Report No: AUS0001563 . Ecuador Graduates and Higher Education Assessing Labor Market Transitions into first Employment for Higher Education Graduates in Ecuador . June 12, 2020 . EDU . 1 . © 2020 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. {YEAR OF PUBLICATION}. {TITLE}. © World Bank.� All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 2 Assessing Labor Market Transitions into first Employment for Higher Education Graduates in Ecuador Report prepared as part of the Higher and Graduates sub-task of the Ecuador Jobs Diagnostic Report 1 Revised - June 2020 Key Messages This report provides an assessment of the transition into formal employment for Ecuadorian first- time job seekers with a higher education degree. The employability of Higher Education (HE) graduates is essential to quantify employers’ perceptions of the educational quality and relevance of higher education institutions (HEIs) and programs. Graduates who are first-time job seekers display a slow transition into the formal labor market, and especially those with technical degrees. Results presented in the report indicate that only 16 out of every 100 graduates who are first-time job seekers find formal employment 18 months after their graduation. This rate is much lower than observed internationally and is expected to deteriorate further in the short and medium-run due to the ongoing fiscal and sanitary (COVID-19) crises, pointing to critical relevance issues which have to be urgently addressed. Decreasing over-reliance on employment in the public sector by establishing stronger connections with the private sector; designing technical education programs in closer coordination with employers; and better using labor market data for decision-making are some of the policy implications standing out from the report. On this last aspect, Ecuador has unique administrative data that allow tracing the employment status of graduates as they transition into the formal labor market. However, these data remain underused and have not yet contributed to inform policy decisions and to guide students and their families, in part because the country lacks adequate institutional arrangements to develop and sustain a graduate tracer system. Policymakers in Ecuador could tap in this available information to improve the pertinence, quality, and performance of the HE system, as well as labor market outcomes of first-time jobseekers. I. Introduction 1. This report provides an assessment of the transition into formal employment for Ecuadorian first-time job seekers with a higher education degree. The HE sector is fundamental to the development of specific knowledge required by different branches of 1 This report was prepared by Diego F. Angel-Urdinola, Sr. Economist, Education Global Practice; and Sebastian Burgos, Consultant, Education Global Practice; with valuable inputs and contributions from Emanuela Di Gropello, Practice Manager, Education Global Practice and Maria Marta Ferreyra, Senior Economist. 3 production, innovation, and to the sustainability of the knowledge economy (Dill and Van Vught, 2010). The employability of HE graduates is essential to quantify employers’ perceptions of the educational quality of relevance of higher education institutions (HEIs) and programs (OECD, 2017). Quantifying the employability of graduates makes it possible to assess the degree of integration between the skills developed by the HE system and the productive structure of the economy. While younger cohorts have greater access to HE than older cohorts, they generally lack job experience, which is an essential variable for employers when they make hiring decisions. Indeed, there is often a bias against hiring first-time job seekers, as there is uncertainty about the adequacy of their competences and skills (Gargouri and Guaman, 2017). Moreover, factors such as the individual’s degree, type of HEI attended, and geographical location – are all critical aspects that determine the transition of graduates from university to the labor market. Within this context, this report provides a detailed assessment of university-to-work transition for first-time job seekers with a HE degree. The report relies on administrative records from the Secretariat of Higher Education (SENESCYT), the social security administration (IESS), and national tax authority (SRI) – which allow tracking the transition of graduates of the HE system into formal employment. 2. This study constitutes the first attempt to use available administrative data to monitor university-to-employment transitions for HE graduates in Ecuador. While graduate tracer systems are quite coming in developed countries (OECD, 2017), in Latin America, the availability of data to systematically monitor university-to-employment transitions of graduates is still very scarce. Nonetheless, a few countries in the region, such as Chile and Colombia, have already developed some form of national graduate tracer systems. These systems provide a useful macro picture of the relevance of higher education institutions and programs. National Programs, such as the Observatorio Laboral para la Educacion in Colombia and Mi Futuro in Chile, have been tracking employment outcomes of HE graduates for more than a decade. They also provide useful information for professional orientation for high school graduates and many other decision-makers (Ferreyra et al., 2017) and focus on monitoring the employability, salaries, and other qualitative variables of graduates. In Ecuador, graduate tracking is still very nascent. In 2016, Ecuador’s National Office of Statistics (INEC) created within the institution a Labor Market Observatory (Laboratorio de Dinamica Laboral y Empresarial) whose function is to assess national trends in the labor market. INEC’s Labor Market Observatory and the SENESCYT have begun to coordinate efforts to use available administrative data to match graduates with the records of the social security administration, to assess their employment and earning status. This study constitutes the first systematic attempt to use such administrative data to monitor the university- to-employment transitions for HE graduates in Ecuador. 