The importance of universities to Australia’s prosperity

28 November 2015

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 Universities Australia commissioned Deloitte Access Economics to analyse the contribution that universities make to Australia’s economic and social prosperity. This work was undertaken to inform the development of Universities Australia’s Keep it Clever—Policy Statement 2016.  The report seeks to present a comprehensive and coherent framework of benefits generated by universities. This includes examination of the conceptual role of universities in Australian society and how they contribute to the success of the nation, as well as a more detailed analysis of the benefits directly attributable to universities. The scope of the analysis does not include a detailed examination of the economic activity generated by university operations, but rather examines the contribution made to the productive capacity of the economy through universities’ teaching and learning, research discovery and adoption, and community service activities.

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Executive Summary

As institutions, universities embody social, economic and intellectual resources which combine to generate benefits on a local, national and global scale. They equip students with the knowledge and skills that allow them to make greater contributions to society; they generate and disseminate knowledge which enhances productivity and improves living standards; and they provide a myriad of broader community benefits.

This report canvasses and examines the various ways in which universities contribute to our economic and social prosperity and how, given the economic imperatives confronting Australia, the sector’s role is likely to evolve and grow over time.

 Universities’ operations make significant contributions to Australia’s economic output

Australia’s university sector directly employs over 120,000 staff and supports the delivery of education to over one million students. The operations of the university sector generate significant contributions to Australia’s economic output and national income.

• The sector contributed around $25 billion to the Australian economy both directly and indirectly in 2013, accounting for over 1.5% of Australia’s GDP and 160,000 fulltime equivalent (FTE) jobs.
• In 2014–15, education related exports accounted for 5.7% of Australia’s total exports, representing the largest service export and the third largest export category overall. Higher education is the single biggest contributor to this, representing around two-thirds of the total value.

A thriving university sector is synonymous with a prosperous economy

The role that universities play in contributing to the socio-economic prosperity of nations transcends the contribution of their operations to GDP and employment, as significant as these contributions are in their own right.

International evidence demonstrates that strong university sectors are associated with stronger economies and higher standards of living. Countries with higher levels of higher education attainment and higher levels of investment in higher education research and development are consistently shown to have higher levels of per capita income.

The empirical analysis conducted to inform this report reinforces the widely held view that Australian universities generate and embed skills and knowledge in society through their teaching and learning, research discovery and adoption, and community service activities. Moreover, it demonstrates that this activity is a direct and significant driver of growth in incomes, output and employment across the Australian economy. The resulting socio-economic benefits accrue both to those directly engaging in university-led activities and to society at large. In some cases, and in research especially, it is broader society that is by far the greatest beneficiary.

University education increases the nation’s productive capacity and, with it, the nation’s living standards

It is well established that university graduates achieve higher labour force outcomes than those with lower order qualifications—employment rates are higher, average hours worked are higher and, most significantly, lifetime earnings are higher. Although part of this is due to a student’s innate ability, a large part of this is due to formal education, including from Australian universities.

• The value that university education adds to the productive capacity of the nation is estimated at $140 billion in GDP in 2014.
  • That is, Australia’s GDP is 8.5% higher because of the impact that a university education has had on the productivity of the 28% of the workforce with a university qualification.
• At least $24 billion of these benefits are estimated to accrue in annual earnings premiums to students themselves each year.
• The broader societal benefits—that is, the positive spillovers associated with the contribution of university graduates to the workforce—are evidently significant. For example, as just one indicator of the positive spillovers from university education, the wage of those without a tertiary qualification has been estimated to be 1.6–1.9% higher as a result of a 1 percentage point increase in the number of workers with a university higher education degree.
• Beyond the benefits generated from incrementally higher labour force outcomes, a university education has been empirically demonstrated to be positively associated with improved health outcomes, quality of life and a range of other social indicators.
  • Recent international analysis has shown the monetary value of these benefits may be equivalent in magnitude to the more readily observable impacts such as labour force outcomes.

University research drives innovation, productivity and, ultimately, economic growth

University research is the causeway between the world of pure and unapplied knowledge and the world of real economic impacts. University research contributes to technological progress through improved productivity, innovation and entrepreneurialism, and the generation of knowledge spillovers and spin-off technologies and companies.

Indeed, it has been estimated that the existing stock of all knowledge generated by university research is estimated to account for almost $160 billion in 2014, equivalent to approximately 10% of Australian GDP.

In further recognition of the vital role that university research plays in driving economic growth and prosperity, investment in university research has grown, in real terms, by $9 billion over the past 30 years, at an average growth rate of 6% a year.

• As this investment has increased, so too have the benefits to society. Indeed, increasing investments in university research over the past 30 years are estimated to have added almost $10 billion to GDP each year (in 2014 dollars) over this same period, primarily through gains to national productivity.
  • The benefits of this improved productivity are equivalent to almost a third of the average living standards growth experienced over this 30 year period in Australia.
  • The majority of these benefits accrue to the public, as universities predominately draw upon grant funding to support their research and activity and, on the whole, the mode of dissemination of research discovery is open and public.
• These estimated effects are large, and there are some empirical limitations that should be borne in mind in their interpretation. Nonetheless, the effect sizes are consistent with results from other studies, both in Australia and overseas, and point to significant positive spillovers from university research expenditure.

Universities are also major contributors to society through their community service activities

By drawing on university resources embodied in staff, students and facilities, universities share knowledge, expertise and amenities to enrich communities on a local, national and even international level.

