• Lucy Murphy

Can fees change the way we study? Incentives in Higher Education

Updated: Oct 25, 2020

One of the most important lessons I remember from my first-year microeconomics class is that people respond to incentives. At the time I didn’t really see the gravity behind the claim, but as I continue to look at the world around me, its implications are huge. The recent changes in university fees can easily be seen as an incentive or disincentive to follow certain study paths, favouring science, maths and engineering and steering students away from humanities, law and creative arts. However, the effectiveness of such policies and incentives as a concept stems much further back, to the idea of objectives, and in this case, the fundamentals of higher education. In order to appropriately debate the financial incentives initiated by Education Minister, Hon. Dan Tehan, we must first define the objectives of universities.

Hon. Dan Tehan, Education Minister, announced the changes to university fees in June of this year. What is the objective of higher education? This is a loaded question. In today’s society, Australian high school students are encouraged to follow their passions in life, whether that be medicine or musical theatre, engineering or education. This cultural custom would imply that universities act as a vessel to lift people into their chosen field, in hopes for individuals to live a content life, doing what makes them happy. However, it can also be argued that the objective of higher education is to engineer a society with qualifications that optimise the output levels of Australia, increasing GDP, and improving well-being. This aligns with recent fee change incentives, leading students into growth areas that the government deems most beneficial in structuring our workforce. This quantitative approach raises some concerns. If we push students into fields that they are not intrinsically motivated to choose, will it be counterproductive and increase long term costs, both to the government and individual? Are unsatisfied workers more likely to pursue additional education after a change of mind? Will this be government subsidized? Are they likely to be efficient in the workplace? Will we see increasing career changes? The answers to these questions could negatively impact productivity in the market, increase unnecessary student debt and see the government fund degrees that will be no more than irrelevant resume fillers. While the end goals of these approaches both seemingly target well-being, it is on an individual level and nation level respectively. This pushes us to the next step of incentive analysis – who is the principal and who is the agent?

*Current 2021 Contributions are without the implemented changes. Source: Deloitte

Do universities service the objectives of individuals or the government? Economics places great importance on principal-agent relationships and while it is clear that universities serve as agents, who is their principal? Agents are commissioned to fulfil an objective by principals, so we must determine whether students employ universities to meet their objectives discussed above or governments procure universities to engineer their desired human capital. Funding sources leverage power to the government to act as principal in public universities, thus implying the objective of universities is to adequately structure the work force to optimise output. The increase in output serves as the measurement of incentive schemes. Agency problems are then called into question in this relationship between universities and the government. Asymmetric information may in turn lead universities to exploit fee changes and encourage students to pursue those courses which are more profitable for themselves, those with increased fees. This conflict of interest dampens the effectiveness of the initial incentive scheme and is counterproductive to the government’s objectives. This is especially interesting with the commercialisation of universities in Australia, as Australian universities continue to uphold their ‘cash-cow’ nickname. Data from the Department of Education, Skills and Employment spells out the 129% increase in international student enrolments in higher education from 2002 to 2020, many of which are full fee paying. The government has allowed this commercialisation, and its implications wreak havoc on universities’ attitudes toward learning, for both domestic and international students. This bottom-line mentality moves targeting of courses away from those who are best suited, and towards those where the most money can be made. However, this all lies upon the assumption that fees have the ability to change the behaviour of incoming students. This assumption seems far stretched, even for economics. Economist Bruce Chapman, who manufactured the Higher Education Contribution Scheme (HECS), has highlighted that students make decisions on what to study based on their interests and earning potential. This is made possible by the income-contingent loans students receive, and the time value of money rendering changes in fees even less effective as incentives. How else can we optimise our work force? ▪ Destigmatise less attractive fields. From personal experience, many people are simply misinformed in about what certain industries do. Increasing education in high school around career opportunities can change cultural views toward these industries. A handful of meetings with career counsellors and a couple of open days is not sufficient, and leaves the opportunity to explore different career options far too late. ▪ The Organisation for Economic Co-operation and Development, in their 2010 report ‘A Skilled Workforce for Strong, Sustainable and Balanced Growth’, attributed substantial economic growth to the globalization of markets, with trade and migration retracting as a result of the recent pandemic. This will have significant impacts on work force optimisation. ▪ Specialising in areas of comparative advantage allows us to achieve the best outcomes with the human capital we have available and while it is crude to assume people like doing what they are best at, this assumption is significantly more mild than assuming students choose what they study based on fees. While this list is in no way exhaustive or perfect, as students we need to actively engage in debate about our education, our drivers and fees as it is reshaping the world we live in. We cannot be passive consumers when we are directly affected by these changes.

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