In writing this it feels like comparing Big Brother and Newsnight and finding that they are really the same thing – both Jeremy Paxman (deliberately) and Jade Goody (accidentally) having the same task of generating more heat than light. I am by no means convinced that anyone graduating from university has much to offer the commercial world. The commercial world knows this and responds accordingly.
There is an analogy here with religion, an idea held as a universal truth without much evidence to substantiate it.
The analogy with religion becomes more apt after considering Blaise Pascal’s thoughts on religion. Pascal was a mathematician who spent some time considering betting and came up with a reason to believe in God knows as Pascal’s Wager
He argued that if God didn’t exist and whether you believed that or nor there was no difference in outcome.
If, on the other hand, God did exist but you denied this existence you would spend eternity in hell. Whereas, by holding that belief you would go to paradise. So the risk far outweighed any reward and a rational person would, therefore, believe in God.
Similarly, conventional wisdom has it that the risk of paying £9,000 in tuition fees (at 2007 prices) plus the loss of 3 years paid employment is counter-balanced by the extra financial rewards that a degree brings. That is, graduates are paid substantially more than non-graduates.
Naturally, figures are quoted to back this argument up. Numbers matter in our society. Society regards itself as being rational, mathematics is the language of logic so numbers demonstrate rationality. However, just as Pascal’s Wager is over simplistic, so are these numbers and the rationale they are meant to underpin.
A belief in God is not sufficient since that belief needs to be demonstrated by the observance of dictats from God’s ‘mouthpieces’; priests, vicars, rabbis, imams, etc. This may, and probably will, cause the individual to incur greater risk than at first seems to be the case. They may engage in wars on behalf of God and will most certainly need to deny themselves pleasures on God’s behalf (as translated by the ‘mouthpieces’), In fact Pascal’s Wager looks to be not such a sure thing after all. So much for philosophers!
It is the same with numbers. By simply taking an average wage for graduates and comparing it with the average wage for non-graduates the assumption is that there are as many graduates and non-graduates earning below their respective averages as above them. That is both graduate and non-graduates have normally distributed wages.
A more reasonable approach would be to use median wages. These are wages where the numbers above and below are the same and so represent a more accurate picture of what might be achieved.Â
Data presented at the Research Methods Festival held at St, Catherine’s College Oxford in 2006 is very illuminating. One presentation by Alissa Goodman of the Institute of Fiscal Studies showed that over a working lifetime the median wages of a male graduate would exceed the median wages of a male non-graduate by £405,500 (for females it was £383,000 – such is life!). This may sound a lot but when subjected to analysis it is less impressive.
What is being presented is that, for a male, an investment of £40,500 (£9,000 tuition fees and a foregone post-tax income of £31,500 – 3 years at median non-graduate wage) is worth the total return of £405,000 – £283,850 post-tax. In order to assess this investment opportunity it is necessary to use a concept called discounted cashflow. That is the total post-tax return of £283,500 is made up of a number annual incomes (cashflow) over a 45 year period – 21 to 65 (it is very unlikely that the state-retirement age will fall with the twin pressures of an ageing population and a low birth-rate). To show the calculation I have posted an Excel spreadsheet .
This calculation shows that the value of an investment producing such cashflow is £13,172. Much less than the cost of a university education of £40,600. In fact, it’s only worthwhile if as a graduate you can get a job in the highest paying 10% of jobs. That is, for 90% of graduates a university education is not a financially worthwhile investment.
Furthermore. according to a survey by the accountants Price, Waterhouse, Cooper (PWC) only a third of graduates get a ‘graduate’ job when leaving university. However, 20% do spend a year travelling and may get such a job later. Even so, that would be only just over half of graduates getting such jobs.
The consequence of this is that, if only 33% to 53% of under-graduates end up in graduate jobs and only 10% of graduate jobs produce an income (cashflow) worthy of the investment of a university course; then only between 3% and 5% of university courses are a worthwhile investment. As with other investments, there should a wealth warning given out with university applications.
This doesn’t really surprise me as it fits in well with my own experience. I remember well when at ‘A’-level in the late 1960s my applied maths teacher (we had both pure and applied maths teachers) advised the class of 5 (I am shocked at the size of ‘A’-level classes my son has had) that if we did go to university we would never make up the financial loss of those 3 years. Of course, we didn’t believe him, in any event in those days there were no tuition fees and there were maintenance grants (at least for me). This couldn’t be true. Oh yes it could.
