Over-educated grads are bad news for economic theory!

An exciting time of the year for many young people, with some setting off to university for the first time, and others starting to polish their applications for next year. Good news if you have been accepted to read economics at Cambridge, say, or business studies at Oxford. A survey by the Sunday Times shows that the average salary, just six months after graduating, is over £40,000. If instead you are off to Worcester to do drama and dance or Liverpool Hope for psychology, you can expect around £13,000, just under half the value of average earnings across the workforce as a whole.

Figures like these raise the question of whether it is worthwhile studying many of the courses which are on offer. It is a question which is increasingly pressing. Last month, a report commissioned by the Chartered Institute of Personnel and Development (CIPD) claimed that no fewer than 58% of the UK’s graduates are in non-graduate jobs compared to only 10 per cent in Germany. The growth in graduates is outstripping the growth in high skilled jobs across the EU, but especially in Britain.

Successive government have made a fetish of higher education. The Conservatives elevated a whole raft of polytechnics to university status in 1992, followed by a second wave under New Labour in the 2000s. Tony Blair was insistent that his target be met of 50 per cent of each year group of young people going to university.

The mismatch between the supply of and demand for graduates is not something new. It was already well known when Blair invented his mantra of “education, education, education”. Peter Dolton and Anna Vignoles, both then at Newcastle University, published a famous paper twenty years ago, in 1996, on over-education in the graduate labour market. Scientists measure the value of an academic paper by the number of citations it receives from other scholars. On this criterion, this one is a star.

They looked at a very large sample of graduates and their conclusion was stark. “We find that 38% of graduates were overeducated for their first job and, even six years later 30% of the sample were overeducated”. So the current estimate of 58 % by the CIPD, 20 years later, startling though it may seem, may not be too far off the mark. To be fair, other studies do come up with lower numbers. But they all demonstrate the same point. Lots of graduates end up in jobs which do not require a degree.

This is bad news for economic theory, which predicts that even if over-education is observed, it will only be a temporary phenomenon. Companies are assumed to adapt their production techniques to fully utilise the increased supply of skills.

Is it bad news for the students? A quantitative degree from a good university still commands a huge premium in terms of lifetime earnings. But estimates of the average amount extra that a graduate will earn conceal massive differences in outcomes. Increasingly, studying weak courses at weak institutions is simply not worthwhile.