Is the graduate premium falling?

The recession seems to have caused an increased scepticism about the returns to a university degree. education. I fear this is overdone in some respects, but correct in others.
Individual experience, anecdotal evidence, is worthless on this point. Economies are irreducibly heterogenous. The fact that some graduates are stacking shelves at Tesco tells us nothing about the general, average, return to education.
Indeed, some recent research suggests that, between 1994 and 2004, graduate over-employment actually declined and the average return to having a degree edged up.
However, the degree premium varies enormously by subject - and has been negative (pdf) for men with arts degrees for some time -  and it might be that more recent graduates are doing worse than older graduates.
Nor is it likely that the recession will much change this. Yes, graduating in a recession is a misfortune. But so is being unskilled, because bosses are quicker to fire workers with no qualifications. From the trough to peak unemployment rate in the last recession (1990-93), the unemployment rate for graduates rose by 2.5 percentage points, whilst that for those with no qualifications rose by 4.6 points.*
So, why do I share the scepticism about the graduate premium? Four reasons:
1. The high premium has been in part due to high graduate wages in London. But with the City now in (temporary?) decline, this contribution to the premium will fade away.
2. The government’s faith in the importance of having a degree might be based in part upon a mistaken extrapolation of past trends.
Yes, the graduate premium soared between the 1970s and 90s. But this was in part at least due to the fact that low-skilled wages were held down by growing competition from low-wage developing economies. But there’s no reason to suppose such competition will continue to affect only low-wage workers. China and India are producing tens of thousands of university graduates. It’s possible that in coming years this supply will hit UK graduate earnings, to the extent that graduate jobs can be offshored. 
3. It might be that the rising graduate premium was not a reflection of a higher marginal product of graduates, but rather of the fact that technical change has made it easier for graduates (bosses) to exploit workers (non-graduates).
4. The desire to get people into university is motivated in part by a desire to give the impression that social mobility is occurring when in fact it isn‘t - if youngsters go to university when their parents didn’t. In this sense, it might be that the expansion of higher education acts as a substitute for genuine egalitarian reform.
* Table 1.3 of this book.

Comments

[Bob B]

Any evidence yet of shrinkage in the premium earnings of economists compared with graduates in other subjects - or will that mainly depend on what happens in the financial markets of the City?
http://www.timesonline.co.uk/tol/life_and_style/education/good_university_guide/article2253011.ece

Btw before readers here start blaming City economists - instead of bankers - for the present global financial crisis, try this:

"A frequent complaint at gatherings of senior physicists is that that everyone with a PhD in theoretical physics abandons research to follow a lucrative career as a 'rocket scientist' in the City. . . A recent report from the Centre for the Study of Financial Innovation (CSFI) in London confirms that there is a genuine and growing demand for physicists in the City, but that the numbers involved are relatively small. Would-be rocket scientists should also be aware that the City is only interested in the 'top two per cent' of talent, and that interpersonal skills are more important than in-depth knowledge of finance."
http://physicsworld.com/cws/article/print/1081

Now we know !

[David Heigham]

Are we discussing a backward-looking observed premium on graduate earnings? Or a forward-looking comparison of likely returns to investment in the human capital of graduate stsus versus other forms of investment?

[dearieme]

"Economies are irreducibly heterogen[e]ous. The fact that some graduates are stacking shelves at Tesco tells us nothing about the general, average, return to education." EH? If economies are heterogeneous, why do we care about average return to education?

[Phil]

"The desire to get people into university is motivated in part by a desire to give the impression that social mobility is occurring when in fact it isn‘t"

Damn right. Issue everyone with an Eton tie on their eighteenth birthday and the class barrier will be no more.

[Bob B]

"Issue everyone with an Eton tie on their eighteenth birthday and the class barrier will be no more."

Why an Eton tie, for heaven's sake?

Two maintained grammar schools within walking distance from where I sit achieved better A-level results in the latest schools league tables.

"Grammar school pupils outperformed their privately educated counterparts at A level by a record margin last summer, piling more pressure on the beleaguered fee-paying sector."
http://www.timesonline.co.uk/tol/life_and_style/education/article5519688.ece

[Charlieman]

David Heigham: "Are we discussing a backward-looking observed premium on graduate earnings? Or a forward-looking comparison of likely returns to investment in the human capital of graduate stsus versus other forms of investment?"

