Education, skills and productivity: commissioned research - Business, Innovation and Skills and Education Committees Contents

3. High-level skills issues


University graduates in relevant disciplines are well-placed to generate new ideas and knowledge relevant to innovation and help firms take advantage of new technologies. For example, US evidence suggests that high-level skills played a key role in facilitating the effective take-up of Information and Communication Technologies (ICTs) and that there has been a complementarity over several decades between ICTs and the educated labour required to perform non-routine tasks (Bresnahan et al, 2002; Autor et al, 2003). A number of studies in European countries have also found evidence of a positive relationship between workforce skills and the adoption of ICTs (for example, Hollenstein, 2004 and Bayo-Moriones and Lera-López, 2007). In general, high skilled workers are well-placed to contribute to the selection and installation of ICTs and also to the adaptation of ICTs to firm-specific requirements.

Other important mechanisms by which high-level skills may affect innovative performance include knowledge transfer processes, for example, the transfer of knowledge between firms, sectors and countries through collaboration on R&D and technical problem-solving among skilled workers involved in supply-chains (Lundvall, 1992), the mobility of highly-qualified engineers and scientists between firms (Saxenian, 1994) and the impact of foreign direct investment (FDI). Research evidence suggests that FDI is attracted to economies with a high skills base while simultaneously bringing with it new technologies and knowledge which augment the skills base of host countries (Barrell and Pain, 1997; Blomstrom and Kokko, 2003). However, the impact of multinational enterprises on host-country innovation may be reduced if host-country firms lack the absorptive capacity to take full advantage of new knowledge and technologies or are unable to withstand the increase in competition.

'Absorptive capacity' here refers to the ability to identify and make effective use of knowledge, ideas and technologies that are generated outside each firm (Cohen and Levinthal, 1989). As suggested by Zahra and George (2002), it is useful to distinguish between potential absorptive capacity (the ability to acquire and assimilate external knowledge) and realised absorptive capacity (the ability to transform and apply acquired knowledge within organisations). At each stage of this process — recognising useful external knowledge, seeing how it might be applied and then successfully making use of it within firms—high-skilled workers have a key role to play. Furthermore, supply-chains involving foreign investors have greater prospects of becoming 'developmental' in nature (with close collaborative relationships between supply-chain partners) rather than 'dependent' (with suppliers being used primarily to cut costs) if prospective host-country suppliers are well endowed with high-level skills. [4]

The potential economic advantages of a large supply of graduates show up in a number of ways. In the US, the ready availability of university graduates over several decades contributed to relatively high levels of innovation and helped the US in the late 1990s and early 2000s to outperform most European countries in terms of both productive applications of ICT and in the estimated contribution of ICTs to growth in labour productivity (O'Mahony and van Ark, 2003; Van Ark, O'Mahony and Timmer, 2008). Similarly, high-level skills featured prominently in the sizeable skills contribution to UK productivity growth in the decade prior to the 2008-09 recession (Rincon-Aznar et al, 2015). Econometric analysis for 15 countries (including France and Germany as well as the UK and US) suggests that a 1% increase in the graduate share of the workforce is associated with 0.2-0.5% growth in long run productivity levels (Holland et al, 2013).

In spite of the apparent advantages of mass higher education, there are similar concerns in both the UK and US about a number of issues relating to graduate supply, in particular:

Reported shortages of graduates in STEM (science, technology, engineering and mathematics) disciplines

·  Reported deficiencies in the 'employability' skills and 'work-readiness' of many new graduates

·  Sizeable proportions of graduates who (at least at the start of their careers) experience difficulties in finding jobs requiring graduate-level skills


In the UK periodic reports of apparent or predicted shortages of STEM graduates over the years (for example, Roberts, 2002; RAE, 2012) might be thought to reflect relatively low salaries for graduates in STEM subjects. However, recent evidence points to relatively high average salary returns to degrees in STEM subjects, albeit more so in engineering and technology than in science subjects (Greenwood et al, 2011). In addition, average salary returns to Bachelor degrees in STEM subjects such as mathematics/computing and engineering/technology have been found to compare favourably with returns to traditionally well-rewarded subjects such as accountancy and medicine (O'Leary and Sloane, 2005). However, there is a wide dispersion of salary returns around the average levels. Where difficulties in recruiting STEM graduates do occur, they tend to be experienced by relatively low-paying employers in STEM-related industries (especially in manufacturing). Many such STEM employers are frustrated by the large and apparently growing proportion of STEM graduates who work in non-STEM jobs and industries (Bosworth et al, 2013).

From the perspective of skill requirements across the UK economy, this can be seen in a positive light as diffusing graduates who, by dint of their studies in STEM subjects, are widely seen as possessing desirable skills in mathematics and in 'logical approach[es] to solving problems' (BIS, 2011: 7). To the extent that such skills are in short supply among the wider pool of graduates, this must partly reflect the fact that STEM subjects absorb a high proportion of those entrants to UK universities who have studied maths beyond the age of 16. Indeed, England in particular is conspicuous by international standards for the relatively large proportion of school pupils who abandon maths study at that age (Hodgen et al, 2013).

In a review of the many reports focussing on apparent shortages of STEM graduates in the US, Cappelli (2015) cites counter-evidence of many recent US engineering graduates not finding jobs as engineers or not choosing to take such jobs because of their relatively low pay rates. One implication is that, as in the UK, if there is a problem in relation to STEM skills, it is that some employers in STEM-related industries find it hard to compete on salaries with employers in other industries. Again as in the UK, the relatively high demand for STEM graduates in non-STEM industries in the US could reflect the relatively low proportion of workers with adequate mathematical skills (discussed in Section 2 above) which helps to enhance employer demand, and thus job and salary prospects, for highly numerate STEM graduates across the whole economy.


