6.1 Our terms of reference asked us to have regard, within the constraints of the Government’s other spending priorities and affordability, to the principle that:

‘there should be maximum participation in initial higher education by young and mature students and in lifetime learning by adults, having regard to the needs of individuals, the nation and the future labour market’

6.2 In this chapter, we consider the future demand for higher education from the economy and from individuals over the next 20 years, in response to the social and economic influences outlined in Chapter 4. We turn in the next chapter, Chapter 7, to consider the pattern of participation between those from different social groups and the steps that need to be taken to tackle under-representation by some of these groups. In Chapter 17 we consider the financial implications of future demand for higher education.

6.3 In considering the future demand for higher education we looked at a range of evidence which enabled us to address:

  • the economic factors affecting demand for those with higher education qualifications;
  • possible scenarios of demand for higher education;
  • how the demand for higher education should best be reflected in determining the size and shape of higher education.1

Economic factors affecting demand for those with higher education qualifications

6.4 The future demand for those with higher education qualifications will be shaped by the changing structure of the national economy and the labour market, which in turn will be responding to changes in the world economy and the associated competitive challenges. These forces will find their response in the choices made by individuals about participation in higher education and in employer demand for lifelong learning opportunities on behalf of their employees.

The changing structure of the national economy
6.5 The introduction of state education more than a century ago was fundamentally a response to the developing needs of the economy. The history of the last century has been marked by the progressive extension of state education not only as something which is socially desirable and good in its own right, but in response to the needs of an economy which, to sustain its markets, has had progressively to provide more advanced goods and services. The 20th century has seen a remarkable change in the structure of the national economy away from the extractive and basic industries and towards activities characterised by the intensive use of human capital, including advanced manufacture, the creative development of new products, and major new services.

6.6 Powerful world economic forces inescapably tie the United Kingdom (UK) more fully into the world economy. As we show in Chapter 4, one phenomenon is the emergence of the global corporation locating and relocating its operations to wherever there is greatest relative advantage, whether in accessing markets or in accessing the factors affecting production, including in particular the quality of the labour force.

6.7 The UK, in seeking to provide its people with a high and improving standard of living, will be able to do so and remain a major economy only if its people are highly educated and well trained. It must match proportionately the investments made in their people by other nations, and the volume and the quality of their outputs from such education and training. A decade ago we had fallen well behind many other countries of Western Europe in the provision of higher education. Even now, after participation rates by young people have doubled, and the target set by the last Government for a third of young people to participate in full-time higher education by the year 2000 has been largely met, our levels of participation remain behind the United States and Japan. However the stock of graduates in the labour market compares well with many European countries in part because of high graduation rates.2 There is a long term expectation of growth in higher education in many countries, especially those of the Pacific Rim. Our degree programmes, whilst of high quality and comparable standards, are in the main shorter (other than in Scotland) than those of almost all other nations, largely because of the very specialised nature of the A level examination system.

6.8 There is international consensus that higher level skills are crucial to future economic competitiveness:

‘The direction is universal participation: 100 per cent participation with fair and equal opportunities to study; in some form of tertiary education; at some stage in the life cycle and not necessarily end on to secondary education; in a wide variety of structures, forms and types of delivery; undertaken on equal terms either part-time or full-time; publicly subsidised but with shared client contributions; closely involving partners in the community; serving multiple purposes – educational, social, cultural and economic.’3

6.9 Our visits overseas suggest that, in the long term, other nations will increase their investment in higher education to sustain their economies. There is some emerging economic evidence to support such an approach. First, that countries which are the first to develop new research and technology capabilities gain a long term advantage over their competitors. Secondly, that ‘the weight of evidence is increasingly that education is positively associated with income growth and higher education seems to be the most relevant educational variable in more developed countries’. As a matter of economic strategy, we must match international levels of investment to anticipate and respond to the changing structure of the international and national economy.

The changing requirements of the labour market
6.10 Labour market requirements for those with higher education qualifications are changing dramatically. Many of the employer organisations which gave evidence to us support this view. This will affect overall demand. The Confederation of British Industry told us:

‘as the economy and organisations change, the areas in which graduate skill and qualities add value will multiply...large numbers of graduates are adding value not just in expanding numbers of traditional graduate jobs but also in a widening range of previously non-graduate roles’.4

6.11 There is room for debate as to whether, following the major expansion in higher education that has taken place over recent years, there is need in the immediate future for further expansion and whether the labour market could absorb further increases in the numbers of conventional graduates. A study of the likely future labour market needs for highly skilled workers by the Institute for Employment Research (IER) at the University of Warwick looks ahead to the year 2000.5 It considers in some detail the likely changes to occupational structures, based on changes in the recent past. The IER research concludes that, up to the year 2000, labour market requirements will largely be met by the current level of higher education participation.

