William Watson: New data shows Canadians might actually be getting too much education

I don’t want to talk down the family business—my spouse and I both teach at university—but a graph in the latest edition of the OECD’s Education at a Glance might make a person think we Canadians are overeducated. It shows that 54 per cent of 25-to-64-year-olds in this country have some form of “tertiary” education (i.e., more than high school). That’s the highest percentage in the OECD. No other country hits 50 per cent. And yet our highly educated folk make only 40-per-cent more than Canadians with an “upper-secondary” degree do, after tax. By contrast, in the U.S. such people make 74-per-cent more than those with a high-school degree, in Germany 66 per cent, in the U.K. 53 per cent. Is excess supply driving down the price of Canadian graduates? 

A good university education teaches that there’s more to life than money. But even if money isn’t everything, it’s not nothing, either. These numbers suggest the income premium to education depends on how many people are educated. Thus only 15 per cent of Brazilians have tertiary education but those who do make 149-per-cent more income than their compatriots who have only high school diplomas. 

Is excess supply of Canadian graduates driving down their price?

Where you are in the income distribution is just one thing, however. There’s also the question of how much an education pays off in absolute terms. The OECD’s answer for Canada is “still a lot.” The gross lifetime payoff (for men) is $405,800 beyond what you could make on average with a high-school degree. That’s not bad, even if it’s less than the OECD average ($461,400) and barely half the same number in the U.S. ($808,200). Canadians happy with our economic performance need to think hard about why the payoff to education is so much greater in the U.S. than in Canada. (For the record: All dollar figures are in U.S. dollars, converted at “purchasing-power-parity” exchange rates—about 85 cents to the Canadian dollar—and discounted to the present at an interest rate of two per cent.) 

Alas, you don’t get to keep the gross income difference. You’ve got to pay the direct costs of your education ($18,300); you lose earnings while you’re at school ($44,700); and you pay income taxes on your extra earnings ($122,700, a rate of a little over 30 per cent). After a couple of other adjustments your net dollar return is $239,300, which works out to a 10-per-cent real rate of return on your initial investment of direct costs and foregone earnings. As the prospectuses say, past performance guarantees nothing, but in my world 10-per-cent real is pretty good. 

The story is a little different for women

By contrast, American males pay $40,700 in direct costs, suffer foregone earnings of $60,700 and pay $245,100 in income taxes (which, perhaps surprisingly, also works out to an average tax rate just a little over 30 per cent on their gross of $808,200). That leaves them with a net cash benefit of $468,200—almost twice what Canadian males net. Despite their bigger initial investment, their rate of return is 13 per cent, which is higher than it is here.  

The story is a little different for women. In Canada, their net income gain, after costs and taxes, is just $181,700, although—partly because their foregone earnings, like all women’s earnings, are lower on average—their rate of return is actually higher, at 13 per cent, than it is for men in Canada. It’s also higher than for U.S. women, who clear $272,700 but net only 11 per cent.  

The OECD also calculates how governments make out by educating people. They front a lot of money by subsidizing institutions and students and they also forego income taxes on the earnings students give up by going to class rather than working. 

Governments do not exist to maximize revenues, so how much they haul in by educating people is not germane

One shocking number, to Canadians, is that while our governments contribute $39,400 to the average tertiary-student’s direct costs, U.S. governments contribute $59,400—20 grand more. U.S. governments subsidize state universities and they provide lots of aid to students. But the payoff is big: $294,600 net from males, mainly from income taxes, and a 12-per-cent rate of return. The equivalent Canadian numbers are a $105,700 net payoff to government for an eight-per-cent rate of return. The payoff to governments from female tertiary education is just $55,000 in Canada, for a seven-per-cent rate of return, and $108,000 in the U.S., also for a seven-per-cent rate of return. 

Governments don’t exist to maximize revenues, so how much money they haul in by educating people really isn’t germane. On the other hand, many in government don’t seem to understand that. The current federal government wants to break down budgetary numbers by gender. When it discovers it makes $105,700 educating males but only $55,000 educating females do you suppose it will start focusing more resources on male education? 

Because it’s 2017? 

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