Podcast episode

How performance-based pay can motivate employees, but there are risks – EP177

Can we get people to work harder and perform better if we make their pay performance-related – e.g. with performance bonuses or commissions? Does this work? What does the evidence say? We know that people respond to incentives, but, as Gene Tunny and Tim Hughes discuss this episode, getting those incentives right can be tricky. 

Please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP177

  • What is performance-related pay? [0:41]
  • The types of jobs in which performance-based pay works and doesn’t – e.g. fast food vs real estate [8:09]
  • The importance of getting incentives right and having transparency [23:16]
  • Performance-related pay is a difficult thing to put into practice [28:24]
  • Group-based incentive schemes – evidence from a recent European study of the Hydrema manufacturing business [52:54]

Links relevant to the conversation

IZA World of Labor – Performance-related pay and productivity 

How group-based incentives increase worker performance | CEPR

Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process 

The Use of Reward and Incentive Systems: A Case Study of McDonald’s – ToughNickel 

McDonald’s Restaurants puts motivation and reward at heart of business strategy – Employee Benefits 

Give and Take – Adam Grant

Performance-related pay | The Economist   

Real Estate Agent Commissions: How Does it Work and How Much Should You Be Paying 

Learn the Truth About Real Estate Commissions | PropertyNow

Transcript: How performance-based pay can motivate employees, but there are risks – EP177

N.B. This is a lightly edited version of a transcript originally created using the AI application It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, Tim Hughes and I chat about performance related pay, can we get people to work harder and perform better if we make part of their pay performance related? Of course, if you don’t perform at work, you can get sacked. So your pay does end up being related to performance in one sense. But what we’re talking about here are such things as performance bonuses and commissions. That is where you don’t just get a regular predictable salary, but part of your compensation is at risk. Does this work? What does the evidence say? We know that people respond to incentives. But as Tim and I discuss this episode, getting those incentives right can be tricky. Okay, let’s get into the episode. Please stick around to the end for some additional thoughts for me. Tim Huges, good to be chatting with you again

Tim Hughes  01:30

Gene, good to be here.

Gene Tunny  01:31

Excellent Tim, I thought it’d be good for us to have a quick conversation on performance related pay. I’ve been thinking about this following on from this whole debate between Steven Crowder and the daily wire, which I talked about with John Humphries on his Australian taxpayers Alliance Econ Chat, earlier in the week, and I thought it’d be good for us to have a chat about a related issue, which is performance related pay I got starting to think about this. Well, when John and I were talking, we were talking about well, does the actual form of the contract matter? Or is it just all about the dollars that are being paid? Or that they expect to earn out of the contract? I mean, obviously, the money is important, but how do the contractual terms affect the amount of effort that you put in, in your work? And so I was thinking about that in the context of the debate between Crowder and daily wire, and then it reminded me that I should cover this issue of performance related pay on the programme, because I think it’s an important, an important issue.

Tim Hughes  02:36

Yeah, sure. It’s an interesting area for sure. 

Gene Tunny  02:38

Yeah. I mean, did you have any thoughts on that whole crowder and daily wire?

Tim Hughes  02:41

I’d never heard of it until you mentioned it. So I didn’t even know if, so he’s a comedian, that guy?

Gene Tunny  02:47

Yeah. Yeah. So he’s on the right wing in the US. He’s more of the Magga type, Crowder, whereas the daily wire and more of the traditional Republican, and I think Ben Shapiro was originally anti Trump. So yeah, the different parts of the conservative movement in the States. 

Tim Hughes  03:09

I think I know now, I haven’t heard of him. But as we often talk about like, it’s it’s good to be exposed to different areas and different views. So yeah, looking forward to hearing about it.

Gene Tunny  03:23

It’s just all over YouTube and social media, people are commenting on it and say, John went through it. And John’s view is that well, all they’re arguing over is the amount of money involved. And it’s not necessarily about, you know, the concern Crowder had was that daily wires just doing the bidding of big tech.

Tim Hughes  03:42

But so what was what’s the what’s the juice? Like? What was the story? Between those two guys? It was a it was a contract. Yeah.

Gene Tunny  03:49

It was a contractual dispute. Well, they were trying to recruit, Crowder to their platform, and they offered him $50 million over four years, but the payment that they have for you, yeah, but what they would pay would step down if he was demonetized on different platforms like YouTube and Okay, Twitter, or Facebook, or whatever. And he was saying, well, you’re doing the bidding of big tech. But look, it costs the money. So it makes sense to, to scale the contract down. And so in John’s saying, look, it’s just all about money. These contractual negotiations are just all about money, ultimately.

Tim Hughes  04:26

Just out of interest. So when he says you’re doing the bidding of big tech, what does it mean by bidding? Like, I can understand that, like big tech may affect that income? So if it’s monetized that’s basically the issue. Yeah. But how can they be doing the bidding of big tech? I don’t understand that.

Gene Tunny  04:43

Well, maybe I haven’t expressed that very well. But the idea is that, well, a lot of these conservatives think that big tech is trying to censor conservative voices. Yeah. And so he’s saying, well, you’re just going along with what they want. Alright, okay. I’m accepting that in the pocket. Yeah, no. Yeah, maybe that’s I don’t know. That was his concern. But look, as John said, it just all comes down to money and at what price you’re willing to, to work for Daily Wire and also to give up the IP because he would have to give up IP and the shows that are produced while he was at. At Daily Wire, they would get the copyright in that. Yeah. So yeah, ultimately, it all came down to money, but it did get me thinking well, okay, well, how would you structure a contract? To get the best performance out of a person was daily while we’re designing the contract, they were proposing a contract in a certain form to get the best outcome from their point of view. And then also, as possibly was from Crowder’s point of view, too, because there’s going to be more money available for both if he’s not demonetize, right, yeah. Yeah. I mean, he may think that, well, that’s bad for his brand. Or maybe he’s playing the longer term game. And he’s thinking well, yeah, I mean, I’m all about being edgy. I don’t care about whether I’m monetized on YouTube or not. But then again, he should have appreciated that if he wasn’t monetized on YouTube, then that’s less money overall. So the Daily Wire is trying to design a contract, where it’s essentially trying to encourage him to be monetized or as monetized as much as possible so that there’s more money for them. Now Share, They Share part of that with Crowder, and depending on what the share of the total revenue that YouTube was of the total revenue that comes in from Crowder, he may well have been better off with the deal they were offering, because he was I think they’re only going to dock 25%. Well, they’re going to dock 25% If he gets demonetized on YouTube, okay, I thought this was an interesting case. And it just got me thinking about incentives and how do you structure contracts.

Tim Hughes  06:56

yeah, yeah, it’s an interesting area, because I know we talked a little bit about this. And certainly, from my experience, like, you know, if you’ve got an incentive, as an employee, or if you can give incentives as an employer to get the mix, right is the tricky thing, because you know, you want something that’s attainable, and sustainable. So if it’s too easy to get the reward, you know, the employer can lose out. If it’s too hard, then the employee loses out. So it’s a bit of a fine balance. And obviously, this is used pretty successfully with commission based work, you know, where there’s a base salary plus commission, and they’re usually done over a period of time, so they can get that amount, you know, pretty much right? And some people can do really well with that. Particularly in real estate. Yeah, well, and with salesmen, it’s a big one for sales, of course, of all sorts of industries where no sales are used. And it makes a lot of sense, you know, if you’re a really good salesperson, then you can be rewarded for that. And if you’re not so good, then, you know, you, you don’t get so much. And so sort of a fair way of doing it. So I think now, wherever possible, it makes a lot of sense to have that involvement in the company. You know, that’s, that’s properly rewarded.

Gene Tunny  08:09

Yeah, exactly. So I thought this would be a good topic to, to talk about. So in the great majority of employment agreements, I would think would not involve any performance related pay that there’s really isn’t any incentive there. But they rely upon, well, the incentive is if you do the job, then you’ll keep your job. But if you don’t, we’ll get rid of you. So I guess that’s the that’s how it works, right? And but if you can monitor how people are working, and you’ve got a good, a good eye on that you can, you’re able to properly understand the contribution output and the profitability of the firm. And in many cases, I suppose you can, you can do that. If someone’s working at McDonald’s, they’ve got a sense of whether that person is able to prepare the number of Big Macs an hour that’s required or whatever they need to do. So you can monitor that sort of activity. And in those cases, there’s no real need to provide any incentive, if they do a better job, or if they suppose they will have to meet a particular level of service or or do so much an hour. And if they do more than that, well, it doesn’t really lead to more money or more profitability for McDonald’s because basically, McDonald’s ends up serving everyone who comes in and tries to buy something off them anyway, doesn’t it?

Tim Hughes  09:39

I mean, that I know people who’ve worked in McDonald’s and they seem to have obviously it’s all about systems have completely been the leader in that kind of business for a long time. Many people, many businesses have incorporated, that whole framework of heavily systemized but of course, it means that the expectations of what needs to be done? Pretty accurate, but I think they do have, you know, opportunities to sort of move within McDonald’s. So the scale or the pay scales quite clearly set out.

Gene Tunny  10:12

You’re right. And just after I gave McDonald’s as an example, I thought I better check that McDonald’s doesn’t actually have performance related pay. Because that was just the first thing that occurred to me. But I think most of the people are working there, they’re just going to be getting paid the award rate or whatever it is, or whatever. Yeah, the agreement. But it turns out, it looks like there is some performance related pay. This is in the UK, McDonald’s restaurants put motivation and reward at heart of business strategy. So I’ll put a link to this. This is for the the top restaurants and it looks like they give a bit of a bonus a small bonus in some cases. So each month, all employees in the top 10% of restaurants based on mystery shopper scores receive a bonus of 50 P for each hour, they have worked in a two week period. Okay, so that seems that seems okay. But it’s not related to your individual performance. It’s related to how the whole store goes. And that’s probably not as strong an incentive as if it’s an individual performance pay performance related pay measure?

