Sorry, but we probably do need more graduates

Arguably, there’s never been a more influential – or controversial – higher education policy than Tony Blair’s 1999 commitment to see 50 per cent of young adults enter higher education.

It was so influential that as recently as 2020 Rishi Sunak and Gavin Williamson took it upon themselves to “abandon” a target that never had any legal underpinning.

The target – as defined at the time using a very broad definition of higher education, and scoring all those between 18-30 as “young adults”, was widely considered to have been achieved in 2019 (though this declaration was based on a projection rather than actual numbers).

Pork scratchings

Drop into any golf club bar in England. Any regular will happily tell you that the 50 per cent target was and remains a terrible idea. As the flecks of Greene King IPA foam fly, you’ll hear that a combination of Mickey Mouse courses and workshy graduates have been terrible for the country and that more young people need to get themselves a real job.

The Tony Blair Institute’s report – We don’t need no education? – takes the opposite route, doubling down on the 50 per cent and pushing for 70 per cent participation by 2040 on the same basis. Jo Johnson lays down the argument succinctly in his foreword – we need more skills, and, crucially, that the skills we need are defined by future flexibility rather than current employment needs.

The headline analysis – based, as we’ll get to, on growth accounting – suggests that a rise in participation of this nature would result in a five per cent growth in the overall size of the economy. With UK productivity still in the doldrums, this isn’t to be sniffed at.

Dash for growth

Growth accounting splits economic growth into three components:

• Human capital – the number of workers, their hours of work, and their education level and workforce experience
• Physical capital – resources, materials, tools, infrastructure, investment
• Residual – “unexplained”, as it were, growth, which is what we take to represent productivity

Indexed to 1995, human capital now stands at 131/100 – with education levels (specifically, the increased educational attainment of those entering the workforce) seen as driving this increase. Indeed, the report argues that without this educational increase, we would have seen no growth at all since the global financial crisis.

If you spotted the word productivity slip in there you’ll no doubt be aware that the UK is in something of a productivity slump right now, and has been since 2008. What this report argues is that without the steady increase in higher level skills, the plateau we have experienced would – due to anaemic investment, lower employment levels, and a low appetite for risk and innovation – have been a significant drop. We would have been sunk without growth driven by better education and skills – so it seems silly to want to stop now.

Retiring and hiring

In the UK we are set to see the education levels of the workforce improve for about another 10 years – as older workers retire and younger (better educated) staff take their place, but unless the increase in participation is maintained this effect is projected to have less impact. Outside of other factors – a sharp rise in investment, a technological revolution (often heralded, seldom seen) – higher education is the only route to growth we have in the UK as far as this analysis goes.

But what higher education?

Back in March 2020, HESA and the University of Warwick released an eye-catching research report that suggested that there was long term evidence of a salary premium to higher degree classifications (more skilled graduates who did better earned more), but that this was diminishing over time. There were, to be fair, some methodological critiques that suggest we should take these findings as indicative. Based as it was on survey data and longitudinal sampling, the report offered one possible story among many – and even the authors noted that the use of administrative (LEO) data could improve the resolution substantially.

Fast-forward to this week, and the higher education team at the Institute for Fiscal Studies (IFS) did just that. They also found a salary premium linked to degree classification, and also noted the strong impact of subject choice (and the weaker but still notable impact of an applicant’s choice of institution).

However, unlike the HESA/Warwick study there was no evidence for a change in the level of degree classification salary premiums – although median earnings for all graduates fell by more than £5,000 five years after graduation between the 2002 and 2009 graduating cohorts. A severe global economic downturn in 2008 would be at the root of this – but it is notable that there has been no indication of a reversal of this proportional trend in the years that followed.

Standard deviation

IFS presented two hypotheses to explain the observed consistency of salary premiums for degree classifications, despite the documented increase in first class and upper second degrees:

1. Everybody is getting worse – Grade inflation has been driven by a lowering of academic standards at all classification levels, but the skill differences have stayed consistent between classifications.
2. Too many graduates – Grade inflation has been driven by a genuine improvement in student attainment, but the wider economy is now less able to absorb skilled workers.

That is, for the sector, a bit bleak. But as always with these things, it deserves a bit of unpacking.

First up, there is a clear cohort effect. The impact of the aforementioned financial crisis was felt – roughly between 2007 and 2014 – in every part of the economy. Earnings for all workers stagnated during this period, and only really began to grow again after 2015. For your default (three years, full time) young graduate – the data only includes those who started university before age 21 – this period neatly maps to when the graduates in this data would have been working five years after graduation.

More germanely to the idea of there being too many graduates, we also see some indication of a selection effect – though the findings do not shift after controlling for prior attainment (itself a proxy for many forms of structural disadvantage) the observed earnings gap by classification is significantly associated with the subject of study. So we know, for instance, that a substantial growth in the proportion of students studying subjects allied to medicine has been matched by a decrease in the proportion of students studying the creative arts – and we know that allied medical graduate earnings are generally higher than creative arts graduate earnings, and that differences in earning by classification are larger for subject areas that have higher returns. We also see that some subject areas (usually the ones leading to a greater salary premium) have awarded more firsts over time.

