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This report presents estimates of the private rates of return for students studying for vocational
education and training (VET) qualifications in Australia. Estimates of rates of return are commonly
used by governments, businesses and others to compare the merits of different forms of
investment where costs or benefits or both are distributed over time. The approach results in a
single number that can be interpreted as an interest rate: the higher the interest rate, the higher the
rate of return and the better the investment.
Education and training are grist to the mill of this type of analysis—students pay for their education
and training qualification while they are studying and then (hopefully) receive higher income further
down the track. As with any calculations involving investment and expected future earnings, there
is considerable uncertainty for individual students—they may not pass their course; they may not be
able to use their knowledge and skills because of unemployment, illness or death; they may decide
on a change in direction in life and not want to use their knowledge and skills; and so on. The
uncertainty in the estimates and the risks in the undertaking, however, are not necessarily greater
for education and training than for other investments.
Students make similar kinds of calculations about courses, but often only in the vaguest of ways—
how long does the course take? how much does it cost? will I find a job when it’s over? and how
much will it pay? They are also motivated by intangibles—will I like the course? and will I like the
kind of job I might get at the end of the course?
More rigorous calculations of the rates of return to VET courses are required to determine whether
VET courses provide potential students with sufficient financial incentives to enrol. Analyses of
data from the Australian Bureau of Statistics (ABS) 2005 Survey of Education and Training were
used to identify the additional income people with different levels of educational attainment
(advanced diplomas and diplomas; certificates III and IV; and certificates I and II) received at
different ages. This additional income was compared with the costs of enrolling in VET courses to
provide estimates of rates of return separately for males and females of different ages and with
different levels of schooling enrolled full- or part-time in different level courses.
The major findings and their implications are highlighted in the points below:
- The rates of return to study in higher-level VET courses mostly provide students with a better-than-adequate
incentive to enrol. Certificates I and II may be an exception. Although the estimated rates of return
for certificates I and II are also sometimes high, they are based on small income effects. This
combination of small income effects and small costs leads to unstable estimates. However, even
if returns to these lower-level qualifications are low, they may still be valuable to students as
stepping stones to higher-level qualifications.
- The rates of return to study in VET courses differ from those reported in some earlier studies.
- The rates of return for advanced diplomas and diplomas are higher than corresponding results reported in earlier studies.
- The rates of return for certificates III and IV are higher or similar to corresponding results
reported in some earlier studies.
- The rates of return for certificates I and II are variable, and earlier studies suggested higher
rates of return for lower-level VET courses.
The variability between this and previous studies can be attributed to differences in:
- how qualifications were classified in the analyses—the Australian Qualifications Framework
(AQF) categories used in this analysis do not fully correspond with classifications used in
previous studies
- comparison groups used—this study used people whose highest level of schooling was
Year 12, Year 10 or Year 9; whereas other studies have used people without post-school
qualifications who completed or did not complete school, or those who left school before age 16
- how the income equations were formulated—this study used income rather than the wages
and salaries often used in other studies. It also accounted for employment effects by
including incomes of employers and the self-employed as well as those who are not
employed. Furthermore, the income equations used in this study deliberately include only a
more limited set of control variables than those sometimes used in other studies.
- Increased tuition charges to students reduce, but mostly do not remove, the economic incentives for students to enrol
in higher-level VET courses. The effect of higher tuition fees on lower-level VET courses is less
certain. This result is consistent with findings that have led other researchers to advocate an
increased contribution by students to the costs of their study.
- The rates of return for advanced diplomas and diplomas and for certificates III and IV are similar, with some
variation across other categories. The similar rates of return suggest that the value of the
additional investment in obtaining an advanced diploma or diploma is commensurate with that
made to obtain a certificate III or IV.
- Age makes only a small difference to the rates of return, which suggests that older students have almost
the same economic incentives to enrol in VET courses as younger students. Policies designed to
encourage lifelong learning and to upgrade the skills of older workers need to consider non
financial aspects of the motivation to study.
- Rates of return are higher for part-time study than for full-time study. Full-time students face additional costs because they forgo the opportunity of full-time work while studying and the income they
could have received. About three in every four VET students are enrolled part-time.
- Rates of return are mostly slightly higher for those whose highest level of schooling is Year 10 rather than
Year 12, especially for females, which points to the value of VET as a pathway for persons who
do not complete their schooling.
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