Treating Students Fairly: The Economics of Post-School Education Contents

Chapter 2: Education and the economy

14.Now that half of young people are entering higher education, almost all of them graduating with degrees, how beneficial has this been for the economy and the labour market? The Government is clear and precise about the contribution to economic growth and the benefits it has brought to individuals. But the evidence, particularly in relation to the labour market, suggests more scepticism is required as to the benefits of an ever-increasing number of young people pursuing undergraduate degrees, and whether some would have been better off pursuing other qualifications.

Benefits of higher education to the economy

15.The Department for Education told us that “skills development accounted for around a fifth of productivity growth in the UK before the financial crisis.”11

16.This claim originated in an August 2013 research paper for the then Department for Business, Innovation and Skills that was written by the National Institute of Economic and Social Research.12 The paper examined education and GDP growth data from 1982 to 2005. It posited that “if the [higher education] sector in the UK were to expand towards the size in the US, this could be expected to raise the level of productivity in the UK by 15–30 per cent in the long-run.”

17.Paul Johnson, the Director of the Institute for Fiscal Studies, said that, while he thought the evidence for the link in the 1990s and early 2000s was “pretty solid”, the UK “may be at the turning point where that increase is no longer there. It may be that we have got to the point where the proportion of graduates in the labour market rising will no longer have that effect.”13 He referenced an Institute for Fiscal Studies report on the labour market that noted forecasts that average earnings will still be lower than their 2007/08 level in 2021/22, which the report said was “despite an extraordinary increase in the education levels of the workforce: 35 per cent are now graduates compared with 25 per cent in 2008.”14

Economic benefits of higher education to the individual

18.The Department for Education also highlighted the economic benefits of an undergraduate degree to the individual. It said that holding an undergraduate degree was associated with 23 per cent higher wages for men and 31 per cent higher wages for women compared to individuals whose highest qualification was two or more A-Levels. It said that this so-called ‘graduate premium’ has “endured in the context of increasing participation in higher education and higher volumes of graduates, and endured through the recent economic downturn.”15

19.A 2016 paper by the Institute for Fiscal Studies investigated why a large increase in graduates had left the premium unchanged, which it described as a “puzzle”.16 The paper concluded that the large increase in people with undergraduate degrees in the UK had allowed organisations to move to decentralised workplaces where higher educated workers could take more individual initiative and control their own work, thus changing the nature of employment for higher versus low educated workers. This change accounted for the “remarkable stability of the education wage differential.” It warned against concluding that the wage premium would remain:

“We caution that it is dangerous to extrapolate. The UK has already surpassed the US in the BA proportion for the entire workforce. It is plausible that the organisational technology is fully utilised so that a further educational expansion, in the absence of the arrival of a new technology, would result in declines in the education wage differential. There is already some sign of this decline in the private sector.”17

20.There are doubts over the benefits of a continuing expansion of young people with undergraduate degrees. Would some of these people have been better off pursuing one of the other two higher education routes, or were able to study part-time or retrain in the workplace? The evidence we heard regarding the labour market—the existence of a perceived skills shortage despite the record number of graduates and high levels of graduate underemployment—suggests this may be the case.

Labour market demand

“[In] the surveys of industrial trends by the CBI … 30 per cent of all UK firms reported skills shortage as a factor restricting output.”18

“[There are] serious shortages of ‘engineering/systems/software’ type skills.”19

“[A problem] which has plagued our economy for so long. I refer to the productivity gap and skills shortages.”20

“What strikes me is that we have very high levels of employment, but at the same time we have skills mismatches, the underutilisation of skills and a lack of advanced skills in STEM in particular.”21

21.The final quote above was by the Minister for Universities and Science when he gave evidence to us; the first three are from 1969, 1980 and 2000 respectively. Since the Second World War there has not been a single year when a contemporary shortage of skills was not referenced in Parliament.22

22.Perceived skills shortages appear to be a perennial problem. What may be different this time is the combination of the mismatch and underutilisation of skills, as mentioned by the Minister in the quote above. Why are there reported skills shortages when there are record numbers of university graduates, many of whom are in jobs that do not utilise their skills?

