Delaying Has Costs Too

Andrew Norton today posts on the impact of delaying the start of university by a year. As he points out, we don’t have very good evidence on the causal impact, but it looks like taking a gap year may lead to better grades at university.

So if we believe the results, then everyone should delay, right? Um, not so fast. The problem with such an analysis is that it counts the benefits, but not the costs. All else equal, starting university a year later means one less year of earnings, or over $50,000 for the typical university graduate. If you want to travel the world, surf for a year, or really get to know your daytime soapies, then by all means take a gap year. But if you’re only doing it to get better grades at university, you might want to think again. Taking a year off your career is a pretty high price. Indeed, even if you work for a gap year, then the cost is the difference between a high school graduate’s wage and a university graduate’s wage (30-40% by most estimates).

The same goes when considering the right age for children to start kindergarten. As the New York Times documented last year (behind paywall – no, wait, they’ve just lifted the paywall), there’s a strong move in the US towards holding kids back a year. Kids who are older for their grade probably do better at school; but it does come at the cost of a year’s earnings. My own theory is that parents may be over-weighting the outcomes that matter to them the most. Having your kid bring home a bad report card is an outcome that will affect you pretty quickly. But deducting a year off the end of your child’s career is an outcome that won’t affect the parent at all, since they will by then have shuffled off this mortal coil.

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13 Responses to Delaying Has Costs Too

  1. conrad says:

    I know that economists like to calculate the cost of doing nothing, but I think that the average 18 year old doesn’t give it the slightest thought. Similarly, I doubt the average 65 year old who took a year off when they were 18 worries about it. You might therefore have some fun trying to convince 18 year olds of this. In addition, if there is any correlation between wages and marks, which there is sure to be due to the way employers select people, scholarships are given etc. then taking a year off might actually help you earn more in the long term. Your holidays may pay for themselves!

    You might also consider non-economic benefits of taking a year off. I might note that most people have a jolly good time in their gap year. Perhaps this has some long term benefit for their mental health — again, something that must correlate positively with wages.

  2. christine says:

    Also, mandatory retirement is getting progressively eliminated.

    I do think the gap year is mostly about having a good time and seeing the world, though. Maybe this has an advantage in terms of lifetime income is that people might come back better able to make a mature decision about what course to take? I suspect there’s more work to be done on the field selection/matching process in post-secondary education.

  3. backroom girl says:

    The other strong argument for a gap year (or even two) is that, in these days of user pays education, kids who don’t quite know what they want to do at university at the age of 17 or 18 have a bit longer to figure that out before they embark on their university career.

    So, Andrew, from the point of view of the individual I don’t think it’s as simple as comparing the kid’s earnings during their gap year with the average earnings of a graduate. If the gap year enables kids to get a better ‘fit’ with their eventual career (or a better career due to higher marks), that could well increase their earnings over their entire career, don’t you think? In which case not going to uni until you have a better idea of what you want to do might be a wise investment.

  4. Cheryl Bookallil says:

    The current popularity of the gap year may be more closely related to economics than most people think. Living away from family and/or earning over a certain limit during that time can allow for a student who may not have otherwise been elligible for Youth allowance due to parents’ income test to qualify for YA and rental benefits when they finally take up their offer of a univeristy place.

    In addition many universities use the receipt of YA as a quasi measure of Low Socioeconomic status that will make the student elligible for Commonwealth Learning Scholarships(CLS). Reciept of YA plus CLS during the university years would significantly reduce the opportunity costs of the gap year and may even negate them altogether providing a net financial benefit.

    Using income (a flow concept) rather then wealth (a stock concept) as the measure of LowSES is flawed for the process of determining equity scholarhsips and YA.

  5. Patrick says:

    First point, that ‘strong move’ is even stronger in Australia – stupid Victorians have legislated it.

    Secondly, Andrew Norton is being a little academic. Whilst I think Conrad has a pretty dumb view of 18 year olds, Andrew Norton has a pretty naive one.

    Eighteen yos definitely count such costs – very many are quite materialistic, for starters. But they also count the sizeable benefits that Andrew seems to have inexplicably overlooked. Hint: think sex, drugs n rock’n’roll, which tend to be markedly less present in high-wage graduate years than in low-wage gap years.

  6. Matt C says:

    Cheryl has hit the nail on the head. The peculiar requirements for a student to demonstrate ‘independence’ by earning a certain amount is a strong incentive for young people to take a gap year. I also know people who have taken a few semesters part time in order to earn enough to prove they’re independent for the purposes of Youth Allowance. It’s a very strange system, and one that is quite open to rorting.

