The lay person might assume that interest in business education courses moves in line with the economic cycle – peaking during booms, and falling in slowdowns and recessions. In fact, deans and admissions directors commonly say that demand for MBA courses is counter-cyclical. Applications increase when the economy is in trouble or – an important distinction – is expected to be in trouble soon. Since it takes a sizeable financial outlay to undertake a course, either from the student themselves or via sponsorship by a company – demand must, to some extent, depend on earnings, either individual or corporate.
When the economy is growing fast and earnings are rising, people are less willing to forego those higher earnings to return to education – the “opportunity cost” is too high. While it is certainly the absolute level of economic development that determines the ultimate demand for courses – through the need for qualified people and the rewards motivating individuals to gain a qualification – it is the perceived direction of the economy that influences the timing of applications and admissions.
Applications seem particularly sensitive to “turning points” in the cycle. When economic conditions are favourable, potential students may worry that if they return to school, the economy may have turned down by the time they try to return to the job market.
Instead many students aim to start their course close to the onset of a downturn, hoping their graduation will coincide with renewed growth. This is why applications tend to increase when future prospects worsen.
And during a slowdown enrolments are likely to remain high: as the job market becomes increasingly competitive an MBA gives an obvious advantage. Those still in employment seek improved qualifications to minimise the risk of redundancy while laid-off ex-executives seek to improve their prospects of getting another job. For those who have lost their job, or are about to, the decision is sometimes made for them.
The most obvious recent example of the counter-cyclical effect is the boost in applications following the fall-out from the ending of the dotcom boom in 2000. Eight years on, and with the markets again in turmoil, applications may go up. Certainly, applications are expected to be boosted in the US by demobbed soldiers returning from Iraq and Afghanistan.
It should be said that, while the data set points to a countercyclical effect on applications to business schools, there are exceptions which prove the rule.
In a growing economy, there are always those seeking a career change or a boost in salary, and during a long boom potential applicants will not delay indefinitely. Conversely, once a downturn has become entrenched and there are hiring freezes at many companies, applications can slow as those considering a return to education postpone until the period of insecurity and uncertainty is over.
Another point to make is this: much of the data relates to the US. Given that the market in business education is becoming global – a student’s citizenship, place of study and place of intended employment may all be different – is the counter-cyclical model still relevant?
In 1999, economists Plutarchos Sakellaris and Antonio Splimbergo published one of the few in-depth academic studies of the relationship between the business cycle and demand for higher education*.
They looked primarily at foreign students coming to the US to go to university and found a strong relationship between enrolment and the business cycle in students’ countries of origin.
But the relationship differed according to the wealth of the country concerned. For countries of the Organisation for Economic Co-operation and Development – the richer nations – the relationship was counter-cyclical.
But for poorer, non-OECD nations, it was pro-cyclical. For the rich, the “opportunity cost” factor predominated. For the poor, the deciding factor was the cost of financing courses.
If these findings hold true, then business schools might find themselves in a “win-win” situation: benefiting from the likely economic downturn in OECD countries and the continuing upswing in developing countries. This time last year, analysts’ forecasts collated by Consensus Economics for US growth in 2008 were 3 per cent. They are now a full percentage point lower, and the “R-word” – recession – is being widely mentioned. Similar patterns can be seen in the other major economies. The financial sector – destination of many MBA graduates – has been hit hard by the credit crunch.
In stark contrast, forecasts for the larger emerging economies are being revised upwards. China’s 2008 growth is forecast at 10.4 per cent, compared with 9.4 in January last year.
* “Business Cycles and Investment in Human Capital: International Evidence on Higher Education” by Plutarchos Sakellaris and Antonio Spilimbergo (Univ of Maryland/IMF, 1999)