Eternal return: notes on Italian university degrees

Italian university graduates don’t earn adequately more than high school graduates, Bank of Italy Governor Ignazio Visco said last week in comments that were widely reported by the country’s main media outlets. It’s the kind of subtle sociologically rich comment that Visco enjoys making. It’s related to another one of his stock-in-trade remarks, which is that the vast majority – 80% or more - of his countrymen are functionally illiterate.

REUTERS/Fabian Bimmer

That datum is attributed to the OECD , and technically measures the ability to read or write a sentence of medium complexity.

Given that a university degree is often seen as a proxy for education and human capital, it is indeed surprising that the salaries for those who have one aren’t sky high in a country where four out of five people are illiterate and yet private wealth – according to Visco’s central bank – is considerably higher than countries such as the United States or Germany.

Visco explains the salary gap as the reflection of an economic fabric held back by the shockingly low general level of human capital, citing feeble innovation rates and the like. While his surprise at the poor return on a scares resource – education – seems a bit wan, he does intriguingly credit Italian families with a modicum of wisdom, saying they don’t bother to invest much in the education of their children because they know it won’t pay back in monetary terms.

His remarks at this year’s economics festival in Trento repeat ones he made last year, when he noted that graduates earn only 30 percent more than those who have completed high school, and that the difference is only 11% for those under the age of 34 today.

They form part of Visco’s salutary approach, generally ignored by the media, which is to lay the lion’s share of the blame for Italy’s stagnant economy on its business elite, who have failed to invest resources in a productive manner. The media and the political class, spurred on by that business elite, tend to think that deregulation of labor markets will lead somewhere nice.

Blinding power

It is, of course, common for powerful groups to be blind to the conditions of thier own privilege.

For there is something amiss in Visco’s remarks. After all, the OECD itself has regularly provided data showing that the value, measured in the premium to lifetime gross earnings, of a university degree in Italy is 30% above the OECD average, and indeed the second highest in the world, clocking in at $500,000.

Just as interesting – especially given the tactical blindness noted above – is that while the U.S. figure in the U.S. is $600,000, the two are very close in net terms, both just over $300,000 and atop the OECD rankings.

The difference, capably noted in a recent analysis available to everyone, is that U.S. university graduates pay larger income taxes. Students and their families also shoulder larger direct costs in shouldering tertiary education. Those two factors in fact amount to twice the gap in gross earnings between Italian and American graduates. The U.S. oddly comes out looking like a socialist paradise in comparison!

One question emerging from this is: Why are some products of fiscal and social policies emphasized and others ignored?

Historically, in Europe, higher education was reserved primarily for elites, and the subject matter of specialization wasn’t so important. A bourgeois family could be confident their child would become an imperial scribe and have a solid income in the public administration.

That gradually changed with mass expansion of universities from the 1960s. However, that change – ongoing, as enshrined in various European Union pledges to produce more graduates – also introduces more competition, and it’s been two decades since the public administration has ceased being the employer of last resort in Italy.

In practice, that means it’s no longer a degree but the quality of the degree that matters more. A subtle study  found comparing Italy, France, Hungary, Poland and Slovenia, found that Italian degrees are worth rather little. In fact, a humanistic degree in Italy has a deeply negative net present value, a situation not matched elsewhere. Science and enginering degrees are worth more, but less than elsewhere.

But Italy rules the roost in one field, with the net present value of related degrees towering over the other EU countries: non-tradeable services, i.e. the professions that are cosseted from competition, be it by their domestic nature, guild structures or corporate lobbies.

So the plot is quietly thickening.

First, Italian degrees in fact pay exorbitantly well to their holder, a point that is interestingly broadcast by the nation’s Education Ministry, which pace Visco but always citing OECD data, claims the Italian college-wage premium is among the highest in Europe at 55%.

Second, it’s important to obtain a degree and a job that is not exposed to competition, the rewards for which aren’t obtained due to human capital but due to network effects in the economic fabric. Note that the top Bank of Italy salaries are a multiple of those for equivalent jobs at the Federal Reserve.

The central bank governor’s alarm, essentially, points to the fact that all this is no longer sustainable. This of course is now new, and Italy’s younger cohort is bearing the entire brunt of the change. Hence their meagre college-wage premium, which conversely underscores how high it is for the elder cohort – and here it is worth remembering that, unlike the U.S., the Italian beneficiaries of this did not pay much more in income taxes even though their human capital was financed collectively.

Global trend

The governor is certainly right to worry, but the fact is that returns to schooling are structurally declining around the world, the logical outcome of increased education achievements globally.

A recent World Bank study of 131 countries found that returns to investment in schooling are declining over time in richer countries, while remain robust in poorer ones.

By its calcluations, an extra year of university offers a 16.8% return globally, while only 11% for advanced nations. Still, for a five-year degree that’s 55%, smack in line with the education ministry’s estimate,

As noted, the return slowly declines. A 2013 study by Cecilia Gabbriellini and colleagues at the University of Pisa found, using Bank of Italy data, that the return on Italian education from 1995 through 2010 – a good proxy for today the 25-35 year-old cohort – found that the return to an additional year of schooling in Italy is only around 7%. For the record, the study also detected that it was higher for those who secure public-sector jobs.

Visco’s implicit message is that Italy should invest more in human capital, and by implication adjust incentives to make that likely.

However, Visco’s own scarsity logic suggests a different outcome, one captured in a new landmark pan-EU study  by Elena Crivellaro of Venice’s Ca Foscari University. She concludes that – barring the sudden emergence of a disruptive high-tech sector or serious dismantling of the “institutional rigidities” that made up for the high premium of the past,the college-wage premium can only head south as more people to go to university.

New problem, same solution

Italy’s public sector historically offered the best deal for graduates, with job security and unfunded pension perks. But that, like just about everything regarding incentives and equity in the country’s economic fabric, changed with the fiscal crises of the early 1990s. Jobs in the public administration have shrunk by almost 5% in the past two decades, leading to the awkward fact that fully half of those who have them now have university degree, compared to only 20% of Italians in general, according to a study published in a journal devoted to one of Visco’sfavorite subjects, demography.

The author of that study, who is with the World Bank, notes that Italy now suffers from an overeducation problem at the same time as a mass-illiteracy one, mainly because businesses feel they have little need for high-skilled people, in turn meaning families have little interest in providing them.

His policy recommendation is to offer tax breaks to companies that hire university graduates.

Such an outcome would be remarkable. As we have seen, Italian university graduates have historically enjoyed the second-highest gross earnings premium in the world, mostly obtained it from state coffers to which they gave back remarkably little compared to elsewhere, and now when there’s trouble in paradise may get public funds.

@CHCEmsden

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