 3.1 The results reported above suggest that rates of return to first degree graduates, based on current earnings premia and levels of teaching costs, are above the 6 per cent rate of return the Treasury requires on public investments. This assessment is before making any allowance for wider benefits to the economy or the intrinsic benefits from participation in higher education, both of which are difficult to quantify. 3.2 However, the measure which is of most value to guiding future investment decisions on the appropriate size of higher education is the prospective rate of return. That is, the return which it is expected will be achieved by today’s graduates over their working lives (together with corresponding measures of prospective returns for future cohorts of students). 3.3 It is the prospective rate of return, after allowing for likely changes in the labour market for graduates, rather than current rates of return, that should influence decisions on whether further expansion beyond current plans is justified on economic grounds. 3.4 The measures of historic rates of return, of the kind reported above, provide only an imperfect prediction of the prospective rate of return. This is because historic rates of return tells us about the pay premiums earned by previous generations of graduates at the stage which their careers had reached in the early to mid-1990s. Such measures of historic rates of return will only provide a good predictor of the prospective return for today’s graduates in circumstances where the pay earned by graduates of different ages remains broadly in line with the premia observed in the early mid-1990s. If, however, today’s graduates face different premia over their working lives then historic rates of return will only provide an imperfect guide to the prospective rate of return.
3.5 The sizeable increase in the share of the workforce with a degree that is occurring and is projected to continue on current levels of participation in higher education, in particular following the doubling of participation of young people since the late 1980s, might well be expected to depress future graduate pay premia. However, this will depend how far the labour market demand for graduates increases, as it has done in the past, as the economy grows and develops. 3.6 Future premia will be shaped by several factors; particularly relevant are:
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Future trends in the demand for and supply of graduates3.7 Trying to forecast the economy’s future needs for highly qualified workers cannot be done with any precision. It is possible, however, to identify broad trends in the labour market for graduates.
3.8 Current earnings differences are based on people who finished full-time education between the late 1950s and the late 1980s, when participation in higher education was much less widespread than it is today. It is possible that pay premia for graduates in today’s era of much greater participation in higher education will be lower than those experienced by earlier generations of graduates, because of the greater supply of graduates. For example, the graduate pay premia declined during the 1970s following the expansion of higher education in the late 1960s, (although there were other factors affecting pay differentials in the 1970s). 3.9 This suggests that rates of return for today’s graduates might be less than current earnings differences imply. However, while the supply of graduates is increasing, the economy’s demand for graduates is also increasing: as new technologies are adopted, and patterns of work change, there is an increasing demand for higher level skills and this is expected to continue. Over the 1980s the number of employed graduates rose from 1.7 million in 1981 to 2.6 million in 1991 while the graduate pay premium was maintained, which suggests the economy was able to profitably absorb more graduates.14 The economy’s increasing demand for graduates will tend to underpin the graduate pay premia. 3.10 Future trends in the supply of graduates to the labour market will be determined by the interaction of three factors:
3.11 Forecasts for each of these components of prospective supply can be made with reasonable accuracy in the short term, and a forecast of trends in supply up to 2001 is summarised in Table 3.1. 3.12 Forecasts of prospective demand to employ graduates are considerably more uncertain. The DfEE commissioned a detailed study from the Institute of Employment Research at Warwick University and this study reported in December 1995.15 Warwick’s analysis models the interaction of three factors in determining the future employer demand for graduates. |
Changes in the structure of the UK economy3.13 Changes in industrial structure will influence the demand for graduates because, for example, some declining heavy manufacturing sectors (eg shipbuilding) employ relatively fewer graduates as compared with some expanding parts of the service sector (eg financial services). Changes in industrial structure of this kind will therefore increase the demand for graduates. 3.14 Warwick’s forecasts build upon sectoral forecasts of the British economy prepared by Cambridge University. These underlying macroeconomic forecasts attempt to predict how the industrial structure of the British economy will change as a result of underlying trends in competitiveness and technology.
3.15 Warwick’s analysis finds, however, that sectoral changes are of relatively lesser importance in determining the future trend in the demand for graduates in comparison with the changes to occupational and skill structures discussed below. Correspondingly, their forecasts of graduate demand are relatively robust to alternative macroeconomic assumptions. |
Changes in occupational structure3.16 Changes in the structure of occupations will influence the demand for graduates because, for example, technological changes mean that there are relatively fewer clerical workers (who are less likely to be graduates) employed in sectors such as financial services but relatively more professionals (who are more likely to be graduates). Changes in occupational structure of this type will increase the demand for graduates. 3.17 Warwick’s analysis investigates trends over the 1980s in employment in 79 detailed occupational groupings and extrapolates forecast growth in each of these groupings. Changes in occupational structure are an important factor in Warwick’s results; broadly a half of the forecast increase in graduate demand results from the forecast changes in occupational structure. Correspondingly, the overall results are quite sensitive to the forecasting assumptions on occupational structure. |
 Changes in qualifications3.18 Warwick’s analysis looks at trends in the skill/qualification mix in the 79 detailed occupational groups (disaggregating into nine discipline areas). Warwick’s forecasts recognise that some occupations are approaching "saturation" and that past trends of increased graduate penetration are unlikely to be continued in future, at least at past rates, whilst in other occupations there is greater scope for graduate penetration. Warwick finds that changes in qualification/skill mix are important in shaping the demand for graduates; accordingly the forecasts are sensitive to the forecasting assumptions made on qualifications mix. |
Warwick’s demand and supply projections3.19 Warwick’s projections are summarised in Table 3.1. They show an increase in the supply of graduates in the ten years between 1991 (the Census year on which the forecasts are based) and 2001 of broadly 50 per cent; the DfEE’s own, more detailed, forecasts are in line with this. Over the same period, Warwick forecasts an increase in the demand to employ graduates of broadly 40 per cent. 3.20 In Warwick’s central demand forecast, the growth in supply to 2001 is greater than forecast demand growth. As a result, there is likely to be a period of labour market adjustment in which graduates come to be employed in a wider range of jobs than projected in Warwick’s forecasts and in which the graduate pay premium (and rates of return) decline. |
Future trends further into the 21st century3.21 As we look further forward beyond 2001 it might be expected that the demand to employ graduates will continue to rise (as technologies change) and will eventually overtake the growth in supply, unless participation in higher education is increased. 3.22 Forecasts of this type clearly become more speculative the further we look into the future, and the results should be interpreted with appropriate caution.
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