6.12 Another view put to us is that the UK’s chief economic need is not for more people with graduate qualifications but rather for more people with lower level post-school qualifications. This view draws on evidence that graduates are now being employed in jobs which were traditionally done by non-graduates, raising the possibility of their under-utilisation, and on the longstanding perception that the UK’s comparative international weakness lies at the technician rather than degree level.

6.13 It would indeed be surprising if the labour market did not need time to respond fully to the increased supply of those with higher level qualifications. We are persuaded that jobs are being progressively redefined to utilise graduate skills:

  • a recent study for the Department for Education and Employment (DfEE) showed that, even when graduates were recruited into traditionally ‘non-graduate’ jobs, a large majority (65 per cent) of managers who had taken on increased numbers of graduates thought that the jobs had improved because they were being undertaken by a graduate;6
  • research by the National Institute of Economic and Social and Research shows that some sectors of the economy have been able to deal more flexibly with additional graduates than others and that redesigning jobs can enable graduates to add value in traditionally non-graduate jobs;7
  • respondents to our employer questionnaire suggest that ‘graduates, as a proportion of total employees, will continue to grow’ and that ‘there is scope to increase the proportion of those with first degrees in some industries, although this will partly depend on the response of higher education to employers’;8
  • Swedish research shows that flexible organisations are more likely to thrive in the international marketplace and that the key to their flexibility is the extent to which they employ highly skilled workers;9
  • Japanese and USA experience demonstrates an ability to make good use of much higher numbers and proportions of graduates in the economy than is traditionally the case in the UK. Even in the USA, where some 60 per cent of the population has some experience of higher education, graduates attract significantly higher salaries than non-graduates, suggesting that their employers continue to regard them as bringing extra value;10
  • a survey of graduates by the University of Central England points to strong demand from employers for graduates with the right qualities, notwithstanding recent increases in the flow of graduates to the labour market;11
  • public policy decisions are transforming certain professions. For example, we were told that in a health service with a new focus on primary care, nurses and those in professions allied to medicine will need the knowledge, skills and aptitudes typically acquired in higher education.12

6.14 As to the demand for more people with advanced technical training, we agree that this is an area of national need. We believe that much of the further growth of higher education, at least in the short term, should be in the Higher National Certificate, the Higher National Diploma and other analogous awards. We reflect this in our proposals for the structure of qualifications in Chapter 10 and for the pattern of institutions in Chapter 16. It is expansion at this level that has particularly characterised recent Scottish experience, where participation by young people has reached almost 45 per cent, significantly ahead of England and Wales.

6.15 Chapter 9 also explores in more detail the views of employers about the range of skills and attributes which they require from graduates; and how those views can better be reflected in higher education, based in part on the questionnaire which we sent to a sample of employers.13 We emphasise in Chapter 12 the importance of higher education institutions ensuring that they are well-informed about local and regional employers’ requirements.

Economic benefits to individuals from participating in higher education
6.16 An assessment of the economic benefits to individuals from participating in higher education has been central to our work. These benefits are probably the most significant economic factor affecting demand. They are substantial and consist of:

  • employment rates which are, on average, above those for people who were qualified to enter higher education but did not do so;
  • pay levels which are, on average, above those for people who were qualified to enter higher education but did not do so.

6.17 We drew on three important studies to assess these benefits and their possible impact on demand:14

  • research by Analytical Services within the Department for Education and Employment. This studies graduates across a number of economic cycles, from those graduating in 1971 to those graduating in 1995. The 1989 to 1995 results are shown in Report 7, ‘Rates of return to higher education’;
  • research by the Policy Studies Institute (PSI) which looks at young graduates (at ages 23 to 24);15
  • research by the Institute for Fiscal Studies (IFS) which uses data for those born in 1958 recorded in the National Child Development Study and examines those who were graduates at the age of 33.16

6.18 These three studies show evidence of strong and persistent economic benefits to those with higher education qualifications. First, the Analytical Services research shows that employment rates are higher for those with such qualifications than for those without, particularly for women (Chart 6.1). Employment benefits are apparent for men with higher education qualifications in their mid-30s onwards, and rather earlier for women. The IFS and PSI reports broadly support these findings for the particular ages they study.

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