(This essay was published in South China Morning Post on 9 September 2015.)
From 1981 to 1994 the number of UGC funded undergraduate places increased from 2,500 to 15,000. The change reflected a shift in government policy to increase the number of undergraduate places from around 2.2% of the relevant admissions age cohort to 18%. This targeted percentage has since remained unchanged.
There is a belief in some quarters, including among some government officials, that Hong Kong is perhaps overeducated. They point to numerous reports of recent graduates having difficulty in finding well-paid jobs, growing numbers of graduates in clerical jobs, young graduates whose salaries have failed to increase for years, and complaints of few upward mobility opportunities for the young.
These officials worry that if more undergraduates are trained then there will be more frustration among the educated youths who fail to land good jobs. Social unrest may become a worrying issue if upward mobility is negatively impacted. Economically, any overinvestment is a waste of valuable resources that should be avoided.
So is Hong Kong overeducated?
From 1976 to 2011, the total number of university graduates in the working age (20-59) population rose rapidly from 87,000 in 1976 (4.1 % of this population) to 1.033 million in 2011 (23.1%). Despite this substantial increase in graduates, the average private rate of return to education has also increased from 8.8% to 14.8% over the same period (see Figure 1).
An average rate of return of 14.8% in real terms over a lifetime would beat the investment performance of the most successful fund managers anywhere in the world.
Even more revealing is the extremely high marginal rate of return to degree education, which has risen from 16.6% in 1976 to 22.7% in 2011. The marginal rate of return to secondary education is also very high and has risen more modestly from 12.6% to 15.8% over the same period. This is the clearest evidence that education has not hit diminishing returns in Hong Kong.
To put it more bluntly, Hong Kong has a severe shortage of university graduates and that is why the rate of return to university education has risen steadily over time.
So why are young graduates complaining about poor job opportunities, stagnant wages, and lack of upward mobility? The most important answer can be found in comparing the earnings of university and secondary school graduates in the same age group.
In 2011, the earnings ratio of university graduates relative to secondary school graduates increased steadily by one-and-a-half times between the ages of 25 and 65. But a very different result was to be found in 1976, when the earnings ratio did not increase at all with age.
This is a very unusual but critical result. What accounts for the difference in the earnings ratio profiles in the years 1976 and 2011?
Since the expansion of higher education occurred only relatively recently in the period 1981-94, the increase in university graduates is concentrated among the younger cohort (aged 20-39). There are relatively fewer older university graduates with more experience. Older graduates are not close substitutes for younger ones.
As a consequence of that scarcity, the market has paid them a huge premium. This has led to the misperception of the lack of upward mobility of younger graduates. Rapid expansion of university places reduces the relative earnings of younger graduates relative to older graduates, but not the true lifetime earnings of a university education.
The full reward to a university education will only materialize with age and experience in the years and decades ahead.
Hong Kong is not overeducated. Its real challenge is that it has a very tight labor market and pays high wages, but the standards of living are not great for many because property prices and rents are even higher.