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

Discussion paper written by Kristinn Hermannsson (Robert Owen Centre for Educational Change, University of Glasgow), Patrizio Lecca and Kim Swales (University of Strathclyde)

INTRODUCTION
It is not clear how increasing the skills of the population through formal education affects aggregate economic activity. Neoclassical growth theory and microeconometric analysis of wage premia in labour markets motivate a prima facia expectation that more education should boost output. However, verifying this has proven elusive ─ macroeconometric analysis has been inconclusive, whilst conventional growth accounting approaches to the same problem rest on restrictive assumptions. Perhaps not surprisingly, given this academic context, the benefits associated with educational institutions are increasingly linked to peripheral features of their mission, such as their expenditure impacts and their knowledge exchange activities (e.g.Scottish Government, 2013), rather than their more fundamental economic contribution of providing skills.

We propose an alternative micro-to-macro method which combines elements of growth accounting and numerical general equilibrium modelling. This enables us to relax the assumption of fixed marginal products inherent in growth accounting, while retaining the flexibility obtained from building on labour market data. We demonstrate the usefulness of this approach for applied education policy analysis by evaluating the macroeconomic impact on the Scottish economy of a single graduation cohort from Scottish further education colleges (FECs). We find the macroeconomic impact to be significant and greater than would be predicted using the conventional growth accounting framework. From a policy point of view this supports a revival of interest in the conventional teaching role of education institutions. Further, a similar comparative analysis for higher education institutions (HEIs) in Scotland reveals FECs to be relatively cost effective in improving the local level of human capital.

Section 2 examines the evidence from the literature on the impact of education on aggregate economic activity and outlines our own micro-to-macro method. Section 3 calculates the increase in human capital generated in Scottish HEIs and FECs from their operation in one single year and the subsequent effect on Scottish labour productivity. Section 4 presents a stripped-down analytical model of the effect of such an increase in labour productivity in an open regional economy. These analytical results are compared with those from the standard growth accounting approach. Section 5 reports simulation results from a much more sophisticated and numerically based Computable General Equilibrium
(CGE) model for Scotland. These simulations give the impacts on economic activity of the increase in labour productivity generated by a single year’s output from Scottish FECs. Section 6 is a short conclusion.

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Hermannsson, K., Lecca, P. and Swales, K. 2014. “How much does a single graduation cohort from further education colleges contribute to an open regional economy?” Strathclyde Discussion Papers in Economics. University of Strathclyde, Glasgow, Scotland.