Does a university education help you earn more?
Maybe, but not in the way that you think
Over the last couple of weeks in the UK, there’s been a lot of controversy about student loans. Graduates have been posting their student loan balance statements on social media showing some punitive interest rates.
That has spilled over into a wider debate about the economic value of university itself. If it is so expensive, is it worth it economically?
What is the graduate premium?
The “graduate premium” refers to the fact that university graduates earn more than non-graduates, and is often used as a reason why a) students should pay for the costs of their university education and b) we should try to get as many school-leavers as possible to go to university.
A popular critique of this argument is that whilst graduates earn more on average, the average is misleading: a small number of degrees command large premiums, whereas some degrees offer no premium at all. This critique is summed up well by Fraser Nelson, who argues that as a result the government should release national data on earnings by subject and institution so school-leavers can make more informed choices about where to study. For example, Glasgow history grads earn only 30k five years after graduating, whereas LSE history grads earn 50k. LSE therefore offers “absurdly good value” and should probably put its fees up.
However, even this more nuanced take on the graduate premium misses something crucial. Discussion about the graduate premium assumes that it is caused by going to university. The implicit reasoning is that you go to university, you acquire knowledge and skills you wouldn’t have got otherwise, and these make you a more productive worker who can therefore command a higher salary.
But graduate income data does not prove this causal chain. Yes, it is true that people who go to university earn more, on average, than people who don’t. But people who wear Rolex watches earn more, on average, than people who don’t. No-one is proposing a “Rolex Premium” whereby every school-leaver is encouraged to take out an expensive loan to fund the purchase of a Rolex watch, on the grounds that it will lead to them having much greater lifetime earnings.
Likewise, the way to critique that argument is not to say “Well yes, the Rolex Glasgow model doesn’t help you earn much, but the Rolex LSE model leads to really high future earnings, so we should encourage school-leavers to buy the Rolex LSE - and in fact, Rolex should charge even more for it because it will pay for itself over time!”
To prove the graduate premium is more than just a Rolex premium, we need some causal evidence that it is caused by skills acquired at university.
Human capital vs signalling
There is an extensive academic debate about this: the human capital vs signalling debate.
The human capital side says that the graduate premium is caused by the knowledge and skills universities impart.
The signalling side says that the graduate premium is caused by the signal that is sent by a degree. Universities select their students based on prior attainment. Employers use degrees as a cheap (for them!) way to select employees who are already smart. They are not that bothered about what the student learns at university.
This debate obviously has enormous implications for public policy.
If it turns out the returns to a degree are mostly due to human capital, then we should definitely be aiming to get 50% of school-leavers to university, and arguably we should be aiming for an even bigger proportion. If university really does reliably impart skills and knowledge that reliably increase your lifetime earnings, then expanding access is economically rational.
If it turns out the returns to a degree are mostly due to signalling, then we are wasting gigantic sums of private and public money. We could essentially replace degrees with some kind of basic test taken at age 18 and that would provide employers with what they are currently getting with hugely expensive three-year degree courses.
So if there is a huge debate, what is the consensus about which side is right? What does the data say?
It’s a difficult question to answer because degrees are used as a filter for a lot of well-paid jobs. One way you could research this question is to compare two cohorts of school-leavers with exactly the same A-levels and prior attainment. One cohort goes to university; one doesn’t. If the university grads do better in the job market, that suggests the university imparts valuable skills and knowledge, and therefore is evidence for the human capital theory.
But of course, that won’t work, because lots of jobs are restricted to graduates. Maybe the non-grads would have done perfectly well at them, but they never get a chance.
Another obvious way you could measure the impact of university is to directly measure the skills and knowledge it imparts by assessing students and seeing what they have learned. This is what happens at school, and this is one of the reasons why we have good evidence that schools do succeed at teaching skills that are valuable in the job market, and that some schools are more successful than others. But most academic degree courses don’t feature any kind of nationally-standardised assessment that could be used for this purpose.
As a result, a lot of the research in this area is hugely complex and ultimately quite inconclusive.
That in itself is quite striking though – given how embedded the human capital theory is, and how much it governs the public debate and policymaking in this area, you would expect there to be some quite solid evidence in its favour!
Assessment data is limited, but it is less limited than earnings data!
A lot of criticisms are made of educational assessment – some of them justified. Can assessment truly capture everything we value about education? Does it distort the thing it is trying to measure? Does it lead to the things that can’t be assessed being neglected? We write about a lot of these themes on this Substack!
Still, even if you are sceptical of assessment, you have surely got to admit that even a basic standardised assessment is a better way of measuring the impact of universities than later earnings.
Earnings data doesn’t capture the value of learning for its own sake. It undervalues low-paid but socially vital jobs. It is often not a measure of productivity because a lot of public sector salaries are set by government. Similarly, it doesn’t account for regional differences in pay (this is probably a significant factor in why Glasgow history grads earn less than LSE ones). It might also lead universities to make bad decisions about which courses to offer or which type of students to recruit.
There is an analogy with health targets, which have their flaws but still tell you something useful. How would you rather measure the success of a hospital – by its infection rate, by the proportion of patients treated at A & E within four hours, by the numbers of beds in corridors? Or by how much its patients earned five years after being treated there?
Standardised assessments at university
Andreas Schleicher is the Director for Education and Skills at the OECD, who run PISA, the international school assessment. He has pointed out that “there was a time when people looked to universities to judge the quality of education. Today, it is the other way around: the public want better information on the quality of universities.”
Given the scale of public subsidy and private debt involved, why not make some form of standardised assessment compulsory for all degrees? This could take a variety of different formats: maybe certain subjects all have to have a couple of shared “national” exam modules covering the content that every university will teach. Or maybe students in every essay-based subject have to take a compulsory writing module and exam – which might also help assuage concerns about the impact of AI on the traditional take-home essay.
You could even assess it with Comparative Judgement…
In what I think is one of the most important studies on this subject—The case against education—Bryan Caplan shows that, at least in the US, earnings for those who complete one, two, three or even four years of higher education but do not actually complete the degree do not earn more than those who do not go to university. The graduate premium is gained by actually crossing the finish line, resulting in what some call "the sheepskin effect". This suggests that the effect is mostly signaling, although there is certainly a human capital effect for some degrees. Graduates in petroleum engineering, for example, can expect to earn well over $100k in their first job.
The question, then, is what, exactly, are bachelor's degrees signaling? If it is mostly ability, then, as Daisy suggests, some kind of test would do as well, but would be far less expensive. However Bryan Caplan argues—convincingly to my mind—that the signal is mostly about conformity and conscientiousness. What employers get, when they recruit graduates, is people who have shown that they are willing to knuckle down, play by the rules, hand stuff in on time, and so on for four (or in the case of the UK, three) years. No one-off test of intelligence or academic achievement can do that.
It is also important to bear in mind that, in the UK at least, there is substantial heterogeneity in the returns to higher education. Older students often have negative returns, not least because they have fewer years in the workplace to earn back the cost of their degrees. Part-time students, especially men, have much smaller, and often negative returns even after prior attainment is taken into account, and of as noted above degree subject also makes a difference.
Studies by the Institute of Fiscal Studies show that around a quarter of men and around one-sixth of women have negative lifetime returns, and, unsurprisingly, these negative effects are more marked in some subjects (e.g., creative arts, social care).
Of course earning more money should not be the main reason for embarking on a degree, but, especially given the increased repayment costs, students need, as Daisy suggests, better information about the costs and benefits.
Do keep in mind, though, that some of the "human capital" that universities produce is not due to academics, but due to a particular kind of socialization (mostly peer-to-peer) that happens in university.