Tim Hughes  11:26

Yeah, and I guess put put a big part of that, because they work as teams, obviously. So to pick out an individual for having particular performance would be hard, but collectively, for that branch, you know, there might be incentives, if not, with McDonald’s with other similar kind of fast food chains. But I know, for instance, in the states, if you work in hospitality, a lot of the jobs are paid, not very much on the understanding that they’re going to receive, you know, pretty good amount of tips throughout the week. Yeah, because it’s customary and traditional to do it in most places. As I understand over there, I worked in Austria, myself in ski resorts years ago. And that was a big thing. There was you lived on your tips, it was fantastic. You know, it made a big difference. And you could save your wages, which weren’t high, because of it. Whereas in the UK, it was less likely you’re gonna get tipped, you know, you’re gonna be hungry. If you’re, if you’re working in hospitality in most places in the UK, and probably in Australia, too, to be fair. It’s not as customary here, either. So.

Gene Tunny  12:30

That is because we have high award wages, or well, maybe not high. If you’re, if you’re working in these jobs, you probably don’t think they’re that high. But yeah, relative to what you get paid elsewhere in the world, we’re doing the same job. It’s quite, it’s a bit higher than that. Yeah.

Tim Hughes  12:44

I mean, yeah, you get to the high end of that kind of scale, you get the concierge is at top hotels around the world. And who knows how much those guys make and women, of course, like in those roles of being in really flush hotels, where a lot of people have a lot of money and just dropping $100 bills everywhere.

Gene Tunny  13:04

Yeah, exactly. And I’ll put a link in the show notes to some of these articles I found on McDonald’s. So just put some clarity around exactly what they’re doing. That was just the first company that occurred to me, but my contention would be, and I think the evidence shows this as the majority of jobs out there. There’s no real performance related pay. Say, if you’re in the public service, generally not. Some public service agencies will offer bonuses, there’ll be some there’ll be some assessment of how you’ve gone through the year, and maybe they’ll pay you a little bit of a bonus. So a lot of that’s, I think that’s rare in the public. Yeah.

Tim Hughes  13:48

I would imagine it’s industry specific. So they’re probably like situations like that with? Well, certainly with government employees, where it will probably be difficult to put any of those kinds of things in place. Maybe not with all departments, but certainly with most we were talking earlier about it clearly is more suited to certain industries and others. And one of the interesting areas at the moment, because there’s a lot of people doing side hustles side gigs, doing their own kind of little business, while they’re still working for, you know, an employer. So their main employment is earning X amount of money every week, but putting time and energy into their own little gig, which is a tricky one, because like, you know, again, depending on what the work is, but if it’s not easily quantifiable, people can be putting less energy and time into their main job. So it’s a problem for the employer, where it’s like, clearly people aren’t getting satisfied from their roles or the work that they’re doing in that main job. And something that we both heard Phil Dibella talking about fairly recently was being an intrapreneur like so. Basically an entrepreneurial spirit within a company so you can be an intrapreneur and what you might be able to offer to that company. So, if a company is open to different sorts of ideas and innovations from within the company, then there might be a space and place for someone to grow within that company. Yeah. And and share their ideas and use that energy within within the business.

Gene Tunny  15:19

Yes, certainly. So if you can demonstrate that you’re, you are making a material impact on the profitability of the firm beyond your normal job, or what you’re doing at the moment and your job or what your role is, and you’ll make your contributions much greater than what you’re getting paid for, then that’s an opportunity to redefine your role to get a better better pay from your boss. And you can be this is what Seth Godin calls the linchpin be indispensable in the business you are and you can be a linchpin in your own business, but you can also be a linchpin in someone else’s. Yeah.

Tim Hughes  15:55

And of course, that that comes down to a symbiosis where obviously, the manager or your superior needs to be receptive to that. I mean, they need to be good ideas, of course, but if it’s a receptive environment that encourages that, they would need that to work. So there’s a few things obviously that have to come together. And again, that would be industry specific. And, you know, within guidelines or, you know, whatever, I think forward thinking companies can certainly take advantage of that, you know, with the event of encouraging intrapreneurship within their own company.

Gene Tunny  16:30

Yeah, exactly. So with, let’s think about the economics of, of all of this. So we’ve identified that there’s performance related pay in more sales and, and in real estate and in in other sales jobs. And that’s because it’s a way of compensating the top salespeople, and it motivates them, it motivates them to hustle or to work harder to make more phone calls or to aggressively go after properties to sell. I mean, what’s going on there? I mean, why is real estate different from, say, working behind the counter at office works or something?

Tim Hughes  17:10

I guess, with real estate, you make a significant sale less often. Whereas like with most retail, it’s going to be a less significant sale? pretty often. Real estate is a bit of an outlier, I think, isn’t it? Because depends where it is. And like, you know, it might be a handful of sales for some people who can do extremely well. Yeah. But you know, that it comes down to, yeah, just very few sales that are really significant. And, of course, are a big, dry periods. There’s not much happening in real estate. So it’s a very, up and down kind of market.

Gene Tunny  17:44

Yeah. So it’s obviously because or, or this, this is what I’m thinking is because this is so competitive, and there are big gains to the people who win, but the people who make the actual sale happen. There are big gains to to that company because of the commission that’s involved. And that’s shared with the agent, isn’t it? And that’s because it can’t just always observe what the agents doing because they’re often out and about, and it’s a job where they may have to work more than the usual hours, they often have to work after hours. There’s a lot of hustling involved, though, to get the sale. They might have to really go above and beyond and sharing the commission or having commission based pay. That’s a way of incentivizing them.

Tim Hughes  18:38

Glengarry Glen Ross Yeah. Like coffee’s for closers is the same. Is that same thing? Like, I can only imagine. I mean, I haven’t worked in that area at all. But I can only imagine it’s, well, pretty stressful. I mean, because if you’re not selling you’re not earning. And there’s a lot of jobs like that where its base salaries is either non existent, or it’s just minimal. So you really, the incentive is you have to you have to sell. Yeah, with real estate, it’s feast or famine, it would appear.

Gene Tunny  19:06

Yeah, I have to look more into that just exactly how they compensated. So if you’re a real if you’re an agent working at the Ray White, you’d be getting as a base salary, wouldn’t you? And then they’d be paid, you’d be getting a bonus or you’d be getting a share the commission that’s charged on the transaction, would you I would imagine, but I can’t say I’m not sure. I don’t know either. But I know I’ve got the sense that it’s related to that because Yeah, real estate is one of those industries where the high fliers the top real estate agents are just yeah, they’re they’re making a lot of money. Yeah, they appear to be making a lot of money. I know that having the BMW that’s part of the act out of the bottle. Yeah.

Tim Hughes  19:52

It’s definitely a regional thing as well. Like, depending on where you were, you’re an agent. You know, obviously the the margins are bigger in the The more expensive suburbs more competitive I imagined to. Yeah. But is that is that thing like sales is definitely the most common way of having incentives. And it makes sense from all sides and employers and employees, there’s a margin that can be shared. And it makes sense. If you haven’t made that sale, then the margin is not there. So it’s probably the most common one, and the fairest one too.

Gene Tunny  20:29

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  20:34

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice, we can help you with funding submissions, cost benefit analysis, studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world, you can get in touch via our website, We’d love to hear from you.

Gene Tunny  21:04

Now back to the show. The places where I’ve seen performance related pay is in consulting. So consulting firms often have a bonus scheme run bankers in banks, for their investment bankers, they’ll have a bonus scheme, hedge funds, they have bonus schemes for their for their people. And they’ll have their salary, but they’ll also be a bonus on top of that. And the idea is that if you’re a better performer, then you can get a generous bonus. And some of these bonuses can be pretty generous, like some of the bonuses that they’ll have in the City of London or on Wall Street for some of these bankers. I mean, that can be millions, millions of pounds or millions of dollars. Yeah, because a really good year. And if, if that particular banker, or trader, if they’ve done well, or it looks like they’ve performed well, like they’ve done incredibly well in the deals that they’ve signed, or on the trades that they’ve been executed. So there’ll be some link there, and I suppose why the bonuses work there to to incentivize people as well. If you’re working in that sort of industry, you’re probably you may be highly motivated by money to begin with. And so the prospect of more money is going to motivate you to work harder. And there’s also that the inability or the, it’s something where you can’t really closely monitor what they’re doing. And you’ve got to rely upon the person putting in the effort going, they’re going the extra mile, so to speak, to get the best outcome for the business or for the for the bank or for the for the consulting firm. So billing more hours getting projects done more quickly. So you can then get another project in, send the invoices out.

Tim Hughes  22:56

So actually, I mean, to be fair, this is where a lot of problems come though, wasn’t that the foundation of the GFC with mortgages been given for properties that shouldn’t have been mortgaged? And so a lot of a lot of deals been done that shouldn’t have been done on paper were worthless, and then that started the whole GFC process. Isn’t that correct? Like? Yes, yeah, absolutely. Like it was basically. And it was that incentive to yeah, get the Commission’s that was driving those deals, you know, so if, if it’s a bad deal, then yeah.

Gene Tunny  23:30

Yeah. The mortgage originators, who were signing people up. And the story was there all these people who had who were getting loans who had no income, no job, no assets, the ninja loans they called? Yeah, yeah, yeah.

Tim Hughes  23:45

 Yeah. So it’s that thing of like, getting incentives right, is really important and having transparency as well. Yeah. So clearly, there wasn’t enough transparency with that.

Gene Tunny  23:56

Well, I guess the, the incentives weren’t there, they weren’t designed well, from the point of view of the of the company or from society. I mean, they it was all about the short term, it was all about, just sign as many people up as possible, right, as many loans or get as many loans approved. And regardless of who these people are, and so, yeah, it’s people who shouldn’t be getting loans. And then you’ve got the people in the bank. So the investment banks who, then they’re bundling up all of these mortgages, some of which, the people who, who have the loans, they’re going to be the first people to just walk away when things get tough, and they can’t service their mortgage, they just walk away and then this, this was part of the problem. What was happening is that all of these mortgages that weren’t worth as much as nominally they were worth they’ll be packaged up and then sold as a financial product, the mortgage backed securities and you know there were people making money out of that. The the investment bankers who were selling that to pension funds. And yeah, they were doing well in the short term. But it was there from a longer term perspective and for the companies themselves. And for the society, it really wasn’t. It really wasn’t great. Yeah, it’s terrible.

Tim Hughes  25:23

So it can see how it’s important to get all those elements, right. Clearly, there was a lot of people, I’m sure the writing on the wall was visible for a lot of people, but they’re just getting in there and doing it while they can.

