Blogs | September 14, 2016

Is a university education worth it?

Millions of young people preparing to go to university have one question on their mind: will it actually pay off?


British research suggests that, for the average student, the answer is: yes. Ian Walker at Warwick University has estimated that men with degrees earn on average 23% more than men with just two A-levels. That’s equivalent to an extra £168,000 over a lifetime. For women, the payoff is even greater. They earn an average of 31% more than women with A-levels, which is equivalent to a quarter of a million pounds over a lifetime.

Surprisingly, this payoff hasn’t changed much, despite a massive increase in the number of graduates since the early 90s. Economists at the Institute for Fiscal Studies say that the graduate pay premium has stayed essentially unchanged since the early 90s.It seems obvious, therefore, that going to university of a great investment.

Doing an arts subject signals that you’d prefer to pursue your own interests rather than knuckle down and do something you might not like so much. And dropping out signals an inability to stick at a task. Employers don’t like either.

Smartness counts
People who get degrees are clever and hard-working. We would therefore expect them to earn good money even if they didn’t have a degree. The raw wage gap between graduates and non-graduates therefore overstates the true extent to which going to university increases your future earnings. Research by Nobel laureate James Heckman show that by controlling for differences in ability – the benefits of a degree are reduced by half.

Of course, this means it still pays to get a degree. However, not everyone benefits. Professor Heckman shows that people with low intellectual ability or poor social skills who manage to get a degree earn less than similar ones without a degree. It’s smart people who benefit from going to university, not everyone. This is consistent with one of Professor Walker’s findings, that there are big payoffs to getting a good degree.

Wrong signals
What’s more, Professor Walker shows that two types of people lose from going to university: men who do arts subjects; and people who drop out. This is because of signalling effects. Doing an arts subject signals that you’d prefer to pursue your own interests rather than knuckle down and do something you might not like so much. And dropping out signals an inability to stick at a task. Employers don’t like either.

There is, though, a big problem here. Stock market investors are always warned that past returns are no guide to the future. The same warning applies to people investing in education.

Demand and supply
A big reason why the payoff to a degree – for most graduates – has remained high is that there’s been a steep fall in the number of good jobs for non-graduates. The decline of manufacturing has reduced demand for skilled craftsmen and the IT revolution has displaced secretaries, typists and clerks. Economists call this job polarisation- a fall in middling jobs but rising demand for graduate-type jobs and for unskilled ones.

But here’s the problem. Carl Frey and Michael Osborne at Oxford University have estimated that almost half of American jobs, and over a third of British ones, could be replaced by computers. Computers and artificial intelligence might replace lower-level law and accountancy jobs. Even management jobs are under threat: companies such as Deliveroo and Uber show that workers can be directed by apps and algorithms and not humans. It might therefore be that many graduates will find computers threatening their pay and jobs in future.

Lessons learnt
So, what does all this mean for people starting university?

First, it means you should complete the course. Good degrees pay well; dropping out costs you. Secondly, try to future-proof life after university by finding creative jobs and ones that can’t be automated. Thirdly, develop your “soft skills” such as getting on with people and use your time at university to show future employers that you have them: this might include taking part in team sports or orchestras, joining the entertainments committee, and so on.

Going to university doesn’t guarantee you success in life, but it improves your chances. Don’t blow them with bad decisions early on.

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Chris Dillow
Chris Dillow

Investors Chronicle writer and economist

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