The Economics of Enrolment: The effects of Covid-19 on higher education

As we head towards the sixth week of lockdown in the UK there have been increasing numbers of studies into the longer-term impacts of Covid-19 and the subsequent economic downturn on different industries and sectors. We have already witnessed the devastating effect that international travel bans have had on the travel and hospitality industries, but what effect will continued uncertainty, social distancing and economic hardship have on the Higher Education (HE) sector? This is particularly salient as prospective students from all over the world consider their next steps and the role of HE in their career development. Will an economic downturn cause fewer students to go to university, or more? What affect, if any, will varying enrolment figures have on university finances heading into the 2020-21 academic year? How will lecturers, university staff and supply chain employees be impacted? And will these impacts be experienced to the same degree all across Europe? To answer these questions, I will be utilising data from the recent report published in April 2020 by London Economics (LE) which examines this area, in addition to highlighting several additional areas that could add to the research. I will begin by examining the baseline figures in the report which can be used for comparison, before studying the predicted GDP declines and consequent impact on HE enrolment in the context of both UK- and internationally domiciled students. Finally, I will look at the wider economic impacts, and draw the analysis into the context of the EU-28.

Beginning with baselines

To begin with, using the most recent available data from the 2018-19 academic year, LE establish the baseline figures both for university enrolment and finances. They find that of the 965,201 first year students, approximately 73% (708,075) were UK-domiciled, 6% (60,250) were EU-domiciled and 20% (196,885) were from non-EU countries. This ratio varied dramatically by institution however, and Oxford and Cambridge offer notable examples with 42% of students being UK-domiciled and 48% being from non-EU countries. In total, the 125 universities in this study generated a total income of £37.63 billion, more than half of which was generated through student fees and teaching grants. An additional £7 billion was also accrued through the provision of ancillary services, such as accommodation, events and catering. Finally, the total expenditure of all the HE Institutions (HEI) combined was £40.94 billion, of which 59% was spent on staff-related costs.

Domestic students

Having established these baseline figures, the LE report then examines various projections for the UK economy, with estimates ranging between a 7.5% and a 35% decline in GDP output between Q1 and Q2. Over the entire year, the Office for Budget Responsibility (OBR) have, working on the assumption of a three-month lockdown, forecast a 13% decline in output in 2020 compared to 2019. Interestingly, however, this lower output does not translate into lower HE enrolment. Instead, for full-time students, there is a countercyclical relationship where the economic slowdown reduces employment opportunities, thereby reducing the opportunity cost of participating in HE which, in turn, results in increased full-time HE participation. However, for part-time HE studies there is a procyclical relationship. As part-time prospective students are more likely to be working when applying for HE, an economic slowdown will reduce their available money to spend on education and, as such, part-time enrolment will decrease. Through an analysis of the Labour Force Survey, LE suggest that for a 1 percentage point reduction in annual UK GDP growth, there will be an approximately 0.03% increase in full-time enrolments and 0.56% decrease in part-time enrolments for UK-domiciled students. Using the OBR’s forecast, this suggests that there will be a net 2% decrease in domestic enrolments as a result of the economic slowdown. This does not appear to be a great deal of students, yet the analysis does not account for deferrals, and as many as 14% of A Level students were reportedly considering deferring their higher education.

International Students

Whereas the overall decrease in enrolments resulting from a 1 percentage point reduction in annual GDP for domestic students was valued at 2%, the LE study suggests that for first-year international undergraduate students there is a reduction of 0.485% in enrolments, although the postgraduate figure would be higher still, especially considering the increased fees often associated with postgraduate study. By using the World Bank’s 2013 estimate of a 4.8% decline in global GDP resulting from a global pandemic, the LE study estimates that there would be a 2% decline in the number of international students enrolling in UK HEI. However, the impact of deferrals is much greater for international students than it is for domestic students. The British Council recently published a survey of 11,000 Chinese nationals who have applied to HE overseas in 2020-21 (of which around 10,780 had applied to study in the UK) and found that 24% of respondents had already cancelled, or were ‘very likely’ or ‘somewhat likely’ to cancel or defer their plans to study. A further 40% responded that they were currently undecided on whether to defer. As such, the LE study uses these figures to calculate an adjusted probability of deferral for international students of 47%, before applying this to all non-UK-domiciled students. This is done so in order to provide a final estimate of students that will not enrol or will defer in 2020-21, although I do question the validity of extrapolating the results of surveyed Chinese nationals to all non-UK students. However, in absence of a greater source of data from multiple countries or continents, this extrapolation is necessary to determine a deferral rate to generate some level of prediction.

Impacts

Following the analysis, the study projects that a combined 231,895 students that would be expected to attend university will no longer enrol in HE in the 2020-21 academic year, approximately 24% of the original baseline. This is expected to result in a reduction in university tuition and teaching grant income of £2.47 billion, and we must remember that there will also be substantial losses from the lack of accommodation, catering and other ancillary services provided by HEIs. The largest segment (£1.51 billion) of the total loss is from the decrease in non-EU student numbers, and this could be exacerbated further if the prospective students decide not to come to the UK to study at all. Should the universities receive no financial government assistance, in order to offset this loss in income HEIs would need to cut 30,280 jobs, an average of 240 redundancies per institution. Furthermore, LE estimate that the wider economic impacts of such measures could result in a further loss of 32,340 jobs throughout the institutions’ supply chains.

Conclusions

It is difficult to gage whether the research carried out by LE offers an underestimate or an overestimate of the economic fallout from Covid-19 in the HE sector. On the one hand, several of their economic assumptions such as the reduction in UK and global GDP could be misjudged, and the actual economic slowdown could be far more damaging. In such a situation, despite a small increase in full-time undergraduate domestic enrolment (resulting from the countercyclical relationship with GDP), the net student reduction could be even greater than the 24% offered in the report, further starving HEIs from tuition and ancillary service income. On the other hand, there are several assumptions which could be incorrectly skewing the data in a negative way, such as the use of the British Council study as the average for all non-UK students, despite it not accounting for other global decision factors such as distance or language, for example. If the study were to be repeated or continued in future, I think it would be valuable to do any of three things, although this list is not exhaustive.

1) To gather greater survey data on deferral opinions in multiple countries. This would allow for more accurate forecasting, as deferral levels are one of the greatest unknown factors with large financial implications in this analysis.

2) To further breakdown the ‘ancillary services’ category. It is clear that lower enrolment will greatly impact upon income generated from accommodation, although the universities’ abilities to host events, conferences and catering may or may not be heavily affected.

3) To fully research the secondary consequences of entering or leaving HE during an economic slowdown. One such example is the study by Gregg and Tominey (2004) on the wage scar following youth unemployment in the 1970s and 1980s.

Finally, this analysis has centred on the UK HE sector, but I think that the UK will likely be more affected by a decline in international student numbers than other country in the EU. This is because of the 1.71 million non-domestic students studying in EU countries in 2017, over 25% of them were studying in the UK, around 60% more than in either Germany or France. Additionally, the UK has the third highest proportion (17.9%) of international students in the EU-28, behind only Cyprus (23.1%) and Luxembourg (46.7%). Considering both the higher fees imposed on international students in the UK and greater reliance upon their enrolment at UK HEIs, I believe that the impacts highlighted in this piece will be less severe in the rest of Europe than they are in the UK, although the true effects will likely depend on individual government responses to the reduced HE finances.