Margin of error?

David de Meza (Letters, THES, June 11) believes I am in error in criticising the background paper to Dearing (Report 7) because it measures the extra value of a graduate to an employer as equal to the extra cost to the employer. He argues that "the purpose of the exercise was to determine if the flow of graduates should be increased" and that what mattered was what was happening on the margins of this market.

We both agree that economic theory predicts that employers will employ a class of workers until the value of the last worker employed just equals the extra cost of employing them. But what is equally true is that the same economic theory predicts that workers will supply their services until the benefits to the last worker coaxed into this market are just equal to the cost to him or her of providing their services. So the last worker makes no net gain.

So, on the margin, neither the employer nor the last graduate employed makes any net gain. I would not suggest using either measure as an estimate of the gains to employers and graduates from higher education. Indeed, it would be a mistake to describe these as estimates of gains, they are definitions of equilibrium conditions that apply only on the margin.

The problem arises if we use what is essentially a theory of short-run factor pricing using marginal analysis to establish the returns to investment in human capital. Clearly employers and graduates both benefit from graduate services (apart from the special case of the last worker employed). De Meza confuses what may have been the political impetus behind Dearing's report with the principles Dearing espoused and made explicit, that is: "The various beneficiaries of higher education should share its costs." If we are applying Dearing principles, these beneficiaries potentially include all employers of graduates, as well as all graduates. It is not just restricted to the case of those associated with expansion on the margin as De Meza thinks. But the methodology adopted in Report 7 simply assumes away all net benefits from higher education to employers by definition. And that is clearly wrong.

Neil Kay Department of economics University of Strathclyde