A larger degree of dosh

Graduates can expect to earn up to pounds 80,000 more than non-graduate s over a lifetime. But will the huge increase in student numbers lead to diminishing financial returns, as more highly-qualified leavers chase fewer jobs requiring their skills? Lucy Ward reports
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The Independent Online
Once upon a time, in the days of full university grants and plentiful graduate employment, financial planning for would-be students might have consisted of nothing more sophisticated than checking the beer prices at the college bar. Provided you could open a bank account ready for the first maintenance cheque, you could forget about the world of jobs and earnings for three years, secure in the knowledge that real responsibility began at 21.

Today, school-leavers considering higher education can't afford such complacency. With graduates already leaving university burdened with average debts of more than pounds 3,000, and the possibility of contributions to tuition fees looming, teenagers are being forced as never before to consider whether their degree will ultimately earn them a return on their investment. The calculation is not easy. Second guessing educational and labour market trends and government higher education policy would tax the combined powers of Mystic Meg and the Deep Blue chess computer, let alone the average 17-year-old.

Some reassurance for those weighing up the financial benefits of a degree came last week with a report from the Institute for Fiscal Studies suggesting graduates could expect "substantial" cash returns as reward for their labours. The study, funded by the Department for Education and Employment, found that, on average, men with first degrees earned around 15 per cent more than male non-graduates with similar backgrounds and levels of ability.

For women, the rewards of a degree were even higher. Female graduates were able to command salaries 35 per cent higher than their counterparts without degrees, though this still left them with earnings 23 per cent lower than male graduates. However, women without degrees earn 43 per cent less than similarly unqualified men, indicating that graduating from higher education helps women close at least part of the gender earnings gap.

Over a working lifetime, the report's authors calculated, the earnings bonus of a degree could total around pounds 80,000 or more. Even assuming the cost to the individual of higher education - including all maintenance costs and tuition contributions - rose to pounds 20,000, graduates would still make a clear financial profit. Before teenagers breathe a sigh of relief and reach for their UCAS forms, however, they should take note of a health warning accompanying the IFS report. The research made use of the National Child Development Survey, a continuing study following the changing circumstances of a sample of men and women born in March 1958, which last collected data in 1991. That means the IFS findings are not only six years old but are based on the experiences of 3,000 adults who went to university in the late Seventies - before the dramatic expansion which now sees one in three school-leavers go on to higher education.

Lorraine Dearden, one of the authors, acknowledges that the pay-back today's undergraduates can expect from their degrees may not match that now being enjoyed by their predecessors. She says: "The evidence is that the return has been increasing since the time these adults were students, despite the increase in demand [for higher education], but whether that will continue is anybody's guess. There are growing questions over whether employers actually use graduates' skills, and some evidence that we are over-educating our population."

Richard Pearson, director of the Brighton-based Institute for Employment Studies, agrees that times have changed since the college days of the IFS sample. The doubling in the number of graduates, he points out, has not been matched by a proportional rise in graduate jobs. "The number of vacancies, which dropped by 35 per cent in the recession of the early Nineties, is recovering and going up among big companies, but we are talking about 15-20,000 people, when there are 200,000 graduates each year."

In such circumstances, Mr Pearson argues, employers aim for precisely the same elite they might have taken on 15 years ago, but develop more sophisticated recruitment techniques to ensure they target their efforts accurately.

Such twists in the graduate employment numbers game night well sow fresh doubts in the mind of our wavering teenager. In theory a degree buys you greater earning power, but are there now enough graduate jobs to go round?

The question is a crucial one at a time when Sir Ron Dearing and his Committee of Inquiry into Higher Education are preparing to report on how our higher education system should look in the 21st century. Just as each school-leaver must decide on whether his or her investment will be repaid, the state must examine just how many highly-qualified citizens it wants and can afford. If the labour market cannot make use of so many graduates, are we over-educating our population?

New research from the University of Newcastle upon Tyne finds that, according to the limited data available, many of Britain's graduates are in jobs for which they are over-qualified. Any analysis in this area is tricky, since defining "over-education" is notoriously difficult - law graduate Tony Blair, after all, is filling a post previously held for seven years by a man with six O-levels.

However, the study by economists Peter Dolton and Anna Vignoles, based on their own research and other UK studies, confirms that in the Eighties around 30 per cent of all graduates were in non-graduate jobs, at least early on in their careers, and suggests that "it is possible that the incidence of over-education is even higher today".

Their findings also show that over-educated graduates earn less than those in graduate jobs, and continue to do so until they move into jobs matched to their qualifications - though they still command higher salaries than employees without degrees. Contrary to conventional labour market theory, the supply of graduate posts has not expanded to meet demand, nor have the numbers flowing into higher education fallen.

The Newcastle University research paints a bleaker picture for the would- be graduate than the IFS study, yet even this is not up to date. Professor Dalton admits: "A lot of the data available is really too old and doesn't relate to the present market. The reality is that at the moment we just don't know the rate of return on a degree and how many graduates will not use their skills."

Richard Pearson sums up the problem: "We are offering school-leavers signposts posted in 1960 when we should be giving them careers information that will be useful in 2020."

Amid such uncertainty, your average 17-year-old pondering his or her future might be forgiven for giving up in despair. Yet, despite the shortage of hard facts, experts agree that a degree is still the smartest option for those who can stay the course. In the employment hierarchy, Mr Pearson points out, a graduate still comes before a non-graduate, and certain jobs are out of bounds to those without degrees. "The rewards ain't what they used to be, but if you don't do it you'll be at a disadvantage. It's like advertising - everyone else is doing it and so must you to stay in the game." Since graduates earn more than non-graduates, concludes the Newcastle study, it still makes sense for individuals to invest in higher education even though they do not know whether their job will demand a degree.

Hugh Smith, graduate entry manager at BT and chair of the Association of Graduate Recruiters, offers more positive encouragement. Employers, he insists, will continue to value the intellectual skills and academic knowledge offered by graduates. Three years at university, coping away from home, also help to develop the personal qualities of independence combined with the ability to live and work with others, which employers value.

There is a clear correlation between qualifications and skills and levels of unemployment, points out Mike Bell, senior manager at Birmingham Training and Enterprise Council, which is leading other TECs around the country in work to link students, employers and universities. Each individual should aim for the highest possible qualifications, he suggests, and the scope of job should expand accordingly, banishing the notion of "over- education". On the way, students may have to rethink the concept of a "graduate job", given the number of opportunities in small and medium- sized companies which have neither time nor inclination for the graduate recruitment milk round.

The Government, promoting the idea of the learning society in which the phrase "perpetual student" is no longer a term of abuse, would be likely to agree. In only a few months, it will be able to put theory into practice when considering its response to the Dearing reportn