The nature of the skills shortage

23.The evidence for skills shortages is based largely on employer surveys. The UK Employer Skills Survey 2015 found that 209,000 of the reported 930,000 vacancies were “hard to fill because of skill shortages”. The sectors reporting the highest proportion of jobs that were hard to fill because of skill shortages were the gas, electricity and water industries, construction and manufacturing.23 What is the nature of these shortages?

24.The focus in recent years has been on the shortage of science, technology, engineering and mathematics (STEM) skills. The Government’s Industrial Strategy said that “we need to tackle particular shortages of STEM skills.” The points listed below were cited in the Industrial Strategy as the evidence for the STEM skills shortage (listed together with their source):

25.In a January 2018 report the National Audit Office said that the Government did not have “a robust, independent evidence base that defines the STEM skills problem.”25 This was acknowledged by the Government in the Industrial Strategy green paper in January 2017: “part of the problem has been the lack of a single authoritative source” of evidence on skills needs, and that such a source needs to be established.26 The National Audit Office concluded that the evidence relied upon by the Industrial Strategy indicated an undersupply of people with the right STEM skills in general terms, but “it does not analyse the undersupply … in a way that can fully identify the problem.”27

26.The National Audit Office therefore carried out its own analysis. They estimated that in 2015 there were around 2.7 million STEM recruitment shortages and expected this to fall to 1.5 million in 2018. They identified the majority of these shortages to be at technician level, for which a person would not require a degree-level education.

Shortage of technicians

27.Rather than a need for more STEM graduates, as the 2015 CBI survey quoted in the Industrial Strategy suggested, the greater shortages today appear to be for people with sub-degree qualifications. The National Audit Office report said that recent research suggested “there is an acute shortage of technician-level STEM skills”:

“Interviewees attributed this shortage to an undersupply of people with Level 3 to 5 vocational qualifications over the last 20 years, due to lower participation in vocational education. This lack of new entrants has led employers to rely on an ageing workforce, many of whom are now reaching retirement age.”28

28.We received similar evidence. Dr Paul Lewis from King’s College London set out the results of his studies of parts of the advanced manufacturing sector and provided detailed examples of industries where employers were struggling to recruit suitably qualified technicians.29

29.He said that in several cases “employers reported that a shortage of skilled technicians had prevented them from expanding and taking on new business.”30 Martin Hottass from Siemens said that “we do not have enough people leaving further education with engineering subjects … we recruit people with academic qualifications to technical roles for which they are not equipped.” He said the provision of intermediate technical skills was deficient.31

30.Our report last year on ‘Brexit and the Labour Market’ called for a “proper system of technical education to provide more of the skills that the economy requires.” We heard evidence during that inquiry that there were a large number of EU workers in some sectors who will not be replaced easily by domestic workers.32

Mismatch between supply and demand for skills

31.The National Audit Office report also said that there was “an oversupply of some STEM qualifications, particularly at degree level. For instance, there appears to be a surfeit of biological science graduates, a greater proportion of whom enter non-graduate roles compared to the STEM average.” They said that the oversupply of some graduate-level skills, and the undersupply of technician-level skills, could result in graduates occupying technician-level roles for which they are overqualified and under-skilled:

“This can lead to low morale and high staff turnover. Graduate-level skills may not align directly with those required in technician-level roles, particularly in engineering-related occupations, where technicians are likely to have expertise in particular processes or instruments that graduates may lack.”33

32.Dr Paul Lewis explained how technician roles in the chemical and biotechnology sectors were not well suited to the skills graduates possessed as they “place a premium on attention to detail, care in following instructions and on practical skill … rather than on graduate-level theoretical knowledge.”34