Gene Tunny  25:34

Yeah, one point I should make, I think for the companies that fell over. So if you think about Lehman Brothers, and Bear Stearns, certainly what happened, those bad short term incentives did cost them in the long term. But one of the problems with the financial crisis was that some companies that probably acted, you know, that acted pretty sketchy, pretty badly in the lead up to the crisis. Ended up getting bailed out. Yeah, yeah. So and, you know, that’s, that’s a problem.

Tim Hughes  26:07

That’s a different, a different episode as well, I guess there’s a there’s a whole.

Gene Tunny  26:10

Yeah. Too big to fail episode. This is part of the problem. We’ve got that this is what happened during that episode. During that the financial crisis that’s caused a lot of the political problems we’ve had since then, I think, because people see Wall Street getting bailed out. So Bernie Madoff went to jail, but probably a lot of other people who should have gone to jail.

Tim Hughes  26:38

Well, yeah, and it’s, it’s difficult not to be cynical, when you see people getting away with, with things where, in other circumstances, people would be sent to jail. And so yeah, having being accountable and taking responsibility should be across the board for sure.

Gene Tunny  26:57

Yeah, exactly. I was just thinking team with the consulting firm example, because that’s what I know a lot better because I was working for a consulting firm before I went out on my own. Now, I mean, my pay is purely performance based. It’s just, it’s purely performance based. Rather, there’s no salary that doesn’t, there’ll be maybe I do effectively pay myself a salary, but I’ve got to generate, yeah, I’m gonna generate the revenue. Whereas if you’re working for a firm, you can the link between the work you do and the amount of money will the salary you get is indirect. There is a bonus scheme to try to encourage people to work harder. And that certainly does motivate a lot of people in consulting firms. And that can make sense, I think, because when you’re in a consulting firm, there’s a lot of extra effort or a lot of a lot of additional things you could do that it’s hard for the employer to hold you accountable for or monitor how you’re going with those things. I mean, we’re talking about well, how well are you really putting yourself out there to try and bring in new business? Yeah, how well, are you trying to get the deals done that sort of thing? How hard are you really working? How intensively are you working when you’re working on jobs to try and do them as quickly as possible, so you can bill as soon as possible, that sort of thing can be difficult to observe. And so therefore, it can make sense for some performance related pay. And so it can benefit the employer too, because they can pay you a bit less than you expect to earn if you’re a high performer, because you’re counting on the getting a bonus. So from the employers point of view, it’s they like it because okay, it’s some of the risk has been taken by the employee. And if they’re a dud, well, if or if they have a bad year, well, we don’t pay him as much. And then okay, if they make money for us, and you were happy to share some of that profit. It’s a difficult thing to put into practice, though, in consulting firms, I think, because the amount of money in the bonus pool and this is a problem with banking to what can happen is if you could have a really great year, and you could be a star, but if overall the whole firm doesn’t do well. Say the economy has a downturn, the economy, but say you might have had a great year, if you if you’re if your bonus scheme, and I think one of the problems in practice is that many bonus schemes are like this. They’re linked to the last financial year profitability or last quarter profitability. If the firm has a bad quarter or a bad financial year, you’ll suffer even though you’re a star, right? So you’ve really got to be careful how you design these bonus schemes because that sort of thing will cause resentment because the person who thought they did really well that year they’ll be mad because they had a great year, but because the firm didn’t have a great year, they didn’t get as much money. And then the other things that can happen is that if, if you don’t design your performance related pay scheme properly, then you’re gonna have all sorts of disputes between your staff, it doesn’t necessarily encourage a collegiate environment, because you may be trying to maximise your billable hours as a share of the total billable hours on a project. And therefore you might not want to bring someone else in the firm to take part in it because you’d have to share any upside with that person. And attribution. So say someone often, often there’ll be performance related pay linked to whether you’re bringing in projects or bringing in jobs. But then how do you attribute the contribution of bringing in the job? Does the fact that my cousin your consulting business, that he knows the person, he’s got a contact in the energy business and then the person there rings up Mike and says, Oh, Mike, do you know anyone who could help me out on on this job? And Mike goes, Oh, yeah, Janine over there. She could probably do it. She’s got the skill set. And then Janine talks to I didn’t give the guy in the energy business, and I did a berry berry. Berry. And then Barry goes, I’ve got this problem, I need this, this issue analysed. And Janine goes, Oh, yeah, I can do that. I can build this sort of model. And Janine does this really big pitch, she does this really great proposal, which convinces Barry that she’s going to solve his problems. And then Barry goes, Oh, that’s great. I’ll give you this big contract to deliver that. And then she goes, oh, that’s great. And then, and then Mike goes, hang on. I’m the one who introduced you to Barry. Yeah, yeah, I want 50% of that, if any profit on that job.

Tim Hughes  31:53

And Janine did 90% of the work? And yeah, it gets tricky, for sure. And I think this is where it’s industry specific. And also, you don’t want to create an environment where people are jealous, and and sabotaging other people that you don’t design it. Well, that’s exactly. So this is the thing. And I think this is where it gets industry specific. Because and this is also where intrapreneurs can help because you have to come up with your own solution, you have to come up with your best design for the situation that you’re in. There’s not one that sort of suits all.

Gene Tunny  32:25

Well, I think the best thing is, is actually to be generous. And you you win overall, you win the long game by being generous. Yeah, it’s that it’s a win, win and grand he’s got that give and take is that Adam grants thesis, I can’t remember. I’ll put a link in the show notes. But I think you do better in the long run by being generous and not being greedy.

Tim Hughes  32:49

Isn’t it one of Stephen Covey’s Seven Habits of win win? That’s, I think so. So because that’s, that’s basically what it is, isn’t it? Because, yeah, one you want it to be any incentive shall be a positive thing within a team with, you know, for an individual within a team within a department and company. Yeah. And you can have friendly competition and everything. But it’s so easily done, where it can be a negative force, you know, like, yeah, tricky, tricky thing.

Gene Tunny  33:17

And I must admit, I mean, I’d probably, maybe I wasn’t as collegiate as I should have been in jobs where I’ve had a bonus where there was a bonus scheme. And I look back on that and think, Ah, I probably wasn’t always being a team player. And I regret that. But that’s just the way it’s set up. So you got to set up the system so that it does encourage collegiality, and it doesn’t just rely on people doing the right thing out of the goodness of their heart, because when money’s involved, they won’t necessarily do that. It’s a good boy,

Tim Hughes  33:48

it’s a good point, actually, like you can design this around the behaviour that you want to encourage, you know, so if you can imagine that, it might encourage negative behaviour, like, you know, if it’s not a fair system, then you can end up with someone that happy employees.

Gene Tunny  34:04

Yeah, so I’m gonna have to try and dig up some examples of bonus schemes that work because I’ve seen various bonus games, not necessarily, I’m not necessarily making a comment on any organisation I’ve worked in. I’m talking generally about consulting businesses I’ve seen because I’ve known a lot of people who do consulting work, and I’ve heard of various different models. I haven’t heard of one that seems to get everything right. There seems to be issues with all of them. I don’t know how you design it, but you certainly have to have your bonus linked, not just to the short term results, but to the longer term outcomes, they maybe have to have it linked to profitability over several years. Yeah. which avoids the issue of well, what if someone has a great year but the whole company doesn’t do very well? And then they don’t have there’s no money to pay the bonus. And you also want to see whether, okay, maybe this person, you don’t want to pay someone a bonus if they’re actually making things worse in the long run, because they’re because they’re really toxic to work with, like, they might be a high performer, they might be generating a lot of sales or doing a lot of work. But they could be a nasty piece of work. And that’s no good for your company’s morale of other team members for your reputation.

Tim Hughes  35:19

It’s actually interesting, because it would be very hard to imagine a perfect system for any scenario. So I would imagine that any good incentive scheme would be constantly evolving, constantly being receiving feedback and, and changing because of all those reasons that we’ve mentioned, you know, like people who might just be a passenger and thinking I’ll just do as little as possible and, and try and, you know, right off the back of other people’s hard work, if it was a team incentive, you know, so it would have to be a very flexible, mobile kind of incentive system, you would imagine.

Gene Tunny  35:53

Yeah, I might look more into this. What are some examples of schemes that have done? Well, because there’s been, there must be a literature on this. So there must be people must have written about this. But what I’ve done is to prepare for this conversation, as I’ve looked up, or what is generally what does the economic literature tell us about the you know, the effectiveness of performance related pay? And? Well, as you probably expect, given that we do see examples of performance related pay out there, it must work, right? Companies wouldn’t be adopting it if it if it didn’t work in some way. And so there’s a great article on the IZA website. So that’s an institute that looks at labour market issues, I think it’s German. So the Z must mean something, mister, must be some German words, starting with Z. I could be wrong about that. I dont know why its IZA, I don’t know exactly why it’s IZA. But there are a great think tank that looks at labour market issues. There’s a great article by these two Italian academics performance related pay and productivity, I’ll link to it in the show notes. And what they find is, so the pros of performance related pay, linking paid or performance is expected to increase worker motivation, effort and loyalty to the firm, pay incentives, raise job satisfaction, lower absenteeism and turnover rates and have a sizeable effect on company performance. Right. So they’re actually finding that their review of the literature tells them that it’s a positive thing. They’re saying that this is a good point, I think the diffusion of remote work may involve a shift from input to output based compensation schemes such as performance related pay, I think it’s a really clever point. What that saying is that as more people are working from home, we really have to start thinking about performance related pay, because there’s less well, in the old days, I mean, where you had to go into the office, then that was how you were signalling your contribution of the firm, wasn’t it? That was your you were you were visibly in the office or you weren’t there. And then the boss could come and give you the tasks to do. And so I guess, just hourly base pay made more sense in that environment than if people are working at home where we’ll really when, when we’re during COVID. And afterwards, we’ve made this shift to working from home and now the boss isn’t really observing whether you’re turning up for work or not, are they they’re just they just expect you to get a certain amount of work done. Yeah. And to be contactable, generally, I mean, available. So it’s a different sort of thing. And so I guess it would force us to think more about how we could design a performance related pay scheme for jobs where in the past, maybe we didn’t have a performance related pay scheme, even though possibly they were amenable to one or they could have, there could have been a performance related pay scheme. But because of the power of debt, well, the status quo inertia, perhaps we didn’t think about that. It’s an

Tim Hughes  39:03

interesting point. Because in that situation, if it’s task based and say somebody’s working from home, it’s performance based, you’re not getting paid any more necessarily, or that might be part of the deal. But if you can do your work in six hours instead of eight, your bonus is you get two hours to yourself to do something else. So I think it’s really interesting point because I think looking at work to be quantifiable by tasks done and those kinds of things if possible, again, it’s an industry specific kind of thing, then absolutely. If you get the balance, right, where the right amount of work is fair within a certain period of time, then yeah, allows people to do that work well within that timeframe or not.