3. The report is structured into six main sections. Section II provides some context to the higher education graduates’ employability challenge in Ecuador; Section III describes the data and methodology used in the study as well as its limitations. Section IV and V present employability outcomes for graduates who are first-time job seekers by type of degree, field of study, and geographical location. Section VI provides information about the type and sector of employment for graduates who enter formal employment within 18 months of their graduation. Section VII concludes and provides a series of policy recommendations. 4 II. Key employability challenges for higher education graduates 4. Monitoring university-to-employment transition is highly relevant in Ecuador as the employability of graduates has been deteriorating rapidly in recent years. Even before the COVID-19 sanitary crisis and the ongoing fiscal crisis, a significant share of University graduates in Ecuador would enter unemployment and under-employment after completing their HE degree. The share of the population with HE has overgrown in the past 20 years (from 10% to 17% of the working-age population 15-64). At the same time, gross enrollment rates in higher education (HE) have more than doubled from 20% in the year 2000 to 45% in 2015 (Ferreira et al., 2017).2 Due to these trends, the number of HE graduates tripled between the years 2005 and 2015 (Figure 1). Nowadays, about 120 thousand individuals graduate every year from higher education. Six out of every 10 graduates (about 72 thousand per year) enter the Ecuadorian labor market after their graduation. Figure 1: Higher Education Graduates [2005-2016] 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2,005 2,006 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 Source: SENESCYT’s administrative records 5. About half of all graduates enter into unemployment or under-employment after completing their studies. While youth unemployment in Ecuador has oscillated between 9 and 10 percent between years 2017 and 2019 (about 2.5 times higher than the national average), unemployment among young graduates has steadily increased from 16.2 percent in 2017 to 21.4 percent in 2019 (Figure 2). As such, young graduates are one of the demographic groups in Ecuador that show the highest unemployment incidence. This occurs partly because HE graduates, who tend to come from households in the top income quintiles, display higher reservation wages and often queue for good pay / stable jobs, often in the public administration. Nonetheless, on average, 14 thousand young graduates enter unemployment every year. Of course, as a result of the COVID-19, the ongoing fiscal crisis, and the contraction of the public administration, the 2 https://data.worldbank.org/indicator/SE.TER.ENRR 5 employment outcomes for HE graduates in Ecuador is likely to deteriorate even further in the short term. Figure 2: Unemployment Rates for Youth and High-Skilled Youth 25 21.36 20 19.29 16.19 15 9.5 9.37 9.9 10 National 5 average 0 2017 2018 2019 Youth 20-25 Youth 20-25 with tertiary education Source: ENEMDHUR, June 2017, 2018, 2019 6. Moreover, attaining a HE degree does not necessarily guarantee graduates access to high-quality employment. About 31 (22) percent of all young graduates age 20-24 (25-29) enter underemployment (i.e., work less than 40 hours per week, earn wages below the minimum wage, and look for another job while working) after completing their studies (Table 1). While this rate has decreased in recent years among graduates age 20-24 (from 38% in 2007), it has increased for graduates who are young adults (20-29), suggesting that graduates’ transitions into full employment takes time. High levels of underemployment among graduates and a slow transition into full employment have several negative implications, including human capital and skills depletion, and undermines worker’s productivity and welfare. Several studies show that underemployment is related to lower levels of health and well-being across a variety of indicators including job satisfaction, life satisfaction, and self-esteem (Friedland and Price, 2003). 7. High rates of unemployment and under-employment among young graduates are of great concern for policymakers. Indeed, available evidence shows that there is a direct correlation between youth unemployment and the socio-economic and political stability and social unrest of a state (Azeng and Yogo, 2013). Unemployed youth feel socially excluded and disenfranchised and often need to engage in unfavorable low-pay working activities (part-time and temporary) and/or in crime. Also, being unemployed at the beginning of one’s working life is a determinant of mental disorders (depression, suicide attempts, desperation) (Taris, 2002). Youth unemployment contributes to make youths’ skills and motivation obsolete and under-used, 6 undermining economic growth and development. The consequences such disengagement often affect their whole adult life (ILO, 2015). Table 1: Employment Status of Youth and Graduates 2017 2018 2019 2017 2018 2019 Youth 20-24 Youth 25-29 % in Labor Force Total 64.60 60.71 62.32 78.40 78.14 77.07 Female 40.66 36.27 37.68 42.33 40.66 42.27 Employment % Full employment 32.83 33.50 29.94 50.90 50.09 45.54 % Under-employment 56.55 57.07 60.76 42.17 44.24 46.90 % Unemployment 10.62 9.44 9.31 6.92 5.67 7.56 % Formal 51.09 47.90 45.83 58.93 58.01 55.07 % Informal 41.12 42.81 42.73 33.67 34.53 34.95 H.E. Graduates % Full employment 49.44 50.31 50.72 71.19 71.70 67.51 % Under-employment 38.61 34.81 31.34 16.41 19.78 22.41 % Unemployment 11.95 14.88 17.95 12.40 8.53 10.08 Source: ENEMDHUR, December 2017, 2018, 2019. Note: Underemployment means working less than 40 hours per week, earning wages below the minimum wage, and/or looking for another job while working. Informal means not contributing to social security. 