When I graduated with a BSc in electronic and electrical engineering I found the wages I was being offered around 40% less than those of my cousin who worked in a British Leyland plant in Coventry. Furthermore, he had been earning that since he was 16 and I was now 21.
Of course, it can be argued that in the long-term he wasn’t so well off as British Leyland ultimately collapsed. Well, the main employer for electrical and electronic engineers appeared to be GEC and look where they have gone!
Fortunately, my bacon was saved by the oil price hike of the early 1970s and the Common Market. As Britain had joined the Common Market (the EU now) in 1972 it meant I could work in other European countries. I got a job in France working for an oil services company where the only qualifications required were that I spoke English (the pre-dominance of the USA in business has been my life-saver throughout my life) and had ‘A’-level physics. Note the degree never mattered.
This makes sense since I had left university with the distinct impression that my knowledge really hadn’t moved on much from my ‘A’-level days. As for the myth that university life somehow equipped me with analytical skills – complete rubbish. As in the preceding 10 years (from my 11-plus days) all I was taught was to pass exams.
As any economist will tell you, the wage an individual earns is a result of their productivity measured in value-added per hour. The only value a graduate can add is either their intrinsic personal ability to learn new things and adapt, which university doesn’t provide, or knowledge that university does provide. This means that, at least in my case, the value add of most degrees is very small. There being little or no increase in knowledge between ‘A’-level and a degree and, therefore, little increase in earning power.
This is not the fault of universities. Universities exist to do research. In order to do that they need money. Under-graduates are a source of revenue. In my day the government paid everyone’s tuition fees and even provided maintenance grants. This meant that the taxpayer funded universities through research grants and tuition fees. University lecturers, in general, are not interested in teaching they want to do research. They teach because of the need for revenue. Although teaching and lecturing are not the same. To lecture is easy, just read out the script and answer any questions with disdain. To teach means to connect with the individual. Consequently, under-graduates (generally) teach themselves from material presented to them. Some of my worst teachers were at university.
By the introduction of top-up fees and the introduction of student loans, the government has introduced a voluntary tax to fund tertiary education. It has a high take-up on this tax due to aspirational parents, most of whom never went to university, seeing a degree as being a sort of magic wand. The pill is made easier to swallow as the old polytechnics, which have lower entry qualifications, have now been branded as ‘universities’ as well thus making their funding easier too. Little Jimmy or Jane who, in the past, would not have made university (lucky them) are packed off to the University of New Town (formerly New Town Polytechnic) by parents proud that their offspring have achieved what they did not. Although, I have always suspected that in the teaching of productive subjects (for example, engineering) Polytechnics were better than universities as they were not so research-oriented.
Furthermore, economics also tells us that supply and demand are stabilised via price. If the supply of graduates increases whereas the demand for them remains static or even falls then the price will fall (the static case) or even tumble.
Of course, some employers will only consider graduates for employment. Sometimes this is because it can reasonably be expected that university has added value, medicine being a prime example. However, for a great many (if not most) it is simply lazy hiring practices. The PWC survey mentioned earlier found that only 5% of graduate jobs were actually part of a graduate training programme. In other words, 95% simply specified ‘graduate’Â as a means of sorting potential hires. They didn’t require graduates it just made life easier.
This also probably accounts for the fact that graduate wages are not what might have been hoped from the investment – they end working for poorly managed firms.
Anyone hoping for a job in the public sector will not progress very far without a degree. However, as the public sector faces no competition for its services the only task facing management is how to share out taxpayers’ money. Classification, therefore, matters and a degree is a means of classification. Of course, not all degrees are equal and where the degree was obtained will become part of this process. The fact that the utilities were privatised as a result of Treasury failure to re-invest in the old water, gas and electricity boards. That the Home Office can’t deport foreign criminals and that the MOD finds it impossible to deliver the correct equipment to the military all serve to demonstrate just how little value is added by most graduates.