Gene Tunny  39:47

Yeah, another point they make is that digital technologies may improve performance measurement, thus improving the targeting and performance related pay. So how to think more about that in In professional services, jobs, that’s probably less relevant because you do see, I mean, you’d see the the effectiveness of their work in terms of how well, their their products or whatever they’re doing. They’re, you know, are they completing jobs on time? Is the customer satisfied? I’m not sure exactly what that points getting out there. Maybe I’ll have a closer look at the article. But I suppose if you guess you could really, you could monitor what they’re doing. If you mean, that sounds awful. But if you’re recording their screen, or their time spent on the computer, perhaps I mean, I’d hate to do a job like that if someone was doing that.

Tim Hughes  40:42

Yeah, I guess, if it’s tasks, down to what tests are being done, then you can quantify it that way. But for sure, I mean, to be fair to employers, like there’ll be employees milking, you know, the opportunity to work from home, you know, so it’ll be, it’ll be sort of a bit of give and take from both sides, I imagine as to the benefits of that. And again, industry specific, the creative industries. I know, for instance, I got a good friend who is in architecture, and that kind of industry is very collaborative. And so the value of having people in the same place and the interaction is and that energy is really valuable to that kind of industry, where you lose that when everyone’s working from home. So it does, it does have different impacts for different industries, for sure.

Gene Tunny  41:33

Yeah. So I’ll go over the cons are trying to get through these quickly. The effects of performance related pay schemes differ significantly, according to their design and the types of firms. Okay, so we were talking about before about how like performance related pay is going to make more sense in some circumstances and others in terms of the design, one of the points they make here, in the author’s main message. So they say that individual schemes linked to performance have been shown to be associated with higher firm productivity, while group performance related pay and financial participation generally exhibit smaller effects on performance. Right. Okay. It’s the individual incentive that matters. I mean, that that makes sense. Because if you’re say there’s a group incentive, there’ll be people in the group who are thinking, Well, I mean, I can end up working a lot harder. But if Jack doesn’t pull just doesn’t do work as hard as the others don’t, you know, they really don’t work any harder than I could do all this extra work, and we’re not going to get the prize anyway. So why should I bother? That’s what’s gonna happen, isn’t it?

Tim Hughes  42:42

Every scenario you can imagine will be happening somewhere. So yeah,

Gene Tunny  42:45

yeah. I mean, that’s a, I think that’s the issue, or it’s less likely that you’re the relationship between the performance of the firm, and you’re relying on the other group members to perform. Whereas if your incentive is linked to how you perform, then I think that’s more of an incentive to work harder, because it’s not, you know, it’s not contingent on the others working hard as well.

Tim Hughes  43:14

I hadn’t thought about it before. But the ultimate incentive scheme that works, the fairest is when you’re self employed. And you, you know, whatever work you you do and bring in is, that’s your income. Well, that’s the fairest of all incentive schemes, you know, and anything beyond working for yourself, like with more people just gets trickier and trickier, I guess, you know, like, there’s more things to consider as to how it might be fair. But yeah, if you’re working for yourself self employed, that is the ultimate payment incentive scheme.

Gene Tunny  43:45

Yeah, you kill what you ate. Now you eat what you kill.

Tim Hughes  43:49

Well, to be fair, if you’re gonna eat it, it’s probably gonna die in the process if you haven’t already killed it.


I think that’s what they say. You eat what you kill. Is that it? Yeah, that would make sense. Yeah,

Gene Tunny  44:00

I think so. Yeah, I’ll go with that. I’m pretty sure I’ve heard that it’s some of the consulting firms have worked in.

Tim Hughes  44:06

But it’s fair. And that would be the thing of like, you know, you you get out of it, what you put in and that’s pretty much every case of being self employed, you know, a very fair and reasonable way for for things to unfold.

Gene Tunny  44:19

Yeah, yeah, exactly. Okay. Now, some of the other cons. When pay incentives are real design, the effects can be perverse and counterproductive. And I think we’ve covered that. Yeah, about the problems that can happen. If you have badly designed schemes. People don’t work together. I mean, you could even have some people who are deliberately they could sabotage the work of others to make themselves look better. It’ll be happening, that hoard information. Yeah. 

Tim Hughes  44:49

But that’s where I think the flexibility and you know giving allowing people to contribute towards these schemes, I think would be a good thing. And you can only imagine that that would make for a better scheme if people had a little bit of autonomy or choice in in how they worked.

Gene Tunny  45:08

Yeah. Another couple of good points on the cons when performance is difficult to measure or when employees intrinsic motivation is relevant, performance related pay may generate distorted incentives and have unintended consequences on worker morale. So I think that maybe that’s the case where somebody thinks that, well, I’m actually making a huge contribution to the company, but because of the way that the incentive scheme is structured, and what what it measures, so particularly if you’re in a support role, so say the, it’s the, the bankers or the consultants who are getting the bonuses, but someone who’s in a support role, maybe they’re an executive assistant, and they’re not getting, they’re not getting a bonus, because their output is less the contribution they make to the profitability, the firm’s less recognisable, then maybe they get their morale starts to suffer. I don’t know if it’s exactly what they’re if that’s what they’re driving out there. But I think the point, that point makes sense to me that the other con that they identify is that linking pay to performance may generate excessive stress and be detrimental to long term performance. Now, I guess that’s correct. So this is where you got to get the balance, right? Because if you’ve got a lot of your workers compensation linked to performance related pay is also linked to performance. So a big part of their compensation is expected to be the bonus. And their normal salaries lower than that could put a lot of pressure on them. That could create a lot of stress for the worker.

Tim Hughes  46:46

Yeah, for sure. I mean, because there’ll be, again, industry specific, but depending on seasonal, or, you know, upturns downturns in markets, you know, can be things out of their control. So there’s certainly situations where you’re willing and able to work, and there’s no work there to be done. So, you know, real estate’s a good example of that, you know, when, when no one selling well, no one’s making commission, you know, so that would certainly be, you know, relative to the real estate market. But yeah, you know, yeah,

Gene Tunny  47:17

I’ve got to look more into exactly the compensation schemes there. I thought I understood it. But when I started talking about it with you, it was clear my level of understanding was not at the level it should be. So I’ll try and clarify that. But I think yeah, that’s a good example, where there is performance related pay, okay, well not try and wrap this up. I will end with the author’s main message, their final words here. So performance related pay is a relevant policy to improve firm performance, and competitiveness. Although the adverse effects on work intensification and employees physical strain and psychological stress should not be overlooked. Looking forward, new patterns of work from home and remote work will increase the relevance of performance related pay. Yep, yep. I think that’s probably true. Because it’s not about how many hours you turn up to the office for. I mean, one of the issues I had when I was in the workforce many years ago was because I, I like to walk around. And I mean, I like to think I did a lot of work when I was working for companies, or for public service, or whatever. But one complaint, and maybe this happens in every workforce, but there was one, at least one or two times when there was a complaint made that I wasn’t at my desk enough, or I wasn’t in the office, because I was that was walking around thinking about a problem, or I was out trying to hustle. And yet, I’d be someone would criticise me because I wasn’t actually at work. And that’s the wrong way to think about it, isn’t it? I mean, it’s, it’s what you’re achieving, ultimately.

Tim Hughes  48:59

Completely, I mean, I guess, you know, that would be a good case for, you know, what work has been done, you know, and who cares who’s walking around, it’s, you know, it’s very good for you. But if you’re getting the work done, because, I mean, that’s definitely a thing where people might be busy, they might be work for many hours, but they’re not necessarily being very productive. And when there’s presenteeism, where people can be at work, and just not very good. Yeah. And especially when they’re side gigs happening, you know, because their energy and thoughts are being put to another, another pursuit. So in containing that, now, if any managers out there looking to encourage intrapreneurship, you know, this is possibly worth looking into.

Gene Tunny  49:43

Yeah, we’ll have to get Phillip Di Bella on the show to chat about that, because Phil’s just around the corner.

Tim Hughes  49:49

Yeah, he’s got a lot of good stuff. And that was when I hadn’t heard that term before, intrapreneur. But it makes a lot of sense because it’s an outlet for people who have ambition, but don’t Uh, you know, you don’t necessarily have to leave your job to have ambition. So yeah, it’s, um, depends on the culture within that company whether they can allow that to happen or not.

Gene Tunny  50:10

Exactly. Okay. Do you have any other thoughts, Tim, before we wrap up?

Tim Hughes  50:14

No, I just got to make sure that whatever I’m eating is dead before I eat it and hopefully, hopefully I can bring something in to keep me sustained. 

Gene Tunny  50:20

Fanastic. Tim, thank you so much.

Tim Hughes  50:25

Thanks, Gene. You’re welcome.