8. As labor demand in the public sector is expected to contract in the short and medium- term, the employment outcomes of HE graduates are expected to deteriorate further. Labor demand in Ecuador’s public administration between 2001 and 2014 was fueled by government- led economic growth and procyclical public investments that were possible due to high public revenues from oil exports in the context of favorable international oil prices. After international oil prices began to drop in 2015, employment in the public administration has not increased at the same pace. Furthermore, curtailing hiring and wages in public administration is one of the government’s fiscal adjustment strategies to cope with current fiscal imbalances.3 These trends, as well as the recent COVID-19 sanitary emergency, are likely to contract labor demand in the short run, affecting graduates’ university to work transition. Many individuals who pursue higher education do so with the perspective to get a public sector job, given that the sector provides competitive wages and more stable contracts. According to estimates from the year 2019, about one-third of all HE graduates work in public administration (34%), including teachers and health personnel (see Figure 3). Ecuadorian public administration, perhaps the single principal employer of high-skilled professionals, is likely to have even less space to provide employment opportunities to new HE graduates. In this context, it is critical to further understand how and where higher education graduates have been transitioning to the labor market, and how this varies according to 3 The Prosperity Plan 2018-2021 and the Optimization Plan of the Executive Function aim to reduce the size of the State and include measures to reduce the number of public sector institutions and officials and contain wage and employment growth in the public sector. 7 important dimensions, such as the type of HE degree, type of HEI , fields of study; to better gauge the seriousness of the issue and identify policy options to improve the situation. Figure 3: Employment sector and wages of HE Graduates, 20-25, Year 2019 800.0 746 45.0 700.0 40.0 630 607 600.0 549 35.0 30.0 500.0 438 420 25.0 400.0 20.0 300.0 15.0 200.0 10.0 100.0 5.0 0.0 0.0 Finance, real Agriculture and Other services Manufacture and Public Commerce, estate, and mining utilities administration construction, professional (including transport, and activities teaching and tourism health) Average monlty wage (US$) Sector of employment Source: ENEMDHUR, December 2019 III. Data and Methodology 9. The analysis conducted relies on three primary sources of data. (i) The administrative records of the Secretary of Higher Education (SENESCYT); (ii) the administrative records of the Ecuadorian Social Security Institute (IESS) and (iii) the administrative records of Internal Revenue Service (SRI). Graduates included in the analysis completed their studies between April 1 and December 31, 2018 and comprised those who obtained undergraduate degrees (professional degree) and technical-technological degrees (2 to 3 years college programs). The sample included individuals who graduated from private and public HEIs. Graduates were tracked in the IESS/SRI administrative records for a period of up to 18 months after graduation. In other words, the employment status of these graduates was tracked within the period between January 1, 2018, and October 31, 2019. Individuals were matched across administrative records using their unique identifying number. The sample only included those individuals whose identity was verified using data from the Civil Registry (i.e., if there was correspondence between an individual’s identifying number, its name, and its date of birth). 10. The sample includes a total of 34,926 graduates who are first time job seekers. The study considered some additional filters to identify the final sample of graduates included in the analysis. The final sample only includes graduates that are first-time job seekers (i.e., excludes 8 individuals who were already working before or at the time of their graduation). Also, some individuals in the sample reported working in more than one formal job or having attained more than one degree between April 1 and December 31, 2018. For those individuals, we only used the information of the highest degree obtained and of the highest paid job. Moreover, we excluded from the sample individuals registered in special social security regimes, such as voluntary contributors, homemakers, and farmers. Once these filters were applied, we obtained a sample of 34,926 graduates (out of a total of about 83,157 graduates, or 42% of the graduates’ population), which reflects the fact that many HE students work and study. Of this sample, 752 individuals (about 2 percent) obtained a graduate degree (Masters or Ph.D.), 25,101 individuals obtained a 5- year academic professional degree (72 percent), and the remaining 9,073 individuals (about 26 percent) obtained a 2-year technical / 3-year technological degree. 11. Limitations of the analysis. The analysis presented here has some limitations. First, data only allow to quantity employability outcomes of graduates who obtain full-time formal employment (i.e. who work more than 40 hours a week and contribute to social security). Given the size of the informal economy in Ecuador, many graduates are likely to enter the informal sector after their graduation and/or work part-time. 4This is not necessarily a negative outcome since, for many of them, the experience they gain in the informal sector may help them to eventually find a formal-sector job and because some university graduates, notably women, choose to share responsibilities between work and domestic endeavors (Angel-Urdinola et. al, 2014). Moreover, the analysis focuses on the sample of first-time job seekers and excludes the individuals who already were working at the time of their graduation, which constitutes a significant share of the graduate population (42 percent). Finally, the analysis in