My AFR op-ed today is on education and the economic “downturn” (formerly known as the Australian recession). Full text over the fold, along with all the usual hyperlinks.

Much thanks (but no responsibility) to Andrew Norton, who helped me understand the university financing issues, although he doesn’t agree with all my recommendations.

A Lesson in Education’s Value, Australian Financial Review, 20 October 2009

If Australian universities employed spruikers, they would be shouting through megaphones at the front gates right now. “Check out these amazing discounts! Get your bachelor now! Economics is economical! Music going for a song! Psychology so cheap you’ll think we’ve gone crazy!”

At first blush, such a pitch might seem deceptive. After all, HECS hasn’t been reduced this year, and textbook prices continue to rise. But to the student, tuition is only a small portion of the cost of going to university. The bulk of the cost of a degree isn’t fees, it’s lost wages. Since the typical twenty-something earns about $40,000 per year, an undergraduate degree costs around $120,000 in foregone earnings.

However, a university student only forfeits $120,000 in lost earnings if she could have landed a well-paying job. Over the past year, the unemployment rate among 15-24 year olds has risen from 9 percent to 12 percent. In a tighter labour market, those who get jobs often have to settle for lower salaries. The lower the expected earnings of young people, the less they forego by attending university. In a downturn, education is a bargain.

Young people know this, of course – which is why the Australian Financial Review last week reported that universities admissions centres around the nation are observing a sharp rise in applications for 2010. Accentuating the crunch, fewer students are expected to defer their places (“sorry darling, we can’t fund that year backpacking through Europe”). And more students are likely to stick around for their honours year, further reducing the number of available spots.

In such an environment, you would expect Australian policymakers to be doing all they could to create extra university places. Yet as higher education expert Andrew Norton pointed out on his blog last week, there is some risk that the reverse might occur. Due to oddities in the way that Australian universities are funded, Norton warns that “some universities may aim for fewer domestic commencing students in 2010 than they did in 2009”.

Cutting the number of university places in a downturn is precisely the opposite of what any sensible government should do. Investing in human capital during a downturn is not only optimal from the individual’s standpoint; it also helps take some of the pressure off the youth labour market.

Yet it makes little sense to blame universities, who are simply responding to the incentives embodied in the current funding agreements (the new demand-driven system does not start until 2011). Fixing the problem will require some creative thinking from the federal government, to ensure that universities have strong incentives to expand their 2010 intake.

For all the talk of overeducation, a university degree still looks like one of the best investments around. Tracking the returns to a bachelor’s degree over the past quarter-century, Melbourne University researchers Michael Coelli and Roger Wilkins find that although the share of working age adults with a degree has tripled, the university wage premium has remained constant. Just as in the early-1980s, university graduates can expect to earn a cool 50 percent wage premium over someone with no post-secondary qualifications.

In taking action to expand education in the downturn, federal policymakers could learn from their state counterparts. Despite copious economic evidence on the benefits of higher school leaving ages, states had dithered for years over raising the school leaving age. The awful state of the youth labour market has finally spurred some action, and from 2010 the majority of Australian children will face a leaving age of 17. Although this will strain budgets and classrooms, it brings Australian education into line with the demands of an increasingly computerised labour market (indeed, one-third of US states now have a leaving age of 18).

For the federal government, expanding the number of available university places in 2010 will probably involve messy negotiations. Neither the fiscal hawks nor the media tarts will look warmly upon a complex deal that temporarily boosts the number of student places. But students should not suffer because of the anomalies in Australia’s university funding system. If nothing else, the spectacle of thousands of school-leavers moving from the university application line to the dole queue should make Federal Cabinet shudder.

Occasionally events lay down a simple character test. A government that’s serious about an Education Revolution doesn’t let university places shrink in hard times.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.