  7. Damien Eldridge says:

    Andrew, how does discounting effect your analysis with respect to the year a child starts kindergarten? Lets assume that the child gets the same salary path over their career except for the final year, but it occurs a year later. This biases the analysis in favour of starting early because it assumes there are no educational (and thereby human capital and subsequently marginal productivity and hence wage) benefits from delaying for a year. There are two costs of delaying for a year. The first is the First, there is the additional year of discounting for the income stream excluding the final year. Second, there is the present value of the final year of employment for the child who starts kindergarten earlier. Given the time periods involved, how significant are either of these costs? (This assumes a fixed retirement age. Alternatively, you could assume they both get the same income stream, but the child who starts younger retires a year earlier. In this case, you would need to include the present value of an additional year of leisure when you are at the end of your career.)

  8. Labor Outsider says:

    Andrew – as someone that took a year off before commencing university studies (to work not play), I think there are a few important considerations when deciding to take a gap year. First, taking a year off is not just about getting grades, it is also about taking more time to consider what course of studies you are most suited to. In the year between school and university I realised that I had a passion for the social sciences so switched from engineering to economics. Not only am I happier as a result of the switch but I have achieved more in my careers as an economist than I would have as an engineer.

    Second, although you are right that there is a cost to delaying – I would argue that is only high if delaying makes only a small difference to one’s grades. For example, if delaying by a year was associated with a grade increase from a credit average to a distinction average, I would expect that the pdv from the higher career earnings would more than offset the lower wage for one year. However, there are of course many other students whom are sufficiently mature and certain of what they want to do that taking a year off is probably not worth it.

    Ultimately, any inference in this area will be plagued by the fact that the decision to take a year off is not exogenous and thus one cannot simply compare the grades of those that take the year off with those that don’t. I do suspect though that there are many students at Australian universities taking courses without being really sure about why they are doing them – many of those may be better off by taking some time out to think about their goals outside the confines of high school or university.

  9. backroom girl says:

    Matt C – you think that the criteria for young people to demonstrate their financial independence from their parents (I would say alternatively their capacity to support themselves) are ‘peculiar’ and ‘open to rorting’.

    Well, you might be right when it comes to kids from very well off families, but I would encourage you to have a look at the parameters of the parental income test for Youth Allowance and ask yourself whether parents with a combined income of around $50,000 pa are really so well off that they can afford to fully support an 18 year old at university.

    I would think that for young people from many low-income working families qualifying for independent YA is probably essential to making university a possibility, especially if they need to move away from home to study. A more realistic parental income test (eg, similar to that for family tax benefit) would go quite a long way to reducing that direct financial incentive for a gap year.

  10. Matt C says:

    Yes, I agree with that. I believe that the parental income test should be loosened considerably. I was fortunate (not really the word) enough to qualify for Youth Allowance as a dependent from the age of 16, as my parents’ combined income was very low, but friends of mine just missed out despite the fact that their combined parental income was less than $35k (this was in 1998).

    My point was that earning $15k over 18 months is a peculiar way to demonstrate one’s ‘independence’, and it leads to all sorts of behavioural distortions in school leavers. The inability for many young people to receive income support without first have worked for a substantial period of time is a disincentive to further study. The structure of the Youth Allowance benefit, with its strict requirements for independence, lack of support for part time students and punitive effective marginal tax rates, is a far bigger issue than HECS for students of a low socio-economic background.

    My comment about it being ‘open to rorting’ reflects the fact that I know two people from well-off families who were able to artificially demonstrate ‘independence’ by having an income funnelled to them from the family business.

  11. Matt C says:

    ‘have’ should be ‘having’ in my second paragraph.
    I have a terrible habit of never reading over things before I click ‘submit’.

  12. backroom girl says:

    Matt

    On balance, I think that independence criteria that encourage young people to take a year or two off before going off to uni are not such a bad thing, since I’m fairly sure that, like Labor Outsider and my own daughter, a lot of young people don’t really know in Year 12 what they want to do with the rest of their lives. In fact, having a year or two’s experience of the kinds of jobs that you can get without tertiary quals might just do the trick in remotivating some of them. (That said, my daughter didn’t earning enough to qualify as independent during her year off – she qualified by working part-time while studying and ended up receiving YA as a student for a whole 6 months.)

    In the end, it is all a bit of a balancing act, like a lot of policy. As I said, with a more liberal parental income test you could afford to have stricter independence criteria, but as things are I think they provide a very necessary safety valve for a lot of not very well off families. I also have a bit of a gut reaction against policies that force children to be financially dependent on their parents potentially up to the age of 24.

    Your anecdote about the rich kids rorting the current system unfortunately confirms that such people always manage to take advantage of rules that are designed for ordinary people. In my opinion the rich have never been effectively excluded from student income support in this country, even though they are ostensibly the target of most of the tightening up of eligibility over the years. The only group that has every really suffered are those families with relatively modest means (and modest SES) for whom access to Youth Allowance can make a real difference.

  13. Cheryl Bookallil says:

    As an equity practitioner in HE for more than a decade I noted many “rich kids” who found ways around the system meant to support the disadvantaged. My final word….There will always be the needy and the greedy.

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