The demographic challenge of higher education: Impacts of a decline in student numbers on the Scottish economy Kristinn Hermannsson Katerina Lisenkova Peter McGregor Kim Swales June 30, 2009 Scotland’s Universities and the Economy: Impact, Value and Challenges Fraser of Allander Institute, Department of Economics, University of Strathclyde; Centre for Public Policy for Regions (CPPR), Universities of Glasgow and Strathclyde

The “demographic challenge” for HEIs Demographic changes in the UK are projected to result in a fall in the number of students Recent Universities UK report makes projections of likely numbers of students We provide a CGE analysis of likely impacts on Scottish economy of Universities UK scenarios

In % of the first year full- time UK-domiciled undergraduates were aged % -11.0%

UUK projections Two types of projections in UUK report: –Baseline projection – based on demographic factors Projected age/gender/ethnicity composition of the UK population Projected population of EU countries Projected number of non-EU students Projected conversion rate from undergraduate to postgraduate study (increasing in line with recent trends) –Three scenarios – take into account how HEIs may react to these changes

Projected total number of students (FTE*): UUK baseline Source: Universities UK, own calculations -11.4% -6.8% *FTE – full-time equivalent; part-time students added with coefficient 0.5

Description of scenarios Scenario 1 Slow adaptation to change Scenario 2 Market-driven and competitive Scenario 3 Employer-driven flexible learning Participation of young people Participation of older people Employer engagement Competition (UK) Technology-based learning As now but with some switch from full-time to part-time Reduced participation in full-time but increased participation in part-time Substantial reduction in full-time, but on headcount basis participation at current level Modestly increasedSubstantially increased Modestly change, mainly through increased influence on the curriculum Increased but not necessarily primarily with publicly funded HEIs Substantially increased – employers are the primary drivers of large proportion of public funding Increased competition amongst publicly funded providers Significant expansion of the range of private providers – fierce competition for UK students Highly stratified and polarised system with only limited competition Competition (int-l) UK HEIs compete effectively despite increased competition UK HEIs compete less wellWith the exception of elite HEIs, UK HEIs compete less well. However, they engage with technology-based borderless education Some increase in e-learning, but face-to-face learning is the predominant mode Substantial increase in e- learning E-learning is the predominant mode Academic staffing As now with academic staff undertaking teaching and research Two streams: one – research and teaching in large HEIs, the other – teaching in small HEIs Flexible academic workforce. Increased movement between academia and business. Significant part of academic staff becomes self-employed, contracting work at several HEIs

Projected total number of students (FTE): all scenarios Source: Universities UK, own calculations

Sources of Scottish HEIs income Funding Council grants –Recurrent grants (Teaching) –proportional to the number of Scottish students (FTE) –Recurrent grants (Research) –Recurrent grants (other) Tuition fees & education grants & contracts –Home & EU domicile Full-time fees – proportional to the number of full-time home and EU students Part-time fees – proportional to the number of full-time home and EU students –Non-EU domicile – proportional to the number of non-EU students (FTE) Research grants & contracts; Other income

Effectively a regional, empirical, general equilibrium variant of the Layard, Nickell and Jackman (LNJ) model. So the supply side is crucial (and, of course, non-passive) Multisectoral CGE calibrated on 2006 Scottish Social Accounting Matrix, with HEIs as one sector: –25 sectors, cost minimisation –3 domestic transactor groups Goods markets modelled as competitive, with equilibrium relative prices determined simultaneously by demand and supply –Demands fairly conventional –Trade flows sensitive to relative prices Labour market imperfectly competitive, though unified –characterised by regional bargaining - wage curve (w, u negatively related) - LNJ variant AMOS-HEI: a CGE model of the Scottish economy

Second element of flexibility - population is –either fixed –or Harris-Todaro (w, u positively related) - LNJ variant –When combined with wage curve the two relations tie down w, u Final element of flexibility relates to treatment of capital stocks, which are –either fixed (total and composition) –or gradually adjusted to optimal level, driven by gap of rental rates and user costs Dynamics in model are recursive: sectoral capital stocks updated each period through investment functions; population updated via the migration function Financial markets fully integrated and not modelled explicitly How does AMOS-HEI relate to IO models of HEI impacts? –Full specification of the supply side –Can therefore capture heterogeneity among regions (e.g. supply constraints?) –Relative prices (competitiveness) endogenously determined –But, if supply-side is passive, AMOS-HEI converges on comparable IO models AMOS-HEI (continued)

Impact of the loss of income by HEIs: baseline UUK baseline GDP (£m) Total employment ('000) Unemployment (%) CPI (%change) Real wage (% change) HEI sector employment('000)

Impact of the loss of income by HEIs: all scenarios UUK baseline GDP (£m) Employment ('000) CPI (%change) Scenario1 GDP (£m) Employment ('000) CPI (%change) Scenario2 GDP (£m) Employment ('000) CPI (%change) Scenario3 GDP (£m) Employment ('000) CPI (%change)

GDP impact of the fall in student numbers: baseline

GDP impact of the loss of income by HEIs : all scenarios

Employment impact of the fall in student numbers: baseline

Employment impact of the loss of income by HEIs : all scenarios

Conclusions and future research The macroeconomic consequences of the demand-side impacts of UUK’s projections of student numbers entering Scottish HEIs appear fairly modest, though unambiguously negative These effects are smaller than would be revealed by conventional “impact” or “multiplier” analyses, in which wage and price flexibility would be unable to insulate the real economy However, here we do not include the adverse supply-side impacts of the projected contraction in student numbers, which we might expect to predominate over the longer term as these are reflected in the level of skills in the host region, and in the scale of knowledge transfer effects. In this sense the estimates represent a minimum estimate of the likely macroeconomic consequences of UUK’s projections Future research along the following lines: –impact on other regions –supply-side consequences of the “demographic challenge” –interregional effects –wider economic and social impacts of HEIs.