The Cost to Australia of Early School Leaving

1 Early school-leaving

3 Costs of early school-leaving

4 Adding up the Costs

6 How certain can we be about the cost?

Trend in retention rates to Year 12

Finn Target for 19 year olds

Estimated number of 'lifetime' early school-leavers

The estimated cohort of 'lifetime' early school-leavers: 1999

3.1 Direct monetary costs

Stylised direct monetary costs and benefits over a lifetime

3.2 Social costs

Components of the cost of early school-leaving

4.1 With whom should the early school-leaver be compared?

4.3 Valuing the social costs

5.3 Total costs of early school-leavers

5.4 Rates of return



	The Cost to Australia of Early School-Leaving
		Dusseldorp Skills Forum
National Centre for Social and Economic Modelling University of Canberra
			October 1999



		Acknowledgements:This report stems from a request to NATSEM from the Dusseldorp Skills Forum for an Australian replication of a report on early school-leaving in Canada. Brenda Lafleur and Maryann McLaughlin, from the Conference Board of Canada, provided helpful information on aspects of the Canadian estimates. Assistance from Poh Ping Lim and Gillian Beer with aspects of the research at NATSEM is gratefully acknowledged, as is the useful advice provided by Helen McDonald, Phil McKenzie, John Spierings and Eric Sidoti. The report has also benefited from useful comments on an earlier draft from Katrina Ball, Bruce Chapman, Ann Harding, Adriana VandenHeuvel, Mark Wooden, and officers from the Commonwealth Departments of Education, Training and Youth Affairs, Family and Community Services, and Prime Minister and Cabinet. Responsibility for the estimates remains with the author.
		Dusseldorp Skills Forum Suite 6 Level 2, 13 - 15 Smail Street, ULTIMO2007 Sydney Australia.			NATSEM University of Canberra ACT2601 Canberra Australia
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		The Cost to Australia of Early School-Leaving
A report commissioned by Dusseldorp Skills Forum and
			prepared by Anthony King
	National Centre for Social and Economic Modelling University of Canberra
				October 1999

Forward

In recent years the Dusseldorp Skills Forum, in collaboration with a number of
Australia's leading research organisations, has endeavoured to provide a
comprehensive picture of the learning and work circumstances of young Australians.

The results of that collaboration are documented in two landmark reports, "Australia's
Youth: Reality and Risk" (1998) and "Australia's Young Adults: the Deepening
Divide" (1999).

It became apparent from these reports that those young people leaving school early
are at much greater risk of becoming trapped in marginal activity, finding no secure
place in either learning or work. Challenged by these findings the Forum determined
to dig deeper to better understand this phenomenon as part of its continuing effort to
identify more effective policy responses.

This report is a further contribution to that cause. It has been prompted by a 1992
report by the Conference Board of Canada, "Dropping Out: the Cost to Canada". It
attempts to do what has not been done before in this country: estimating the lifetime
costs to the nation of a single-year cohort of early school-leavers.

The Forum turned to NATSEM, a collaborator in both the earlier reports, to deliver on
what was never going to be an easy task. This report is the product of their labours.
At the draft stage this report has been subject to consultation with a number of key
parties including government officials. It represents, we believe, a very significant
contribution to this most important public policy debate.

THE DUSSELDORP SKILLS FORUM

The Dusseldorp Skills Forum is an independent, non profit association with a charter
to stimulate innovative educational developments, to focus upon the importance of
the workforce in the continuing development of Australia, and to reach out to the
wider community to promote the formation of skills and personal effectiveness,
particularly in young people. It has had a strong focus on innovation and change and
active engagement with the contemporary worlds of learning and work.

Website: www.dsf.org.au

NATSEM

The National Centre for Social and Economic Modelling (NATSEM) was established
on 1 January 1993 as part of the Faculty of Management at the University of
Canberra. Since 1997 NATSEM has been funded by four partners - the University of

Canberra and the departments of Social Security, Health and Family Services, and
Employment, Education, Training and Youth Affairs.

NATSEM's key area of expertise lies in developing microsimulation models and using
microdata for a range of purposes, including analysis of the distributional impact of
social and economic policy.