the report does not include information about information on student’s skills and socio-economic conditions, which are both important determinants of a graduate’s employability outcomes.5 Results presented in this study should be interpreted taking these limitations into consideration. IV. Employability by type of degree and HEI 12. On average, only 16 out of every 100 graduates who are first-time job seekers find formal employment within 18 months after their graduation. This section provides an overview of the formal labor market insertion rates and wages of HE graduates who are first-time job seekers in Ecuador, 18 months after their graduation. Results are presented by the type of degree obtained (professional vs. technical) and by type of HEI (public, private, co-financed).6 Results indicate that, on average, only 16.4 percent of all graduates have a job in the formal sector 4 As shown in Table 1, 40 to 45% of all workers between 20 and 29 years of age work in the informal sector. 5 Ecuador’s National Institute of Education Evaluation (INEVAL) applies, on a yearly basis, a standardized student assessment (Ser Bachiller) to high school graduates, which is used a criterion to determine HE admissions. The assessment collects socio-economic information about students and evaluates students’ cognitive skills in the areas of mathematics, language, and science. Unfortunately, while the information exists, these data were not made available to conduct this study. 6 The system of HE in Ecuador is composed of 292 technical institutes and 55 Universities: 22 universities that offer undergraduate programs, 5 polytechnic universities, 4 emblematic colleges, 20 private universities (8 of which receive public funding / co-financed), and 3 universities that offer only graduate programs. 9 within 18 months of their graduation (Table 1). This rate is much lower than that observed in OECD countries and in LAC countries such as Colombia and Chile – where similar rates oscillate between 30 and 50% (see OECD, 2017 and Spain’s Ministry of Education, 2019). The observed average entry-level salary for those graduates who enter formal employment in the period of study was US$632, equivalent to about 1.6 times the average minimum wage (US$395 per month in the year 2019). 13. Graduates with professional degrees display, on average, better employability outcomes than graduates with technical/technological degrees. Results indicate that insertion rates for graduates with a 5-year academic professional degree (at 19.2 percent) is significantly larger than among graduates with a technical/technological degree (at 8 percent) (Table 1). Moreover, the average wage (in the first job) for graduates with a professional degree (1.7 minimum wages) is substantially higher than among technicians (1.1 minimum wages) – implying (as it is the case in most countries) that the early returns to professional education are higher than those of technical education. 14. Results also indicate employment outcomes for individuals who graduate from private HEIs are, on average, better than those of individuals who graduate from pubic institutions, especially among technicians (Table 1). For instance, insertion rates into formal employment for technicians who graduate from a private technical/technological institute are almost twice as large as that of technicians who graduate from a public technical/technological institute. Also, results indicate that entry-level wages for graduates with a professional degree from private universities are over 15 percent higher than those for graduates from public universities. Of course, some of these differences cannot be attributed only to the type of HEI (public vs. private), but to the characteristics of the student body, in terms of human capital accumulation, ability, and socio-economic conditions. In order to make conclusive inferences about education returns by type of HEI, these factors would need to be accounted for. 15. Graduates from private HEIs also display higher volatility in employability outcomes than graduates from public HEIs. Results in Figure 4 show graduates’ employment outcomes by HEI. For technicians, one can observe a high dispersion in graduate insertion rates across public and private HEIs, oscillating between 5 and 55 percent. However, the observed dispersion in graduates’ entry wage levels is not as notorious. Results also indicate that there are a few private technical and technological institutes that are overperformers. For professionals, graduates’ outcomes also display a significant variance across HEIs. Graduates from universities that display better insertion rates also display higher entry-level wages. Results also show that graduates from private universities tend to over or underperform when compared to graduates from public universities. As mentioned before, differences in employability outcomes across different HEI type (public vs. private) may arise due to differences in institutional quality / management and in the socio-economic status / ability of the student body. For instance, more (less) talented students are more likely to attend a high (low) performing private university. Also, high performing HEIs tend to have better signaling in the labor market and are likely to be more responsive (and work more closely) with local private employers. Low performing private universities tend to display low 10 selectivity and are associated with lower levels of instruction quality. Finally, higher-performing HEIs are likely to invest more in student programs (e.g., employment counseling or internships) and to operate in areas with more economic activity. Table 1: Employability outcomes by degree and type of HEI [2018-19] Average insertion rate (18 Average waiting time (in Average wage months) months) to get first job Total (*) 16.36 632.15 11.97 Professionals 19.19 658.88 12.05 Private 22.37 718.33 11.97 Co-Financed 23.98 681.53 12.07 Public 17.98 621.15 12.02 Technologists 8.04 430.62 11.60 Private 9.78 443.1 11.67 Co-Financed 8.85 365.99 