Likewise, we know that the proportion of students studying at more selective providers has grown over the period in question – and the research finds that the salary gap varies more by classification at more selective universities. And that graduates from more selective providers are more likely to get a first.

Policy implications

In government and regulatory policy terms, we’ve seen – in England most notably – a drive to address the issue of “poor quality courses” (generally, though not explicitly these days, those courses that do not lead to high earnings) and a presumption towards steering more people on to level 4 and 5 (sub-degree) technical qualifications. On surface level, the appearance of an IFS report that appears to back a “too many graduates” hypothesis in the same week as the latest Tony Blair on on the proportion of graduates looks like good news for the government. But – importantly, the IFS report does not address productivity, just salary.

The usual people are keen to make the point that this productivity impact is determined by the type of higher education offered. More “skilled” graduates (for the direct job fit value of “skilled”) will have an impact on productivity, more – it is implied – history or fine art graduates wafting around will not.

Though the IFS report doesn’t get into the specifics of skills, one of the hypotheses advanced for the static classification effect on earnings – that the economy is at the limit of the number of graduates it can accommodate – does appear to run contrary to both the Blair argument and that of Blair’s detractors, and by extension to the government’s interest in expanding employment-focused level four and level five provision.

Skills breakdown

The thing is, paging back to those halcyon pre-2008 days of productivity growth, there were proportionally a lot more history and fine art graduates wafting around than they are now. Our productivity plateau exists despite a multi-year trend towards science and technology training (and a massive expansion in support for technology-focused research and development, for that matter) – and chucking more and more people with that skillset into the job market appears, at very best, to be contrary to what recent experience has taught us.

Blair’s report cites Learning and Work Institute predictions that England will be short 2.6m “highly skilled” workers by 2030. All the old stories about a shift to a high-skilled economy appear to be coming true at just the point we appear to have turned away from the idea. Though we know currently that most occupations deemed to be “highly skilled” are primarily performed by graduates, we don’t know where in the economy the additional demand (for high skilled roles outside of those current ones where people need to be replaced as they retire) will happen, or what skills will be demanded.

The continued growth in graduate earnings in economics, law, and certain aspects of business (maths is in there, but reflects a very small number of graduates) suggests that these are the skills that are economically rewarded. The pure and applied sciences, in contrast, sit midway down the earnings table – and sport sciences are slightly better for graduate earnings (for men, at least) than physics and chemistry. In a rational world, salaries would reflect the productivity value of employment – and if this was the case in England it would appear that finances, not physical sciences, drive economic growth. STEM, in other words, may not be the answer.

Employer needs and skills planning

Though employers do (as they have since the dawn of time) complain about a shortage of skilled workers – the hints of a renewed emphasis on employer training in the Spring Statement were encouraging here – there’s not really much evidence to suggest an undersupply of young L4+ qualified scientists or technicians is the issue. If you see this trend alongside graduate wage stagnation, it is possible that poor graduate salaries (and low graduate recruitment during the financial crisis years) might be a contribution to poor productivity.

Here the Tony Blair Institute has a thumb on the scale somewhat – we are told we need “high level technical and cognitive skills”, but there’s also a document trend away from specific codifiable skills and towards “general, co-specific, skills” – the latter having the added bonus of providing resilience for people who may change career several times during their working life.

We know, anecdotally at least, that higher education in the widest and most liberal sense is quite good at stuff like this – adaptability, comprehension, autonomy, research, presentation, team work . The picture is muddied by the signalling effect (do we know graduates are good at this kind of thing because we know people with degrees must be quite good at this kind of thing) but the sense is there and the existence of a continued graduate premium in the overwhelming majority of cases backs it up.

So which is it? The general “graduateness” stuff or the specific technology/science knowledge? We’re back on low value courses and thus graduate salaries according to the TBI – and though the arguments on social and personal non-pecuniary benefits to higher education are both present and solid there’s still an element of cakeism in encouraging graduates away from “low returns” based on current (historic) salary rates.

Sea change

The Tony Blair Institute recommends raising higher education to 60 per cent by 2030 and 70 per cent by 2040. By international standards this is not an unusual goal – there are many countries that already have a participation rate in advance of this. But it is savvy enough to keep a broad and non-traditional definition of HE (anything at all above level four) that means that simply implementing the Lifelong Loan Entitlement (as currently envisaged) would probably make it happen.

There’s intelligence too, about the need to improve school attainment and examine alternative routes into higher education (including aptitude testing, but not a grade floor as DfE is proposing). And the reintroduction of maintenance grants would go some way to addressing current student needs, especially as loan repayments now extend for most of the working life of graduates.

At this point it is fairly clear that the main difference between TBI and DfE is one of nomenclature – there are differing definitions of “higher education” and “skills” that make the gaps between two similarly general aspirations to upskill the workforce in England appear larger than they actually are. Indeed, TBI talks more about salary returns than ministers do these days.