Education and training and the avoidance of financial disadvantage

There is a very large body of literature on the returns from education, which typically focuses on narrow outcomes such as employment, occupational status and wages. Gary Mark's paper extends this work by examining the relationship between educational attainment and a number of dimensions of financial disadvantage. The study uses four measures, namely, income poverty; financial stress, which refers to cash-flow problems; not being in employment; and low wealth.

He takes a systematic approach, using the longitudinal data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. He runs a series of multiple regressions, beginning with demographic variables and then sequentially adds educational attainment and a series of labour market outcome variables. As expected, educational attainment assists in preventing financial disadvantage, but to a large degree this occurs through the impact of educational attainment on labour market outcomes. University qualifications have more of an impact on reducing financial disadvantage than vocational qualifications—not surprising, given that on average those with degrees earn more than those with vocational certificates.

While the work is useful in extending the conventional focus on employment and wages, it leaves a number of issues unanswered. The first obvious extension is to analyse how educational qualifications impact on financial disadvantage over and above the direct effect on employment and earnings. Do better-qualified individuals learn how to manage their financial affairs more successfully, or is a practical qualification more useful than a theoretical one? The second challenge thrown up is the role of marriage. A variable that is consistently important in the models is marital status, with those who are married suffering less financial disadvantage than those who are single, divorced, separated or in a de facto relationship. This in itself is interesting but the research challenge is to understand the relationship between education and marriage. My hypothesis is that those with very poor qualifications suffer the double disadvantage of having a low skills base and being less marriageable than their more qualified peers. However, this is work for the future.

Tom Karmel
Managing Director, NCVER

Poverty and other forms of financial disadvantage are the most obvious categories of social disadvantage. Being in poverty or suffering financial stress has serious detrimental implications for housing, debt reduction and the ability to obtain credit, future career prospects, marriage and partnering, health, crime and children's education. Generally, they reduce the ability to fully and actively participate in society. Not only is financial disadvantage detrimental for individuals but there are also societal costs (for example, on welfare, legal and health services) and reduced revenue from taxation.

For policy-makers, increasing the level of education and training is an attractive policy option for reducing financial disadvantage, by providing more people with the skills and credentials rewarded in the labour market. Furthermore, increasing the levels of education and training is beneficial for other reasons, for example, by increasing the stock of skills and thus theoretically enhancing productivity.

Making use of the longitudinal data from the Household, Income and Labour Dynamics in Australia (HILDA) survey, this study examines the relationship between post-school qualifications and financial disadvantage among Australians during the period 2001 to 2008. Specifically, it is concerned with the extent that education and training, vis-à-vis other influences, protects individuals and households from experiencing financial disadvantage and increases the likelihood of getting out of, or exiting, financial disadvantage once in it.

The primary research questions are:

• To what extent do the different types of education and training reduce the risk of experiencing financial disadvantage?
• To what extent do the different types of education and training facilitate exit from financial disadvantage?

In this report four dimensions of financial disadvantage are investigated, namely, income poverty; financial stress; unemployment and not in the labour force (NILF); and low wealth. ¹

The post-school vocational education and training (VET) qualifications examined are certificates I/II, III/IV, diplomas and advanced diplomas. The university qualifications examined are: bachelor degrees, postgraduate certificates and diplomas, and higher degrees. Four dimensions of financial disadvantage are used because an over-reliance on a single measure can be misleading.

It is postulated that the effects of qualifications on financial disadvantage should largely be accounted for (or mediated) by their effects on subsequent experiences in the labour force, specifically the percentages of time spent working and unemployed, present labour market status and occupational status of the current or previous job.

A range of other factors were also examined as they may also affect financial disadvantage: demographic factors (age, gender and marital status) and school completion.

The statistical techniques used include repeated-effects models, which use all eight waves of data, and fixed-effects models, which estimate the effects of factors, net of all unobserved (but stable) influences.

A general conclusion from this study is that post-school qualifications in education and training differ in their effects on the four dimensions of financial disadvantage.

For income poverty, all post-school qualifications reduce the risk of experiencing this, although university qualifications appear to have stronger effects than VET qualifications. Certificate III/IV qualifications have very weak effects. However, after background influences are removed, only bachelor degrees strongly reduce the risk of experiencing income poverty as well as enhancing the likelihood of exiting this state. Much of the protective effects of post-school qualifications can be attributed to their promotion of stronger labour force histories: more employment and less unemployment; and in the case of university degrees, higher-status occupations.

With financial stress the study found that bachelor and higher degrees, postgraduate diplomas and certificates all reduce the likelihood of experiencing this form of disadvantage. These effects are mediated by labour force experiences and in the case of higher degrees and bachelor degrees facilitate securing higher-status occupations. However, their effects on financial stress are weaker than their effects on income poverty. Vocational qualifications do not reduce the chances of experiencing financial stress and this expands to all post-school qualifications, after background influences have been removed. In terms of getting out of financial stress, only bachelor degrees and trade certificates helped.

Only some post-school qualifications were found to reduce the chance of becoming unemployed, namely, bachelor degrees, VET diplomas and trade certificates. A similar outcome was found when demographic and unobservable characteristics were removed: bachelor degrees, VET diplomas, and to a lesser extent, certificate III/IV qualifications reduce the likelihood of unemployment or being not in the labour force. These effects can be accounted for by their promotion of higher levels of experience in work and less unemployment. In the case of bachelor degrees, the explanation also involves higher-status jobs. Bachelor degrees, and to a lesser extent VET diplomas and entry-level VET qualifications, were also found to enhance exiting from being unemployed or not in the labour force.

For low wealth, almost all types of post-school education and training reduce the risk, with similar effects for graduate diplomas or certificates, advanced diplomas, VET diplomas and trade certificates. The protective effects of VET diplomas and trade certificates on low wealth were only partially accounted for by labour force experiences and occupational status. Certificate III/IV qualifications, however, had no significant effects on reducing the incidence of low wealth.

The study also examined the relationship between financial disadvantage and labour market outcomes and found that a higher proportion of time working reduces the likelihood of financial disadvantage. This is not surprising; however, the effect is weaker for financial stress than for the other dimensions of financial disadvantage. Higher-prestige occupations were found to offer some protection against financial disadvantage.

The study also found that being unemployed or not in the labour force tends to substantially increase the chances of experiencing income poverty, financial stress and low wealth, as well as reducing the probability of exiting from these dimensions of financial disadvantage. Further, experience of unemployment tends to have a scarring effect on financial disadvantage. Interestingly, part-time work has only weak effects on increasing the likelihood of income poverty and financial stress and has no impact on low wealth.

Looking at the relationship between financial disadvantage and demographic factors, the study found that the risk of income poverty increases with age, but for the other dimensions of financial disadvantage the risk declines with age. Gender differences tended to be small and were not consistent across the four measures. Marriage was found to strongly and consistently reduce the likelihood of financial disadvantage and promoted exiting from disadvantaged states, while being divorced or separated tended to have detrimental effects on financial status. De facto relationships also tend to show the same patterns as for marriage, although the effects are weaker and they afford no protection against low wealth. The effects for marriage cannot be wholly attributed to labour force factors and background influences, suggesting that marriage involves changes in attitudes and behaviours that help to protect against financial disadvantage.

Finally, the study examined the impact of school completion (Year 12) and found that after background influences are removed it strongly increases the likelihood of experiencing financial disadvantage. This suggests that Year 12 completion may not necessarily be beneficial for those with poor labour force prospects.

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1 Note that low consumption could not be used for this report, given that the HILDA measures do not cover all forms of consumption.