Website: www.natsem.canberra.edu.au

Jack Dusseldorp

Chair, Dusseldorp Skills Forum



Contents
1 2 3	Early school-leaving The extent of early school-leaving Costs of early school-leaving		2 3 5 6 9 11 11 12 14 15 17 17 18 20 21 21 24
	3.1 3.2	Direct monetary costs Social costs
4	Adding up the Costs
	4.1 4.2 4.3 4.4	With whom should the early school-leaver be compared? Putting a value on the market costs Valuing the social costs Bringing future costs back to the present
5	The bottom line
	5.1 5.2 5.3 5.4	Average costs per early school-leaver: overall costs Average costs: individuals and government Total costs of early school-leavers Rates of return
6	How certain can we be about the cost?
References



			1

		Highlights
	Australia still has relatively low levels of secondary school completion. It is estimated that from each year of students going through school, 35 000 students will not complete their secondary schooling and will subsequently obtain no further formal education or training qualification. The estimated lifetime cost (discounted to 1999 terms) to the country of each early school-leaver is $74 000. Half this cost is a direct monetary cost, borne partly by the individual and partly by government. The remaining half is a social cost which falls across the individual, government and the whole community. The overall cost to Australia of one year's early school-leavers is an estimated $2.6 billion. Reducing the number of early school-leavers would be a very sound investment for the individuals concerned, for government, and for the country as a whole. Just on the basis of the monetary costs, it would yield an estimated 12.5 per cent rate of return.
* *
* *
* *

One of the acclaimed policy successes of the 1980s was the striking increase
in school retention rates (Figure 1). At the start of the decade, just 35 per cent
of school students were continuing on to Year 12. By 1992, this figure had
more than doubled to 77 per cent. The increasing trend has, however, since
stalled and is in fact now showing signs of a decline.

Figure 1

Data source: Ainley (1998 Table 1) and ABS Schools1998, Cat. no. 4221.0.

Other ways of measuring Australia's performance in this area include the so-
called 'Finn targets' and international comparisons. The Finn targets for
participation in education and training were set by a 1991 inquiry and include
the target for 19 year olds shown in Box 1. Education outcomes have been
moving toward this target (Productivity Commission 1999 p29), though there is
still some considerable way to go. Meeting the targetstill requires large
increases in Year 12 school retention rates and in participation in post-school
education and training by those who do not complete Year 12 (Sweet 1998).

Box 1

By 2001, 95 per cent of 19 year olds:

will be participating in, or have completed, year 12; or

will have completed years 10 or 11 and be participating in, or have completed,
some formally recognised education and training.

*
*



		3 How does the Australian situation compare with other countries? Figures presented for 16 OECD countries by the Productivity Commission (1999 p31) showed Australia to have the third lowest proportion of the workforce with post-compulsory school qualifications. Moreover, Australia appears to be the only OECD country in which school participation rates have been falling in the 1990s (Spierings 1999 p8). By all measures, early school-leaving is still a major issue in Australia. Every year, thousands of Australians leave school before completing their secondary education and many of these early school-leavers do not continue later with any further formal education or training. Why is this an important issue? Why has it been such a policy emphasis - and why should it continue to be so? The answer lies in the widely-recognised and considerable benefits of education that flow to individuals and to society as a whole. Through early school- leaving, some of these benefits are forgone. This is the cost to individuals and the country of early school-leaving. In this study we put a figure on these costs - estimating the lifetime costs to the country of a single-year cohort of early school-leavers (those early school- leavers from among one year of students going through school). We also separately identify the costs borne by the individual early school-leaver and those borne by government. The steps taken to produce these estimates are described below, with further details available in the accompanying technical paper. Broadly, we follow the approach used by the Conference Board of Canada (1992) in their study of the costs of early school-leaving in Canada.
		2		The extent of early school-leaving
		How many early school-leavers are there? There is good information on how many people leave school early each year, but just using these numbers would grossly exaggerate the numbers of early school-leavers when looking at impacts over a lifetime. This is because a large number of early school-leavers subsequently continue their education, possibly returning to first complete their secondary schooling, though more often continuing with some form of post- secondary education. Those early school-leavers who do not later obtain a formal education or training qualification we call'lifetime' early school-leavers. There are, however, no exact figures available on the number of these lifetime early school-leavers and the numbers need to be estimated. How this is done is described below and shown in Figure 2.

Figure 2

Sources:

Australian Bureau of Statistics, Schools 1998, (Cat. No. 4221.0), Tables 22 and 51. Rumberger and Lamb (1998). See technical paper.

Early school-leaving very largely takes place after Year 9, so the number of
Year 9 students is our starting point. In 1998, there were about 255 000 Year 9
students. Applying the Australian Bureau of Statistics (ABS) figures on
apparent Year 12 retention rates (the percentage of students who start
secondary school and who continue on to Year 12), and accounting for those
who commence but do not complete Year 12, gives us about 75 000 early
school-leavers - including more males than females, because of females'
notably higher retention rate.

Now, we need to work out how many of these 75 000 early school-leavers
subsequently return to education. Our estimate, based on data about recent
early school-leavers from the Youth in Transition study (Rumberger and Lamb 1998) is that 65 per cent of males and 35 per cent of females do so¹. This
leaves a final figure of just over 35 000 lifetime early school-leavers in that
single year cohort -16 000 males and 19 200 females. These are the
estimated numbers of Australians from each year-cohort going through school
who leave school early and will not later resume their education.

