Graduate premium: will you get your money back?

The headline figures from a new report suggest that a university education really does pay dividends. But the devil is in the detail. Antony Mason reportsEducation Costs

Male graduates earn on average 28% more (£168,000 over a lifetime of work) and female graduates a whopping 53% (£252,000).  These are the headline benefits of a good university degree (a 1st or 2:1), according to the new report from BIS – the Department for Business, Innovation and Skills, which oversees universities.

These figures are up on the last official graduate premium report of 2011, which suggested a degree was worth £121,000 for men, and just £82,000 for women (as covered by another IF blog at the time).

Good news for the government, then, which is always keen to find justification for trebling the tuition fees to £9000, and burdening the gifted young with 30 years of debts, or a 9% extra tax on their income to pay off their university loans.

But is it?

Not quite what it seems

In fact the study, called “The impact of university degrees on the lifecycle of earnings: some further analysis”, by the highly experienced analysts Ian Walker, a professor of economics at Lancaster University, and Yu Zhu, a reader in labour economics at the University of Kent, is far more nuanced than the headline figures suggest.

Essentially, trying to work out just what benefit a university education brings, in terms of earnings advantages, is highly complex. To attempt to get a fair measure of this, Walker and Zhu have compared the prospective fortunes of graduates with good degrees with peers who have got two or more A-levels but chosen not to go to university.

The figures of £168,000 for men and £252,000 for women are comparisons, not with each other, but with non-university workers of the same gender. And the somewhat surprising figure of £252,000 for women is not so much a measure of their success as a comparison with the rather dismal earnings over a lifetime of other women who have not been to university. That makes sense when you think about it: graduate women, for instance, are often relatively well paid, and will return to work after having children, while many low-paid women simply cannot afford to do so because high child-minding costs don’t make it worthwhile.

We are talking here, too, of a lifetime career from ages 18 to 68 (the projected state pension age for the current university generation). The figures of £168,000 and £252,000 are relatively small when compared to someone’s  total earnings over an entire career.

That said, £168,000 gives male graduates an advantage of £3,350 or so per year over non-graduates; and £252,000 gives female graduates an advantage of about £5,000 a year – not something to be sniffed at.

Furthermore, as Prof. Walker also points out in an article in the Daily Telegraph: “The evidence suggests it doesn’t much matter what type of HE [Higher Education] institution you attend. It’s just getting there and working for a good degree that counts for life earnings. Differences in the rate of return between a Russell Group institution and a ‘lesser’ one in terms of rankings is, on average, small – and in statistical terms, insignificant.”

But it has always to be borne in mind that these are projected averages over a lifetime of earnings. And furthermore they are averages taken from across all subjects studied, and all professions. Some graduates will be earning very high sums: the report is wary of indicating which subjects lead to the highest incomes, but suggests (as previous studies had done) that outcomes from the STEM subjects (Science, Technology, Engineering and Mathematics) and LEM subjects (Law, Economics and Management) do far better than OSSAH subjects (Other Social Sciences, Arts, Humanities).

Indeed graduates of Arts and Humanities very often fare worse in terms of lifetime earnings than their non-graduate counterparts. In other words, their graduate premium is negative.

What about the tuition fees?

Walter and Zhu have taken great trouble to make sure that their figures are for net earnings, which means they take account of all of the costs that obtaining a university education involves – including student loan repayments, the higher taxes graduates have to pay if they earn more, and the £75,000 or so that non-graduates might earn in the three years when their peers are at university. In other words, the figures seem to be about as fair as you can make them.

To make the analysis manageable, however, the authors have had to ignore some niceties. For instance, the study is based on the assumption that all degrees are three years long, and excludes Medicine (and therefore, by the same token, doctors, who tend to have relatively high salaries once qualified).

So should we go to university?

In the end, though, you have to say that not a lot has changed. We know who the high earners are: the STEM and LEM graduates (doctors, dentists, lawyers, architects, vets, engineers et al.), if they have worked hard to get good degrees, should do well. But you can’t do those jobs without a degree in the first place.

What about those jobs for which you need a degree, but which are never paid a great deal more than the average salary – classroom teacher, university lecturer, social worker, archaeologist, museum curator? Well, of course the conversely generous aspect of the new tuition fees regime is that, if you keep your income low, you will never have to pay off your loan, and it will be written off after 30 years. But for such graduates the £168,000 or £252,000 graduate premium is just a mirage.

For this reason, the headline graduate premium figures should never be used either by universities touting for trade, or by the government trying to justify the burden of tuition fees. In this respect, they are highly misleading.

And speaking of government…

Another aspect of the study is an assessment of additional income that will come to the government as a result of the graduate premium, through taxation.

Walter and Zhu’s conclusion is that the benefits to government are substantial. “The research also suggests that the net present value of the additional tax payments made by graduates relative to non-graduates is much larger than earlier research had suggested. HE is an important investment for the government as well as for students [their emphasis].”

It has always been IF’s contention that universities are a public good, and if students and graduates benefit financially from a university education as much as this research suggests, then the outcome will be higher tax revenues. By contrast, high tuition fees will, in time, corrode the whole system as students – particularly OSSAH students – calculate the costs and seek other avenues for their talents, and courses which have no obvious routes to above-average incomes will fall by the wayside.

Posted on: 26 August, 2013