Gene Tunny  50:33

Okay, I hope you found that informative and enjoyable. My main takeaway from looking at performance related pay is the importance of getting the design of the scheme right. So you actually motivate good behaviour. You end up with some bad behaviour if you don’t get the incentives right. As Tim and I discussed, on balance performance related pay schemes can be beneficial and boost overall business productivity and profitability. But that’s not guaranteed. We see that individual incentives work better when teamwork is limited, as in real estate, but they can be problematic when teamwork is required. One thing I should have noted in the main conversation is that rewards don’t have to be monetary. In a 2009 article on performance related pay, which I’ll link to in the show notes The Economist observed in their 1982 book In Search of Excellence, Tom Peters and Robert Waterman mentioned the great variety of non monetary incentives used by the excellent companies that they studied. They said that excellent companies actively look for excuses to hand out rewards. at Hewlett Packard, for instance, they found members of the marketing team who would anonymously send one pound bags of pistachio nuts to salesman who sold a new machine. That’s a bit of a quirky example, but it does illustrate that rewarding high performance and then be complicated. Celebrating wins with a team dinner or pizza night could be good for team morale. For example, I’ll put links in the show notes to articles mentioned in the episode, including to the eyes at a article on performance related pay and productivity. It’s really good and it’s easy to read. I’ll also add some links on how real estate agents get paid and on performance related pay at McDonald’s. This is how you can check out what McDonald’s has tried in Australia and in the UK. The Australian scheme does look better designed than the British scheme, because the Australian McDonald’s employees get extra benefits based on the individual performance rather than their team performance. My suspicion is that a group based incentive may be too weak to motivate performance. That said individual incentives can be difficult to apply when people have to work very closely together, and where it’s difficult to assess individual contributions. And in many businesses, teamwork is probably something you want to encourage. So it may be that you need to have a group incentive scheme of some kind, or an incentive scheme based on a mix of individual and group incentives. I’d say that you need to look at businesses and their workforces on a case by case basis to work out what’s right for that business. For now, I’d note that one of the major concerns with group based incentives is the free rider problem. Some employees may try to freeride on the efforts of other team members. However, there’s an intriguing new quasi experimental study which suggests the free rider problem may not be a big deal for some companies. The study was done by Anders Frederickson, Daniel Hanson and Colleen Flaherty Manchester, from Office University Siemens Gamesa in the University of Minnesota respectively. The researchers have written about the study in an ice at a discussion paper and an Avox EU article that I’ll link to in the show notes. They took advantage of the fact that a European dump truck manufacturer, high dreamer, introduced a group based incentive scheme and it’s planned in Denmark but not in Germany. Hence, they could treat the workers at the plan in Denmark as a treatment group, and the workers in Germany as a control group. The researchers then use what’s called difference estimation to establish that the group based incentive scheme increased performance by 19%. The researchers note that, despite free writing concerns stemming from group based incentives, being part of a group may have influence workers paid based on the performance of the group will naturally not tolerate that team members shirk, which leads to peer pressure. And team members even without peer pressure may feel some kind of internal pressure such as guilt or shame if they do not deliver in a team context. Okay, that sounds like a fair point to me. This new study adds to a small number of existing studies that actually suggest group based incentives can be beneficial in some businesses, particularly whereas there’s a close knit group which can prevent members from free riding How widely applicable is this finding? It may be too hard to say based on the limited number of studies so far, I might have a closer look at the evidence regarding performance related pay schemes and return to the topic in a future episode. But for now, I hope the discussion in this episode helps you understand the relevant issues and trade offs. Okay, please let me know what you think about this episode. What were your takeaways or thoughts on performance related pay? Do you have any experiences with performance related pay that you’d like to share? Where you’d like me to take a closer look at some of the issues covered? I was thinking that it may be worthwhile having a bonus episode discussing the methodology of the hydrangea study, as the difference in differences method can be very powerful. Let me know what you think. Feel free to email me at contact at economics I’d love to hear from you. Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@ Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.


Thank you for listening. We hope you enjoyed the episode. For more content like this. To begin your own podcasting journey head on over to


Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business

Full transcripts are available a few days after the episode is first published at Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Podcast episode

ROI of education: how economists estimate it + US economic update – EP152

Do you get a return on investment if you get a university or college degree? Does the taxpayer get an ROI for any subsidies provided? Economics Explored host Gene Tunny discusses how economists crunch the numbers on the ROI of education with his colleague Arturo Espinoza. Gene also gives an update on the US economy, covering the strong jobs growth figure for July 2022 among other indicators.  

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

Links relevant to the conversation:

Macrobond charts and commentary on the US economy (PDF)

Sheepskin effect (Wikipedia)

Estimating the return to schooling using the Mincer equation by Harry Anthony Patrinos, World Bank and Georgetown University (PDF)

Evaluating the Return on Investment in Higher Education: An Assessment of Individual- and State-Level Returns by Kristin Blagg and Erica Blom, Urban Institute

Reassessing the College Wage Premium Payoff by Jack Salmon, Mercatus Center, George Mason University

Rich Roll’s podcast

Graduate Winners: Assessing the public and private benefits of higher education by Andrew Norton

Estimating the public and private benefits of higher education report from Deloitte Access Economics

Median weekly hours data by qualification for Australia (Australian Bureau of Statistics)

Transcript: ROI of education: how economists estimate it + US economic update – EP152

N.B. This is a lightly edited version of a transcript originally created using the AI application It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored.

Arturo Espinoza Bocangel  00:04

The mincer equation suggests that each additional year of education produces a private rate of return to schooling about five to 8% per year.

Gene Tunny  00:17

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 152 on  the Return on Investment in Education. Joining me is my Adept Economics colleague, Arturo Espinosa. Arturo, good to be chatting with you. 

Arturo Espinoza Bocangel  0_00:00:41_

Hey, Gene, it’s my pleasure to be here. 

Gene Tunny  0_00:00:44_

Excellent, Arturo. So, today, what I’d like to talk about is the return on investment in education. So, whether it makes sense for people or rather the typical person to go to university or college. So, we’re talking about the typical person rather than a Bill Gates or Steve Jobs who dropped out of a top university and ended up founding a billion-dollar company, despite that. There are always going to be exceptional individuals who can thrive even if they don’t finish university. So, we’re not necessarily talking about them. Okay. 

We’re talking about the relationship between education and earnings and GDP at that population, or the whole economy level or for the average rather than specific individuals. And this is based on a question that came from one of my listeners – Dave, and he asked what I thought about this issue. Can economists demonstrate whether there is a return on investment in education? So, I thought this would be a good topic to cover on the show. So, if you’re happy to chat about it, we can get stuck into that a bit later. Okay. 

The first thing I want to do though, is I just want to go over this issue of what’s happening in the US again. So, I published an episode last week on US recession; is the US in recession or not? There’s a big debate about it. And the funny thing was, just as I was about to publish it, the Bureau, I think it was Bureau of Labor statistics released the new jobs figures, and they were strong. And that has really changed people’s views on how the US economy is going. It lends support to the view that the US is probably not in a recession at the moment. So, that came out just before I published it. And I thought, Okay, well, I’ll publish it, I’ve got the episode ready. I’ll cover this in the next episode, because it’s an important update. 

And this new report showed that; and this is according to the Guardian, and their quote in the actual data. So, it’s right. The US added 528,000 jobs in July, the jobs market return to pre pandemic levels, the US has now added 22 million jobs since reaching a low in April 2020. Unemployment rate dipped to three and a half percent. Okay. So, this has meant that the talk about the US recession that’s died down a bit, because this jobs report was so good. And just today, we’ve learned about new inflation data in the US that so it looks like inflation on a monthly basis is much lower. So, that’s suggesting to some economists that maybe the Fed doesn’t have to hike rates as much as was previously expected. And therefore, there may be less risk of the US going into a recession because of what the Federal Reserve’s doing. Of course, these are month monthly data. And I one thing I always caution about monthly data is you don’t want to read too much into month-to-month changes, because there could be statistical error; statistical noise in the data. And you can be misled by that. So, you want to look at things over, over many more months than that. So, that’s the one thing I’d say about that. 

It just goes to show how difficult it is to forecast or even to understand even to nowcast, even to understand where the economy is at the moment. And there’s a big debate still about what’s happening in the US. I received a great note from the macro data service that we subscribe to here, in Adept Economics. They said that’s macro bond. And they’ve looked at a range of data they sent out a great note on this. I’ll put a link in the show notes. And they’ve looked at the various indicators that the NBER, the National Bureau of Economic Research; what it looks at when it calls the business cycle in the state It’s and it’s not just GDP. It’s things like well, nonfarm payroll employment, personal consumption expenditures, real industrial production, real manufacturing and trade sales, real personal income, excluding current transfer receipts. And there’s a chart that they have there that shows that if you compare those indicators; these six major indicators with where they were earlier in the year, in January, most of them are still above where they were, except for real manufacturing, and trade sales in this chart here. So, I’ll put that chart in the show notes or a link to that so, you can see that. 

But what that’s telling us is that some indicators are suggesting there could be a downturn, others aren’t necessarily suggesting that. And the jobs market data, as we noted before, are incredibly strong. On the jobs market, on the labour market, I do have to note that the very high rates of job openings that they’ve had, so the jobs that are available, that is starting to come off from the very high level. So, there’s a chart that macro bond has produced from the job openings and labour turnover survey, and we had numbers up around 12 million, so 12 million vacancies, 12 million vacant jobs, and that’s fallen to below 11 million now, if I’m reading that chart correctly. Still, much higher than it was pre pandemic. So, it looks like there’s still very strong labour demand in the States, but it is coming off. 

Okay, so what do we make of this? It’s all a bit of a confusing picture. It’s probably too soon to tell whether the US is in recession or will go into recession. That said, I think Janet Yellen, the Treasury Secretary did make a risky call when she was so adamant that the US isn’t in one at the moment, because there’s always a chance that the economy could react badly or households could really react badly to these interest rate increases to try to control inflation, and then you do end up in a downturn. And then, months later, Janet Yellen is having to apologise for that, because she spoke too soon. 

Okay, so the main topic is going to be return on investment in education. So, we’ll get on to that now. And there are some big questions around this issue of the return on investment in education. So, what are those big questions? Okay. One, does it make sense for individuals? So, for people to go to college or university. 

Okay, now, there’s a general expectation or a general view that, you’ve got to finish high school, right? I think all the data suggests, you’ve got to finish high school, there are big returns to finishing high school. If you don’t finish high school, then your career prospects are limited, you’re going to end up in minimum wage jobs for the rest of your life. So, we know that completing high school is a positive thing. And therefore, state governments and school boards around the world fund secondary education. 