1_{Higher proportions are likely to have some subsequent participation in education,}though our analysis is based on participation which leads to a qualification. See
technical paper.

Exactly when these early school-leavers leave school is important in
estimating these costs. The ABS figures on retention rates show that very few
leave school before Year 10, close to half of early school-leavers depart
before Year 11, and the remaining half leave before commencing Year 12.
The Youth in Transition data (Rumberger and Lamb 1998) show a similar
pattern, though with some difference between males and females, and this is
used here. There is of course some variation in the ages of students in any
given school year, though using the predominant ages we summarise our cohort of early school-leavers to include the groups shown in Table 1². This is
our estimated number of early school-leavers from among the single-year
cohort of young people who are - or would be, if they continued their
schooling - in Year 11 in 1999.

Table 1

Males

8 300

7 700

Females

10 900

Persons

19 200

16 000

Year 10 leavers
(leave school when turning 16 after completing Year 10)
Year 11 leavers
(leave school when turning 17 after completing Year 11)

8 300

Total16 00019 20035 200

What sorts ofcosts to individuals, government and the country as a whole
does lifetime early school-leaving involve? In studies of the costs and benefits
of education, these effects are often grouped under various headings such as
private, public, social, government, market and non-market costs and it is
important to be clear about what we are including. Here, a basic distinction is
made between what we term 'direct monetary costs' and 'social costs'.

2_{The numbers of Year 10 leavers in Table 1 include the relatively small number of}Year 9 leavers, though the estimates take no account of any who leave before
Year 9.

Costs to the country

The direct monetary costs of early school-leaving are those effects which
appear as clear monetary flows of income and expenditure. These include the
difference in earnings due to early school-leaving and the costs of providing
education - the two basic elements of most economic studies of the costs and
benefits of education. How these earnings and expenditure effects operate
over a lifetime is shown schematically in Figure 3. This figure shows two
stylised lifetime earnings profiles - for a lifetime early school-leaver and for
someone who completes secondary school.

Figure 3



		8
the costs in the long second period against the benefits in the short first period.
Individuals and government Because we want to separately identify the costs of early school-leaving for individual early school-leavers and for government, we also need to estimate the lifetime impact of early school-leaving on transfers between individuals and government. These include income tax, social security and indirect tax. The rewards from the additional school-age earnings flow largely to the individual as after-tax earnings, but also partly to government through increased income tax. Similarly, the cost of forgone earnings is borne largely by the individual but also partly by government via reduced income taxation. With regard to social security (including student allowances), early school- leavers can be expected, for example, through their higher rate of unemployment to make a greater demand on the social security budget. Differences in income levels also affect expenditure and, thereby, indirect taxation such as taxes on petrol, alcohol and tobacco and so forth. As these income tax, social security and indirect tax payments are simple transfers between one 'party' and another within the country, they do not affect the overall costs to the country of early school-leaving. The cost to government of reduced income tax revenue, for example, is cancelled out by an equal benefit of lower tax payments by individuals. These elements are, however, obviously important in estimating the costs of early school-leaving faced by individuals and by government. Four elements of these transfers are identified here - with the income tax component split into two parts corresponding to the two periods of Figure 3⁵:
1. 2. 3. 4.	additional school-age income tax payments; lower income tax related to forgone earnings; social security payments; and indirect tax.

5_{The social security and indirect tax elements could also each be separated into two}components, but this is not done here in order to simplify the presentation.

While the earnings differences and direct education costs described above are
the standard fare of studies of the returns to education, most studies also
acknowledge the existence of significant social benefits from education (or
social costs in the case of a low level of education). Often cited examples of
these benefits include the impact of education on matters such as health,
crime, social cohesion, more informed voting and more efficient labour market
adjustment (see Chapman and Chia 1989 and Conference Board of Canada
1992). The Conference Board of Canada (1992 pp 5-6) gave the following
examples of the social costs of early school-leaving:

costs borne by society at large:

increased administration costs of social welfare programs;
increased demand on the health system;

a less efficient operation of markets;

higher costs of crime prevention and detection;
decreased participation in the electoral and political process;
decreased level of charitable giving; and

decreased social cohesion.

costs borne largely by the individual early school-leaver:

lower non-wage benefits at work;

decreased opportunity for mobility and training;
less successful job search;

lower return on investment portfolio;
less highly educated offspring;

decreased financial security; and

decreased cultural enjoyment.

These types of costs may, of course, apply differently in Canada and Australia,
though the list does illustrate the range of aspects which can come under the
heading of social costs. The Industry Commission (1997) has noted how these
types of effects need to be recognised in studies of the returns to education.