33.Across all sectors, there are varying estimates as to the proportion of graduates in non-graduate jobs. In written evidence the Department for Education said that “academic researchers” had sought to define a graduate job and they had indicated that 26 per cent of graduates were not in graduate-level jobs.35 Professor Francis Green said that between 1997 to 2001 and 2006 to 2012, the proportion of graduates aged between 25 and 39 working in non-graduate jobs remained steady at around 32 per cent.36

34.Some estimates are higher. A November 2017 Government Office for Science report on the ‘Future of Skills and Lifelong Learning’ quoted estimates from the Chartered Institute for Professional Development and the Office for National Statistics that around 50 per cent of British graduates are employed in non-graduate roles.37

35.These estimates will vary as they are based generally on survey data and the definition of a graduate job may change. But whichever estimate is correct, it does appear a sizeable proportion of graduates are employed in jobs for which their qualifications are not necessarily relevant. This is consistent with the research quoted in the Government Office for Science report that over half of the UK’s workforce report having skill levels that are higher than needed to do their current job.38

36.There are good reasons why a graduate may wish to be employed in a role for which they appear over-qualified, not least of all personal choice, but the proportions of graduates in this position does suggest a degree of mismatch between the supply and demand for skills.

Box 2: Informal evidence on skills shortages

We met informally a range of small and medium-sized businesses in Birmingham during the inquiry. Their comments support the idea that there is a skills mismatch:

“There’s an oversupply of history graduates and an undersupply of geeks.”

“There’s insufficient high quality technical people, these things aren’t sexy to do at university.”

“We’re having to employ massive numbers of humanities graduates to do customer service jobs because they’ve got nowhere else to go. But there’s no incentive for them to stay in that job for any long period of time so we get a massive turnover of staff in that area.”

The MoneySavingExpert website set up a discussion page for the Committee’s inquiry. One contributor discussed his experience as a research and development manager in charge of recruitment for a medium-sized company:

“We had to employ candidates with poor degrees to do the Technician jobs that would have been filled by school-leavers with ‘O’ or ‘A’-Levels (who would then have acquired further qualifications by day release) when I first entered employment. Our graduates were unhappy because they hadn’t got jobs at the level (or salary) they had been led to expect and we were unhappy because we still had to train them up as such skills as they had were academic rather than practical, meanwhile paying them more than we would an equally useful school leaver.”39

Quality of skills

37.We heard evidence from business representatives who questioned how ready graduates were for the workplace. Seamus Nevin from the Institute of Directors said that “one of [their members’] biggest complaints is not necessarily about the lack of technical skills but about the application of those skills in the workplace—specifically, soft skills such as team-working, communication and time management.”40 A small business in Birmingham told the Committee that “we need those practical skills. People don’t train in that, employers and universities are guilty of that failure.”

38.Nigel Whitehead CBE from BAE Systems explained how young people who were new to the workplace had to learn communication and teamwork skills and develop their work ethic. He said apprentices “sort all their behavioural stuff ahead of the graduates who come in.”41

39.The National Audit Office report on STEM skills shortages said that for graduate roles the issue was not a shortage of people with the relevant qualifications but with the skills that these people held:

“This includes particular technical skills that employers expect graduates to have, or ‘softer’ employability skills. This indicates that, in some areas, there are sufficient people with high-level STEM skills to meet demand, but these individuals do not possess all the skills required by employers.”42

Higher education qualifications and labour market demand

40.The nature of the skills shortage therefore appears to be more nuanced than the way it was presented in the Government’s Industrial Strategy: at sub-degree level, the available evidence suggests there is a shortage at craft and technician level; at graduate level, the evidence suggests that rather than a shortage of people with the right qualifications, it is more a question of the skills that those graduates possess and their readiness for the workplace.

