The number of university graduates in the working age population rose to 1.03 million in 2011 from 87,000 in 1976. Photo: Sam Tsang
The View
by Richard Wong
The View
by Richard Wong

Hong Kong not overeducated as tight labour market rules

A tight labour market, not overeducation, is to blame for the poor job opportunities and stagnant wages for young graduates

From 1981 to 1994, the number of undergraduate places funded by the University Grants Committee increased from 2,500 to 15,000. The change reflected a shift in government policy to boost the number of undergraduate places from about 2.2 per cent of the relevant admissions age cohort to 18 per cent. 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 are worried 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 affected. Economically, any over-investment is a waste of valuable resources that should be avoided.

So is Hong Kong overeducated?

The number of university graduates in the working age (20 to 59) population rose rapidly from 87,000 in 1976 (4.1 per cent of this population) to 1.03 million in 2011 (23.1 per cent).

Despite this substantial increase in graduates, the average private rate of return to education has also grown from 8.8 per cent to 14.8 per cent over the same period (see chart).

An average rate of return of 14.8 per cent 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 per cent in 1976 to 22.7 per cent in 2011. The marginal rate of return to secondary education is also very high and has grown more modestly from 12.6 per cent to 15.8 per cent. 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 increased steadily over time.

So why are young graduates complaining about poor job opportunities, stagnant wages and a 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 1.5 times between the ages of 25 and 65. But a very different result was to be found in 1976, when the ratio did not rise at all with age.

This is a very unusual but critical result. What accounts for the difference between the earnings ratio profiles in 1976 and 2011?

Since the expansion of higher education occurred only relatively recently in 1981-94, the increase in university graduates is concentrated among the younger cohort (aged 20 to 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 for younger graduates.

Rapid expansion of university places reduces the 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 materialise 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 labour market and pays high wages, but the standards of living are not great for many because property prices and rents are even higher.


This article appeared in the South China Morning Post print edition as: Cost of education