Recognising the existence of the social benefits of education is one thing.
Taking them into account in an estimate of the returns to education (or the

costs of reduced education) is another. Three key characteristics distinguish
these social effects from the direct monetary costs described above. Firstly,
they include effects which are felt across the community, rather than being
enjoyed only by those undertaking education or directly by government.
Secondly, as the Canadian examples clearly show, they are diverse and
include a host of quite different effects. Thirdly, and most importantly here,
they are notoriously difficult to value. For this latter reason, the social benefits
of education are frequently recognised as substantial, but they are very rarely
included in valuations of the costs and benefits of education. Some estimates
have, however, been made - including by the Conference Board of Canada.

In summary, our estimate of the costs of early school-leaving includes the
components shown in Box 2. As will be seen, our estimate of the social costs
is far less robust than the estimates for the other components, so we treat it
somewhat separately.

Box 2

a) Costs to the country

Direct monetary costs:

forgone after-tax earnings
forgone tax receipts

*
*

Less direct monetary benefits:

additional school-age after-tax earnings
additional school-age tax receipts
savings in government education costs
savings in individual education costs

*
*
*
*

= Net direct monetary costs

Plus social costs

b) Costs to individuals and government

also includetransfers:

income tax
social security
indirect tax

*
*
*

Having identified the costs and benefits to be included, the task now is to add
these costs and subtract the benefits over a lifetime. What we want to estimate
is the total cost to the country over the lifetimes of a cohort of early school-
leavers. The first steps in this calculation include:

deciding who the early school-leaver should be compared with, and over
what period;

putting a value on the direct monetary costs and benefits;
putting a value on the social costs; and

expressing future costs and benefits in today's terms.

What we do is work out the average lifetime cost for an early school-leaver -
with this done separately for males and females who leave after Year 10 and
after Year 11.

To measure the costs of early school-leaving, we need to compare the early
school-leavers with those who did not leave school early. The question here is
who we should chose for this comparison:

those peoplewho have completed secondary schooling but have no
further qualifications; or

all those who have higher levels of educational attainment.

We use the first group, which has the advantage of isolating the effects of not
completing secondary schooling without introducing the added complications
of the effects of post-secondary education and training. However, because
most of those who complete secondary school go on at some stage with
further education or training, the second group arguably better represents
where the early school-leavers would be if they completed their secondary
schooling. So, we do look later at what impact using the second group would
have on the results.

Over how many years of a lifetime should the comparison be undertaken? We
start at age 16 and then look at the costs over a 'working' lifetime to the age of
64 years. Going beyond this age would complicate the estimate, though add
little to the results. This is because the discounting described in Section 4.4



		12 means that any differences that far into the future will have little effect on the overall outcome. Still, it is interesting to consider whether there are any costs to do with the effect of education on retirement incomes and this issue is touched on in the description of an illustrative case in the technical notes.
		4.2		Putting a value on the market costs
		Forgone earnings and income tax Lifetime earnings profiles for early school-leavers and for the comparison group of those who completed secondary school are obtained from detailed data from the ABS 1990 Income Survey. While not the most recent income survey, it is the most recent one which allowed identification of early school- leavers, and the results have been inflated to 1999 levels in line with changes in average weekly earnings. The gross earnings profiles are shown in Figure 4, with the gap between the profiles for early school-leavers and others reflecting the forgone earnings. Using the detailed Income Survey data, these profiles were split into separate profiles for after-tax earnings and tax paid. For the early school-leaver and comparison groups, these profiles show the average annual earnings of males and females at different ages. They reflect differences in wage rates and differences in labour force activity. A group with a high level of unemployment, for example, will tend to have lower average earnings. The decline in the profiles is not because people get paid less as they get older, but because a growing proportion of the age group are not in paid employment, or are only working part-time. Oneadjustment made in calculating these average profiles was to exclude those people (mainly women) who were deemed to be the primary carer of a child under 6 years old. If this was not done, we would be counting this unpaid caring work as having no value to the country. This is important here because early school-leavers tend to have slightly more children than those with higher levels of education attainment. In applying these earnings profiles to people's future lifetimes, we have assumed that there will be real future growth in earnings through productivity increases. Common practice would be to assume, say, a one or two per cent per annum increase in earnings. Here, we assume a one per cent per annum increase, though with some later examination of the sensitivity of the results to this assumption. This real growth also applies to the forgone income tax.