41.Would some graduates have been better off studying something else? The Minister for Universities and Science said it was “legitimate to ask whether it is appropriate for everyone who goes to university to go to university, and whether they are getting the best education that suits their skills and needs.”43 Paul Johnson said that there were “clear mismatches between the kinds of skills coming out of universities and some of the demands in the labour market.” He believed some people would have been better served by pursuing a different option through the higher education system:

“Clearly, there are people who have spent time in universities who are doing jobs that do not require the particular set of skills they may have learned, or the particular degree … If the question is whether feasibly there was a better set of skills that some of those people could have got that would better match the labour market, the answer is almost certainly yes.”44

42.Professor Anna Vignoles from the University of Cambridge said that her analysis of graduate earnings showed that the median earnings of men from the bottom 23 universities were less than the median earnings for non-graduates. Lord Baker of Dorking, a former Secretary of State for Education, said this showed that many graduates would have been better off doing something different.45

43.Nigel Whitehead CBE said that their preferred ratio of recruitment was two-thirds apprentices to one-third graduates.46 He said that “by and large the UK is not producing enough people at the intermediate level through apprenticeships, and has overemphasised higher education, which has led to high levels of underemployment in the workplace.”47

44.Some witnesses were cautious about drawing conclusions from the available evidence. Professor Sir Anton Muscatelli, chair of the Russell Group, was hesitant to conclude that there is an oversupply of graduates as “looking at a period of economic slackening … it is easy to conclude that perhaps we have overproduced… but the danger is that, if you put on the brakes, you might be disadvantaged in five or six years’ time.”48

45.Professor Vignoles said that the graduates who are overeducated were also under-skilled: “When you look at the skill levels of graduates in non-graduate jobs, they tend to have lower levels of skill than the average graduate.” She said this was “an issue of the quality of the [higher education] provision that they have experienced as much as the fact that our labour market cannot absorb more graduates; I do not think there is evidence for the latter.”49

46.Dr Simon Marginson from UCL said that economies and workforces adapt to the number of graduates, with more higher-skilled roles being created: “the availability of graduates itself has an impact on the nature of the work that is done.”50 Professor Julia Buckingham, a board member of Universities UK, said there was a problem in judging graduate outcomes too soon as graduates in some areas, such as creative arts, do not get into significant jobs until later in their careers.51

Level 3 qualifications and labour market demand

47.The UK may also have a shortage of people with Level 3 qualifications. Comparisons with similar countries show that the UK has a higher proportion of graduates, but a lower proportion of people for whom a Level 3 qualification is their highest qualification, as shown in Table 1.

Table 1: UK and OECD educational attainment among 25 to 64 year olds (2016)52

UK (%)

OECD average (%)

Level 3 as highest qualification



Level 4 or above as highest qualification






Source: OECD, Education at a Glance (September 2017): [accessed 14 May 2017]

48.The statistical claims made by the Government about the relationship between higher education and economic growth are oversimplified. Whatever relationship may or may not have existed in the past, the assumption that sending increasing numbers of today’s young people to university to study undergraduate degrees is the best option for individuals and the economy is questionable.

49.The evidence suggests that there is a mismatch between the qualifications and skills provided by the higher education system and the needs of the labour market. A substantial proportion of current graduates may have been better off pursuing other higher education qualifications in areas where there are skills shortages.

11 Written Evidence from the Department for Education (HFV0086). This claim is often made by the Government: in a 2017 speech to the Universities UK annual conference, Jo Johnson MP, then the Minister for Universities, said that a study had shown that “20 per cent of UK economic growth over a two-decade period came from graduate skills accumulation, and that a 1 per cent increase in the share of the workforce with a degree raises long-run productivity growth by between 0.2 per cent and 0.5 per cent.” Jo Johnson, Speech on Embracing accountability and promoting value for money in Higher Education to UUK annual conference (7 September 2017): Lord Willetts, the Minister for Universities between 2010 and 2014, made the same two points in his written evidence (HFV0088).