The only reason a firm should want to hire graduates is, again, explained by economic theory. A firm is capital and labour brought together under the umbrella of knowledge. That knowledge being managerial knowledge. Labour may have knowledge of how to do something but it is managerial knowledge that enables that knowledge to produce goods and services the market values. A graduate making a piece of furniture can only be worth more than a non-graduate if the graduate makes a table that the market values more than the non-graduate. In practice, the value is added not by the maker but by the manager. Universities may have something academic to say about management but, by definition, that is theoretical.
The best, practical, example of this is the fact that both the US and the UK produce more graduates than Germany. Yet both the US and the UK have massive balance of trade deficits. That is the average American and Briton prefers to buy foreign goods and services rather than from native firms despite the fact those firms have access to large numbers of graduates.
Germany, on the other hand, has few graduates but a large vocational (can-do) workforce producing goods and services people want and therefore value.
Closer to home, Birmingham, despite having a number of grammar schools, still saw the loss of both British Leyland and Lucas. My cousins’ son got a first in Physics from Oxford. His job opportunities were either British Nuclear Fuels or the City. He chose the City and later Microsoft and has done well. But that is down to dubious practices by both the City (investment funds, endowment policies and pension plans that have failed) and Microsoft than to do with providing superior goods and services.
This brings us back to Pascal’s Wager. He argued that a belief in God (ignore the question of which one) outweighed any risks because the risk of disbelief (eternal damnation) outweighed the benefit (such as it is) of atheism. So it is with a degree. It is not the degree that matters but how old the graduate is. A thirty year old getting a degree and seeking a new employer and fresh employment will find it much harder than a twenty-one year old. So it is, effectively, a once in a lifetime chance to turn graduation into money. A once in a lifetime chance to avoid the pits of damnation. What parent is going to deny their child such an ‘opportunity’ no matter how unlikely it is to succeed. Parents that have a son with the talent to kick a football who is spotted by a professional football club are unlikely to deny their son that opportunity in favour of academic study or just messing around.- both are likely to benefit their child more than being spotted – because, it might, just might, be a path to wealth and fame.
Trekstaaf…
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There is an assumption that the only benefit from a University is the education that one gains as a result of being taught something. I am very much unconvinced that it is true. There are other benefits, such as the range of experiences that one can get indirectly at university.
By no means do I think university is right for everyone, but it certainly can be an environment where one can learn about oneself, and about the areas in life, learning and employment that are right for the individual.
Am I directly financially better off as a result of my degree? No, probably not. Am I a happier individual now as a result of the things that happened during my time getting a degree? Almost certainly.
I have some sympathy for the argument about university being an experience that can improve an individual. My original blog was meant to dispel the notion that university is THE way to a well-paid job. Also, to explain the crafty way in which the electorate can be manipulated in order to pay what was previously tax-payer funded. The fact that MPs sitting for Scottish seats (where the costs do not apply) were decisive in introducing these costs is also note-worthy. However, whether or not university is THE best way for to achieve this improvement, I don’t know. It may well be, because of the expectations people have of university.
I would not have said university made me a better person. It made me more aware, both of others and myself. The experiences I had made me better able to piece together certain aspects of life. Two examples stand out.
I come from a working class area. We lived in a two-up, two-down terraced house, which my parents lived in until they died. For the first seven years of my life we lived in a rented house with my maternal grandmother.
Both my grandfathers had been miners. The 1926 General Strike was often a topic of conversation with my mother – she had a brother born the second week of the strike with, literally, no food in the house. My father had lost the nail on one of his big toes having caught his foot in a sunken barge whilst diving for coal. He was quite a hard man – having served in the Cameron Highlanders during WWII, the only Englishman in his battalion – not a pleasant experience.
My adolescent years were spent in the Sixties, so it’s probably no surprise that I was very left-wing, I even joined the Young Communist Party. So, when I went to university, the first in my family, I headed for the Socialist Society (Soc-Soc). Very, very few children from my background made university in those days, so I thought I would be something of a celebrity – and get laid easily. What I found were a bunch of middle-class ex-public school boys and girls who thought my accent (West Midlands) bizarre and strange and who had no time for oikish me. I’m sure over the 30-plus years that have elapsed some of those Soc-Soc members have found some niche within the Labour movement.
I never had any time for the Tories. That experience has given me no time for Labour either.
Both parties are about privilege, one inherited one conferred by the State.
So much for others, how about my self-awareness.
