As the country sizzles, an IFS analysis suggests the graduate premium is holding up

It seems like only Monday when skills minister Jacqui Smith was touring the broadcast studios to tell us it was time for a decisive break with the past. She had ostensibly been put out to talk about the government’s ‘new deal for young people’ but spent all her time not answering questions about the prime minister’s future.

Given half the chance, Smith was going to tell us “too many young people feel university is the only route to success and are working hard for degrees that don’t deliver the future they were promised, as they miss out on better opportunities while amassing thousands in debt”.

The press release told us the minister was probably going to say that “while university was once a clear route to social mobility, particularly for working class people, the reality for today’s generation of young people has significantly changed”.

And for good measure she may have added, “many students hugely benefit from a degree, and the UK’s university sector is rightly world leading. But the outdated belief that university is the only path to success has led to a ‘degree by default’ mindset, resulting in too many young people working tirelessly for degrees that don’t unlock the best opportunities to make the most of their talent and hard work.”

As we said in Tuesday’s Playbook, this bold new announcement after two years of Labour running the department for education sounds a lot like previous Department for Education pronouncements under the Conservatives. Both parties seem to share the belief that people could do just as well by not studying for a degree as by going to university.

That’s politics for you. The problem is, there is little evidence to support the claim.

This morning, the Institute for Fiscal Studies lands one of its periodic analyses of graduate earnings. You know, the ones that are actually funded by the DfE to demonstrate the value of the graduate premium.

Maybe the DfE has forgotten why it originally commissioned this research, back when graduate earnings were the main justification for trebling university tuition fees. However, the Longitudinal Education Outcomes (LEO) data does not stop, and this latest report shows that the graduate premium is holding up quite nicely.

LEO kids, defined as those who took their GCSE exams in 2002, are now in their late thirties. So, the data now tracks those graduates into that part of their careers where they might be expected to be earning reasonable salaries.

The IFS findings are not surprising, but they do fly in the face of government rhetoric. The analysis concludes: “On average, graduates earn substantially more than non-graduates in their 30s.”

Women who went to university in the LEO cohort are earning 56 per cent more than women of the same age who did not do a degree. For men, the figure is 28 per cent.

The IFS says that gap in earnings will persist throughout the working lives of the cohort for both men and women. Female graduates are projected to earn £290,000 (48 per cent) more than non-graduates, while male graduates will earn around £390,000 (44 per cent) more than their peers without a degree.

And it is not just this lucky graduate cohort that is making it rain. The IFS says, “We do not find any evidence that the graduate premium has declined for later cohorts.” That is despite more young people now studying for a degree than in the original LEO group.

Taxes may have gone up, as has have tuition fees, but the IFS continues to “estimate large positive average returns from the point of view of the student. To the extent that the past is a guide to the future, the average graduate can expect to be around £100,000 (15 per cent) better off financially than a similar young person who did not go to university.”

That’s an average, of course. At the top end, the analysis projects that some male graduates will earn £330,000 more than non-graduates. For women that figure is £230,000.

At the lower end of salary expectations, those figures are £67,000 for women and £60,000 for men. The numbers also vary by subject studied, with medical graduates projected to earn in excess of £400,000 more than non-graduates.

Pop LEO

However, and here is where the “low-quality degrees” folk find their starting point, the IFS also estimates that “around 20 per cent of women and 30 per cent of men can expect a negative return; i.e., they would be financially worse off than if they had not gone to university”. That can also be subject-specific, with the analysis—as it usually does—estimating “low or negative individual returns on average” for graduates in the creative arts, philosophy and languages.

This is the only figure from the analysis that most media will report.

The report concludes, however, that “financing undergraduate degrees is a substantial investment from the point of view of the taxpayer, but one that pays off in the long run, on average”, in terms of loan repayments, income tax and national insurance contributions from graduates. The Treasury, on average, takes in fiscal contributions of £48,000 for every woman with a degree and £107,000 for every man.

“That said,” write the report’s authors, “we estimate that the exchequer can expect to make a loss on around 40 per cent of degrees.” That figure made Conservative Treasury ministers nervous; it is now making Labour ones anxious too.

But if the graduate premium has slipped a little, that is partly down to the Treasury taking more from graduate pay packets. Loan repayment terms are less advantageous to graduates, while personal tax thresholds have been frozen—the result is graduates will earn £15,000 less over their lifetimes, while the Treasury will take £25,000 more per funded student.

While this is all based on averages and everything is subject to change, the IFS says, “Our conclusion that average net returns for individuals over the lifetime are large and positive is robust.” School leavers and their parents understand this intuitively, even if it seems to be a stretch for ministers at the DfE.

The higher education commentariat were cock-a-hoop at the results of the IFS report. Vivienne Stern, chief executive of Universities UK, said: “The evidence is clear that a university degree still pays off in a big way for the large majority of people—and that the Treasury makes a strong return on investing in students. The graduate premium is holding up, despite growth in the minimum wage and the generally poor performance of the economy which has held back wage growth.

“While not all graduates benefit financially to the same extent, it is worth pointing out that some of those graduates who earn lower salaries contribute a lot to society, including those who become artists and performers, whose choice may not have been motivated by money. We should recognise that these subjects also feed the creative industries, which are a huge economic driver for the UK. And as a humanities graduate myself, my bet is that, in an age of AI, we’ll value the understanding of how human beings think and act more, not less, in the future.”

It is good to know that UUK is not motivated by money, and that the low-paid artists of tomorrow will save us all from our robot masters.

Other sector bosses joined in. Rachel Hewitt, chief executive of MillionPlus, said the analysis was “a clear reminder that financially, for the vast majority of students, going to university pays off”.

Nick Harrison, CEO of the Sutton Trust, said that “while university is not a guarantee of financial success, it remains the most reliable route to upward mobility we have. Most graduates continue to see big financial benefits over their lifetimes, and for young people from lower-income backgrounds, those gains are often greatest.”

Libby Hackett called the report “a reminder of the continued high value of a university education for most students”. While flipping over the portrait on the wall of Russell Group headquarters from Keir Starmer to Andy Burnham, she added: “As the government looks ahead to new leadership, we look forward to partnering with them to deliver world-class study opportunities and the high-level skills the UK needs to power our leading sectors and generate growth.”

So, that’s all good news then: ministers are wrong, and the evidence suggests that degrees are great and graduates are rolling in cash. Sadly not.

On Monday, the world did not really get to hear Smith’s message about universities, due to other distractions. But it is a message that universities have heard many times before.

It is not going away, just because it might not be supported by evidence. It is a view held now by parties of both the left and right—accordingly, universities might be in a spot of bother unless they can persuade the public otherwise.

Politics always trumps policy. Bashing universities continues to be good politics—expect Starmer’s successor to carry on in that mould—even if the LEO data consistently tells us otherwise.

And f...

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