The returns to education

The returns to education

Education is an obvious route to higher-skilled and higher-paid work. Graduates tend to earn more than non-graduates and post-graduates more still. In the US students who fail to graduate from high school earn significantly less than those who do.

• In the UK, the ‘graduate premium’ over a career stands at about £130,000 for men and £100,000 for women. The scale of the premia varies across institutions and subjects. Graduates of newer UK universities tend to command lower premia. Graduates in medicine, economics and maths tend to earn more than those with humanities degrees. Higher class degrees tend to be associated with an even larger wage premium, especially in more selective universities and for vocational degrees. The Institute for Fiscal Studies estimates that in law and in economics a graduate with a 2:1 earns 15% more than someone graduating with a 2:2.

• So by and large degrees raise earnings, just as one would expect. Yet that effect is weakening. Slow growth, high inflation and rising taxes have hit incomes across the board since 2008, but more so for graduates than non-graduates. Research by the Resolution Foundation shows that the weekly pay of graduates aged 21–40 after accounting for taxes and inflation fell by 9% between 2007 and 2021. Over the same period pay for non-graduates of the same age fell by 2%. It isn’t only 20- and 30-year-old graduates who have been affected. Pay fell for graduates of all ages over this period.

• One obvious explanation for the waning of the graduate premium is an increase in the number of people with degrees. In 1950, just 3.4% of 17–30-year-olds went to university in the UK. By the year 2000, the proportion had risen to 25%. In 2019, 53% of all young people attended university in England. The latest census shows that more than a third of adults in England and Wales hold a degree.

• The increase in the supply of graduates has been followed by a compression of pay rates and a shortfall in graduate demand. By 2023 a third of UK graduates were in non-graduate jobs.

• An alternative way of framing this is to say that the UK economy has insufficient demand for some higher-level skills. That seems to be a particularly British problem. The US has a similar share of graduates in its population to the UK, but makes better use of them. Far from declining, as they have in the UK, graduate earnings are rising in the States. A US millennial graduate, aged 21–40, experienced a 15% rise in the real value of their income between 2007 and 2021. UK graduate incomes in the same age range fell 9% over this period. Incomes have risen for US graduates of all ages and fallen for UK graduates since 2007.

• The differences in spending power are significant. Last year the FT reported that in 2022 US median graduate hourly earnings were $36, 40% more than the $26 earned by British graduates, a gap that has widened significantly in the last 15 years.

• This difference does not appear to be due to different degree choices. The proportion of graduates with some of the most lucrative degrees, in science, technology, engineering and maths (STEM) is broadly similar in the UK and US, at 30% and 34%, respectively.

• The irony is the UK combines an oversupply of certain skills with undersupply in others. The government’s Shortage Occupation List covers a range of jobs – particularly in science, engineering, design, IT, software, medicine, nursing, teaching and catering. At least in recent years the growth of the graduate population has exceeded demand without fully meeting the requirements of the economy.

• UK vocational education has long lagged behind the best in Europe, creating shortages in key areas, and this remains the case. But something else is at work. The UK has fewer and smaller high-productivity sectors and businesses than the US. That seems to be limiting the demand for graduates and narrowing the graduate premium. For that to change, the UK needs to tackle its long-running productivity problem.

OUR REVIEW OF LAST WEEK’S NEWS 
The UK FTSE 100 equity index closed the week down 0.6% at 7,573. 

Economics 

• Bank of England chief economist Huw Pill said that it is a “question of when, not if” the Bank will start reducing interest rates as the UK’s inflation slows
• UK services activity grew more than expected in January, according to S&P Global PMI, with UK services activity expanding at the fastest rate since May 2023
• UK house prices rose by 1.3% between December and January, reaching levels last seen in October 2022 as mortgage rates fell in anticipation of interest rate cuts this year, according to Halifax 
• Brent crude oil price rose to more than $81 a barrel due to continuing geopolitical tensions in the Red Sea 
• The S&P 500 broke the 5,000 mark for the first time thanks to a narrow group of outperformers including Nvidia and Meta, each registering a rise in their share price of more than 30% since the start of the year
• US monthly mortgage applications jumped by 7.3% in January as demand for housing picked up
• German industrial production fell by 1.6% in December, and now stands below levels seen in the depths of the 2008 financial crisis
• House prices in Germany fell at the fastest annual pace in 60 years in 2023 as single-family home prices declined by 11.3% last year while apartment prices decreased by 8.9%
• Deflation in China worsened with consumer prices falling by 0.8% in the year to January, as policymakers struggled to boost domestic demand
• Russia’s economy grew by 3.6% in 2023, according to official Rosstat estimates, boosted by a booming demand for war production and exports of oil and gas. However, personal incomes and non-military spending have been squeezed

Business 

• UK chipmaker Arm Holdings reported higher royalty and licensing income, which contributed to a 14% year-on-year jump in revenues in Q4 2023, driven by strong AI demand
• The CEO of personal care company L’Oréal, Nicolas Hieronimus, said he expects industry-wide price rises to fall back to about 5% this year, in line with pre-pandemic averages as the cost of supplies and raw materials normalise
• Asset managers T. Rowe Price had the worst year for outflows in its history in 2023, chiefly due to high interest rates, geopolitical instability and uncertain markets, pushing investors towards money markets
• Shipping company AP Møller-Maersk announced an operating loss in Q4 2023 and predicted that losses may continue in 2024, despite the ongoing disruption in the Red Sea increasing shipping prices
• News Corp managing director Robert Thomson cautioned that companies using its content without permission through artificial intelligence are "stealing" from the publisher
• The European Parliament approved a law to make it easier for farmers to use gene editing to improve the resilience of crops amid protests from farmers about the lack of support from policymakers 
• Wind energy developer Ørsted cut dividends and up to 800 jobs as the company exits offshore markets in Norway, Spain and Portugal due to rapidly rising costs
• UK housebuilder Barratt Developments reached a deal to buy rival Redrow for £2.5bn as developers continue to struggle amid the property market downturn 

Global and political developments 

• US secretary of state Antony Blinken toured the Middle East in search of a diplomatic solution between Israel and Hamas
• The BBC reported that Donald Trump said that he had told allies he would "encourage" Russia to attack any NATO member that failed to meet the alliance's target of 2% of their GDP
• Israel’s prime minister Benjamin Netanyahu rejected Hamas's conditions for a prolonged ceasefire in Gaza and a significant release of Palestinian prisoners, in exchange for the release of Israeli hostages 
• The head of the German stock exchange, Theodor Weimer, said the rise of far-right politics in the country would be “fatal” for Germany and Europe as financial centres. The comments come as a response to the far-right Alternative for Germany party's ambition for a German exit from the EU

 And finally… after being detained for eight months, a pigeon suspected of being a Chinese spy was released by police in India. According to detectives, the bird had been captured near a port in Mumbai and was found with two rings tied to its legs featuring Chinese characters, leading to suspicions of espionage – licence coo kill