I had passed my 11-plus but I went to the local comprehensive as the grammar school was in the next town and I didn’t want to stay school dinners. There I was a big fish in a small pool. I had one excellent mentor there – Dr Nathaniel Shulman. A Holocaust survivor who taught chemistry (which I really liked). He ran the debating, chess and philosophy societies – you would expect no less from an Ashkenazi Jew. So, despite having a stutter, I was confident in expressing my opinions.
At university I was suddenly mid-table rather than top of the league. That was a bit of a shock at first, but I soon came to terms with it and, along with the realisation that I wasn’t being taught anything really useful, soon found other ways to develop myself – like improving my social skills. I had seen university as a glorified apprenticeship scheme. For someone from my background the ability to earn a crust was paramount. And the bigger the crust the better. What I was now seeing was that a process meant to turn out an elite was falling way short of that. This was rammed home nicely in the second year.
For some reason, it was decided that as electronic engineers we needed to quantum maths. Not sure why since diodes, transistors, etc. are black boxes, you only need to know how input and output are related not how it works. Anyway it was a course to be dome. The maths department did not believe in feats of memory but whether you understood what was going on. So in the exams they set you could take your notes. The questions set required you do so something original using the notes as a set of tools to accomplish it. I came first. This surprised everyone, not least of all me, as I was normally just an average student. However, this was the first and only time I ever sat an exam that tested understanding rather than memory. This confirmed, at least in my own mind, that I was smart. The fact I might fall short against conventional measures merely made me regard those that had done well by such measures as being very unlikely to be my intellectual superiors. As you can imagine I don’t give doctors much respect.
The effects of these experiences seem to me, with the value of hindsight, have made me very self-reliant and self-confident. I expect little or nothing from others and certainly don’t assume they have some insight I don’t or can’t achieve.
The Iraq War is a case in point. The 45-minute claim concerning a possible Iraqi attack was literally incredible. After a decade of the bombing and photographing of Iraq, it would have been inconceivable that Iraq had the logistics to achieve that. Yet Parliament, or at least most Labour and Tory MPs, believed government claims.
That the Tories would is reasonable – they are not known as the stupid party for nothing. The Labour MPs would because they are a mixture of stupidity, cowardice and greed. Cowardly because they dare not face down government whips. Greedy because they did not wish to see their careers go down the toilet.
Whether university has made me a better person I doubt. But it did make me better able (I think) to survive. Whether it was THE only way to achieve that I don’t know – but it was an effective way.
As promised on the CiF site.
Your main errors:
1. Although you claim not to, you have failed to take into account that media salary figures you have used only counts those who are in work and not the whole population. As the unemployment rate for those with A-levels, but who did not choose to go to university is higher than those who do go to university, your assumption about the level of ‘foregone’ earnings is incorrect.
2. The PWC survey cited is based on a sample of, and I quote from the first page, “646 final year students who were ‘opting out’ of the graduate employment market in 2004′.
This is a subsample of annual research undertaken by High Fliers. This survey has been heavily criticised in the past for not being representative of the true picture for graduates. It samples graduates only from selected universities, it does not sample evenly by subject (in particular underselecting from science graduates) and it makes a number of extremely dubious conclusions, the two most serious being that jobs on formal graduate schemes represent a significant proportion of graduate level jobs (they actually make up around 15 per cent), and the second being that postgraduate study is, in effect, a failure in the employment market. Since they sample particularly from research-intensive universities, whose graduates are more likely to take a postgraduate course, this is an especially serious mistake to make.
The work of Blenkinsop and Scurry of Newcastle Business School highlights why trying to treat this subset of students as representative of the whole is deeply flawed.
3. You have also made a very grave mistake in assuming that progression rates in jobs at graduate and non-graduate level are equivalent, and that graduates will reach the same level as non-graduates.
4. This statement: “only a third of graduates get a ‘graduate’ job when leaving university. However, 20% do spend a year travelling and may get such a job later. Even so, that would be only just over half of graduates getting such jobs”
Is very simply and provably incorrect. In fact, around two thirds of graduates start their working careers in a job that requires a degree.
(data sources – HESA Destinations of Leavers from Higher Education survey)
After one year, the average working graduate overtakes the average salary of those who took A-levels but chose not to go to university. (From the Labour Force Survey).
The excellent work of Elias and Purcell of Warwick Business School found that after three and a half years, the proportion of a graduate cohort in non-graduate jobs had declined to less than one in ten. Many workers had been promoted, often repeatedly.
