less. With the demand for labour shift-ing towards more educated workers, the moresluggish response of the educational systemsouth of the border has resulted in a rise in thesalaries of people with university degrees (sincesupply has not kept up with demand) and afall in the wages of high school graduates (sincetheir labour market has been overstocked withpeople who would have received further edu-cation had they lived in Canada).20

Thus, an expanded system of public, low-fee colleges and universities can promoteequality in British Columbia. As noted ear-lier, such a system can also promote economicgrowth more effectively than a high-fee, self-financing system. Both arguments require thatthe provincial government expand the systemas long as the social rate of return exceeds theinterest rate on government bonds. Given thecurrent high returns to post-secondary edu-cation, BC␣ can realize the full growth- pro-moting, inequality-reducing potential of col-leges and universities only by significantly ex-panding the systems.


Part VIII:␣ Impact on the deficit

people from other provinces take the higher-paying jobs that they might have had.

Beyond those drawbacks, cutting taxeswould likely have a smaller stimulating ef-fect on demand in the province than wouldmore educational spending. The problemwith tax cuts in this regard is that some ofthe tax reductions are saved rather than spent,so dollar-for-dollar their stimulating effectis less.

The other virtue claimed for tax cuts isthat they will accelerate economic growth byincreasing the incentive to work and invest.The notion that high taxes in BC␣ have de-pressed growth here is hard to credit, giventhat BC␣ posted strong growth in employmentand domestic demand during the 1990s withessentially the same tax structure that it hastoday. Why these tax rates have suddenly be-come an impediment to growth is unclear,especially when there are other developmentslike the Asian economic crisis and decliningforest commodity prices that provide credibleexplanations for the recent economicslowdown. Indeed, employment growth hasresumed, so the claim that BC’s tax structureis depressing growth may be even farther offthe mark.

The claim that BC’s taxes are too highhas drawn strength from the “brain drain” ar-gument. The claim here is that high Cana-dian taxes have driven educated Canadians towork in the United States, to the great loss ofthis country. The brain drain, however, hasbeen shown to be chimerical for Canada as a

The final argument against British Colum-bia’s spending more money on education isthat its budget is in deficit and needs to bebalanced before additional funds are com-mitted. That argument, however, ignores thefact that education is a good investment. Theinterest rate on long-term provincial debt isabout 5%, while, as we have seen, the socialrate of return to many educational expendi-tures is 10% or more. Borrowing money at5% to make a 10% profit is simply goodbusiness.

Investing more in education now wouldalso counteract the effect of low resource pricesthat are depressing provincial GDP and re-ducing employment. The increased spendingwould directly raise output and employmentand the re-spending of their salaries by teach-ers, support staff, and those involved in build-ing and supplying schools, colleges, and uni-versities would lead to further economicexpansion.

Tax cuts (rather than expenditure in-creases) are the alternative approach to stimu-lating the economy. Following the tax-cut-ting approach, of course, would forfeit theincome gains and favourable effect on equal-ity of additional educational spending. Itwould guarantee the kind of increases in classsize that have occurred in Alberta and On-tario; it would guarantee the continuationof large classes in universities; and it wouldguarantee that thousands of students in Brit-ish Columbia who might otherwise haveearned a post-secondary degree will see


whole,21 and it lacks any credibility for Brit-ish Columbia. For decades, this province hasbenefited from brains coming in rather thanbrains draining out.

As shown earlier, the growth in employ-ment of university graduates in this province

2. A significant proportion of students in Brit-ish Columbia fail to complete high school.Programs to increase graduate rates warrantfurther support.

3. BC’s universities and university collegesshould be expanded to increase the numberof bachelor degrees by about 70%, or 8,000per year. This would bring the rate ofunivesity completion up to the Ontariolevel, which is appropriate since BC␣ (likeOntario) is a growth centre of the knowl-edge-based economy. Most of the expan-sion should be at the third and fourth yearundergraduate level.

4. The colleges and universities need morefull-time faculty to reverse the increases inuniversity class sizes that have occurred inthe last decade, as well as to teach the addi-tional undergraduates that the provincialeconomy requires. To erase the damage offunding restraint and return the student-to-full-time-teacher ratio to its 1980 value

greatly exceeds provincial supply, and the gapis closed by migrants from other countries andprovinces. These people have found ampleincentive to settle here and work despite—perhaps, indeed, because of—the taxation andexpenditure policies followed here.

