The Importance of Graduates to the Scottish Economy: a "Micro to Macro" Approach

There have been numerous attempts to assess the overall impact of higher education institutions (HEIs) on regional economies in the UK and elsewhere. There are two disparate approaches focussing on: demand - side effects of HEIs, exerted through universities' expenditures within the local economy; and supply-side effects, exerted through HEIs' contribution to the "knowledge economy". However, neither approach seeks to measure the impact on regional economies that HEIs exert through the enhanced productivity of their graduates. We address this lacuna and explore the system-wide impact of the graduates on the regional economy. An extensive and sophisticated literature suggests that graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies. However, there is some dispute over the extent to which the graduate wage premium reflects innate abilities rather than the impact of higher education per se. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator o f productivity enhancement. While the detailed results vary with alternative assumptions, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most HEI "impact" studies.