I can see what you have tried to achieve, but unfortunately, you have
- Made incorrect assumptions
- Used an inappropriate sample
- Failed to consider existing research
So, I am afraid, your conclusion about the financial value of a degree is badly wrong.
That is before we even start to ask whether you are even trying to measure the right thing.
An excellent post! Allissa Goodman’s data on lifetime earnings must take those who graduated circa 1957/1962 – assuming a 40/45 year working life. Those graduating at that time, some 6% of the population would have enjoyed relatively high salaries if only due to their relative scarcity. If 50% have a degree then simple commonsense suggests they will not necessarily enjoy the same high salaries relative to their non-graduate counterparts.
I recall a similar analysis during the seventies comparing a University Professor with a bricklayer. This found that it was only when the Prof was over 45 that he pulled ahead. The fact that the bricklayer earned more at an earlier stage meant he was able to buy a house and start a family earlier and so gained from house price inflation. Those who didn’t make it as far as Prof presumably ended with similar lifetime earnings, so a degree would have proved little advantage.
To answer these fundamental questions
1 The figures I use come from an IFS study of lifetime earnings. I used the word wage incorrectly, as I was trying to get a point over. Consequently, the difference in lifetime earnings becomes the return an individual can expect to earn from a degree course investment. I applied a tax rate of 45% to those earnings – 11%NI and a marginal rate of 35%,  the bulk of the extra wages probably attrcat higher rate tax.Â
I use discounted cashflow techniques in my spreadsheet to establish what is the net present value of those returns.
The lifetime earnings are a series of payments that rise each year by g
LE = E + E(1+g) + E(1+g)^2 ….. E(1+g)^n
Where LE are the life time earnings, E the starting wage, g growth in wage and n the period
This is a geometric progression where
E = LE*g/[{(1+g)^n+1}-1]
Using the life time earnings as cashflow from a degree investment and discounting back to the net present value we have
NPV = E + E( 1+g)/(1+k) + E [(1+g)/(1+k)]^2 …. E[(1+g)/(1+k)]^n
Where k is the discount rate
This is also a geometric progression where
NPV = E *(1+k)*[[(1+g)/(1+k)]^n+1]-1}/(g-k) since g is less than k it simplifies to
NPV = E * (1+k)/(k-g)
Substituting for E we have
NPV = LE*g*(1+k)/[(k-g)*{(1+g)^(n+1)-1}]
Using a discount rate of 9%, 5% riskfree return on government stock and a median risk figure of 4.6% with a beta of 1. The choice of beta is dogy but its reasonable to expect wages to march with the market as a whole.
Plugging in comparable figure from the IFS lifetime earnings data, comparing graduate median lifetime earnings with non-graduate lifetime earnings or graduate top 75 percentile with non-graduate top 75 percentile. You find that its only when comparing the 90 percentile figures that the NPV is greater than the cost of a degree (£45,000 – £9,000 fees and 3 years of average wages -£12,000 post tax- for non-graduates). So only the top 10% come anywhere close to a decent investment.
2. I used the PWC survey to be a little more precise but I am quite happy to drop that as a figure of 90% university entrants making a poor investment choice gets the point over adequately.
3. Ties in with 1. As I use lifetime earnings the issue of promotion is covered.
4 Ties in with 2. As with 2, the fact that 90% or 95% make a poor investment decision doesn’t really matter. It still shows that the vast majority of university entrants are making a bad investment.
Elizabeth Deeley…
I Googled for something completely different, but found your page…and have to say thanks. nice read….
I have to say, that I could not agree with you in 100% regarding s Clothes, but it’s just my opinion, which could be wrong
I’d prefer reading in my native language, because my knowledge of your languange is no so well. But it was interesting! Look for some my links:
[...] My son has a small part-time job that boosts his income, as a university student, slightly. When I was a university student, back in the early 1970s, I knew no one who did this but then I had a full grant, albeit means-tested, and whilst I left university with no money I had no debt either. My son will not be so lucky. The (financial) value of a degree is highly dubious anyway (see the Emperor’s Clothes) and with what looks like a severe recession (if not depression) on the way he needs to do all he can to keep this debt to a minimum. It also serves another purpose. [...]
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