The IFS is wrong about the value of degrees

Len Shackleton

March 5, 2020

The Institute for Fiscal Studies has published a new report on the earnings of graduates. Although the report uses data on individuals born in the mid-1980s and their post-graduation earnings for the first decade or so of their working lives, projections are made of likely earnings trajectories for the rest of their career. These are then used to estimate likely lifetime returns to individuals – and to the taxpayer. 

Although on average degrees appear financially worthwhile for both students and the public purse (higher projected income tax from the most successful graduates offsets the losses on the student loan system), there are very considerable variations between different groups of graduates and between individuals within these groups.

The IFS’s Paul Johnson has also looked at the variation between subjects. As in previous studies of returns to higher education, those subjects topping the list, both in average returns and the percentage of graduates getting positive returns, include medicine, economics, computing and maths. At the other end of the earnings league table we predictably find subjects such as creative arts, philosophy, languages and English.

Johnson makes the now fairly standard observation that many graduates would have been personally better off if they had not bothered to take a degree, and so would the taxpayer. A student of creative arts “ends up earning rather little and costs the taxpayer a considerable sum”. Johnson  then goes on to argue that the government should focus its funding on technical and vocational education outside the traditional university route; he doesn’t spell this out but presumably he wants to reduce the number of university places on low-paying degrees and move more people onto apprenticeships. Certainly this is what many on comment pages seem to want.

I have some issues with what has now become conventional wisdom on this. It seems to assume that students taking unremunerative degrees are ill-informed or irrational. But economists since Adam Smith have recognised that monetary returns from an occupation are just one factor in determining occupational choice – the same applies to a degree.

We talk of the “net advantage” of a job, taking into account not only pay but also working conditions, a sense of vocation, social esteem and so on. Jobs carry “compensating differentials”, both positive and negative. A particularly demanding, stressful or unpleasant job requires higher pay to attract applicants, while people will be prepared to work for lower pay with friendly colleagues, in a pleasant environment or where they find a clear sense of social purpose.

Some people value this mix differently from others. Women rank pay lower in their assessment of the attractiveness of a job. Some ethnic groups rank professions more highly than others for their perceived status. This will influence the choice of degree.

One interesting exercise is to compare the pay rankings of UK degrees with the National Student Survey’s assessment of degree courses. The NSS is based on final year students’ perceptions of their degree courses. The courses ranked most highly (in terms of “overall satisfaction”) are not those leading to careers which pay the most. The list is topped by “philosophy, theology and religious studies”, with subjects such as history, English, and European languages close behind. Geography is rated above medicine. Politics, sociology, sports science, and even performing arts rate above economics. 

Students may enjoy their studies more in less remunerative fields,  and may even go on to enjoy their lower-paying careers more than we might suppose. If somebody studies theology and goes on to become a priest or an imam, do they really wish they had studied accounting? 

But should the taxpayer subsidise such courses? Perhaps not, though it does raise questions about why we should subsidise any graduates. Why should those who are likely to benefit most receive a subsidy, as Paul Johnson’s argument seems to imply? At this stage, people talk about externalities, the spillover benefits from having a well-educated population – but it’s not clear that these externalities are related in any simple way to future graduate earnings.  

The issue might be clearer if the fees which students (or taxpayers) are charged reflected the real costs associated with higher education provision. At the moment, the standard £9,250 a year across most subjects involves a great deal of cross-subsidisation, with the suspicion that students in, say, sociology or English are often subsidising more expensive subjects, or indirectly subsidising staff research time.

Perhaps if fees more closely reflected costs in the low-paying subjects, they would not look such a bad financial deal for students and the taxpayer. And if we involved universities in the student loan system, sharing risks with the taxpayer, as businessman Peter Ainsworth has suggested, they would have a greater incentive to offer courses which better prepared students for careers even in less vocational areas. They might also think more seriously about reforming the archaic and expensive structure of our higher education system, with its pointlessly long holidays and leisurely pace.

Closing courses where students don’t gain much financially is a central planner’s solution. Despite the IFS projections, we don’t know what the graduate labour market will look like in a few years’ time, and we don’t know how students will use their qualifications in a rapidly-changing world.

In the short run, closing courses by central diktat would almost certainly disproportionately penalise potential students from poorer backgrounds, and those in parts of the country which are economically depressed. Those who could not find a university place would not switch easily into vocational programmes which don’t suit their abilities or interests. And, as Johnson hints, few such programmes exist.

We have talked about the need for better vocational courses for many decades, and many policies have been tried and failed. The latest attempt, to use the apprentice levy to boost higher-level apprenticeships, seems to have descended into farce, with funds being used to finance rebadged basic training courses, which are likely to be even less financially beneficial to young people than media studies or performing arts degrees.

The IFS report is an interesting and useful piece of analysis, but its findings are not a simple guide to policy.

Author

  • Professor Len Shackleton is an editorial and research fellow at the Institute of Economic Affairs and professor of economics at the University of Buckingham.

Written by Len Shackleton

Professor Len Shackleton is an editorial and research fellow at the Institute of Economic Affairs and professor of economics at the University of Buckingham.

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