The economy and society benefit from individuals with graduate ability, not graduate status.

[Bob B]

"If economies are heterogeneous, why do we care about average return to education?"

In principle, if sufficient data are available, we could work out the social and private rates of return for degrees in all subjects in national economies. As it is, we usually have to make do with observing that degrees in different subjects in the UK labour market attract different earnings premia.

It seems that for men with degrees in art subjects, subsequent average career earnings are generally insufficient to recover the costs of getting the degrees. But that said, the graduate earnings premium in the UK has been fairly robust and persistent so far and greater than in most other OECD countries:

"research from the Organisation for Economic Co-operation and Development (OECD) has shown that the graduate earnings premium in the UK is high by international standards, and is lower than those in only five other countries: the Czech Republic, Hungary, Poland, Switzerland and the US."
http://www.prospects.ac.uk/cms/ShowPage/Home_page/What_do_graduates_do__2007/Graduate_employment_and_salaries_review/p!efbkXli

I think we need to recognise that and reflect on why the graduate earnings premium in the UK is so high relative to that in other countries.

[kinglear]

Interesting piece on Coffee House about how education in the US is the key to recovery. Whilst US females are better educated than they were 30 years ago, they earn on average 30% more than then in real terms. US men, on the other hand, are on about the same educational level as they were 30 years ago and are earning roughly the same as then.
http://www.spectator.co.uk/americano/3301746/the-next-american-economy.thtml

[Bob B]

Before we worry about producing too many graduates - or Eton - we really need to worry about the much greater problem of failing adult literacy skills, which does impact on social mobility:

"A cross-party group said as many as 17.8 million over-18s had poor literacy and 23.8m had numeracy skills below the level needed to get a good GCSE.

"In a report, the Commons public accounts select committee said the country still had an "unacceptably high number of people who cannot read, write and count adequately" - despite some £5bn being spent on training between 2001 and 2007.

"It means Britain is still lagging far behind other developed nations for standards in the basics, the study said.

"According to the latest available figures, Britain was ranked 14th in a global skills league table."
http://www.telegraph.co.uk/education/educationnews/4372738/Almost-24-million-adults-with-poor-numeracy-skills-say-MPs.html

And we need to ask why so many failing secondary schools - which are unable to get even 30% of their 16 year-olds through GCSE with 5 or more subjects at A*-C grades, including English and maths - tend to cluster in particular districts:
http://news.bbc.co.uk/1/hi/education/7827214.stm

[Claude]

Great piece.
Also. I'm sure there are notable exceptions, but if anyone disagrees that the actual standards of Universities are also slumping big time -consequence of overcrowding and taking everyone in? - then they need their eyes checked.

[Bob B]

I suspect that what has continued so far to buoy up demand for graduates by employers in Britain - almost regardless of degree subject - is because employers consider a degree a better guarantee (or "signal" in econojargon) of basic literacy and numeracy skills than just a secondary education.

This really is appalling when c. 28 million were in employment pre-crunch and the UK electorate is c. 44 million:

"A cross-party group [of MPs] said as many as 17.8 million over-18s had poor literacy and 23.8m had numeracy skills below the level needed to get a good GCSE"

Btw:

"WOMEN university students now outnumber men across all subject areas, from engineering to medicine and law to physical sciences."
http://www.timesonline.co.uk/article/0,,2-2356965.html

"The number of young people in England not engaged in any productive activity went up in recent years, figures show. . . The numbers of those aged 16 to 24 who were not in employment, education or training rose by 94,000 from 2003-07."
http://news.bbc.co.uk/1/hi/uk/7859345.stm

So much after 11 years in government for all Blair's stuff in 1997 about Education, Education, Education.

[Andrew Duffin]

Surely the decline in the average graduate premium represents (a) good old supply and demand - more supply [of graduates] = lower price and (b) the fact that lots of modern degrees are, in fact, worthless; think of media studies, anything involving the fashion industry, all those young geeks studying recording technology, etc etc. I'd be prepared to bet that the premium attaching to hard science degrees from Russell group Unis has not declined at all.

[Uk.cv.com]

Great Post, you’ve done a very nice article, thanks a lot.