Brent Sheather: University degrees - choose wisely

Some over-qualified café staff are New Zealanders who have completed degrees at local universities and now cannot get jobs in their specialist fields says Brent Sheather. Photo / Thinkstock

Talking to baristas and café staff in Mount Eden I had noticed that quite a few have a University education of one sort or another. Whilst making a good long black coffee is obviously critical to the functioning of any modern economy the high qualifications which aren't being used seem a huge waste of precious resources.

Some café staff have overseas degrees - psychologists, engineering etc and the reason that they are working in Mount Eden is often that our education system doesn't recognise their training. But some over qualified café staff are New Zealanders who have completed degrees at local universities and now cannot get jobs in their specialist fields.

Anecdotal evidence from this narrow sample suggests that degrees in communications and environmental studies seem to be more difficult to convert into relevant employment than others.

The lesson seems to be, today more than ever, when considering university education: choose carefully if employment is your objective.

At the risk of stating the obvious the decision as to whether to go to University or not is a big one because the cost of getting an education has risen substantially in the last 30 years. When I went to University in the 70s most expenses were publicly funded even without the benefit of a bursary or a scholarship.

Many people seemed to do Sociology, Psychology or Arts degrees with little consideration of the employment consequences, or lack thereof.

Consequently many people seemed to do Sociology, Psychology or Arts degrees with little consideration of the employment consequences, or lack thereof. Certainly there wasn't much need to do a cost/benefit analysis given that costs were negligible.

That was then however today's environment is radically different. The University of Auckland estimates the cost of doing a three year BCom degree in terms of fees to the University totals some $17,400 and a law degree will set you back some $23,200. The Treasury estimate that student loans amount to $13.6 bn and the average loan per person is about $19,000. The medium repayment time for people who finished study in 2009 is about seven years.

Student debt is a global phenomenon - Gillian Tett of the FT reckons that although credit card loans have drifted down from 2008 crisis levels and house mortgage growth has been subdued student debt levels have continued to explode. Quoting Senator Elizabeth Warren, a former Harvard University Professor, she said that student loans in the US had tripled in value in the last 10 years so that in dollar value terms they are now bigger than credit card debt and loans on cars.

That is significant! So going to University requires a massive investment and today we will try and estimate whether it is worth it and consider some historical data which gives a hint as to which courses of study have the best job prospects.

The research

First off let's look at some recent research from the US which estimates the value of a University education in the USA. In September 2014 the US Federal Reserve Board of New York published a series of articles examining the value of a college degree. To do so they measured the costs and benefits for the average college graduate where costs were the tuition and other fees paid to the University plus the opportunity costs of going to University ie the wages one doesn't earn whilst studying.

The benefits of a University education were estimated as being equal to the "college wage premium" - the extra wages one could expect to earn having obtained a degree. The Federal Reserve Bank of New York (FRBoNY) analysts then put those figures into a present value model and they reckon that the net present value of a bachelor's degree, across all faculties, is around US$300,000.

This might seem low to someone earning $300,000 a week trading foreign exchange at one of the big US banks but it takes into account the fact that some University graduates don't earn very much and some non-graduates earn lots and it also has regard to the fact that, in net present value terms, the costs of obtaining the education are less heavily discounted than the extra cash flows further out in time.

What it doesn't value are the non monetary benefits of education like possibly increasing the chances of getting a job that is fun and not a drag. Anyone who has done shift work in a factory doing a mindless packing job will appreciate this point more than most. The phenomenon of actually enjoying your job, as unbelievable as it sounds, is sometimes referred to as "self actualisation". The term was popularised by the writings of US psychologist, Abraham Maslow.

The NZ Ministry of Education (ME) looks at these issues too because the country needs to ensure it optimises returns on this investment. In a study dated June 2014 entitled "What young graduates do when they leave study" the ME looks at "destinations" of young domestic bachelors graduates by faculty.

The data categorises "destinations" as follows: employment, study, overseas, on a benefit, other. For this story I have grouped employment, study and overseas together which assumes graduates who are overseas are employed.

For example only 21 per cent of physics and astronomy graduates are employed within 12 months of graduating but almost 65 per cent are continuing with their study - presumably to get a Masters or PhD qualification and seven years after graduating 40 per cent of these people are employed locally, 39 per cent are overseas (probably because that's where the jobs are) and 16 per cent are doing further study.

Alternatively 47 per cent of accounting graduates are employed locally within 12 months of graduation and almost 40 per cent are doing further study. Roll forward seven years and 50 per cent are employed in NZ with almost 37 per cent overseas and 5 per cent doing further study. The table below summarises the ME data.

% of NZ graduates in employment* within 12 months of graduation

Maths 95%

Physics/Astronomy 95%

Chemistry 95%

Biology 95%

Environmental Studies 90%

Accountancy 98%

Engineering 100%

Teaching 99%

Performing Arts 90%

Medical Studies 99%

Communications & Media Studies 95%

*Employment = NZ employment/overseas or further study

Look at the dispersion of the data - there is hardly any, with a low of 90 per cent of performing arts students and environmental studies graduates either gaining employment/overseas or doing further study versus a high of 100 per cent for engineering graduates on the same basis. Goodness me even communications and media studies graduates get to 95 per cent. So much for the comments at the start of this article. Don't you hate it when the data doesn't support the hypothesis!

The other important outcome of a university degree is how much you earn. In another study entitled "What young graduates earn when they leave study" the ME confirm that doctors earn the most with a starting salary of $89,000. The average of all graduates is $61,000 with performing arts graduates earning $23,000, graphic and design $28,000 and communications and media studies $33,000.

Hopefully the above is helpful. Links to the two ME reports are detailed below:

• What young graduates do when they leave study
• What young graduates earn when they leave study

Brent Sheather is an Authorised Financial Adviser. A disclosure statement is available upon request. Brent Sheather may have an interest in the companies discussed.