Woroninomics: ‘Fee Deregulation is Bad, But Not for the Reasons You Think’

By now you will have all heard the heated arguments the ANU student protest movement have made against university fee deregulation. Let’s not repeat those points here. Instead, let us delve into the dispassionate realm of economic theory for an alternative perspective.

My claim is this: Fee deregulation will increase income inequality in Australia. However, this won’t be because university graduates are made worse off by it (they might actually be better off!) but because deregulation will hurt Australians without university degrees. Deregulation will lower their earnings relative to those of graduates in the labour market.

As strange as that sounds, the driving force behind it is even stranger – It’s all happening because of improvements in technology.

Normally, economists tend to think of improvements in technology as beneficial for everyone since better technology makes us all more productive. But suppose technological growth is skill-biased (the ‘Tinbergian assumption’). That is to say, it tends to benefit those with a higher skill level such as university graduates. Case in point, advancements in computer hardware are more useful for nerdy software programmers than humble cleaners.

If labour markets are fairly competitive, then technological growth will push up the wages of high-skilled workers relative to those of low-skilled workers. This makes it more rewarding for people to acquire a higher skill level and so more people start going to university. The supply of high-skilled workers then goes up and so their wages are pushed back down again. Fairly standard stuff.

These insights were first developed by economists such as Gary Becker, Jan Tinbergen, and Finis Welch. What it implies is that the growth of university graduates in Australia is able to keep the wage-gap between tertiary educated workers and non-tertiary educated workers in check. There is a metaphorical ‘race’ going on between our levels of technology and the level of higher education among Australia’s population.

But deregulation tips the race in favour of technology since by jacking up fees, less people will find getting a degree economically worthwhile. The ratio of high-skilled to low-skilled workers in the labour market falls and this means the earnings of university graduates will sky-rocket compared to everyone else’s. From here we can insert some economic/religious/political/ethical objections to income inequality and we are done.

It should be noted that this is not just idle speculation. Harvard economists Claudia Goldin and Lawrence Katz argue that the decadence and decline of the US education system (which the ANU is apparently striving towards) is a major reason for rising income inequality in the United States.

However, I strongly doubt the student protestors will embrace this argument since it rejects the idea that students are the ones who will fare worse under deregulation. In fact, the exact opposite is likely true. Even with a higher debt burden, university graduates could become better off as part of a high-income educated elite. It’s simply that these gains are made at the expense of the majority of Australians without university degrees and at the risk of economic inequality in society.

Léon Walrus was an Economics / Arts student, now undertaking Honours in Economics.