Graduate earnings rise fee question

October 8, 1999

Higher education expansion over the past ten to 15 years appears to be working - at least in labour market terms. Earnings of graduates, relative to those with only A levels, retained their premium over the period, according to a study by Martin Weale, director of the National Institute of Economic and Social Research.

The buoyancy of graduate earning power indicates there is further scope for making students pay for their degrees, said Mr Weale. "Raising the tuition fee to Pounds 2,000 would have have very little impact on the high rates of returns to graduates," he said.

"However, it is a risky investment. Returns can vary quite considerably between individuals and subjects, so loan and repayment schemes need to be designed with that in mind," he added.

Mr Weale's study was based on an analysis of the annual General Household Survey of 22,000 people. He says it suggests there are no grounds for fears that an oversupply of graduates, caused by over expansion, would reduce the rates of return on the investment in their education.

Between 1985 and 1996, the period covered by the study, graduates enjoyed on average a nearly 50 per cent premium on their salaries, compared with workers who had just A levels.

The rate of return to individuals who invest in a degree is estimated at between 10 and 20 per cent a year during their working lives. There is no evidence that those who graduated during the period were worse off in terms of earning power compared with the rest of the population.

The analysis is restricted to nearly 2,000 males in the two groups. Mr Weale is hoping to extend the study to cover women. Over the period, the percentage of males aged 20 to 29 with degrees rose from 11 per cent to over 15 per cent, while those with A levels who did not enter higher education increased from 19 per cent to 25 per cent.

Mr Weale said the study was unable to determine whether relative graduate earning power had been maintained since 1992 - which marked the start of another big expansion - because the data on graduates who entered the job market from this phase were unavailable. But, he added: "The data on 1996 certainly suggest that, at that point, there was room to go much further with the expansion."

The study also reveals that people who went to polytechnics in the 1980s had a significantly poorer earning power than those who attended universities. By 1996, however, the distinction between "new" and "old" universities on this measure was diminishing markedly.

The maintenance of graduate earning power has occurred against rising numbers and falling expenditure per student. At current prices, the spend per student in the old universities was around Pounds 8,000 a year compared with Pounds 5,000 in polytechnics. The average for all universities is now below Pounds 5,000.

"Efficiency gains, with people in universities working much harder, is one explanation for this. But it does raise the question of whether universities, as a supply industry, can maintain their current level of output," said Mr Weale.

On the labour market side, the resilience of graduate earning power indicates there is still considerable slack in the economy for absorbing the type of labour they offer. Mr Weale said: "We cannot say whether it is technological change that is responsible for continuing high demand for graduates or whether it has always been there. My feeling is that demand has always been present but not fulfilled."

Some graduates are worse off than others. Mr Weale has concluded that for humanities and the biological sciences there is little or no return on the investment made by individuals in a degree. In market terms this suggests there is an oversupply of graduates in these fields.

Subjects boasting high rates of return include engineering, agriculture, design, physical sciences, maths and computing, business studies and social studies.

Mr Weale said: "Logically, this suggests we should have differential fee charging across subjects. The level should be decided by universities themselves on the basis of both the actual cost of the degree and the rate of return on the investment. Making scholarships widely available for students from adverse backgrounds would help address issues of

inequality."

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