There’s a bit of a question now about well, what about tertiary education? And does it make sense for individuals to go to the tertiary education? And this is a question that economists are well placed to answer because it’s a question about the return on investment, isn’t it, Arturo? It’s a question of what you’re doing is there’s a tradeoff there. I mean, you’re sacrificing earnings that you could make today; you’re forgoing some earnings by going to college or university, rather than going straight into the workforce or working full time, you could have a part time job, of course, you’re spending all of this time. So, there’s an opportunity, cost of your time, three or four years in university or even more if you want to be a doctor, and then that’s in the hope of having higher earnings over your lifetime. So, you’ve got to think about well, does that make sense as an investment? Does it makes sense to make that investment? Now, those foregone earnings, any tuition fees, you may have to pay? Or loans you have to take out and then pay back? Do you get compensated for that through your lifetime from higher earnings? I mean, the general answer, the broad answer is yes. I mean, if you look at the data, people with higher education degrees, earn more on average than those without; we know that. We’ll go over some figures a bit later in this episode. We’ll look at some of the studies. So, we know that occurs, the question is, does that compensate you enough for the cost of the tuition and also the foregone earnings? So that’s the basic economic question, isn’t it?

Arturo Espinoza Bocangel  10:11

Yes, definitely. Yes. Individually, you will face that important decision between, okay, if I study one additional year, how much I will receive as a return. For example, in my case, I study Economics in Peru, then I was there around five years, and then I decided to study overseas. And I choose to study Mastering Economics and Public Policy here in Australia, because at that moment, I expected to receive or a higher return for those years of education. That was a purely economic decision. So, that’s why I’m here now in Australia after finishing my Masters, and now I am working with you.

Gene Tunny  11:10

Very good. Yes, yes. I think what you find too with students who come from overseas to either Australia or to United States or UK, I mean, there’s also a benefit from coming to an economy with higher productivity on average or higher earnings. So, there’s certainly a benefit there, that helps out too, and also, there can be benefits to some people, because if you get permanent residency or citizenship in a country, that can be a great benefit to people to, of course. 

Now, we’ve been talking about financial benefits. One thing I should acknowledge, because I know if you’re, you know, some people might bring it up in the audience, because it is a point that does get made from time to time. It’s this point that they are going to be non-financial returns to tertiary education. Okay. I mean, university is one of the best, the some of the best years of your life, really. I mean, if you get involved in various activities at uni., you make great friends. I mean, you could join a debating society, various other clubs, you make friends for life, interesting people, a great conversation. So, there are all of these non-pecuniary returns as well. But we’re not factoring those into this discussion, because you can’t really measure those. 

So, we’re talking about does it make sense for individuals to go to college? And yes, economists can attempt to estimate this, given the available data. And the way they do this is through these mincer earnings regressions. Now, I’m going to ask you about those a bit later, because you’ve been looking at that. And that’s after Jacob Mensa, who is a Professor of Economics at Columbia University in New York City. The studies of the returns to education, they’ve been helped out a lot by just the great data sets we have now in many countries. However, in Australia, we have this Hilda survey, this household income and labor dynamics Australia survey, which is a longitudinal survey. So, it’s panel data, you’re tracking individuals over time. In the US, there’s the Panel Study of Income Dynamics, which is the gold standard panel data, set or longitudinal data set, and that’s what the Hilda was trying to replicate.

So, one big question is does it make sense for individuals to go to college? And then, I think the other big question is, does it make sense for the government to subsidize college investment? University investment, to subsidize tuition to an extent. And what we find is that, I would say in most of the OECD economies, or in most of the advanced economies, there are very substantial subsidies to higher education in Europe and the UK, in Australia, although it’s a mixture here. I mean, we’ve got an income contingent loan scheme, which was called HECS I think now it’s called help, but it’s the higher education loans program whereby there’s some subsidy for your tuition, but the rest of it you effectively borrow from the government and you have to pay it back through the tax system. So, this HECS/help system okay. You’ve heard of that, haven’t you?

Arturo Espinoza Bocangel  14:36

Yes, I heard something about it, yeah.

Gene Tunny  14:39

So, in the 70s, the government at the time, the Whitlam government, I think you helped me out on a presentation we were looking at that; just the changes that came in during that government in the 70s. It made university education free, and that led to the Commonwealth would just subsidize the whole cost of course. And that led to a big increase in tertiary education. But by the late 80s, it was clear that that was very expensive, and that they had to introduce this HEC scheme as Higher Education Contribution Scheme where people would contribute when their income got over a certain level. So, it’s an income contingent loan. And this was something that was designed by Bruce Chapman who was an economist today. 

Initially, the amount of HECS you had to repay was pretty low, I hardly had to pay anything back when I went through in the 90s. But over the years, it’s become a bit more substantial. But still, there is a very generous subsidy from the Australian Government to higher education here in Australia. I think there’s some support in the states in the US, depending on what sort of college you go to. There are state colleges, there’s state university system saying California, there’re student loans you can get, there are scholarships; I think there are more private scholarships in the US than there are here in Australia. But generally, there’s less public support, less public subsidy for university or college education in the US than there is an Australia. We’re not as generous here in Australia as they are in the UK, or in the continental Europe, in France or Germany.

Arturo Espinoza Bocangel  16:28

What about those developing countries, like Peru, and Chile? I know that those ones are still providing scholarships to study overseas. So, they tend to promote national student to study around the world in order to enhance their knowledge and then come back.

Gene Tunny  16:56

Yeah, yes. Yeah. I’m not an expert on that, Arturo but yeah, if actually, we probably should look at what’s happening in some of those other countries, in Latin America sometime that would be interesting. Okay. 

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  17:16

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. 

Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, We’d love to hear from you.

Gene Tunny  17:45

Now back to the show. 

So, they’re the big question. Are there returns to individuals to go to college? Does it make sense for the government to subsidize college? And look, there’s another, there is another question that sometimes comes up, but it’s not one we’re going to explore in great detail on this episode. Have you heard of this sheepskin effect?

Arturo Espinoza Bocangel  18:12

Gene, more or less, yes, yeah.

Gene Tunny  18:14

So there’s this idea; there’s this effect called the sheepskin effect. It’s named after the fact that, I think once upon a time, university degrees, so if you got it from Oxford, or Cambridge, or Harvard or Yale back in the, the 18th century, or whenever or 19th century, your degree was on sheepskin. So, I think that’s where it comes from. But there are some economists who have speculated that if you look at the average earnings of people who complete year 12, or finish school, or finish a university degree, versus those people who nearly finished it or similarly experienced or similarly clever, or whatever as the people who actually did get the degree or the diploma than the people who got the degree or the diploma, get an extra benefit, it looks like they get a boost in their earnings relative to those people who look very similar other than the fact that they just didn’t get a qualification. 

So, there’s this view that, well, there’s this sheepskin effect. And some economists have speculated that that means that a lot of education is just sorting, it’s just figuring out who are the highly productive people that doesn’t actually confer much of a productivity benefit itself. All it is, is it’s signaling, it’s signaling that these people are high quality individuals. And that’s what the benefit of that education is. Yeah, I mean, one of the prominent economists associated with that view is Brian Kaplan. He wrote a book – The Case Against Education for Princeton University Press he’s associated with, might be George Mason, I better get that right. I’ll check and put it in the show notes, but he’s often on Ross Roberts’s podcast – Economics, or Econ Talk, I mean. He’s quite prominent in making in expressing that view. 

I’ll put some links regarding that sheepskin effect. I’d like to think that a lot of the benefit from education is certainly it is from lifting your productivity or making you think critically, I mean, as a former university teacher, and as you are, I mean, you’re doing some tutoring there, you would like to think that most of the benefit that you see in terms of higher earnings of university graduates is related in some way to what they learn or the development of critical thinking skills at university. 

Okay. So, just note that as a bit of a caveat or a qualification on what we’re talking about today, and maybe we’ll come back and look at it in a future episode. Any of these topics, Arturo, anything in economics; there’s just so much you could talk about, there’s so many studies, so many different perspectives, we just have to limit it to what we’re looking at today. 

Okay, so you found an interesting study on the return on investment in education. It’s a Cross Country Study, is it? Can you tell us about that. 

Arturo Espinoza Bocangel  21:25

It’s a very interesting study, and the author is Harry Anthony Patrinos, he’s an advisor from the World Bank. And he also specialized in the Economics of Education, particularly the return to school in school based management, demand side financing and public-private partnerships. So, his study, which is related to the return to school in using the mincer equation. Basically, he highlights that the mincer equation suggests that each additional year of education produces a private rate of return to schooling, about 5 to 8% per year.

Gene Tunny  22:11

That’s a real rate of return, is it? And so, that would mean, it’s a relatively good investment. If you think about what’s the cost of borrowing or what’s the opportunity costs.

Arturo Espinoza Bocangel  22:24

With the current fee for example of inflation, that is not going to be a good value. 

Gene Tunny  22:32

But is that a real return? I think it wouldn’t it be.

Arturo Espinoza Bocangel  22:34

It could be, but I’m not sure.

Gene Tunny  22:37

Okay, I will check that and put it in the show notes. How does he interpret it? Does he interpret that as a positive? Is he saying that it suggests that education does yield a good return?

Arturo Espinoza Bocangel  22:49

He’s positive. That is the main message that another important findings related around the world. So, in general terms, the returns to tertiary education are the highest. So, that mean that people who will study university level or trying to get a university degree, they will get a higher rate of return.

Gene Tunny  23:19

So, there are big gains from going to university then. So, he’s looked at all around the world, has he?

Arturo Espinoza Bocangel  23:26

Yes. it’s like considering most of the countries. Yep.

Gene Tunny  23:33

And has he just reviewed existing studies? Or has he done his own data analysis?

Arturo Espinoza Bocangel  23:38

It’s he’s own analysis. 

Gene Tunny  23:41

Okay. Oh good. Well, I’ll put a link to that in the show notes so people can check that out. Generally, that makes sense, right? I mean, there are various studies that show there is a positive and a reasonably good return on investment, private return on investment for education for university or college education. And you talked about the mincer equation. So, what that’s trying to do, you’ve got this statistical equation, econometric equation where you’re getting data on earnings of individuals, is that right? And then, you’re looking at the different characteristics of those individuals, their sex, their age, their years of experience; whether they’ve got a qualification on all the things that you think could influence their earnings, and then you’re testing whether the contribution or whether there’s a statistically significant relationship between having a degree and your earnings and what’s that contribution, what’s the uplift to earnings from that degree, is that right?

Arturo Espinoza Bocangel  24:47

Yes, that’s right. That means your equation estimate the average impact on one additional year of education on the wage. Yeah.