11.79 Public 5.39 430.47 11.51 (*) Includes Postgraduate level Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 - 2019 Figure 4: Employability outcomes by degree and type of HEI [2018-19] Technicians Professionals Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 - 2019 16. Nonetheless, the employability of graduates from public and private institutions is comparable once controlling for factors such as degree type, field of study, and geographical location. A better way to assess the correlation between degree type, HEI type, and employability outcomes is through regression analysis. Table 2 presents the results of a log-linear regressions where the dependent variable are the natural logarithm of wages and insertion rates. The regressions controls for the degree type (professional vs. technician), HEI type (public, private, co-financed), regional dummies, and field of study.7 Regression results confirm that insertion rates 7 Fields of study: agriculture and veterinary, arts and humanities, business administration and law, education, engineering and construction, health and well-being, information and communications technology, sciences-math- statistics, services, and social sciences and journalism. 11 (wages) of graduates that have a professional degree are up to 71 percent (37 percent) higher than among technicians. Nonetheless, regression results indicate that once controlling form degree type, geographical location, and area of professional knowledge, insertion rates by type of HEI (public vs. private vs. co-financed) do not differ statistically. Results confirm, however, that entry wages of graduates from public HEIs are, on average, 5 percent lower than among graduates from private HEIs. These results are indicative of important differences in the nature of the programs offered by public and private HEIs, in terms of the type of degree and geographical location. Public HEIs, as key actors for the development of public goods, may offer HE services and programs in locations and in fields that are considered socially important, but which not necessarily respond to the needs of local employers. Private HEIs, on the contrary, many of which operate on a fee-for- service model, need to assure adequate revenue, which gives higher incentives to adapt to the needs of students and employers. Nonetheless, private HEIs are likely to serve a much diverse student population, in terms of skills and socio-economic background. Table 2: Regression Analysis. Employability outcomes by degree/type of HEI [2018-19] Log (18-month insertion Log (Entry wage) rate) Professionals dummy (against technicians) 0.371*** 0.709*** Public HEI (against private/co-financed HEIs) -0.045* N.S. Controls for regional dummies Yes Yes Controls for field of study of degree Yes Yes Note: Dependent variables expressed in logarithm. N.S. Not Significant. * p<0.10, ** p<0.05, *** p<0.01 V. Employability of graduates by field of study and geographical location 17. The above results suggest that field of study and geographical location are important determinants of graduates’ employability. Graduates’ employment transitions are partly explained by how relevant their degrees are to the labor market and by other factors that determine and influence labor demand, such as geographical location. Results indicate that the employability outcomes of graduates across knowledge areas display substantial variation (Figure 5). Professionals with a degree related to health and wellness display insertion rates into the formal labor market higher than average, independently from the type of HEI where the individual attained his/her degree (public, private, co-financed). Results also show that graduates with a degree in STEM, Information, and Communications Technologies (ICTs), and Health-related fields are 20 to 70 percent more likely to find formal-sector employment after their graduation (Table 3), as compared to graduates from business administration and law (the comparison category). In contrast, individuals who graduate with a degree in arts and humanities, display lower than average insertion rates into formal employment. Regression results indicate that graduates with a degree in arts and humanities are 10 percent less likely to find a formal job (18 months after graduation) than graduates from business administration and law (the comparison category). 12 Figure 5: Graduates’ insertion rates by field of study, degree and type of HEI [2018-19] Professionals Technicians Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 - 2019 18. The insertion rates of graduates with degrees in fields like education and agriculture differ across public and private HEIs. For instance, individuals with agriculture and veterinary related degrees in private HEIs display higher insertion rates than graduates with similar degrees but who graduate from public institutions. The opposite happens among graduates in the field of education, which display higher insertion rates when they attend public and co-financed institutions. These results indicate that the HEI type matters as a determinant for employability in some knowledge areas. This feature may arise because of the types of programs and interactions HEIs have with local employers in the field, and HEI’s signaling effects (e.g., HEI’s reputation). For technicians, independently of the HEI type, technicians who graduate from STEM-related fields (i.e., engineering, information technology, and natural sciences) display much higher than average insertion rates into the formal labor market. 