Part IX:␣ Conclusion

The demand for educated workers is risingin British Columbia, and the increase is ex-pected to continue into the next millennium.Knowledge-based industries provide the op-portunity to diversify the BC economy awayfrom the extraction and export of primaryresource commodities. The profitability ofinvesting in education at all levels is very high,and so there is both economic need andpopular demand for more spending in thisarea. It is only prudent business managementfor the province to borrow at 5% in order torealize a profit of 10% or more on educa-tional programs.

Social rates of return and comparisonswith other jurisdictions suggest the followingareas require attention:

1. The BC␣ pupil-teacher ratio in elementaryand secondary schools exceeds the nationalaverage. An additional 1,550 teacherswould be required to bring the ratio downto the Canadian average (based on 1996/7 figures).


would require another 1,800 full-timeteachers in the universities and universitycolleges.

In addition, the following conclusions regard-ing educational funding were implied by theanalysis.

5. The long-run success of the BC␣ economymeans that the province’s population hasbeen growing—and will continue togrow—faster than that of the rest ofCanada. BC not only must provide the re-sources for its existing population— whichall jurisdictions must do—but in additionmust build and operate schools toaccomodate the new immigrants. The lat-ter expenditure implies that BC must in-vest at a higher rate than most other prov-inces. BC now spends a smaller fractionof its GDP on education than all prov-inces except Ontario and Alberta.BC␣ should increase its investment rate ineducation to be the highest in Canada if itexpects to continue to be a growth centrein the knowledge-based economy of thetwenty-first century.

6. Most funding for BC’s colleges and uni-versities has come from the provincial

government (including federal transfers tothe province for post-secondary educa-tion). Government funding has one greatadvantages over tuition fees as a source ofrevenue: namely, that the provincial gov-ernment can borrow at lower cost than pri-vate individuals. Hence, if the province fi-nances education, it will be profitable toexpand the system beyond the point whereprivate individuals would find it profitable.A larger system would be good for growthand good for equality in the province. Tosecure these favourable outcomes, how-ever, the provincial government must ex-pand funding for post-secondary educa-tion. College and university graduates, infact, pay for more than the cost of theireducations through the higher taxes theypay over their lifetimes. These taxes, in ef-fect, are compulsory contributions to theiralma maters. The federal and provincialTreasuries should pass these contributionson to the colleges and universities and notuse them to retire debt or reduce taxes.

7. BC␣ should increase spending on educationwhether or not the extra spending increasesthe deficit. Education is an investment. Itis only good business to borrow money at5% in order to earn a 10% rate of return.


Endnotes

6 I thank Randall Brown, Coordinator of Funding,Finance and Information Management Branch, PostSecondary Education Division, Ministry of AdvancedEducation, Training, and Technology.

7 Dickson et al. 1996.8 Education at a Glance; and Alsalam and Condy

(1995).9 Inter-Provincial Education Statistics Project

(1998).␣ ”Summary of School Statistics from theProvinces and Territories:␣ Final Edition,” Table 4.

10 Inter-Provincial Education Statistics Project(1998).␣ ”Summary of School Statistics from theProvinces and Territories:␣ Final Edition,” Table 2.

11 Statistics Canada, Education in Canada, 1997,p.158-9.

12 Combining the categories, however,introduces onenew complexity. In some provinces, a high schooldiploma is required for admission to trade/vocationalprograms, while in others (including BC)␣ that is notalways the case. Hence, for some students in BC, atrade/vocational program is not a post-secondaryprogram, strictly speaking.

13 The much smaller number of students in third andfourth year undergraduate programs at universitycolleges are included by Statistics Canada in theuniversity enrollment.

14 The details of this calculation are elaborated in Allen(1998a).

15 Statistics Canada data indicate that 2918 people

1 The averages discussed in this paragraph werecomputed from Statistics Canada, Census of Canada,1970, microdata file, and Statistics Canada, Survey ofConsumer Finance, 1995, microdata file. All figureshave been expressed in 1995 dollars by using theCanadian consumer price index.

2 These studies are summarized in Allen (1998b),which also reports new results using BC data thatsupport the conclusinos that education increasesearnings and that educational attainment is not aproxy for ability.

