Friday, 13 February 2015

Why MOOCs will fail – they're not dating sites

MOOCs are not dating sites. Image via iStock

By Jason Potts, RMIT University

One of my Phd students is studying how parents make decisions about education for their children (you can participate in his survey here). We economists treat this as a problem of investment under uncertainty, which is to say that education is a bit like buying a stock, in that it has an uncertain future rate of return but a known upfront cost.

But it’s actually a harder problem than that, because unlike a stock, which will have dividends and hopefully capital gains, both measured in dollars, the return to education has many dimensions. Some are from labour markets and are measured with money, but other returns give rise to less tangible contributions to personal well-being along with broader spillovers to society. So economists have had to get good at measuring these total benefits and then using them to reverse engineer the choices people make about education.

Now I’m mentioning all of this because we’ve just noticed a fairly large hole in the case for MOOCs (massively open on-line courses) as compared to traditional bricks and quadrangles universities with expensive buildings and eye-watering fees. It’s this: the reason MOOCs will fail to displace universities is that, unlike universities, they’re not dating sites.

We make this claim based on some very recent work by economist Gustaf Bruze, who applies some clever economic modelling to large Danish data sets to generate very interesting and insightful findings about the “returns to schooling”. Specifically, he finds that “Danish men and women are earning about half of their returns to schooling through improved marital outcomes”.

The case for MOOCs has always been that they can deliver the same educational services, but at a fraction of the cost through the use of new technologies and business models. But this Danish study quantifies the extent to which educational outcomes are not the only valuable service that universities deliver – namely that a further and large component of the implicit demand for education is assortative mating – and MOOCs might not be so good at that.

In the economics of education, there are two broad explanations for the demand for a university degree. There is the human capital model, which argues that you go to university to learn things, and these things are like investments in capital, namely they increase your productivity, making you more valuable on the labour market. You invest up to the point where the cost of the education equals the expected return on your increased skills.

This predicts that by lowering the costs of acquiring human capital, MOOCs should increase the demand for higher education.

The other model is costly signalling. This argues that you go to university to acquire a signal to send to potential employers that you are smart and hardworking. You already know this of course, but employers don’t, and the problem is that anyone can make that claim.

So you have to do something that only smart, hardworking people will not find prohibitively costly. Interestingly, lowering the costs of a degree degrades the value of the signal. This will drive credential inflation, forcing the truly smart and hardworking to pursue graduate studies, or some other costly pointless thing, in order to differentiate themselves.

The private rate of return to higher education is not in debate here – it is substantially positive, with a wage premium around 60% over non-graduates and with an annualised return on the order of 10-18% – although as a recent report by Andrew Norton from the Grattan Institute shows, it does matter what you study.

What these types of studies tend to emphasise is:
(1) the importance of studying hard things, for example STEM subjects
(2) the importance of finishing them (called the sheepskin effect), ideally at prestigious places.

Now MOOCs might well be more effective ways of studying, especially of hard things. And MOOCs are tightly linked with some of the world’s most prestigious universities (e.g. here and here).
But are MOOCs more effective ways of dating? That’s the question it seems that no-one is asking. This matters because, as the Danish study shows, a large component of the return to higher education is due to better quality matches in household formation.

And if MOOCs are terrible at that (this is not a foregone conclusion; they may evolve to include local meetups, for instance) then that may well be the unreplicable competitive advantage (what investors call a ‘moat’) classic universities have.

This is not really the argument that most Vice Chancellors have in mind when selling their product (and paying my salary!). And it’s also likely that this private benefit translates into some social harm when assortative mating drives income inequality (see here, and here).

But the real story here is that those same Vice Chancellors shepherding their university’s enormous property portfolios might sleep a little easier knowing that these MOOCs are not going to eat their lunch and destroy their business model with their relentless cost advantages. Because MOOCs can’t supply the thing that Danish men and women, and likely Australian ones too, also want in their return to schooling – high quality matches not just with jobs, but with each other.

The Conversation
This article was originally published on The Conversation. Read the original article.

Thursday, 5 February 2015

Industrial reform: ignore fairness at your peril

by Steven Kates

Industrial relations protests in Sydney, November 15, 2005. Image via iStock.