Gene Tunny  24:56

Okay. So, then you could also use to determine whether; can you use it to determine whether a qualification, university education helps gives you an uplift?

Arturo Espinoza Bocangel  25:10

Gerry’s methodology when you use categorical variables.

Gene Tunny  25:16

Okay, categorical variable, okay, good.. So, you could you could determine that. I mean, there are a wide variety of ways to do this; many ways to skin a cat, probably many ways to specify the variables in a mincer earnings regression. Okay, so that’s that study that you mentioned. We’ll put a link in the show notes to that. 

I’ve had a look at some studies from the States and from Australia. And for the US, I’ve looked at this; there’s this great briefing note that’s come out of the Urban Institute. And that’s a leading think tank in Washington, DC. It’s not particularly partisan. As far as I can tell. I think they do good work. I’ve had one of their people on my show in the past. Steve Rosenthal is a tax policy expert. And we talked about all of the various tax loopholes there are in the in the US. So, this paper from the Urban Institute that I think is really good is called Evaluating the Return on Investment in Higher Education: An assessment of individual and state level returns by Christian Blag and Erica Blom. So, they’re looking at does it make sense for individuals, for private people to go to college? Does it make sense for the state government in the relevant state government in the US. I think, because state governments have a big role in the provision of the college or they’ve got their own state-based university systems. 

Here in Australia. Even the, even though the universities have been set up under state acts of parliament, typically, so there’s a University of Queensland act here in Queensland, there’d be a University of Sydney act in New South Wales. Even though that’s the case, the federal government has largely taken over university, so the funding of universities and administration of them or the policy settings for universities. 

So, what this Urban Institute study finds or rather a review, and they do do some number crunching themselves, I should note. So, they find that, for most an investment in higher education yields a substantial economic and personal return, but this investment may not pan out for some students. okay, so we’re talking about students on average, or the majority of students; some people can obviously go to uni., and you know, maybe they have some bad luck. Or maybe they study something that’s not really in demand. So, we’ll talk about that a bit later. Because we’re economists we know that supply and demand is everything, ultimately, okay. And there are big differences in returns for different fields, and also between the level of the degree. So, they go, a bachelor’s degree recipient will typically have higher earnings than an associate’s degree recipient, and a Harvard graduate will likely earn more than a graduate from a nonselective four-year school. However, the relationship between the students selected degree level major and institution can be complex, in some degree major scenarios may not pay off until later in life or ever. Right. Okay. 

Now, in that Urban Institute paper, they present some return-on-investment estimates. So, what economists call internal rate of return, which is a yield – an investment yield. So, what’s the rate of return you get on that investment? And so, they find, like, depending, and I’ll put a link to it in the show45 notes, but depending on the degree area, and depending on the level, it differs. So, business management looks pretty good. So, if you go to a private, not for profit, four year college and you do business management, you’ll get an 18% return on investment. The way to think about that is well think about, if you made an investment in the stock market, and you were getting, I don’t know, 7 or 8% or whatever, even less a year. And that’s not what you’d compare with that business management, that yield of 18%. Now, if they’ve calculated that properly, that should be a real rate of return. So, that’s a very good real rate of return, 18%.

So, business management, good stuff. I mean, we’re economists, so we’d probably fall in business management, unless we’re in social and behavioral sciences. Those rates of return are a little bit lower, humanities a bit lower too. Life sciences here are in your near calculations; they have relative well, much lower rates of return. So, 9% compared with the 18%, for business management, the worst here looks to be education at 7%. And yes, so education seems to be less lucrative than these other fields.

I’ll put the link in the show notes to that so you can check that out. 

There are various studies of the returns on investment to different fields, and it’s going to depend on your country and depends on supply and demand too. I mean, if you’re in the US, for example, and you get an IT degree, or you specialize in artificial intelligence, or whatever the latest hot thing is, or data science, and you’re probably going to get a higher return on investment, because there’s a big demand for that sort of thing at the moment.

So, the Urban Institute paper moves on to talk about the return to the state government, whether it makes sense to have subsidies for tuition. And look, they just, we don’t really know as to how to work out. There are so many things to consider. You get additional tax revenue being; one of the big gains that governments get from subsidizing higher education is that if you get people more educated, more productive, they’re going to earn more, they’re going to pay more tax. And the way that; this is particularly the case in Australia because of the progressive nature of our tax system. So, as you earn more, you go your higher tax bracket, your marginal tax rate increases. So, there’s a big benefit to government. And we’ll talk about that a bit later. 

I think, in the States, there is still a benefit to the state governments and they would be to the federal government, I think it’s probably less than what it would be in Australia. And one of the things that makes this so challenging is its tax, but it’s also the fact that the government could save money in other ways, too. There could be lower crime with if people are better educated, and then you don’t spend much on crime. There could be less spending on social services, on your transfer payments for those people. Well, we know that if you’re more educated, you’re less likely to become unemployed, you’re probably less likely to need unemployment assistance. Yes, that’s true. And you could also be healthier too. And you could save; I think there there’s some evidence that people who are better educated are healthier, in fact, I think they work out more. 

Now, once upon a time, if you had a manual job, you would be fitter and healthier than someone who didn’t. This back in, I don’t know, early 20th century or something. But what’s happened? Nowadays, if you’re more educated, you’re more likely to work as a professional, then you’re probably more likely to go to a gym and go cycling, go swimming, than someone who isn’t.

Arturo Espinoza Bocangel  33:09

I know that there’re a lot of paper related to if you’re more educated, you will consume healthy foods. 

Gene Tunny  33:19

That’s true. You’ll consume healthy foods and you probably don’t consume as many; you don’t have the unhealthy stuff. You probably don’t drink as much. You’re not having a beer after work every day. Yeah. 

Not that I’m saying everyone’s doing that, we’re talking about averages. Because there’s certainly going to be, well, people who are highly educated, successful who are alcoholics right? And who have to sort themselves out. Rich Roll was a good example of that. Rich Roll is an ultra-endurance athlete. He’s got a great podcast. And he’s in California is in Malibu, and like, he talks about how he was, he’s a Stanford Law graduate, sort of a college swimming champion. And he was a lawyer, highly successful, but just drinking too much. partying too much, and it just caught up with him and he had to have a complete change of lifestyle and, and go to Alcoholics Anonymous, his story’s incredible. So, if you’re in the audience, and you’re interested in that, I’ll yeah, I’ll put a link to Rich Roll’s podcast because he’s fascinating. Okay. 

The other thing to think about with the public return to education is spillover benefits, or the fact that if you have a more educated population, then that lifts other people up too. It’s sort of like that whole rising tide lifts all boats, or maybe that’s not the right analogy. But essentially, you If you’ve got more educated people in the workforce and other people can learn off them. And also, it can lead to greater innovation. And there are spillover benefits from innovation. So, more educated people, more creative people, they can solve problems, they can innovate and develop new products. And that provides a benefit. 

And in that Urban Institute paper, they talk about some study by Moretti. So, a 1% increase in the supply of college graduates raises the wages of high school dropouts. 1.9%. Okay. Who knows? I’d have to look closely at that study to see whether that’s plausible. There’s probably an effect is possibly it’s probably not that high. And the Urban Institute paper acknowledges that there was a paper from Smo, Lu and Angrist, 2000, that finds smaller spillover effects, I’ll have to look at how what the magnitude of that is. 

The general point is that there’s going to be some spillover benefit, or some benefit that’s wider than just the benefit to you, the benefit to the government through the taxpayers, through higher educated people paying more taxes. That’s difficult to measure, positive, but just very difficult to measure. Right. 

So, what they say, in conclusion, is that; we can’t work it out. There’s a benefit to the state governments as a benefit to the public, we can’t really work it out. So, we can’t tell you whether, on average, it’s the state gets a return on investment. 

Now, we can for Australia. There’s some good evidence in Australia that there is a return on investment, not just to the individual, but to the government as well, which I’ll go over a bit later. Before we move on to Australia. I just want to talk about the trend over time. There’s a lot of discussion about whether the college wage premium in the states, what they call the college wage premium, whether that has stagnated. And there’s a note that I’ll link to from Jack Salmon, who’s a research associate at Makeda Centre at George Mason University. So, there are some big names at George Mason people like Tyler Cowen, and he’s got a great podcast. And he’s one of those renaissance man, just talks about everything; brilliant guy,  and also the host of Macro Musings, David Beckworth is there too, he’s at Makeda center. 

And what Jack Salman writes is that he talks about; there’s been a stagnation in the college wage premium over the last 15 years. And the problem, and this is an issue for the future. So, generally, college has been a great investment in the States, but it’s becoming less, so as the cost of going to college has risen. So, what he’s saying is that this college wage premiums remained flat. So, the uplift you get in your earnings, but at the same time over that 15-year period, the cost of college has grown by more than 50%. So, the cost of college is just growing massively. And when I’m not sure why that is, but I mean, it could be, I guess it’s your input costs, isn’t it? It’s the cost of skilled labor to do the teaching. It’s the whole Bowmore cost disease thing that we know about.

Arturo Espinoza Bocangel  38:35

Inflation too.

Gene Tunny  38:37

I guess what they’re saying is that it’s higher in other sectors of the economy, it’s higher in higher education. And perhaps it’s you know, it’s sort of, I guess, the fancy facilities that they need to provide nowadays, the, the theatres and stadiums, etc. 

He’s just highlighting that, look, there’s this issue, there’s this growing issue that it could mean that for many people, it doesn’t pay off. But generally, it’s been a good investment but your individual returns may differ from the average. So, if you’re looking at making the decision whether to go to college or not, it’s got to make sense for you. 

Nowadays, I mean, I think there are a lot more there probably, a lot of opportunities to make money outside of university or college more than there were once upon a time. I mean, I’d still recommend people go to university, but when you think about all the opportunities; there are freelancing, opportunities to teach yourself via online courses, opportunities to then make money from freelancing or if you’re really good, and you’ve got a huge audience, you could become a YouTube star. I mean, that’s a very limited number of people though, so maybe that’s not a legitimate career, aspiration or strategy. 

I mean, what do you think, Arturo, do you think generally University is a good idea?

