The debate around the costs and benefits of attending university is, at present, very narrowly focused on expected earnings over the working lifetime (see my previous blog-post for example). However this debate needs to be broadened out. The returns to education in general and university in particular may be far wider than the private financial returns that are the focus of so much of the economics literature.
For a start, to compare earnings we are conditioning on the individual being in a job – and while graduates earn more when employed, they are also more likely to be in a job, which has never been more important given current labour market conditions. Recent figures from National Statistics show that in the third quarter of 2010, unemployment amongst 21-24 year olds with a degree was lower (11.6%) than for the same age group without a degree (14.6%) and far lower than the unemployment rate of 18-20 year olds (27.0%).
The range of job opportunities available to graduates is also larger (not many job adverts specify that not having a degree is a requirement), moreover as a graduate you are more likely to be in a job that you actually enjoy doing, and that offers opportunities for self-accomplishment and social interaction – which are all important for mental health, happiness and general “well being” outcomes. Oreopoulos and Salvanes (2011) show for US data that amongst individuals with similar family backgrounds, those with more education are more likely to report being happy with life and be in a job that they enjoy and that gives them a sense of achievement. This is the case even after taking into account the fact that more education increases income which itself may increase happiness and related outcomes. The largest increases in each measure are associated with the difference between those who do and do not attend university.
Though this US evidence is only suggestive – it could be that people who go to university have unobserved characteristics that mean that they would always be happier regardless of whether or not they went to university – the fact that the relationships exists even taking into account a wide range of background characteristics and income makes a strong case that higher education positively impacts these health and well-being outcomes. Moreover, other evidence from the US (Stowasser, Heiss, McFadden and Winter, 2011) and the UK (Oreopoulos, 2007) shows that increasing education has a positive causal impact on physical and mental health.
Aside from these effects on the likelihood of being in a job and enjoying that job there are other considerable non-pecuniary benefits of going to university. A university education can impact major life outcomes such as location, marriage/relationships and child-bearing. It can also enhance key personal skills, characteristics and preferences – for example critical thinking, decisiveness, communication, confidence, self esteem, self awareness, risk attitude and future orientation – that are not easily captured by qualifications.
Attending university broadens your experience and may make you better at running your own life and managing your time and resources – making you more attractive in the marriage market and benefitting others, such as your children. This broadening of experience and skills and encountering of new people, new environments, new perspectives and opportunities – the “consumption value” of university if you like – cannot easily be monetarised but is all a part of the “return”.
The likelihood is that if you go to university you will earn more over your lifetime than if you elect not to go, and even paying £9,000 per year in tuition fees you will still see a good return on your investment (see previous blog post). However, I would argue that much more important than this narrow earnings focus is the fact that you will also be less likely to be unemployed, more likely to be in a job that you enjoy, have better physical and mental health and gain in many personal skills and characteristics that will improve your outcomes both inside and outside the labour market over the rest of your life.
National Statistics: http://www.statistics.gov.uk/cci/nugget.asp?id=1162
Oreopoulos, P. (2007). ‘Do dropouts drop out too soon? Wealth, health and happiness from compulsory schooling’, Journal of Public Economics,Vol. 91, pp. 2213-2229.
Oreopoulos, P. and Salvanes, K. (2011). ‘Priceless: The Nonpecuniary Benefits of Schooling’, Journal of Economic Perspectives, Vol. 25, pp. 159-184.
Stowasser, T., Heiss, F., McFadden, D. and Winter, J. (2011). ‘“Healthy, Wealthy and Wise?” Revisited: An Analysis of the Causal Pathways from Socio-economic Status to Health’, NBER Working Paper, No. 17273.
So, you’ve got your A-level results and are now having to decide whether or not to go to university. On the one hand a degree should lead to higher wages throughout your lifetime but on the other there is the issue of having £27,000+ of student debts to pay off. So the big question: is it actually worth it?
Economics studies that have addressed this directly suggest that, on average, a university degree is a worthwhile investment with a positive expected rate of return – indeed in many cases a rate of return that compares favourably with anything the stock market might offer. Surprisingly, this remains the case even with the fee level increased to £9,000 per year: recent work by Ian Walker and Yu Zhu (2011) shows that even with such an increase in tuition fees the returns hold up.
What does make a difference to the expected return is the subject you study and how hard you study it. Variation in lifetime returns by broad faculty is particularly clear for men: with a £9,000 fee the estimated rate of return to a degree in Law, Economics or Management is around 29% if you get a 2:1, whereas a 2:1 degree in other social sciences, arts and humanities has a return of around 6% over your lifetime, compared with not going to university (but having the grades to do so). Only managing a 2:2 drops the return by around 4 percentage points. For women the picture is bright whatever the area of study – the average returns are in the high teens for all faculties, with even the lowest estimated return (for a 2.2 in an arts/humanities subject) more than 14%.
So the numbers suggest that on average investing in a degree is a sound investment and will pay a decent return over and above what you would otherwise have earned during the course of your working lifetime.
However these numbers come from aggregating across universities and across courses within broadly defined faculties. Another recent study (Chevalier, 2011) looks at variation in earnings returns within specific degree subjects, for the cohort of graduates who left university in 2003. The finding here is that variation in wages three years after graduating is large across subjects (as Walker and Zhu suggest) but that the variation within a subject is considerably larger. Moreover, the quality of institution attended matters for the estimated return too.