12 Department for Business Innovation and Skills, The relationship between graduates and economic growth across countries (August 2013): [accessed 10 May 2018]

13 2 (Paul Johnson)

14 Institute for Fiscal Studies, The UK labour market: where do we stand now? (April 2017): [accessed 7 May 2018]

15 Written evidence from Department for Education (HFV0086)

16 Institute for Fiscal Studies, The UK Wage Premium Puzzle: How did a Large Increase in University Graduates Leave the Education Premium Unchanged? (May 2016): [accessed 1 May 2018]

17 Ibid.

18 ‘CBI survey shows trend of production is quickening’ The Times (February 1969)

19 National Economic Development Office, Computer Manpower in the 1980s: The Supply and Demand for Computer Related Manpower to 1985 (1980)

20 HC Deb, 21 March 2000, col 902

21 Q 154 (Sam Gyimah MP)

22 Committee staff research.

23 Government Office for Science, Future of Skills & Lifelong Learning (November 2017): [accessed 7 May 2018]

24 HM Government, Industrial Strategy, Building a Britain fit for the future (November 2017): [accessed 8 May 2018]

25 National Audit Office, Delivering STEM (science, technology, engineering and mathematics) skills for the economy (January 2018): [accessed 29 May 2018]

26 HM Government, Building our Industrial Strategy, Green Paper (January 2017): https://beisgovuk. tegygreenpaper.pdf [accessed 1 May 2018]

27 National Audit Office, Delivering STEM (science, technology, engineering and mathematics) skills for the economy (January 2018): [accessed 29 May 2018]

28 National Audit Office, Delivering STEM (science, technology, engineering and mathematics) skills for the economy (January 2018): [accessed 3 May 2018]

29 Written evidence from Dr Paul Lewis (HFV0028). For example, “employers in chemicals and industrial biotechnology find it very difficult to recruit experienced control and instrumentation technicians; employers in industrial biotechnology and cell therapy/regenerative medicine struggle to find manufacturing technicians skilled in fermentation and cell cultivation; firms that make, or use, composites parts find it hard to hire technicians who are skilled at manufacturing and using that material.”

30 Written evidence from Dr Paul Lewis (HFV0028). See also written evidence from the Royal Society of Biology (HFV0032).

31 Q 106 (Martin Hottass)

32 Economic Affairs Committee, Brexit and the Labour Market (1st Report, Session 2017–19, HL Paper 110), p 25

33 National Audit Office, Delivering STEM (science, technology, engineering and mathematics) skills for the economy (January 2018): [accessed 3 May 2018]

34 Written evidence from Dr Paul Lewis (HFV0028)

35 Written evidence from the Department for Education (HFV0086)

36 Written evidence from Professor Francis Green (HFV0013)

37 Government Office for Science, Future of Skills & Lifelong Learning (November 2018): [accessed 7 May 2018]

38 Ibid.

39, ‘Is post-school education good value for money?’ (August 2017): [accessed 3 May 2018]

40 Q 121 (Seamus Nevin)

41 Q 107 (Nigel Whitehead CBE)

42 National Audit Office, Delivering STEM (science, technology, engineering and mathematics) skills for the economy (January 2018): [accessed 7 May 2018]

43 Q 156 (Sam Gyimah MP)

44 Q 1 (Paul Johnson)

45 Q 91 (Lord Baker of Dorking)

46 Q 105 (Nigel Whitehead CBE)

47 Q 106 (Nigel Whitehead CBE)

48 Q 33 (Professor Sir Anton Muscatelli)

49 Q 91 (Professor Anna Vignoles)

50 Q 33 (Dr Simon Marginson)

51 Q 78 (Professor Julia Buckingham)

52 These figures need to be treated with some caution: the UK’s 16+ qualifications (principally GCSE) and A Level classifications do not easily match the classifications of ‘lower’ and upper secondary’ used by the OECD. As a result, in comparative data published by the OECD, the UK ‘upper secondary’ figures incorporate ‘intermediate upper secondary’ achievement (5 GCSEs at A-C). Few other countries have qualifications like this so there is no comparative data.

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