		13
Figure 4	Lifetime earnings profiles


Data source: See text
How much of the difference in earnings can be attributed to education? A standard adjustment in studies of the costs and benefits of education is to recognise that not all the difference in earnings for people with different levels of education can be attributed to their education. Part of it may be attributable to natural ability or family background. There is, however, no firm view on how large the part which can be attributed to education is, and the literature shows a variety of values being used. These range from around 60 per cent to 100 per cent. In this study, we use a figure of 80 per cent, while later examining the sensitivity of the results to other assumptions.
Additional school-age earnings and income tax The benefits of additional school-age earnings for early school-leavers are the difference between their earnings at the ages of 16 and 17 from the above profiles and the earnings of school students. The figure for the average annual earnings of school students was calculated from recent ABS Income Survey data, giving figures in 1999 dollars of around $620 for males and $970 for females. As with the foregone earnings, the income tax component of these additional school-age earnings was also estimated.

Education costs

Information on the annual cost to government of a full-time secondary student
was derived from material presented by the Productivity Commission (1999)
and by Burke (1998), giving a figure of about $8190 in 1999 dollars. The figure
for individual education costs was inflated from the results of a 1996 survey by
the Smith Family of the costs of students in state secondary schools. This
gave a 1999 figure of about $880 per year.

Social security

Lifetime profiles of social security (including education allowances) were
derived from ABS Income Survey data in a similar way to the earnings profiles
- relying mainly on the 1990 survey data. The real one per cent per year
increase which is applied to earnings is also applied to social security so that
the relative value of social security payments moves in line with earnings. Like
post-school earnings differences, only 80 per cent of the difference in social
security incomes is attributed to education. This follows the importance of
factors such as labour force participation and earnings in people's social
security entitlements.

Indirect tax

Indirect tax effects are calculated as a fixed percentage of after-tax incomes (earnings and social security)⁶. The figure used - 10.4 per cent -was
calculated from 1993-94 ABS estimates of the indirect taxes paid by
households. This will provide a conservative estimate as the ABS figures are
recognised as capturing only about one half of all indirect tax (see Harding,
Warren and Lambert 1998). Also, note that the estimates refer to the current
indirect tax system, not to the situation with the GST.

As was mentioned above, it is very difficult if not impossible to estimate the
value of the social benefits of education - or the social costs of early school-
leaving - with any accuracy. It might be possible to value the health effects,

6_{This is done after the 80 per cent factor is applied.}



		15
but how do you put a value on social cohesion? The most comprehensive attempt to value these social costs still appears to be a 1984 United States study which combined what evidence was available with a series of assumptions to reach the stated conservative conclusion that omitting them 'may capture only about one-half of the total value of an additional year of schooling' (Haveman and Wolfe 1984 p401). The Conference Board of Canada (1992) drew on some of the findings of Haveman and Wolfe in a manner which resulted in social costs amounting to 80 per cent of the total estimated costs of early school-leaving in Canada. One Australian estimate of the total value of these social benefits of education has been made - by Chapman and Chia (1989) in the context of tertiary education. The estimate was based on the argument that the extent to which government subsidised education indicated the value society put on the social benefits. They proceeded to calculate the net present value (see below) of social benefits per tertiary student to be of the order of $20 000 in today's dollars. Exactly what this estimate means for the social benefits of completing secondary school is unclear, though one could reasonably expect the order of magnitude to be similar. Short of a major study, which at best could only partly value the social effects of education, we are obliged to rely on the broad estimates described above. They at least give us an indication of the magnitude of the value of the social costs of early school-leaving. Here, we adopt the simple assumption -arbitrary, but within the range indicated above - that the net present value of the social costs equals that of the direct monetary costs.
4.4	Bringing future costs back to the present
When we add costs and benefits up over a lifetime, we have to take into account the fact that amounts in the future are worth less than amounts now. Would you rather have $100 now or $100 in 10 years time? Anyone should prefer the $100 now because they could invest it for 10 years and have more than $100 in 10 years time. Indeed, they should prefer an amount less than $100 now. Suppose they believed$50 now was equally valuable as $100 in 10 years time. In that case, the 'present value' of $100 received in 10 years time would be $50. In summing the costs and benefits over the lifetime we need to convert them all to present value terms. To do this, we then need a 'discount rate' which defines the value people put on future costs and benefits. Given the



		16 uncertainty about the future and the likelihood of variation in people's preferences, it is obvious that there is no clear choice of the discount rate that should be used. One option is to link it to the real long-term bond rate and this is what we have done here. The average value of the real bond rate over the past 15 years was 6 per cent, and this is the value of the discount rate used. The results of these estimates of the cost of early school-leaving are very sensitive to the discount rate chosen and some examination of the results obtained using different discount rates is presented. Besides this sensitivity, the use of a discount rate greatly diminishes the value of costs and benefits received far into the future. The benefits of early school-leaving during the school-age years assume greater relative importance in the equation, while the costs incurred later on in the lifetime are reduced in relative importance. The dramatic impact of discounting, and the sensitivity to the discount rate, are illustrated in Figure 5 which shows the present value of $100 received at increasing time from now under alternative discount rates. The higher the discount rate, the lower is the present value of future costs and benefits.
		Figure 5			The impact of discounting



