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Graduate wage premium high but too variable?

Newspaper article

I was one of the lucky few. Being born in the late 1960s, I had merely about a one in eight chance of going to university, indeed rather less than that in the school I went to. As we graduates were only a few, we could enjoy free tuition and maintenance grants without putting too much strain on public finances.

Those heading off to university over the next few weeks are in a very different position and not merely because it’s no longer free. Around four in ten young people now do a degree, not yet a majority but certainly not a small and privileged minority.

That is a truly remarkable change. The growth in the number of graduates in recent years has been much quicker in the UK than in most other comparable countries.

So my generation, at least the minority of us who made it to university, was certainly lucky in terms of getting our education paid for. You’d also expect us to have been lucky in another way — and we were. We ended up earning a lot more than our contemporaries who did not get a degree.

This, though, is one way in which more recent graduates have also been lucky. Despite the fact that there are vastly more of them, they are doing just as well relative to their non-university-educated peers. The supply of graduates has gone up. On average, their relative wage has not gone down.

This looks like a triumph. It would appear that globalisation and technological change increased the demand for the kinds of skills offered by graduates. Far-sighted governments ensured that supply kept up with demand, thereby both powering economic growth and ensuring that a degree is just as valuable today as it was 30 years ago. That is the sort of explanation behind policy aimed at ensuring more of the costs of higher education are paid by those fortunate enough to benefit from it, and aimed at maximising the numbers who get degrees.

A more educated workforce, alongside the opportunities created by new technology, also allowed companies to reorganise. They did this in ways that provided more autonomy for their graduate employees, increasing both productivity and demand for graduates along the way. That was a positive change, but it is a process that can go only so far. For several reasons, we are beginning to see the first signs that the graduate premium might be starting to drop off in the private sector.

Certainly, the fact that graduates have done well up to now does not mean that they will necessarily continue to do so. Moreover, while recent decades have been hugely successful, it would be foolish to assume that all is well with the present settlement.

Two concerns stand out: while the graduate premium over non-graduates has held up well over most of the period, the level of graduate wages has been falling; and the variation in wages, according to what you study and where, is huge.

While the gap in wages between graduates and non-graduates has been maintained, both groups have seen big falls in their average wages since the mid-2000s. Astonishingly, the median wage of 25 to 29-year-old graduates is more than 10 per cent lower now than it was 15 years ago and about the same as it was in the mid-1990s. The same is broadly true for non-graduates, although minimum wage policies have helped to ensure that those with the very lowest education levels have done slightly better.

That kind of fall in wages is not at all in line with what the government was expecting when it introduced £9,000 fees. Repayments will be made by graduates who are on average less well-off than was intended. In addition, loans have become more expensive because lower wages mean that less will be paid back. Government has responded by freezing the earnings threshold above which graduates have to start repaying their loans.

Second, there is huge variation in what graduates earn according to what they studied and where. Graduates in medicine, lest we forget in the midst of current industrial strife, earn far more on average than graduates in any other subject. Economists, I’m happy to report, also do pretty well. Those graduating in creative arts and some other humanities do much less well. And while graduates on average do much better than non-graduates, there are, worryingly, institutions whose graduates earn less on average than those who didn’t go to university at all.

At the very least, prospective students need better and more consistent information about which degrees lead to what labour market outcomes so that they can make more informed choices about whether to attend university at all, and if so what to study and where. This is perfectly possible to provide by subject and institution. It is extraordinary that it is not made available. More fundamentally, the way in which the student loan system works means that the biggest public subsidy goes to those institutions and courses whose graduates do least well. Those who don’t earn very much won’t pay much back in the end.

This subsidy may make sense. There is value in a university education that goes well beyond the wage benefit it confers. But at the very least we should be clear about where the subsidy sits and how much it costs. If too many graduates end up on low wages, that should act as a warning that not all is as it should be; and while our university system, and its expansion, have been a great success, we need to be aware of its limits. Past performance, as they say, is not necessarily a guide to the future.

This article was first published by The Times and is reproduced here with permission.