Private returns to vocational education and training qualifications

Much attention has been given to thinking about how to respond to the current skills shortage in
Australia. One response has been to encourage people to enrol in vocational education and training (VET). But why enrol in a VET course? An essential part of the story is the financial benefit from doing a course.This study provides estimates of the rates of return to students enrolling in VET courses.

An estimate of the rate of return from enrolling in a VET course considers the study as an investment by the student in his or her future income. It treats the costs of study as an investment and expresses future increases in income resulting from undertaking the course as a rate of return on that investment—akin to an interest rate. In other words, the higher the interest rate, the better the investment for the student.

The rate of return framework provides a very useful way of looking at the private benefits of various qualifications. However, it is important to understand how it is constructed because the structure plays an important role in determining the answers. Distinctive features of the model used in this paper include the following:

• The cost of education includes foregone income.This means that the rate of return is lower for fulltime students than for part-time students because their foregone earnings are included as a cost.This values leisure as having no value, and doesn’t include any personal satisfaction that might come from the ‘full-time student experience’.

• Income is used rather than, as is more common, earnings.The advantage of this is that the calculations include the effects of qualifications in securing employment.

• Finally, the model excludes those with university qualifications, and so it cannot be used to compare the value of VET and university qualifications.

Key messages

• VET is a good investment for males undertaking diplomas or certificates III or IV and females undertaking diplomas, with rates generally exceeding 20% for those studying full-time

• For males, the rates of return are similar for full-time students doing diplomas and those completing higher-level certificates. While incomes are higher for those undertaking diplomas, the period of study is longer.

• Rates of return increase greatly for part-time students because foregone earnings are lower.

• An increase in tuition fees would reduce rates of return, but they remain healthy even under high-fee scenarios.

This study provides valuable insights into the private returns from undertaking VET. However, many interesting questions remain, including whether these rates have changed in recent years, how they compare to the return from university level study and the exact nature of the interrelationship between the year left school and the level of VET qualifications.

Tom Karmel
Managing Director, NCVER

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.

• R ates 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.