19. Entry wages are higher than average in fields related to health, ICTs, and STEM. Figure 6 illustrates entry wages for graduates by HEI type, degree and field of study. For professionals, while dispersion in entry wages is rather low, graduates in fields related to health, communications, and information technology (arts and humanities) earn higher (lower) entry wages than average. For technicians, dispersion in entry-level wages is rather high. For this group, entry wages tend to be higher in STEM-related fields as well as in fields related to health and education, which are fields that are traditionally in high demand by the public administration. Regression results (see Table 3) indicate that graduates with a degree in STEM, ICTs, and Health and well-being related fields display entry-level wages that are higher of between 10 and 70 percent than those of graduates with a degree in business administration and law (the comparison 13 group). In contrast, regression results indicate that graduates with a degree in education/arts and humanities-related fields display entry-level wages that are up to 10 percent lower than those of graduates with a degree in business administration and law (the comparison group). Table 3: Regression Analysis. Employability outcomes by field of study [2018-19] Log (18-month insertion Log (Entry wage) rates) Health and well-being 0.451*** 0.755*** Natural sciences, math, and statistics 0.127*** 0.239*** Engineering and construction 0.124*** 0.317*** Information and Communications Technology 0.100** 0.268*** Social sciences and journalism 0.073** 0.118** Education -0.105** N.S. Arts and humanities -0.060** -0.246*** Agriculture and veterinary N.S. N.S. Services N.S. N.S. Type of HEI dummies (public, private, co-finances) Yes Yes Type of degree dummies (professional, technical) Yes Yes Note: Dependent variables expressed in logarithm. N.S. Not Significant. Comparison knowledge field: business administration and law. * p<0.10, ** p<0.05, *** p<0.01 Figure 6: Graduates’ entry wage by field of study, degree and type of HEI [2018-19] Professionals Technicians Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 – 2019 14 20. Geographical location is also an important determinant of graduates’ employability. Results in Figure 7 indicate that graduates’ employability outcomes display significant variations across Ecuadorian provinces. This feature reflects the fact that labor demand behaves quite differently across provinces in Ecuador, as it varies significantly in terms of economic context and conditions. The result could also be explained by variations in socio-economic and human capital development status across provinces. With a few exceptions, provinces where graduates display higher rates of insertion into their first formal employment are also associated with the highest levels of entry wages for graduates. Interestingly, the two main economic poles in Ecuador (Pichincha and Guayas) are not necessarily the locations where graduates display the best employability outcomes. Indeed, regression results indicate that graduates in middle-size provinces such as Napo, Santo Domingo, Sucumbíos, Zamora, Cañar, and Loja are associated with a 6 to 60 percent higher entry level wages than graduates in Pichincha. This result may also reflect the fact that labor demand in Pichincha (primarily driven by hiring in the public administration) has decreased significantly in recent years due to the fiscal crisis. This could be explained by the fact that there is more ample spectrum of employment opportunities (both low-quality and good quality) in larger urban poles. Furthermore, regression results indicate that graduates’ insertion rates in Pichincha are not significantly higher than in many other provinces (such as Esmeraldas, Santo Domingo, Cotopaxi, and Azuay, to name a few). However, graduates’ insertion rates in provinces such as Guayas, Chimborazo, El Oro, Imbabura, Los Ríos, and Manabí tend to be 20 to 30 percent lower than in Pichincha (the comparison province) (Table 4). Figure 7: Graduates’ employability outcomes by geographical location [2018-19] 15 Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 – 2019 Table 4: Regression Analysis. Employability outcomes by Province [2018-19] Regional dummies Log (18-month insertion Log (Entry wage) rate) Napo 0.563*** N.S. Santo Domingo 0.226*** N.S. Sucumbíos 0.205** N.S. Zamora Chinchipe 0.167*** 0.952*** Morona Santiago 0.120* N.S. Cañar 0.117*** N.S. Loja 0.061* -0.260*** Azuay N.S. N.S. Bolívar N.S. N.S. Carchi N.S. N.S. Chimborazo N.S. -0.238** Cotopaxi N.S. N.S. El Oro -0.061* -0.211** Esmeraldas N.S. N.S. Guayas N.S. -0.210* Imbabura N.S. -0.206** Los Ríos -0.100** -0.679*** Manabí N.S. -0.336*** Orellana N.S. N.S. Pastaza N.S. N.S. Santa Elena N.S. -0.345* Tungurahua N.S. -0.220* Note: Dependent variables expressed in logarithm. N.S. Not Significant. Comparison province: Pichincha * p<0.10, ** p<0.05, *** p<0.01 VI. Graduates’ employment characteristics 21. While most graduates entering formal employment work as wage earners in the private sector, the public sector continues to be an important source of employment. This section provides information about the type and sector of employment for graduates who enter formal employment within 18 months of their graduation. The available administrative data from the SRI and IESS also provide information on the main characteristics of the jobs that graduates hold after their graduation, notably employment type, firm size, and industry of employment. Results in Table 5 indicate that most graduates enter formal employment as wage earners (about 95%). Graduates with a professional degree are more likely to find public-sector jobs (35 to 40%) than graduates with a technical degree (17 to 18%). The public sector constitutes a primary source of formal employment for all graduates – even though most graduates find private-sector jobs. In terms of firm size, results indicate that between 30 and 40 percent of all graduates (professionals 16 and technicians) work in firms of more than 100 workers (large firms). In comparison, 20 to 30 percent of all graduates’ work in micro-firms (smaller than 10 workers) (Figure 8). Table 5: Type and sector of employment [Employed Graduates] Professionals Technicians Public Private Co-financed Public Private Co-financed Type of employment % Self-employed 4.50 3.50 4.60 4.10 3.00 6.90 % Employer 0.10 1.40 0.50 0.80 0.10 0.00 % Wage earner 95.40 95.10 94.90 95.10 96.90 93.10 Sector of employment % Public