Another common issue in both the UK and US concerns a perceived lack of employability skills among many graduates. From the perspective of employers, 'employability' tends to refer to 'work-readiness', that is, possession of the skills, knowledge, attitudes and commercial understanding that will enable new graduates to make productive contributions to organisational objectives soon after commencing employment. In the UK a number of employers' associations and higher education organisations in the UK have, over many years, urged universities to make more explicit efforts to develop the 'key', 'core', 'transferable' and/or 'generic' skills needed in many types of high-level employment (AGR, 1995; Universities UK, 2002; CBI 2009; CBI/Universities UK, 2010).

In response to such urgings, considerable resources have been devoted to various employability skills initiatives in UK higher education. Empirical evidence on the effectiveness of these initiatives suggests that structured work experience is more likely to have positive effects on graduates' employment prospects than is the case for university departments' efforts to develop employability skills in classroom settings (Mason et al, 2009). This finding serves as a reminder that many relevant employability skills are probably best learned in workplaces rather than through full-time education courses.

In past decades many UK employers used to offer substantial work-based training programmes for new graduate recruits. However, the implication of the current pressure for employability skills to be developed prior to taking up employment is that many employers are now less willing to undertake responsibility for graduates' initial training. This trend is entirely consistent with US evidence, reviewed by Cappelli (2015), of employers' unwillingness to recruit graduates without prior work experience, with the same implication that many employers now seek to avoid responsibility for training inexperienced new recruits.

Once graduates do find employment, many benefit from high positive average salary premia attached to Bachelor degree-level qualifications in both the UK and the US (Goldin and Katz, 2007; Walker and Zhu, 2008). [5] However, in both countries there has been some widening in the dispersion of returns to university education and there are concerns about under-utilisation of some graduates' skills, particularly when they first enter the labour market (Green and Zhu, 2010; Abel et al, 2014).

How do France and Germany compare with the UK and US in relation to STEM, graduate employability and graduate underemployment issues? International comparisons suggest that the STEM shares of university students in both France and Germany are higher than in the UK and US and there are fewer concerns about possible shortages of STEM graduates in the two Continental European countries (Marginson et al, 2013). France and Germany also differ greatly from the US and UK in respect of graduate employability skills in that structured work experience and training is provided for large proportions of higher education students in France and Germany as part of their study programmes (discussed further below), including the sizeable proportion of graduates from German Fachhochschulen. In addition about one in six German students who gain the Abitur necessary to study at university choose first to undertake apprentice training (Pilz, 2009). These features of the French and German HE systems do not, however, prevent issues of graduate underemployment from arising in both countries.

One comparable measure of underemployment of graduate skills across countries derives from the 2010 European Working Conditions Survey which asks if respondents possess the skills to carry out more demanding duties than they are given in their jobs. The proportion of graduates replying yes to this question only fell below 25% in four of the 27 countries participating in the survey. In Germany the proportion so responding was just above 30%; in France and the UK it was just above 40% (CIPD, 2015). Possible explanations for the wide extent of apparent underemployment of graduate skills include post-recession labour market weakness in some countries and technological factors which affect all countries such as high-level skills not being needed for ICT utilisation as much as they were for ICT adoption (Chun, 2003). In addition, many developments in ICTs make them both easier to use and capable of de-skilling or displacing previously demanding graduate jobs (Beaudry et al, 2013).

As described in Section 2, the graduate shares of employment in France and Germany are markedly smaller than in the UK or US. Until recently the most common initial degrees in both France (Maitrise) and Germany (Hochschulabschluss) took five years or more to complete (often including structured work placements) and were more equivalent to UK or US Masters degrees than to Bachelor degrees. In Germany, as described above, this form of higher education has long been complemented by four-year degree courses of a practical or occupation-specific nature in Fachhochschulen. However, in the last 15 years, substantial changes to HE qualification structures have taken place in both France and Germany in response to the 1999 'Bologna Declaration' in which several European countries agreed to make HE study programmes more comparable and internationally competitive. One prominent feature of this process has been the introduction of three-year Bachelor degree courses in both France and Germany, some of whose graduates immediately enter the labour market while others stay on to complete additional study for Masters-equivalent qualifications (MER, 2010; Ertl, 2013).

This has required considerable adjustment from French and German employers who were accustomed to all graduates having skills and knowledge commensurate with longer study programmes. But a striking feature of many new Bachelor degree courses in both countries is the extent to which they have been designed to be practical and work-related. In France new 'vocational Bachelor' courses (Licenses professionnelles)—which include work placements in firms for three months or more—now attract growing numbers of students (Powell et al, 2012). In Germany the new Bachelor degree courses are offered by both universities and Fachhochschulen, with the latter institutions also prominent in the development of 'dual study programmes' which combine HE study with vocational training for state-recognised occupations. It is notable that, so far, employment prospects for graduates with Bachelor degrees from Fachhochschulen are superior to prospects for Bachelor degree graduates from universities (Ertl, 2013). This apparently reflects the greater emphasis in the Fachhochschulen courses on practical applications of knowledge and on work practice (ibid).

4   For more discussion of this distinction between developmental and dependent supply-chains, see Turok (1993) and Brown (2000). Back

5   A long-running debate continues about the extent to which graduate salary premia reflect value added during degree-level education as compared to employers' assumptions that possession of a university degree is a positive signal of individual ability (CIPD, 2015). Back

previous page contents next page

© Parliamentary copyright 2015
Prepared 5 November 2015