While it is not possible to quantify the scale of benefits generated by community service activities, through a number of representative university case studies, it is apparent that there are many and varied ways that Australian universities contribute through community service. These additional activities can include:

• contributing to regional governance and planning;
• community capacity building;
• providing cultural facilities and programs;
• hosting community forums, events and festivals;
•  opening up university facilities to the community; and
• student-led community initiatives.

As the global economy changes, the role and contribution of the university sector will expand and evolve

As has been evident throughout history, the global economy is always changing. The nature of the changes taking place over the coming decades is particularly profound. When coupled with other macro trends—such as the disruptive impacts of technology—the changes suggest both a big opportunity for the Australian university sector and a critical imperative in supporting continued growth in the nation’s living standards.

The demand for international education is burgeoning and the associated economic opportunity confronting Australia is a sizeable one

The middle class of emerging Asia is burgeoning. In less than two decades’ time, some two thirds of the world’s middle class will reside in the Asia Pacific region and demand for services such as education will grow rapidly. Deloitte Access Economics projects international education to be among the fastest growing sectors of the global economy over the next two decades.

This, coupled with the Australia’s competitive strengths in education and training, saw international education identified as among the five most significant sectoral drivers of the next wave of Australia’s economic growth and prosperity in the Deloitte Access Economics (2014a) report Building the Lucky Country #3, Positioning for prosperity? Catching the next wave.

Already Australia’s largest service export, the scope for international education providers like universities to grow the nation’s incomes through the provision of education to a new wave of international students is vast.

The Australian economy’s demand for university graduates is increasing and so too is the calibre of education they require in the 21st century knowledge economy

Australian universities will play an important role in meeting future skill demands, and ensuring a strong and growing stock of intellectual capital is made available for an increasingly high-skilled labour force. Indeed, on current trends, the demand for higher education qualifications will increase by 34% by the year 2025, equivalent to 2.1 million more university qualifications compared to current levels.

In net terms, this means that Australia will require an additional 3.8 million university qualifications by 2025, which will result in an increase in the proportion of the working age population with a higher education qualification from 23% in 2015 to over 26% in 2025. The top five industries projected to need the largest increases in skilled graduates over the next 10 years include education and training, health care and social assistance; professional, scientific and technical services; public administration and safety; and financial and insurance services. Each of these industries will require additional workers with over 100,000 new university qualifications over the period 2015—2025, representing a growth in demand for university qualifications of 30% or more.

Throughout history, Australia’s prevailing industrial economic context has been inexorably linked to the considerable and expanding contribution and impact that universities have made to the economy and broader society.

As digital technology changes the way we communicate and interact, and computerisation alters the skills required of workers, the Australian economy of the future will not just require workers with traditional ‘higher skills’, rather we will require a workforce of creative, innovative and highly adaptable knowledge-workers.

By virtue of their unique position in society, Australia’s universities can support this pluralism of intellectual and human capital that will be demanded over the coming decades.

Indeed, digitalisation and computerisation, as well as other forms of scientific and technological progress, often originate from the research undertaken within universities. Via the nexus of teaching and research, universities are uniquely positioned to define the skills and attributes of Australia’s future workforce.

Universities will play an essential role in responding to the changing skills demand of the knowledge economy, but will also help to shape and define the industry and jobs of the future, acting as a gateway for Australia’s future prosperity.

The continued growth of living standards in Australia will rely almost exclusively on higher levels of productivity and the university sector stands to be at the forefront of this challenge.

It is widely acknowledged that Australia faces a significant challenge over the coming decades if it is to maintain growth in national income and living standards as commodity prices fall and the sizeable returns from the decade long mining boom recede. This challenge is compounded by Australia’s ageing population, which will see rates of workforce participation decline as more Australian workers enter retirement. With both participation and the terms of trade acting as a drag on the nation’s living standards, it will fall almost exclusively to productivity growth to propel national incomes higher.

The university sector, and the skilled workforce it produces, has a major role to play in addressing the productivity imperative Australia confronts. Indeed, recent estimates suggest that one-third of Australia’s historical labour productivity growth may be attributable to the accumulation of university higher education.

Successfully evolving to provide not only the graduates that the changing Australian economy needs, but the skills and intellectual resources that the future knowledge economy requires, will see the university sector continue to be among the most significant drivers of growth in living standards over the decades ahead.

The results from this study suggest that a permanent 10% increase in the tertiary education attainment rate in Australia would increase labour productivity in Australia by 1.5–2.0 percentage points, representing around half of the required rate of productivity growth required to maintain our growth in living standards over the coming decade.

University research too will play an important role in supporting growth in multi-factor productivity (MFP)1 over the coming decades. Indeed, recent published estimates show that a 10% increase in the stock of publicly supported higher education research can increase Australia’s MFP by 3.6 percentage points over the long-term.

Concluding observations

Australia’s university sector has evolved considerably over the past 165 years since the first university was founded in 1850. Throughout this period universities have strived to meet the skills demands of an emergent economy and champion progress in terms of technology, culture and society.

Over the coming decades creative and innovative embodied human capital will become central to the strength of the Australian economy, while at the same time, university research will continue to be an indispensable driver of technological progress. Should Australian universities realise this enormous potential, and adapt to meet the demands of the future knowledge economy, the value of their economic contribution to society can only be expected to grow.