administration 35.2 38.5 40.2 18.3 17.4 16.7 % Private sector 64.8 61.5 59.8 81.7 82.6 83.3 Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 – 2019 Figure 8: Firm Size [Employed Graduates] Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 – 2019 22. Graduates with 5-year professional degrees are more likely to work in the public sector than graduates with technical and technological degrees. About half of all graduates with a 5-years professional degree find a job in public administration. While some variation exists 17 depending on the type of HEI graduates attended, results indicate that about half of graduates with a professional degree (47 percent) find a job in public administration and in the education and health industry. Also, about one-third of graduates with a professional degree are employed in financial and real estate services as well as construction and commerce. For graduates with a technical degree, manufacturing, construction and commerce, and transport and communications constitute the primary industries of employment (absorbing about 6 out of every 10 technical graduates) (Table 6). Table 6: Industry of employment [Employed Graduates] Professionals Technicians Public Private Co- Public Private Co- HEI HEI financed HEI HEI financed Employment Industry % Agriculture and mining 3.2 2.2 1.6 2.5 3.2 0.0 % Manufacturing 8.3 5.5 5.5 17.8 9.4 0.0 % Water and electricity 0.7 1.3 1.1 2.2 1.0 0.0 % Construction and commerce 15.7 14.2 16.0 27.1 23.0 42.9 % Transport and communications 7.0 6.1 7.3 12.6 12.2 14.3 % Finance and real estate 14.5 20.0 18.2 11.7 13.4 25.0 % Public administration 28.0 32.8 32.3 11.1 10.6 7.1 % Education and health 19.1 14.6 14.9 11.1 22.0 7.1 % Arts and other services 3.5 3.2 3.1 4.0 5.2 3.6 Source: SENESCYT – IESS – SRI, Monthly administrative records 2018 – 2019 VII. Conclusions and policy implications 23. This report provided an assessment of the transitions into formal employment for Ecuadorian first-time job seekers with a higher education degree. The employability of HE graduates is essential to quantify employers’ perceptions of the educational quality of relevance of higher education institutions (HEIs) and programs. Quantifying the employability of graduates makes it possible to assess the degree of integration between the skills developed by the HE system and the productive structure of the economy. Ecuador has unique administrative data (records from the SENESCYT, IESS, and SRI) that allows tracing the employment status of graduates as they transit into the formal labor market. Nonetheless, these data remain underused and have not yet contributed to inform policy decisions nor to guide students and their families to make better- informed decisions about their HE choices and their expected individual returns. 24. Graduates who are first-time job seekers display a sluggish transition into the formal labor market, and especially those with technical degrees. Results presented in the report indicate that only 16 out of every 100 graduates who are first-time job seekers find formal employment 18 months after their graduation. This rate is much lower than that observed in OECD 18 countries and in LAC countries such as Colombia and Chile – where similar rates oscillate between 30 and 50%. While the business cycle explains these results partly (i.e., Ecuador’s fiscal crisis), especially in view of the importance of the public sector in graduate employment, these results are also symptomatic of the lack of relevance of the offer of HE. 25. Lack of relevance to labor market needs of HE is visible across the board, with some differences according to degrees and type of HEI. Both public and private HEIs and professional and technical degrees show low employability outcomes suggestive of limited relevance. Over- reliance on employment in the public sector is a key issue in the current fiscal-crisis context. While relevance is an issue for both professional and technical degrees, and over-reliance on the public sector seems stronger for graduates with professional degrees. Additionally, on average, public sector institutions appear to be doing less well than private ones. This gap could be related to differences not only in the composition of their student bodies, but it is also in the supply of services geographically and in terms of fields of study. The supply of HE programs of public institutions is probably less responsive to the demands of the labor market than that of private institutions. 26. Results confirm that the field of study of the degree and geographical location are important determinants of graduates’ employability outcomes. Graduates with a degree in STEM and Health-related fields display much better employability outcomes than those with degrees in humanities, business administration, and law. Also, graduates’ employability displays significant dispersion across geographical locations, with some mid-size industrial provinces (such as Napo, Santo Domingo, and Loja) displaying higher entry wages than average, and some coastal provinces (such as Santa Elena, Guayas, and Los Rios) displaying lower than average graduates’ insertion rates into formal employment. 27. Preliminary results are indicative of the urgent need to align the offer of HE education services to the needs of local employees. While more research is required, the analysis presented by this report shows some important analytical underpinnings that could guide HE policy in Ecuador. In particular, the Government of Ecuador will need to assure that HE programs are more responsive to the needs of private employers and decrease the over-reliance of graduates in public sector employment, which is likely to remain stagnant in the years to come. This is particularly important for HEIs offering professional education degrees, which will need to adapt and be more responsive to the skills demanded by private employers. Public HEIs will also need to develop systematic mechanisms to improve student university-to-work transitions, in close coordination with private employers. Results presented in the report suggest that graduates from private HEIs do better than graduates from public HEIs, probably because private HEIs are better connected with employers and offer of degrees that are more attuned to labor market needs. A way to address these gaps is to provide public HEIs with information about the employability of their graduates by field of study, so that they can reorient the offer of academic programs based on their observed pertinence. Also, data on employability by geographical location and field of study could be made available to students and their families to help them make better HE choices. 