What students really need to know is whether going to University X to read subject Y is expected to give them a positive lifetime return in wages. At present this information is just not available which is a problem – I’m not sure that we would expect people to invest £27,000+ on anything else without a more accurate idea about the likely return on the investment and the variance of that return. All of the requisite information is in theory available and if it could be released (to researchers) and linked together it would provide students with a much more precise picture allowing them to make informed choices about where to go and what to do.
At the same time, what is also needed is much better communication – particularly to young people from less advantaged backgrounds – of how university is paid for. It is not the case that students pay the £27,000+ cost of a university degree. Graduates do. And only if they are earning £21,000 or more per year. If they don’t earn at least this amount, they don’t pay back a thing. And if they are earning above this threshold, a little is deducted directly from their salary each month. Moreover, these student loans are the cheapest form of borrowing – the interest rate is inflation plus a maximum of 3% per annum. Compare this with a typical credit card: 18% APR – that’s about inflation plus14%. So student loan debt is very different to having £27,000 on your credit card which is racking up 18+% APR and will destroy your credit rating, chances of getting a mortgage and risk a visit from the bailiffs if you can’t pay it back.
It is clear that the variation in expected returns by subject and also within subject means that there is risk associated with the investment in a degree, but this risk is insured against by these loan repayment arrangements and having student loans should not damage your credit rating or undermine your chances of getting a mortgage.
So while we can be pretty sure of the costs of a degree and how it is paid back over the lifetime, it is less clear exactly what the expected return to any specific course at a particular university will be. Nevertheless, the statistical evidence that we do have suggests that if you work hard enough then whatever course you choose to do, there will be a positive lifetime wage return on your investment.
Walker, I. and Zhu, Y. (2011). `Differences by degree: Evidence of the net financial rates of return to undergraduate study for England and Wales’, Economics of Education Review, doi: 10.1016/j.econedurev.2011.01.002
Chevalier, A. (2011). `Subject choice and earnings of UK graduates’, Economics of Education Review, doi: 10.1016/j.econedurev.2011.04.007
The UK education system has been firmly in the headlines. Whether it’s the Coalition Government’s Schools White Paper, The Importance of Teaching, or students protesting against the Government’s response to the Browne report (Securing a Sustainable Future for Higher Education in London) the critical issue of whether education is a public or private good is being discussed and debated rigorously, though not necessarily in those terms.
Of course, it’s both. Though one might question the (historic) figures bandied around to assert the wage premium a higher education degree is said to attract, and certainly discount the idea it will apply to everyone who passes through a University, it must be true that one of the motivations that attracts students to University study is the prospect of a well-paid job. Nothing wrong with that. Indeed, it is often the transferable skills and training that Universities offer that make them an attractive proposition for internal as well as overseas students. On the other hand, at a time when the talk is of ‘the Big Society’ and about measuring happiness not merely economic output as a measure of the country’s progress, it would be odd to stop valuing learning as a social and cultural good in its own right. There may not always be an immediate and tangible economic return but were Universities ever intended to be just the training partners of industry, business and commerce?
Meanwhile, the new academies and free school programmes outlined by Michael Gove MP, Secretary of State for Education, have reignited the debate about social polarization if the best performing schools opt-out of local authority governance and, it is assumed, begin to attract the better (meaning middle-class) pupils who then receive a better funded educational experience than those left “trapped” in the less desirable schools. Here again, we encounter the question, who is education for? The individual recipients? Society as a whole? Or, both (in which case, how are they balanced?).
In A Journey, Tony Blair staunchly defends the New Labour policy of promoting school choice. The basic argument is who is government to hold back those who want to innovate, to be successful, to want the best for their children? It’s compelling but critics of those and current policies might argue they are individualistic. They miss the broader social point that it is not a level playing field: those with the resources and influence to do so, it is alleged, are best able to capitalise on the system. They will be the “winners” and inequalities will grow. And inequalities, according to the authors of the much publicised and debated book The Spirit Level are socially damaging.
But is it true? Have policies of school choice, partial marketisation and competition actually raised levels of social polarization? For schools the evidence remains unclear: see past CMPO papers and a forthcoming CMPO working paper reviewing the literature to date. In Higher Education, University education is not the preserve of the elite and the wealthy. In fact, the traditional image of the ivory towers where fresh-faced young students travel from the Home Counties along the M4 to study for three years away from home increasingly is misleading. Many students are part-time, mature and live at home. And, though young people from more affluent areas are still more likely to attend University, young people from disadvantaged areas have been substantially more likely to enter higher education since the mid-2000s (see Trends in young participation in higher education: core results for England, HEFCE, 2010). It would also not be unreasonable to suggest that the professionalization of teaching with Universities, though still not as strongly valued as it should be, is driven in response to the raised expectation of fee-paying students.
Yet, that was before a near three-fold increase in fees that will see the Aimhigher programme (promoting widening participation) axed and which will make the English University system the most expensive in the world, saddling students with a debt for up to 30 years. Quite what the effects on the housing and mortgage markets will be when graduates must first pay a fixed proportion of their salary to repay their student fees can only be guessed at. Will it be the case that only those from the “best schools” will be able to afford to go on and attend the “best universities”? Only time will tell.
In the meantime, the debate continues. What is that value of education? And who or what gains from it?