Are we seeing an end to the graduate premium?
Does it pay to go to university?
It is often considered as axiomatic that a university degree leads to a higher paid job. In recent years, that assumption has been called into question on two grounds. First, there are increasing numbers of underemployed graduates, who are working in roles that don’t actually need a degree. Second, there are increasing numbers of cases where the absence of a degree has not held back the advancement of some workers. This suggests that we are witnessing a deep change to the employment market. If we are to examine this, we need to consider why is it that graduates should command a wage premium? What has weakened this process? What are the consequences of this weakening? And what does that mean for the future?
Traditionally, graduates have commanded a wage premium because they are more valuable to employers. Their embodied knowledge helps them to perform routine tasks more easily and allows them to undertake more complex tasks for the employer. As the economy moved from an industrial base to a knowledge led service base, upskilling through higher education commanded an ever growing premium. Those studying degrees with a vocational element were given a head start in the employment market because they started employment already familiar with the concepts that would be needed in their employment. Those studying degrees with less of a vocational tint would nonetheless command a premium because of the ability for critical reasoning and logical argument that a degree course instils as a discipline. In both cases, this was of more value to an employer than a staff member who lacked these attributes. This is very much the supply side of the story.
About thirty years ago, a view took hold that the expansion of the graduate population was the key to future prosperity. The number of degree courses increased, the number of degree awarding institutions increased, and the number of students — who turned into graduates — increased. This expansion of higher education would achieve the objective of underpinning future prosperity as long as the number of graduate jobs expanded along a parallel track. Sadly, that didn’t happen.
According to the IFS (see here for the report), between 1993 and 2022, the number of university educated workers outside of London working in jobs that didn’t require a degree rose from 31% of graduates to 42%. This feature on the demand side was accompanied by a hollowing out of the jobs market. Between 1993 and 2022, employment in traditionally middle paying occupations (generally, the entry strata for graduates) fell by 12%. This was accompanied an increase in low paid employment of 14%, and of high paid employment by 95%. Much of this increase in high paid work occurred in London, thus exacerbating regional inequalities across the UK.
In many respects, this outcome was quite foreseeable. If a supply of a commodity (graduate labour) experiences a rapid expansion, and if the demand for that commodity remains static or falls, then the price commanded by that commodity will invariably fall. In recent experience, this means the erosion of the graduate premium. Graduate salaries barely moved in the decade following the global financial crisis in the UK. It was an era of low inflation, low investment, low productivity growth and low wages. The balance has shifted a little since the pandemic. The growth in the number of retirees and long term sick after Covid coming out of employment have revitalised the jobs market and labour is again a scarce commodity. Whether or not this will accelerate the hollowing out effect remains to be seen. However, it has highlighted the need for a degree relevant to the work to be undertaken.
This demand for a relevant degree may act to further weaken the graduate wage premium. Employers have become aware that they can teach the ability of critical reasoning and logical argument to their non-graduate staff, especially those with a decent secondary education. They can, at the same time, also instruct the trainees on skills an knowledge relevant to the job in question. These trainees generally cost less to employ and are broadly as productive as non-specialist graduates. From the perspective of the staff member, the employer is holding out the prospect of an employment route that ends up at the same place as a graduate entrant, but without the debt that going to university entails. The non-graduate trainees are serving to undercut the graduate wage premium.
It is also serving to give a greater focus to the relevance of a number of degree programmes. This is a trend for the future rather than now, but it is worth bearing in mind. Many graduates leave university in the UK without the hope of ever repaying their student loans. This is because the market for graduate employment is weak, because non-graduate trainees are undercutting the graduate wage premium, and because many degree courses are seen as not being relevant to the needs of the employer. This has reached the attention of the ultimate funder of the university sector — the government.
If the UK is producing too many graduates, then one response could be to restrict the supply in future years. What that means in practice would be the wholesale closure of degree courses. At present, the metric by which degree courses are likely to be judged is the extent to which they assist their graduates to find employment after graduation. The university sector has correctly objected that the purpose of higher education is not only to assist graduates in finding employment, but the government has countered that graduate employment is what it wants to fund. If the government has its way, then we may see the long term increase in the graduate wage premium again.
In the meantime, what is one to do? The expansion of higher education has been at the expense of further education. Whilst the UK has a surplus of university graduates, it also has an acute shortage in the trades. The wage premium for the trades far exceeds the graduate wage premium. From the perspective of a young person, two possibilities commend themselves at the moment. The first is to enter the professions as a non-graduate trainee. The young person will then enjoy three years seniority over graduate entrants, they will find themselves at the same point as the graduate entrants in terms of qualifications, and will have enjoyed a salary for three years without any attendant student debt. The second possibility, which particularly commends itself to those who didn’t do too well at school, is to undertake some form of training in the trades. The skilled trades — bricklaying, plastering, the electrical trades — command a significant wage premium at present. It is significant that neither of these options involve a university degree.
As we go forward, it is possible that the graduate wage premium may return, but only if there is a significant reduction in the number of university places available. If things stay as they are, we are likely to see the continued erosion of the graduate wage premium. Balanced against this is the expansion of non-graduate employment opportunities for those bright youngsters who don’t fancy incurring student debt. If they are willing to upskill in-house, or through some form of vocational training, their wage premium is likely to increase at the expense of the further erosion of the graduate wage premium. As things currently stand, there is a significant imbalance within the UK labour market for graduates. Eventually, that imbalance will rectify itself, either through the reduction in university places on the supply side, or from young people abandoning a university education on the demand side. It is unlikely that the graduate wage premium will end fully, but it may well be impaired for some time to come.
© Stephen Aguilar-Millan 2023