19 28. The most important policy implications of the paper relate to the use of data for decision-making. Administrative data on graduates’ employability outcomes have a vital potential to inform HE policy at several levels. As mentioned before, Ecuador has unique administrative data that allows tracing the employment status of graduates as they transit into the formal labor market. However, data remain underused and have not yet contributed to inform policy decisions nor to guide students and their families to make better-informed HE-related decisions. To improve the use of these data, below are some proposed policy recommendations: • Systematize the production and publication of graduates’ employability outcomes as part of INEC’s / SENESCYT HE data monitoring efforts. Even though all the administrative data necessary to develop a robust graduate tracer system in Ecuador exists, the country lacks adequate institutional arrangements to develop and sustain such a system. First, INEC’s Labor Market Observatory does not see the development of the graduate tracer system as an institutional priority. While SENESCYT demands the development of such a system, its technical staff cannot access these data – as INEC has not developed the necessary mechanisms to share micro-data with other institutions. This reality hinders the process and undermines the potential use of administrative records. A proposed solution would be to automatize the exercise through an algorithm through which SENESCYT provides INEC with the personal identifiers of their graduates (as well as other information about their degree). Using the algorithm, INEC would automatically match graduates with their administrative records, and give back to the SENESCYT employability outcomes aggregated by HEI type, field of study, and province, among others. Such an automated process would not entail INEC’s sharing of individualized data, which is a process complex due to the current regulation and lack of systematic anonymization protocols. • Use the INEVAL’s student assessments and socio-economic data to improve the robustness and reliability of the national graduate tracer system. The INEVAL proctors, on a yearly basis, the Ser Bachiller assessment, a census-based instrument, to assess student learning. The assessment is a compulsory exam that students need to take to graduate from secondary education. The assessment is used by most higher education institutions as the entry exam to access higher education. The exam also collects information about the socio-economic status of students and their households. These data, which are currently available for about 8 years, could be transferred to INEC’s Labor Market Observatory. Since INEVAL’s data includes the national unique ID of all individuals who take the Ser Bachiller exam, these data could be easily merged with the administrative records on graduates from SENESCYT as well as with INEC’s employment data. As mentioned before, graduates’ skills and socio-economic conditions are key determinants of a graduate’s employability outcomes. As such, having and using these data would contribute to design and implement a more robust and accurate national graduate tracer system. 20 • Disseminate available data on graduates’ employability outcomes to guide HE choices for individuals and their families. It is well established in the literature (see OECD, 2017) that information about HE returns is an essential input for students and their families to make better-informed career choices. Based on information resulting from the graduate’s tracer system, the SENESCYT could develop an online portal where individuals and families can assess the returns of the HE options they pursue. Many online portals allow individuals to enter their HEI of preference, geographical location, degree type so that students can assess their expected employability outcomes given their HE preferences. • Introduce regulatory and financial incentives to HEIs to improve graduates’ employability outcomes. The SENESCYT could introduce different incentives for HEIs to monitor and improve the employability outcomes of their graduates. The financing formula used by SENESCYT to transfer budget to State universities could introduce incentives to universities that show improvements in graduates’ employability outcomes or in the implementation of programs that support graduates’ transition into the labor market (such as internships and employment counseling services). Moreover, employability outcomes could be considered as a quality assurance parameter in the current process of HEI accreditations. • Use data resulting from the graduate tracer system for formative purposes. A systematic weakness of available graduate tracer systems around the developing world is that the data they produce does not translate into HEI-specific reports that can guide decisions about the programs they offer. University principals and career directors can use the information of graduate tracers to expand (reduce) the offer of more (less) pertinent degrees. Also, these data can guide the development of student programs to facilitate student transition into labor markets, the establishment of alliances with employers who demand graduates, and revisions of curricular content of programs to make it more aligned to the needs of local employers. 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