																											17
5			The bottom line
5.1			Average costs per early school-leaver: overall costs
Adding the direct monetary costs and benefits of early school-leaving over a lifetime to the age of 64 years, and using a discount rate of 6 per cent, gives us the average costs to the country shown in Table 2. These are the average estimated lifetime direct monetary costs to the country of a single early school- leaver. We are not distinguishing yet between costs to individuals and to government, so the table just includes the four basic elements of costs and benefits. For all four cases, the net present value of costs is positive and substantial, ranging from $21 800 for a female Year 10 leaver to $54 700 for a male Year 11 leaver. The right hand column of Table 2 gives the average figure - taking into account the different numbers of male and female and Year 10 and Year 11 school-leavers. The overall average lifetime cost is $37 100 for each early school-leaver.
Table 2				Average discounted monetary costs of early school-leaving: Australia, 1999 ($000 per early school-leaver)
																							All^a
						Year 10 leaver									Year 11 leaver								All^a
					Males					Females				Males					Females

								$000				$000					$000				$000				$000
	Costs
		Forgone earnings							73.1 18.2 1.7 16.0				59.5 20.0 1.7 16.0					73.1 9.8 0.8 7.8				59.5 10.3 0.8 7.8				65.8 15.1 1.3 12.3
	Benefits
Additional school-age earnings Savings in individual education costs Savings in govt education costs (sub-total benefits) Net Total Cost a_{Weighted average.}Source: See text.
							(35.9)				(37.7)					(18.4)				(18.9)				(28.7)
									37.3				21.8					54.7				40.6				37.1
The costs of a male leaving school early are shown to be markedly higher than those of a female. This is largely due to the higher difference in lifetime earnings for males than for females (see Figure 4).



		18 The estimated costs of a Year 11 leaver in Table 2 are considerably higher than those of a Year 10 leaver. Note that the forgone earnings for the Year 10 leaver and Year 11 leaver are identical. This does not mean that there is no earnings benefit in completing Year 11, but simply reflects the fact that we do not have separate earnings profiles for Year 10 and Year 11 leavers. The important difference between these groups is that the forgone earnings of the Year 11 leaver are offset by only one year of school-age benefits. If we now add in a value for social costs, using the assumption that they are the same as direct monetary costs, then we are looking at even more substantial costs across the community. The estimated average total (direct monetary plus social) cost to Australia per early school-leaver rises to $74 000.
		5.2		Average costs: individuals and government
		To look now at the costs facing individuals and government, we need to expand Table 2 to include income tax, social security and indirect tax. This is done in Table 3, with the transfers shown in the shaded rows. Each of the transfer elements appears as a cost for one party and as a benefit for the other, so the overall bottom line is unaffected. Table 3 shows that the larger part of the cost to the country is borne by government, though still substantially by the individual school-leaver. Of the average total monetary cost of $37 100, the government bears $22 400 and the individual $14 700. This reflects the role of the progressive income tax system and of social security in cushioning the impact of lower earned incomes.



																															19
Table 3					Average discounted monetary costs of early school-leaving: individuals and government, Australia, 1999 ($000 per early school-leaver)
																											All^a
								Year 10 leaver									Year 11 leaver										All^a

							Males					Females				Males						Females
										$000				$000					$000					$000					$000
	Individual Costs Forgone earnings73.159.573.159.565.8
			(sub-total costs) Benefits Add. school-age earnings Savings in individual education costs						(75.0)				(61.5)					(74.2) 9.8 0.8					(60.6)					(67.4)
											18.2 1.7				20.0 1.7			(74.2) 9.8 0.8								10.3 0.8				15.1 1.3

		(sub-total benefits) *Net individual cost* Government Costs							(60.9)				(53.7) 7.8					(52.2)					(43.2)					(52.7)
											14.1		(53.7) 7.8								22.0					17.4				14.7

				(sub-total costs)					(41.1)				(32.0)					(41.6)					(32.2)					(36.3)
	Benefits Savings in govt education costs16.016.07.87.812.3
			(sub-total benefits) *Net government cost*						(17.9)				(18.0)							(8.9) 32.7 54.7					(8.9) 23.2 40.6			(13.9)
			(sub-total benefits) *Net government cost*								23.2 37.3				14.0 21.8															22.4 37.1
Net Total Cost a_{Weighted average.}											23.2 37.3				14.0 21.8															22.4 37.1
Net Total Cost a_{Weighted average.}						Source: See text.

