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Fraser of Allander Institute Department of Economics University of Strathclyde

The Importance of Graduates for the Scottish Economy: A “Micro-to-Macro” Approach DIME Workshop Regional innovation and growth: Theory, empirics and policy analysis! Kristinn Hermannsson, Katerina Lisenkova, Patrizio Lecca, Peter McGregor and Kim Swales. Fraser of Allander Institute

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Fraser of Allander Institute Department of Economics University of Strathclyde

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  1. The Importance of Graduates for the Scottish Economy: A “Micro-to-Macro” ApproachDIME Workshop Regional innovation and growth: Theory, empirics and policy analysis!Kristinn Hermannsson, Katerina Lisenkova, Patrizio Lecca, Peter McGregor and Kim Swales Fraser of Allander Institute Department of Economics University of Strathclyde

  2. Existing literature Existing literature on regional impacts of HEIs primarily falls into two forms: Expenditure impacts of HEIs (and their students) Expenditure (demand-side) multiplier studies (Blake and McDowell, 1967; Florax, 1992, Hermannsson et al, 2010) “Knowledge economy”, with focus on technology spillovers HEIs as a source of innovation (supply-side studies) (Jaffe, 1989; Goldstein, 2009)

  3. Regional impact of increased human capital • Lack of a quantitative system-wide estimates of the regional impact of changes in graduate human capital • Adopt a micro-to-macro approach. • Use combination of demographic projection and Computable General Equilibrium (CGE) modelling • Provide numerical estimates for the Scottish economy

  4. 7 Steps • Discuss the demographic model • Use the demographic model to generate projections of graduate intensity of labour force up to 2050 • Evaluate econometric evidence of the size and stability of the graduate wage premia • Identify the link between wage premia and labour efficiency • Give key characteristics of the Scottish CGE model (AMOS) • Introduce the labour efficiency improvement associated with HEI-generated human capital as an exogenous in to the CGE model • Report and analyse results

  5. Step 1: Scottish Higher Education Participation Rates

  6. Step 1: Future graduate composition of the labour force We begin with the 2006 Scottish graduate total and graduate population, broken down by age, 2006. Run the demographic projections forward to 2050 (General Register Office for Scotland) Each projected year add new graduates, adjusted proportionately to the number of people aged 20-25 The “UK net retention rate” (HESA DLHE data) of 88% is applied to total number of Scottish graduates. Graduates leaving the labour force determined by the retiring cohort. For each year the total number of graduates in the labour force are divided by the total labour force to get the proportion of the labour force made up of graduates.

  7. Step 2: Share of graduates in total labour force

  8. Step 3: Graduate wage premium • Wage premium level: • Scotland: Walker and Zhu (2007) 28% - 45% • US: Goldin and Katz (2007): 30% - 60% • Stability • Relatively stable in the recent past. • Central Estimate • 45% with range between 30% and 60%

  9. Step 4: The link to productivity • Signalling • Education acts a signal of innate abilities (Spence, 1973; Stiglitz, 1975) • Central estimate • 10% (Lange and Topel, 2006) with range 0% to 30% • Calculate economy-wide changes in labour productivity year-by-year

  10. Step 4: Long-run increase in skill-adjusted population in Scotland Signalling 0% 10% 30% 30% 3.1% 2.8% 2.2% 4.5% 4.1% 3.3% 45% Wage premium 60% 5.7% 5.2% 4.2%

  11. Step 5: Scottish CGE model AMOS • Single-region period-by-period CGE model parameterised on 2006 Scottish SAM • Standard multi-sectoral production structure • Nested CES production functions, cost minimisation and perfectly competitive product markets • Labour market characterised by a wage curve. • Independent investment function. • Two variants, forward looking and myopic • Government expenditure fixed exogenously

  12. Step 6: Exogenous efficiency shock • Introduce a general Harrod-neutral (labour augmenting) efficiency increase across all sectors, period by period • Population held constant • All other exogenous variables held constant • Isolating the impact of the continued operation of present policy on graduate provision in Scotland

  13. Step 7: Long-run results, % change from base

  14. Step 7: Simulation results • The increase in labour efficiency allows: • increase in real wage (stimulates employment) • An increase in competitiveness (stimulates exports) • The increase in activity stimulates investment • Therefore both the supply and demand sides of the regional economy are strengthened. • We assume that the graduate wage premium remains constant but this implies that the non-graduate wage falls (by 3.8%)

  15. Step 7: Sensitivity of long-run GDP changes to wage premium and signalling Signalling 0% 10% 30% 30% 3.2% 2.9% 2.3% 4.6% 4.2% 3.4% 45% Wage premium 60% 5.9% 5.4% 4.3%

  16. Step 7: Period-by-period impacts under alternative investment assumptions

  17. Step 7: Period-by-period impacts under alternative investment assumptions

  18. Conclusions A CGE approach allows a single framework in which to explore the impacts of HEIs on both demand and supply sides of Scottish economy: The supply effects identified here through human capital accumulation dominate any demand side Any number of extensions but particularly: Inter-regional modelling Disaggregation of labour market by skill More industry specific efficiency impacts

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