The returns to education - The Monday Briefing


Education is an obvious route to higher-skilled and higher-paid work. Graduates tend to earn more than non-graduates and post-graduates more still. In the US students who fail to graduate from high school earn significantly less than those who do.

In the UK, the ‘graduate premium’ over a career stands at about £130,000 for men and £100,000 for women. The scale of the premia varies across institutions and subjects. Graduates of newer UK universities tend to command lower premia. Graduates in medicine, economics and maths tend to earn more than those with humanities degrees. Higher class degrees tend to be associated with an even larger wage premium, especially in more selective universities and for vocational degrees. The Institute for Fiscal Studies estimates that in law and in economics a graduate with a 2:1 earns 15% more than someone graduating with a 2:2.

So by and large degrees raise earnings, just as one would expect. Yet that effect is weakening. Slow growth, high inflation and rising taxes have hit incomes across the board since 2008, but more so for graduates than non-graduates. Research by the Resolution Foundation shows that the weekly pay of graduates aged 21–40 after accounting for taxes and inflation fell by 9% between 2007 and 2021. Over the same period pay for non-graduates of the same age fell by 2%. It isn’t only 20- and 30-year-old graduates who have been affected. Pay fell for graduates of all ages over this period.

One obvious explanation for the waning of the graduate premium is an increase in the number of people with degrees. In 1950, just 3.4% of 17–30-year-olds went to university in the UK. By the year 2000, the proportion had risen to 25%. In 2019, 53% of all young people attended university in England. The latest census shows that more than a third of adults in England and Wales hold a degree.

The increase in the supply of graduates has been followed by a compression of pay rates and a shortfall in graduate demand. By 2023 a third of UK graduates were in non-graduate jobs.

An alternative way of framing this is to say that the UK economy has insufficient demand for some higher-level skills. That seems to be a particularly British problem. The US has a similar share of graduates in its population to the UK, but makes better use of them. Far from declining, as they have in the UK, graduate earnings are rising in the States. A US millennial graduate, aged 21–40, experienced a 15% rise in the real value of their income between 2007 and 2021. UK graduate incomes in the same age range fell 9% over this period. Incomes have risen for US graduates of all ages and fallen for UK graduates since 2007.

The differences in spending power are significant. Last year the FT reported that in 2022 US median graduate hourly earnings were $36, 40% more than the $26 earned by British graduates, a gap that has widened significantly in the last 15 years.

This difference does not appear to be due to different degree choices. The proportion of graduates with some of the most lucrative degrees, in science, technology, engineering and maths (STEM) is broadly similar in the UK and US, at 30% and 34%, respectively.

The irony is the UK combines an oversupply of certain skills with undersupply in others. The government’s Shortage Occupation List covers a range of jobs – particularly in science, engineering, design, IT, software, medicine, nursing, teaching and catering. At least in recent years the growth of the graduate population has exceeded demand without fully meeting the requirements of the economy.

UK vocational education has long lagged behind the best in Europe, creating shortages in key areas, and this remains the case. But something else is at work. The UK has fewer and smaller high-productivity sectors and businesses than the US. That seems to be limiting the demand for graduates and narrowing the graduate premium. For that to change, the UK needs to tackle its long-running productivity problem.