From our average costs per early school-leaver and our estimate of the
number of lifetime early school-leavers (Table 1), we can now work out the total lifetime costs of one year's early school-leavers⁷. The total figure for
estimated direct monetary costs amounts to $1.3 billion (Table4). Of these
costs, almost $800 million (60 per cent) are borne by government, with a little
over $500 million borne by the early school-leavers themselves.

Table 4

Total discounted direct monetary costs of early school-leaving: Australia, 1999

Males

Females

Persons

286
444

230
345

516
789

Individuals
Government

Total direct monetary cost7305751305 Source: see text

If we add in social costs, we are looking at a figure of $2.6 billion⁸. This is
clearly a huge cost and, remember, it refers to only one year's early school-

7_{A common argument found in studies of the returns to education might caution}against aggregating the average costs of an early school-leaver in this manner. The
argument is that, at least over the short term, increasing the supply of people with
a given qualification level is likely to diminish the value of that qualification -
and, correspondingly, the cost of not having the qualification. This argument is,
however, generally seen in the context of qualifications, such as higher degrees,
which are held by a minority of the population. Whether the argument holds
equally over the longer term and for a low qualification level which is already
attained by a sizeable majority of a cohortis questionable. Still, the issue remains
as an aspect of the uncertainty attached to these estimates: specifically, uncertainty
about the future structure of the Australian labour market.
8_{This can be compared with the figure of $4b in 1989 Canadian dollars estimated by}the Conference Board of Canada. Adjusting for inflation, currency, and the
difference in the number of early school-leavers, the Canadian figure reflects a
total cost (including social costs) in today's Australian dollars of about $40 000 per
early school-leaver, compared to our estimate of an overall average of about
$75 000 per early school-leaver. The Canadian study, however, used a discount
rate of 10 per cent, compared to our 6 per cent. As indicated in Section 6, this
difference in discount rates could more than account for the different results.
There are also a number of other important differences between this and the

leavers. The loss to the country from next year's early school-leavers, if there
are the same number, will be another $2.6 billion, and so on.

A common way to look at the costs and benefits of education is in terms of the
rate of return obtained from investing in education. It provides an indication of
the value of investing in education compared to other possible investments.
The rate of return is calculated using the same information used above and
the results are shown in Table 5. The estimated rates of return shown fall into
the 10-15 per cent range which is typically found in education studies. They
tell us that reducing the number of early school-leavers would be a very sound
investment for government, for the individuals concerned, and for the country
as a whole - and these rates of return do not include any consideration of the
social costs of early school-leaving.

Table 5

Internal rates of return on completion of secondary education: Australia, 1999 (direct monetary basis)

Males

%

12.4

Females

Persons

%
10.1
13.7

%
11.1
13.9

Individual
Government

14.2

Total13.411.712.5 Source: see text

It is useful to divide the picture shown in Figure 3 into two periods: the period
when the person who completes secondary school is still at school, and then
the period when both have left school. During the first short period, the early
school-leaver - and the country - enjoys benefits rather than incurs costs.
These benefits are the earnings of the early school-leaver, which are only
slightly offset by any earnings of the continuing school student. These
additional earnings represent an increase in productivity, and are termed:

(1) additional school-age earnings;

The other benefit in this first period is the saving on the costs of providing
education. Teaching fewer students costs less. This is largely a saving to
government since 'free' secondary education is available to all, though to the
extent that there are individual costs (fees, levies etc) there is also an
individual saving. There are thus two further components in this first stage:

(2) savings in government education costs; and

(3) savings in individual education costs.

When we move to the second - and much longer - period in Figure 3, the
picture of benefits of early school-leaving is replaced by one of costs.
Schooling costs are no longer an issue and the single element is the
difference between the lifetime earnings of the early school-leaver and the
person who completes secondary school. The lower earnings profile of the
early school-leaver reflects both the well-established lower earnings of people
with lower levels of educational attainment and their lower levels of labour force activity - seen, for example, in higher unemployment rates³. In this period, the difference in earnings represents a loss of economic productivity⁴,
and this element is called:

(4) forgone earnings.

The above four components make up our estimate of the direct monetary
costs of early school-leaving to the country. This comes down to weighing up

3_{See, for example, the account of the different labour market patterns in the early}years after leaving school provided by Ainley and McKenzie (1999). 4_{Differences in investment incomes, such as interest and dividends, should also be}included if possible but are omitted here because of the difficulty of attributing the
differences to education. Their omission will tend to understate the costs of early
school-leaving because the profit component of forgone economic activity is not
being counted.

There are many areas of uncertainty in this study. The estimates make a lot of
assumptions about what the future will look like - particularly about future
earnings and labour force behaviour - and there is, of course, a good deal of
uncertainty about what the future holds. Part of this is the uncertainty about
the effect that any major reduction in the number of early school-leavers would

Canadian estimate. These include a different approach to valuing social costs, a
fuller account of labour force differences here, the assumption here of real
earnings growth, and allowance here for the number of early school-leavers who
return to education and training.