Any industrial system that doesn't recognise the importance of fairness is destined to fail. That's why we need tribunals and can't simply "leave things to the market".

It always worries me when economists get involved with industrial relations reform, since their area of expertise is often too remote from what they need to understand to make useful policy.

Sure, there are prices called wages. There are a number of workers who will be hired at different wage rates, while the level of wages will affect the number of workers looking for jobs. But an economist all too often argues that the labour market should be administered like any other market.

Let the equilibrium wage be determined by supply and demand, they say, and leave arrangements to the law of contract. Bring in real courts to deal with breaches of agreements. Don't interfere in the market for labour (unlike in the market for money and credit) since it will only distort outcomes and leave us economically worse off. Beyond the pale is any suggestion of a minimum wage.

Where I can agree with the economic consensus is that our cost of labour is too high in relation to productivity. Unemployment could be much lower if the cost of labour could more closely conform to capacity to pay.

It is unreasonably difficult to effect workplace change, or start a new business from scratch. Far too much of what is required at the workplace in relation to the employment of labour is pre-determined by legislation and industrial awards, with only a limited ability to make changes that suit the particular circumstances of a workplace.

The Fair Work Act remains a genuine obstacle to economic prosperity.

Yet all too often, the core issue about industrial relations reform is not about outcomes, but about the structure of the system itself. Australia has developed its own unique and largely successful system of tribunals that has been the perennial target for elimination by economists since it was first formed.

And so it worries me that we are there once again. This is the basic outline of what is being investigated according to the Productivity Commission website:

In undertaking this inquiry, the Commission has been asked to review the impact of the workplace relations framework... [my emphasis]

If the continuation of industrial tribunals were off the PC agenda, and instead the issue was how our existing industrial relations system could be made to function for the better, I would be much more confident that the PC inquiry might come up with something of genuine value.

So my prime recommendation to the PC is this. If you start from the premise that industrial tribunals are here to stay, there is a possibility that the inquiry might do some serious good. But if that is not your premise, I would expect little good to come from this inquiry.

So let me mention a couple of things that are different about the labour market, and why industrial tribunals are important for the operation of our economy, while "leaving things to the market" will seldom work out for the best.

Start with this: union power. Union power is different from market power. And what makes it different is that unions are filled with some of the most ideologically driven people you are ever likely to meet. Their aim is not to try to make a market system work as efficiently as it can. Their aim is to represent the interests of employees, who may be expected to resist workplace change that is perceived to make them worse off.

And unions are working in an environment in which individual workers are going to find decisions made that will be detrimental to their own future livelihoods and workplace standing. They will want someone to take up their case, which is why, when union elections come round, the delegates with the hardest edge are often the ones who get elected to represent the rest.

Meanwhile, the reality of the business environment is constantly changing, and the need to adapt to a very rapidly evolving economic landscape is an absolute necessity.

Industrial disputes are therefore common. And unlike union officials, the owners of business are not specialists in labour relations. What is needed is a system that can channel, as rapidly as possible, workplace disputes into outcomes acceptable to both parties. That is what our present industrial "framework" is designed to do.

And what is likely to be ignored in looking at this framework, since it is outside of the normal range of economic consideration, is the importance of fairness in any economic institution, which is of particular importance in labour relations.

Put simply, if the system is not perceived to be fair, it will not work.

To an economist, something called "the just price" is an absurdity. There is an equilibrium price, which clears the market. If the actual wage is higher, some people will be unemployed who would otherwise have found work.

I can certainly agree that administered, arbitrarily determined wages and conditions will cause havoc in any market. So it is the process that needs to be fair in arriving at the equilibrium price.

The importance of fairness is generally ignored in the approach taken by economists, and I say this even though the PC notes that the aim is to find "fair and equitable pay and conditions for employees, including the maintenance of a relevant safety net".

We have an indigenous system of industrial tribunals that has been at the centre of our labour relations system for more than a hundred years. I often think it is under appreciated because of its uniqueness. But sometimes, like this time, we do things better than anyone else.

Steven Kates is Associate Professor of Economics at RMIT. He was chief economist for the Australian Chamber of Commerce for 24 years and a commissioner on the Productivity Commission. This article was originally published on The Drum and is republished here with permission from the author.