Future demand for vocational education and training

Labour market developments are a significant influence on VET demand, both in aggregate and for different types of VET:

• On that front 2004 looks set to continue strong job growth. However, the following two years may see a cyclical downturn as domestic demand drivers fade. These forecasts then see a cyclical rebound in job growth again in 2007.

• Looking further ahead, Australia’s demographic destiny implies slowing overall job growth due to supply side weakness – population growth is slowing, the baby boomers are ageing, and the unemployment rate is already relatively low.

• On an industry basis, the same broad industries which accounted for most job growth in the decade to 2003 (construction, business services, community and health services, and tourism, retail and recreation) are projected to do likewise for the next decade.

While net job growth trends are a key influence, the gross number of people entering an occupation to replace those who retire, or those who leave for some other reason (normal turnover) is also important in assessing training requirements. These are accounted for in the VET demand model.

A continuation of the trend towards greater part-time and casual employment is likely to be a positive for VET demand, largely as it means that more people have to be trained for any given amount of work.

Productivity growth is a further key influence on VET demand. Fast productivity growth over the past decade has meant that workers needed to continue to upgrade their skills. Access Economics’ projections are for productivity growth to average 1.9% per annum over the forecast period to 2010, slower on average than over the past decade (where productivity growth averaged 2.6% per annum). In the VET demand model this is an important influence, but one which wanes gradually over time.

Finally, a variety of VET policy initiatives have been implemented over recent years. These have been significant in encouraging greater participation in publicly funded VET. Further increases in VET participation may arise as a result of policy initiatives, particularly as training packages penetrate non-traditional industry sectors. The VET demand model does allow for policy initiatives to influence publicly funded VET demand to a limited extent, beyond changes to student fees. These changes are based on recent extensions of training packages. Further policy initiatives are difficult to project, and so are absent from the forecasts (making the forecasts conservative on that score).

Average growth in the number of VET students over the decade to 2002 was 4.9% per annum, considerably faster than employment growth (the latter averaged 1.9% per annum over the decade to 2002). Much of the difference is due to a higher level of productivity and faster productivity growth over the past decade (both enabled by and requiring higher skill levels), and a range of supply side initiatives which have promoted greater use of VET.

Over the past decade, growth in the number of VET hours delivered has been more moderate than growth in student numbers, at 3.8% per annum, suggesting a shift towards more people undertaking part-time study, or undertaking fewer modules per person.

The strong growth in the number of students undertaking VET has been stemmed over the past two years, with the number of VET students some 1.4% below the 2000 peak. While the labour market has generally remained solid, the plateau in the level of student numbers may partly reflect an end to a period of ‘above normal’ training of the existing workforce, who have been encouraged to undertake higher qualifications, and to an extent have ‘caught up’.

The VET demand model is used to estimate future demand for VET, initially with the assumption that the fees faced by students to undertake VET are unchanged in real terms.

On that assumption, annual average growth in VET hours from 2003 to 2010 is projected to be 2.2% per annum, while growth in VET students from 2003 to 2010 is 1.8% per annum.

Those rates are both considerably slower than those recorded over the past decade, due to:

• employment growth slowing as workforce participation ebbs and there are fewer additional gains to make in reducing unemployment,

• the impetus to demand for VET from productivity gains slowing, and

• VET policy initiatives becoming less significant in driving further growth in the future, with VET participation having already lifted significantly.

Average growth in VET hours is expected to be strongest in those States/Territories where job growth is also expected to be strongest on average over time, notably Queensland, Western Australia and the Northern Territory. New South Wales and Victoria are expected to have growth in VET activity marginally below the national average. This assessment is prior to the significant fee increases in 2004 in those States being taken into account.

VET student fees

The fees faced by students in undertaking publicly funded VET are generally low. On average they represent recovery of only a proportion of the cost of delivering the courses. The Australian average fee per VET hour delivered was just over 50 cents in 2002. There were some notable variations around this national average at the State/Territory level, with New South Wales and Victoria in particular below the national average VET fee level.

2004 is seeing notable fee increases in New South Wales (a 95% increase on average), with considerable increases also imposed in Victoria (25%) and the Northern Territory (15%).

In general, higher fees can be expected to decrease the demand for VET. That is because increasing the fees will take the cost of the courses outside the means of some students, or reduce the expected return to them relative to other uses for their funds.

Estimating the response is difficult as, until now, there have generally not been large scale changes to VET fees. Fee increases could also reduce excess demand rather than actual demand in some cases, with the current level of excess demand difficult to gauge.

Access Economics undertook econometric analysis in estimating the demand response to changes in student fees. The results suggest that nationally, a 10% rise in VET fees would be associated with a 0.8% decrease in VET hours, and a 0.6% decrease in VET students. Those two results also imply a marginal reduction in average VET hours per student.

That degree of price response is low, reflecting the low level of VET prices to begin with. The higher VET prices go, the higher that elasticity may climb.

These results vary on a State/Territory basis, depending on their fee levels to start with. The percentage demand response to fee increases in 2004 in New South Wales would be expected to be more moderate than nationally, given its low fee levels prior to this increase.

That is, the higher are fees already, the relatively greater the impact from any additional percentage increase in price. That latter relationship is shown in Chart 1.

Chart 1: Relationship between elasticities and fee levels

The VET demand model suggests the rises in real student fees mean VET hours delivered in 2004 are just under 9 million hours below what they would otherwise have been in the absence of an increase in real fees charged. Nationally, VET hours are still expected to grow in 2004, but by a lower amount (1.2% rather than 3.6%).

Chart 2: Projected national VET hours, with and without price (student fee) change

The significant real fee increases in New South Wales account for the bulk of the reduction in VET hours – 7.2 million hours lower in 2004 than in the absence of the fee increases. The remaining drop in VET hours is essentially accounted for by a reduction in Victoria of some 1.8 million hours in 2004. VET hours in the other States/Territories are little changed. The real price decreases in Tasmania and the ACT (with student fees constant in nominal terms in 2004) result in a marginal increase in VET hours delivered in those jurisdictions above the base case (where fees charged are unchanged in real terms).

Table 1: Change in VET hours in 2004 resulting from price change

VET student numbers in 2004 are just under 30,000 below what they would otherwise have been in the absence of the real fee increases. Nationally, VET student numbers are still expected to grow in 2004, but by just 0.5%, rather than growth of 2.3% without the real fee increases.

Access Economics’ projections of VET hours (after incorporating the known real fee increases in 2004) suggest average annual growth over the period from 2003 to 2010 is expected to be 1.9% per annum, while growth in VET student numbers is expected to be 1.6% per annum. Variations at the State/Territory level are driven largely by the expected underlying performance of their economies in generating jobs (and therefore demand for additional skills), along with the changes to student fees.

Table 2: State/territory projections for growth in VET hours

In terms of key drivers of VET demand (as summarised in the chart below), employment growth is expected to remain the most significant, both in training new entrants, and meaning there are more people in employment who may need to upgrade their skills from time to time. Implications for VET demand tend to vary pro-cyclically, because some occupations are more VET-intensive than others.

Continuing productivity growth, encouraging higher levels of continuing training and re-entrant training, is a notable positive for future VET demand, as is the expected continued trend towards the part-time share of the workforce growing over time, meaning more training required for a given labour demand.

Finally, increases in student fees are clearly a negative for VET demand, while other policy initiatives are modelled as being roughly neutral over the forecast period.

Chart 3: Contribution to average annual growth in VET hours, 2003 to 2010

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