Arturo Espinoza Bocangel  40:00

I think in general education, for example, there are some technical education also. If our society may have higher population, or highly educated population in relative terms is going to bring positive externalities. Or whole the society, I’ve seen that this is always education is, I think the best option.

Gene Tunny  40:38

Right? So, you’re talking about externalities. So, these are the external benefits beyond the returns to the individual. Are you talking about things like lower crime. I mean, what other things you’re talking about? Are there no cultural improvements? I don’t know. I mean, yeah, I guess there is a view that having a more educated population does have wider benefits than just to the individual. I mean, greater and more knowledgeable society, right? More informed public debate. So, we would hope that our political leaders make that decision. 

Okay. I think that’s a good observation. So, before we wrap up, we might better cover the Australian evidence. The two studies; and I’ll link to them in the show notes, I found that are relevant to this is there’s a study by Deloitte Access Economics, and there’s one by the Grattan Institute. The Deloitte one was from 2016. And it found that on average, 52% of the observed differences in earnings between bachelor degree holders, and those without any post school education, can be attributed to qualification effects rather than demographics or innate ability. Okay, so they’re finding that, there’s some self-selection of high performing individuals into bachelor’s degrees. So, some people are more conscientious and productive are going to study, they’re going to do that anyway, rather than go into the workforce full time early. So, some of the difference in average earnings between bachelor degrees and people who don’t have them, that’s going to be due to the fact that, yeah, they’re just more conscientious or they’re harder working. 

But then, what Deloitte saying is that they’ve done some econometric analysis, and they’ve concluded that half of that gap, or that difference, half of the higher earnings is due to having the bachelor degree, so, the university education. 

Now, one thing I should have checked was, what are the data tell us about average earnings of bachelor’s versus not having any post school, I’ve got the figures over a lifetime, we’ll talk about later. But I have to look at that. But if you think about it, I mean, if you’re on minimum wage here in Australia, and that’s probably what you’d be on, if you don’t get a higher education degree, you would be getting maybe 40 to 50k, if you’re full time. Okay, so the national minimum wage is 812 60 per week. So, what does that equate to over the year? Yep, so that’s, that’s 42,255 over the year, so I was sort of in the ballpark, which is good. And if you think about it, if you get a university degree, and you graduate, and you’ll get in, if you get into a graduate position, then you’re going to be at least in that 55 to $60,000 range. And then as you progress through the career, you’ll get up to 80 or 100, or even higher. So, yeah, there’s definitely an average difference in the averages for people with bachelor’s and not with bachelors with no post school. So, I’ll put a link to ABS data on that so you can check that out. So, generally Deloitte find that it makes sense for individuals. It looks like it’s a good investment. 

So, we might talk about the final study that we’re going to consider today; it’s from 2012, but it’s a very good study. I think the findings probably still are relevant today. And it’s by Andrew Norton, who was at Grattan Institute at the time. I know Andrew quite well. He used to be at Centre for independent studies, which I’ve had a lot to do with here in Australia. And Andrew in his analysis concludes that graduates do well out of higher education. They have attractive jobs above average pay and status. They take interesting courses and enjoy student life. And that’s what I was talking about before those non-financial benefits. And then given these large benefits and with the help student loan scheme in place, that’s at higher education loan program. Most subsidies are for courses that students would take anyway. Benefits greatly outweigh the costs for most students and the minority of graduates who don’t win through higher income never pay for their degrees as a result of the help scheme. In effects, today’s tuition subsidies redistribute income toward graduates at the expense of the general public, particularly those who do not go to university. 

Okay, so the point of Andrew’s report back then was to argue that, people who go to university are doing incredibly well. So, therefore, the government should require them to contribute more of their income when they succeed later in life. And I think the government may have adjusted those repayments. I’ll have to check, but Andrew was essentially saying that back in 2012, the way that the policy settings were the rate of recovery of the money of this HELP loan, or the government wasn’t requiring you to pay enough of your education, there was there was a heavy subsidy. So, he’s saying they should cut that subsidy. That was back then. I mean, there’s still heavy subsidies now. But I haven’t seen this study replicated recently, just to see how extensive that is. There are big returns and he’s got these great data here, he’s got in one of the tables, table seven, median gross lifetime income by level of education. And let’s look at Niles; he’s got to split by male and female, it doesn’t have it for people, for everyone. So, year 12, if you get year 12, your median gross lifetime income is $1.7 million. But if you get a bachelor degree, it’s $2.8 million. So, the difference for a male between getting year 12, and a bachelor’s degree, if you get your bachelor’s degree, you earn $1.1 million; that’s Australian. So, if you’re in the States or somewhere else, just note that the Australian dollar sort of, averages around, I don’t know 75 US cents, okay. 

And for women, the difference is $800,000. That’s going to be partly because many women take time out of the workforce because they have children, and they’re the primary carer for children, or for sick or disabled relatives or elderly relatives.

So, that’s good that Andrews got those stats in there. Just bear in mind, that’s 2012. So, those numbers would be inflated now, because you’d have to adjust for inflation since then. 

One of the neat things that Andrew does is he calculates to what extent the government wins from having graduates because of their higher earnings and their higher tax paid. And this is his point that I think in Australia, because of the way our tax system works, it’s highly progressive. Then as people get higher education, they earn more, they become doctors or lawyers, or public servants, or economists or physiotherapist or whatever, then they’re paying more of their income in tax. And the government does extremely well out of that. And this is great. So, Andrew concludes it benefits. The net public financial benefits for the median graduate. Yeah, it’s strongly positive. Okay. So, for engineering, for example, you’ve got, you’ve got a net public financial benefit of $425,000. Over the lifetime, dentistry looks really good. If you’re a male dentist, you get; this is for the government net public financial benefits. So, it looks like it’s nearly 800 to 900,000 on that chart. Medicine, similarly. Law, a little bit lower, but still, you know, 700, 800,000. Commerce, bit over half a million. 

Quite substantial returns to the government. So, that’s to the government from just your medium graduate. So, if you think about, well, then there are the ones above that, and there’ll be contributing even more than that. But then as you go down the scale, the amounts decrease, but even so, even for education or nursing graduates, it’s still a $200,000 net public financial benefit. It gets lower as you go to agriculture. For males, it looks like it’s 150,000. For females, if they’ve studied agriculture, I don’t know, 50 to 100,000. Humanities, sort of around 100,000. On net still positive. 

The one field where there was a negative return and this is something that Andrew points out is performing arts. Performing arts graduates have a negative $40,000 net public financial benefit from studying. And he’s written that at least financially, the public would have been better off if the performing arts graduates never went to university. So, that is just going to reflect the types of people who study performing arts and then it’s going to be more creative people, and they’re going to be artists, and they’re going to have spills out of the workforce, or might be working in cafes, where they’re trying to get their big break. And it’s such a difficult thing to have a career in, really. I mean, it’s one of the things where, if you win, if you become Chris Hemsworth, or Margot Robbie, right, you’re going to be a superstar, you’re going to make millions of dollars, but most people who are in performing arts, they’re not in that league and so yeah. Okay, so that makes sense. 

And then, Andrew cites some studies of the rate of return, the yield, the internal rate of return on education in Australia, from people like Jeff Borland and others, and they generally show that the decision to attend university is financially sound in Andrew’s words. So, high internal rates of return on education investment, Jeff Balland found 12% for both genders. 15% for males 17% for females.

There was another study by Daly, et al. So, Daly and others, 2006: males 15% females 12%. Right. Overall, big returns from the going to university. And, you know, even though more people have gone through university in recent decades, at the same time, you’ve had this sort of skill biassed technical change, you’ve had a greater demand for universities that these graduates at the same time. So, even though in the states it looks like the college wage premium has stagnated, you still do have reasonably good returns to higher education; you do still in Australia. I think it’s probably for the average person or the average person looking at going to university, it’s sensible. It’s financially sound. I mean, I would certainly recommend it. And particularly being a former university teacher, and still having a connection with the University of Queensland and in various different ways. I’m sure you probably would too, Arturo recommend? Anything we missed anything we should cover in a future episode on return-on-investment education?

Arturo Espinoza Bocangel  52:41

Probably, the gap between female and male return? Yes. It’s quite notorious. How Australian male are receiving more or higher wages than female?

Gene Tunny  52:57

Well, we’ve covered that gender or talked about gender pay gap in previous episodes. A lot of that gap can be explained by observable characteristics or the industry or occupation that people are in. But yeah, there is still a gap that you can’t explain, and hence, possibly could be attributable to discrimination of some kind, but it’s not the bulk of the gap, it’s a few percentage points, if I remember correctly. But yes, that is an issue that we could revisit in a future episode. 

Okay, well, Arturo, if there’s nothing else, I think we better wrap up because we’ve gone for nearly an hour. And yeah, it’s been great chatting. So, thanks for joining me today.

Arturo Espinoza Bocangel  53:40

No, thank you, to you Gene for having me. 

Gene Tunny  53:43

Very good. Thanks Arturo. 

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. 

If you have any comments, questions, suggestions, you can feel free to send them to and we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.


Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at Also, please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Podcast episode

EP107 – Gender differences in negotiation and policy for improvement

Women tend not to initiate negotiations over pay and conditions as frequently as men, and this contributes to the gender pay gap. In Economics Explored EP107, Dr Maria Recalde from University of Melbourne explains what researchers have learned about gender differences in negotiation and potential policy responses which could improve outcomes for women, such as salary history bans and increased transparency.

About this episode’s guest – Dr Maria Recalde

Dr Maria P. Recalde is a Lecturer (Assistant Professor) in the Department of Economics at the University of Melbourne, Australia. My main fields of interest are experimental and behavioral economics, public economics, and development.

Links relevant to the conversation with Dr Recalde

Gender Differences in Negotiation and Policy for Improvement

The gender pay gap with Dr Leonora Risse

Gender and the Labor Market: What Have We Learned from Field and Lab Experiments?

You can’t ask this: the spread of salary history bans and what it means for employers

Links mentioned in Gene’s introduction relating to EP106

At an Overrun ICU, ‘the Problem Is We Are Running Out of Hallways’

Heartbreaking plea from ICU nurse: ‘Bodies are piling up’

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode. Check out Josh’s Upwork profile.

Please get in touch with any questions, comments and suggestions by emailing us at Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.