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A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/
Economists don’t agree about much, but there is a strong consensus that education is a powerful enabler of growth and living standards. In the last century, the number of years people spend in education has risen inexorably. Today better education and training are offering the answer to challenges as diverse as mass automation, low productivity and lack of social mobility.
Since the Second World War, university enrolments have expanded throughout the Western world. In 1950, just 3.4% of 17-30-year-olds went to university in the UK. By the year 2000, the proportion had risen to 25%. Today close to half of all young people attend university in the UK.
The same holds true across most of the developed world. Policymakers around the world tend to see rising undergraduate numbers as a key driver of opportunity and incomes.
The standard benchmark for valuing degrees comes from comparing the lifetime earnings of graduates with non-graduates. In the UK, the ‘graduate premium’ over a career, for those from the Russell Group of leading universities, stands at £177,000. Graduates of newer UK universities tend to command significantly lower premia; one estimate suggests that for all UK universities the graduate premium is around £100,000.
Harvard academics Lawrence Katz and Claudia Goldin have studied changes in the US graduate premium over the second half of the last century. Their research shows that the premium rose sharply through the 1980s and 1990s, increasing the attraction of a university education. But between 2010 and 2015 the premium flatlined. This coincided with a period of weak wage growth and escalating student debt and led some to question the wisdom of continuing to expand university education.
The overall number for the graduate premium gives a pretty poor idea of the likely value of any particular degree. The premium is an average which conceals wide differences in the salaries earned by graduates of different subjects and from different universities.Research by the Institute for Fiscal Studies shows that students with degrees in medicine, dentistry, economics and mathematics tend to command the highest salaries five years after graduation. Salaries for graduates in arts and design, agriculture and psychology are at the opposite end of the scale.
Where you graduate from matters. In the UK graduates of the London School of Economics, Oxford and Cambridge command the highest salaries five years after graduation.
Yet there is not a simple Russell Group vs the rest divide. Thus, 2008-09 graduates in nursing from Liverpool and education from Manchester, both Russell Group institutions, commanded the lowest median salaries for their subject, of any UK universities five years after graduation. Conversely, graduates in architecture and planning from Anglia Ruskin and creative arts and design from Bournemouth, two non-Russell Group universities, commanded the highest salaries in their field.
The headline figure for the graduate premium is somewhat deceptive in another respect. The calculation excludes those who drop out of university, people who forgo earnings and accumulate debt but do not secure a degree. With 7% of people starting a full-time degree in the UK in 2014/15 dropping out after their first year, this is a material omission.
Finally, the surge in the supply of graduates and the rise in the number of graduates taking non-graduate jobs suggest that the graduate premium could narrow in future. The Office of National Statistics reports that just under 50% of recent UK graduates now do jobs which are “non-graduate” in nature – defined as involving tasks that do not normally require knowledge and skills developed through higher education to be performed competently.
A report from the Intergenerational Foundation think tank has observed, “As more people become graduates, is it any surprise that previously low-to-median paid jobs now demand graduate-level qualifications? Not on any required intellectual level, but just because graduates are available…Job descriptions for a police constable, nurse, market researcher, advertising salesman or sales support worker are now not only specifying a degree, but in many cases also demanding an upper second-class degree” (August 2016).
Yet the UK also suffers from skills shortages. The Government’s Shortage Occupation List covers a range of jobs – particularly in science, engineering, design, IT, software, medicine, nursing, teaching and catering. At least in recent years the growth of the graduate population has exceeded demand without fully meeting the requirements of the economy.
There is a wider question too. A university degree is widely seen as offering a signal to an employer about suitability of an individual for a job. Part of this reflects ability, but non-graduates with the same aptitude are disadvantaged by virtue of not having the signalling power and credibility that comes with a degree. A full measure of the return to university education would need to take account of such distributional effects.
In the UK rising fees, higher levels of student debt and stagnating incomes have prompted new thinking about higher education.
Baroness Wolf, a leading expert in education at King’s College London says that “for many occupations, university is neither a good nor a cost-effective preparation”. She believes the UK should focus more vocational training. Baroness Wolf contrasts the experience of British polytechnics with their German counterparts – the Fachhochschulen – set up in the late sixties. While many polytechnics have become universities, and some abolished, the German institutions have thrived, producing skilled technicians.
Last week Theresa May announced a review of tuition fees and university funding. Criticising the spiralling costs of higher education, the Prime Minister warned that the UK must get away from “an outdated attitude” that university is the only desirable route to a good career.
Improving education is one of the surest routes to prosperity and social mobility. But it needs to be right for the individual and the economy. Government and students are increasingly focused on the cost of, and value from, degrees. Alternatives to university, such as vocational courses, apprenticeships and technical qualifications, are likely to move centre stage.