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22 Fraser of Allander Institute
The key steps are as follows:
n Step 1: We identify the latest robust econometric evidence measuring the private returns to college
graduates in terms of wage premia8. In practice, this involves measuring the productivity enhancing
effects associated with the additional human capital generated by a single college graduation cohort for
the year 2015/169. Appendix A details how the productivity impact of college graduates is estimated10.
n Step 2: We use this evidence to inform the specification of a Computable General Equilibrium (CGE)
model of Scotland (see below).
The CGE model we use is the latest version of the Fraser of Allander's AMOS11 model12 - see Harrigan et al.
(1991), McGregor et al. (1991), Lecca et al. (2013) and Ross (2017). Appendix B gives a brief description of
the AMOS model.
AMOS has been developed over three decades and been peer reviewed on a continual basis by academics and
policy officials outside of the FAI. Its development has been supported by funding from a variety of sources
including the Economic and Social Research Council, the Engineering and Physical Sciences Research Council,
the UK Energy Research Centre, the Scottish Government and Skills Development Scotland.
AMOS is an example of a CGE model. These are detailed representations of the real-world economy which
capture the inter-linkages between the private sector, government, trade, the labour market and households. In
addition to providing important insights into how an economy operates, they are ideal for simulating the impact
of policy. CGE models are the preferred mode of (macro)economic analysis within major policy institutions -
including HM Treasury. The Scottish Government use a CGE model of Scotland that was initially developed by
the Fraser of Allander Institute.
In terms of our focus, we limit our analysis to the impact of graduates obtaining nationally-recognised
qualifications. This is for two reasons, one practical and the other more general. Firstly, whilst there is robust
international evidence on the impacts of recognised qualifications on labour market outcomes, there is no such
evidence for non-recognised qualifications and certificates13. Given the absence of such evidence it makes
sense to focus primarily on the impacts of recognised qualifications. Secondly, the Scottish Government and
the SFC have set out a clear policy that prioritises the funding of nationally-recognised qualifications. It is
therefore appropriate to focus attention primarily on this key group.
We emphasise, however, that non-recognised qualifications generate a number of economic and non-economic
benefits. Indeed, we believe that future research should seek to generate the data that would allow a full
assessment of the contribution of such qualifications. For illustrative purposes, we provide an indicative
assessment of the potential impact of non-recognised qualifications in our sensitivity analysis in Appendix C.
8 As is the standard practice in the absence of any direct measures of labour productivity effects, we assume that observed
wage rates directly reflect labour productivity. See Becker (1964,1994), Mincer (1985), and Schulz (1960).
9 We extend the earlier analysis by developing the analysis to cover system-wide impacts of multiple graduation cohorts.
10 As in Hermannsson et al. (2014, 2016, 2017), we adopt an important simplifying assumption: we treat human capital as
homogenous within each skill category, in an approach similar to that of Acemoglu and Autor (2012). This implies that the difference
between skill categories is simply the average quantity of human capital possessed - where it takes more unskilled labour to perform
the same task as skilled labour.
11 AMOS: acronym for A Micro-Macro Model of Scotland.
12 The model employed here is described in detail in Ross (2017). This model is an extension of the AMOS model that
incorporates skill-disaggregation (AMSOKI). AMOSKI essentially extends the production structure of the standard AMOS model to
incorporate skill and unskilled labour in nested CES functions using an elastivcity of substitution between the skill categories of 1.25.
13 It must be stressed that the modelling approach and framework employed here are capable of incorporating all of the
qualifications, certificates, diplomas and other training initiatives that colleges engage in. However this would require robust
empirical evidence on the private market benefits to individuals i.e. wage and employment premia.