									22
have on the labour market and on the returns to a completed secondary education. There is also clearly a high level of uncertainty about the value of the social costs of early school-leaving and the best we can do there is try and get the order of magnitude right. Finally, there is uncertainty about a number of other elements of the study, such as the discount rate used, the number of lifetime early school-leavers, and the share of earnings differences which can be attributed to education. An appropriate response to this environment of uncertainty is to use established techniques and clearly state the assumptions in the estimates, which we have done. It is also useful to consider the sensitivity of the results to changes in key assumptions. In Table 6 we show the effect of some different assumptions on the estimated net present value of the direct monetary costs for Year 10 leavers.
Table 6		Sensitivity outcomes: total discounted direct monetary costs per person: Year 10 leavers
	Sensitivity test		Males			Females
				$000 37.3			$000 21.8
	Base case Share of earnings difference attributable to education (80% in base case) 60% 100% Discount rate(6% in base case) 4% 8% Real growth rate (1% in base case) 0% 2%			$000 37.3			$000 21.8
					19.0 55.6 69.3 17.5 25.7 51.9			6.9 36.7 44.1 7.5 13.5 32.1
	All qualifications comparison group(those with only48.936.4 completed secondary in base case)

The assumed share of earnings differences which can be attributed to
education, the chosen discount rate, and the real earnings growth assumption
all clearly have a major effect on the results. A two percentage point change in
the discount rate, for example, basically alters the result by a factor of two -
the lower rate almost doubles the outcome, while the higher rate more than
halves it. The comparison of early school-leavers with all those with a higher
level of educational attainment (the 'all qualifications' comparison group),
rather than just with those with only completed secondary, has a marginal
impact on the result for males, but increases the result for females by about a
third. This largely reflects the greater labour force differences between the
female groups than between the male groups.

These sensitivity outcomes suggest that, depending on the choice of
assumptions, a range of estimates of the cost of early school-leaving could be
obtained. This is true, and what we have tried to do here is put together what
can be regarded as a mid-range estimate of the costs to Australia of early
school-leaving. It should also be remembered that these estimates do not
include the costs associated with those early school-leavers who later go on to
a higher level of education qualification. These estimates have been confined
to the costs of lifetime early school-leavers.

The estimates presented in this report are very much aggregate estimates and
have been based on available data which are seldom ideal. It would be a
useful exercise to extend the work with a focus on the different groups that
make up the population of early school-leavers. Similarly, it will be interesting,
when appropriate data become available, to revisit the question of the cost to
Australia of early school-leaving and take account of the effects of recent
policy initiatives such as the under-18 year old provisions of Youth Allowance
and the Youth Pathways Action Plan.



			24
		References Ainley, J. and McKenzie, P. 1999, 'The influence of school factors on young adult life', pp 105-16 in Dusseldorp Skills Forum, Australia's Young Adults: the Deepening Divide, Dusseldorp Skills Forum. Burke, G. 1998, 'Expenditure on education and training: estimates by sector and course', pp 141-55 in Dusseldorp Skills Forum, Australia's Youth: Reality and Risk, Dusseldorp Skills Forum. Chapman, B. and T. Chia, 1989, Financing Higher Education: Private Rates of Return and Externalities in the Context of the Tertiary Tax, Discussion Paper No. 213, Centre for Economic Policy Research and Department of Economics, ANU, Canberra. Conference Board of Canada, 1992, Dropping Out: The Cost to Canada, The Conference Board of Canada, Ottawa. Harding, A., Warren, N. and Lambert, S., 1998, Who bears the tax burden?, Income Distribution Report No. 8, National Centre for Social and Economic Modelling, University of Canberra. Haveman, R. and Wolfe, B. 1984, 'Schooling and Economic Well-being: the Role of Non-market Effects', The Journal of Human Resources, 19(3), pp 377-407. Industry Commission, 1997,Industry Commission Submission to the Review of Higher Education and Policy, Industry Commission, Melbourne. Productivity Commission 1999, Report on Government Services, AGPS, Canberra. Rumberger, R. and Lamb, S. 1998, 'The Early Employment and Further Education Experiences of High School Dropouts: A Comparative Study of the United States and Australia', paper prepared for the Organisation for Economic Co-operation and Development, May. Spierings, J. 1999, 'A crucial point in life: learning, work and young adults', pp 5-27 in Dusseldorp Skills Forum, Australia's Young Adults: the Deepening Divide, Dusseldorp Skills Forum. Sweet, R. 1998, 'Youth: the rhetoric and the reality of the 1990s', pp 5-22 in Dusseldorp Skills Forum, Australia's Youth: Reality and Risk, Dusseldorp Skills