3 If part-time students continued to work full time, thenthe social cost of their education would be less thanthat of full-time students and that effect would tend toraise the rate of return to part-time education abovethat of full-time. However, part-time students will takelonger to complete their programs than full-timestudents, so part-time students will have fewer years toearn the extra income caused by their program. Thateffeect will tend to lower the rate of return to part-timestudy. In addition, there is the possibility that part-time students will be less likely to complete theirprograms than full-time students, a possiblity thatwarrants further study. If true, that factor will also tendto lower the rate of return to part-time study withrespect to the return to full-time study.

4 1995, p.545.5 Statistics Canada, Educational Quarterly Review,

Vol.␣ 4, No.␣ 2, 1997.

A Tale of Two PROVINCES26

References

completed apprenticeships in 1994, 14,900 completedpre-employment vocational programs, 5707completed skill upgrading programs, and 554 finishedjob related training. In 1995, 6,418 completed collegecareer programs. These figures total 30,497. A higherfigure could be obtained by including completers oflanguage programs or adult basic education, but thoseprograms are not post-secondary in a strict sense. Also,the size of the vocational and career programs isprobably larger today (implying a smaller gap, if any,between demand and provincial supply) but figuresare not available.

16 The details of the calculations and a full descriptionof their rationale are in Allen (1998b).

17 “World Bank Promotes Its Agenda in Paris,” CAUTBulletin, Vol.␣ 45, No.␣ 9, November, 1998, pp.␣ 1-8.

18 “Degrees allocated to back seat in Ontario poll onfuture jobs,” Globe & Mail, 15 August, 1998, p.␣ A6.

19 Education at a Glance: OECD Indicators, 1997,pp.␣ 10, 170, 171.

20 Murphy, Riddel, and Romer (1998) develop thisanalysis in detail with a simulation model.

21 “Brain Drain or Brain Gain?␣ What do the DataShow?”␣ Statistics Canada, 1␣ October, 1998.

Allen, Robert C.␣ (1998a).␣ Standing Room Only:␣ TheCase for Expanding BC’s Universities, Vancouver,Canadian Centre for Policy Alternatives.

Allen, Robert C.␣ (1998b). Paid in Full:␣ Who Pays forUniversity Education in BC?, Vancouver, CanadianCentre for Policy Alternatives.

Allen, Robert C.␣ (1998c).␣ The Employability of UniversityGraduates in the Humanities, Social Sciences, andEducation:␣ Recent Statistical Evidence, Ottawa,Social Sciences and Humanities Research Council ofCanada.

Alsalam, N., and Condy, R.␣ (1995). “The Rate of Returnto Education:␣ A Proposal for an Indicator,”Education and Employment, formation et emploi,Paris, Organization for Economic Cooperation andDevelopment.

“Brain Drain or Brain Gain?␣ What Do the Data Show?”␣Statistics Canada, 1 October, 1998.

Dickson, Vaughan, Milne, William J., and Murrell, David(1996). “Who Should Pay for UniversityEducation?”␣ Canadian Public Policy, Vol.␣ 22,pp.␣ 315-329.

Education at a Glance:␣ OECD Indicators, 1997, Paris,

Organisation for Economic Co-operation andDevelopment.

Hettich, W.␣ (1971). “Expenditures, Output andProductivity in Canadian University Education,”Economic Council of Canada, Special Study 14.

Inter-Provincial Education Statistics Project(1998).␣ ”Summary of School Statistics from theProvinces and Territories:␣ Final Edition.”

Klein, Seth, and Walshe, Catherine (1999).␣ A Tale of TwoProvinces:␣ A Comparative Study of Economic andSocial Conditions in British Columbia and Alberta,Vancouver, Canadian Centre for Policy Alternatives.

Murphy, Kevin M., Riddell, W.␣ Craig, and Romer, PaulM.␣ (1998). “Wages, Skills, and Technolgy in theUnited States and Canada,” in Elhanan Helpman,ed., General Purpose Technologies and EconomicGrowth, Cambridge, MA, The MIT Press, pp.␣ 283-309.

Vaillancourt, F.␣ (1995).␣ ”The Private and Social Returns toEducation in Canada, 1985,” Canadian Journal ofEconomics, Vol.␣ 28, pp.␣ 532-54.

“World Bank Promotes Its Agenda in Paris,” CAUTBulletin, Vol.␣ 45, No.␣ 9, November, 1998, pp.␣ 1-8.

Canadian Centre for Policy Alternatives–BC Officependakur/allen.pdfBob Allen has published three...

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Transcript of Canadian Centre for Policy Alternatives–BC Officependakur/allen.pdfBob Allen has published three...