Tuesday, April 24, 2007

Hong Kong Education Reform

Even policy changes which do not seem to be closely related with economics may have significant economic effects. Hong Kong is moving to a new structure for secondary and higher education- from "5+2+3" (five years junior secondary, two years senior secondary, three years university) to "3+3+4." How will this effect Hong Kong's economic development?

This is an excellent question that is worth writing a whole book on! But let me make some brief comments here anyway.

The biggest change in the proposed education system in Hong Kong is that students will loose one year of high school education, which will be replaced by one additional year of university education. I know little about high school education in Hong Kong, but I presume that part of this change is driven by a perception that the marginal value of the final year of high school is relatively low relative to the potential marginal value of an additional year of university. As a university teacher, I am not in a position to give an unbiased response to this presumption (“Of course it’s true! Otherwise I would have been a high school teacher!” … or something like that.)

The increase in length of university studies may be used for one of two purposes:
1) to increase the depth with which students understand their chosen field of study, or
2) to increase the breadth of their education.

It is possible to make a strong case for either of these. My understanding is that HKU is focusing more on 2) than 1), with additional broadening courses and students being encouraged to take additional majors, instead of focusing on as narrow a field of study as is often the case today.

What are the macroeconomic consequences of this change? Assuming that the benefits outweigh the costs, the workforce in Hong Kong should possess higher human capital. This implies increased productivity, and higher GDP, income, and taxes in the future. This final element is important, as universities are expensive to run; I haven’t seen any financial break-down, but I would be very surprised if the savings from decreasing the time students spend in high school will cover the increased costs to tax payers of an extra year at university!

From the student’s point of view, I think the change is good. At higher levels of education, students are likely to receive nearly all the benefits from any increase in human capital via increased wages. Any positive externalities to the rest of society (over and above the wages received by our graduates) are likely to be small.

All the above arguments assume that education truly is useful, and that increased university education makes students more productive when they obtain work.

But there is an alternative model of education, based on “signaling theory.” That’s the idea that education itself is of little use, but serves as a signal that you’re smart. In that case, increasing the length of a university education, or increasing investment in university education more generally, is socially wasteful. The smartest students will still end up with the highest grades, and therefore receive the strongest “signal,” which should translate into the highest wages among students entering the labour market.

The coming change in the education suggests a simple test of this theory. If signaling theory explains the wages of university graduates, then the wage distribution (and wage growth trajectory) should be similar for students under both the old system and the new system, once we take into account their relative grades. In contrast, if the new system produces more productive workers, a competitive labour market (like Hong Kong) should ensure that this is reflected in higher wage levels and/or faster wage growth for students graduating under the new system.

Another less important effect of this change is that it brings us more into line with Mainland Chinese universities, as well as those in Canada and the United States, although I don’t think this factor has much effect on economic growth.


Tina said...

Such a detailed explanation!
So much Thank-Yous for you~
I can learn a lot from the macroecon perspective to look deep into this edu reform issue~!

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