The Value of Higher Education in Developed Economies

• This HEPI blog was authored by Vivienne Stern, Chief Executive of Universities UK, as an adaption of a speech she gave in response to a lecture by the Hon. Mathias Cormann, Secretary General of the OECD, on the value of higher education in developed countries.

Just over a month ago, our Prime Minister, Rt Hon Rishi Sunak, made a statement in his speech to the Conservative party conference. He said that:

“The false dream of 50 per cent of children going to university […] was one of the great mistakes of the last 30 years.”

Never mind that the 50% target he refers to relates to tertiary education, I am certain he is not alone in believing that too many people go to university. It is an argument I have heard many times throughout the two decades that I have worked in higher education policy and politics. It is often made by those who went to university themselves, and of whose children 100% participate.

Our job must be to examine the evidence. In doing so, the OECD’s Education at a Glance is one of the most useful sources available to us.

I want to use the next few minutes to lay out a simple argument: that the expansion of higher education in the UK has been an unequivocally good thing; that it has been necessary for both economic and equity reasons and that its value should not only be assessed on the basis of graduate earnings. I will respectfully disagree with our Prime Minister. But I will argue it is time for a rethink about what we value when it comes to higher education, and how we pay for it.

The UK is not alone in seeking to increase the share of our population educated to tertiary level. In 1998, 20% of adults in the OECD had a tertiary education. By 2022 it was 40%. All but one country in the OECD has increased its share of young people with tertiary attainment in the last 10 years.

The UK has one of the highest tertiary attainment rates in the OECD, at 51%. However, that only puts us in 7^th place, behind Canada, Japan, Ireland, Korea, Australia, Luxembourg.

Higher levels of education are good for the individual, wherever you are in the OECD.  Graduates are more likely to be employed – 86% of adults with tertiary education are employed compared to 77% with upper secondary education. They are likely to earn more than non-graduates. Across the OECD adults with a Bachelor’s degree earn on average 43% more than those with an upper secondary qualification.

Other studies have shown that graduates enjoy non-financial benefits too – including better health and longer life expectancy. A study by Yale study found that in the US, level of education was the best predictor of life expectancy – not income or race, and recent analysis published in The Lancet Public Health Journal showed that adult mortality went down by 2% for every year spent in full-time education.

But it is not just the individual who benefits. In the UK, on average, the treasury makes a considerable profit on each graduate they co-finance through university, through the higher taxes and national insurance contributions they pay. In 2020, the Institute for Fiscal Studies found that each graduate has a lifetime exchequer return (i.e. how much net they give back to the taxpayer as a result of higher earnings, minus how much the public purse ‘spends’ on them) of £110,000 for men, and £30,000 for women.

Because graduates are more likely to be employed than non-graduates, they also call less on state support in other ways – for instance, LEO data shows that 15 years after key stage 4 just 2% of graduates are on out-of-work benefits, compared to 11% of non-graduates. Better health, a greater propensity to volunteer and the intergeneration effect of graduate parents supporting children who do better at school all have a quantifiable benefit to the country.

 So higher education is an excellent investment for most (although not all) individuals, and in most cases, it is also an excellent investment from the national point of view.

Beyond that, it is also clear that higher rates of participation benefit the economy. Research by the Department for Education (DfE) shows that skills and labour have been the only factor driving making a persistent and positive contribution to productivity in the last few years.

And across the OECD there is a positive correlation between tertiary enrolment and GDP per capita.

This is why developed countries have expanded their higher education: it makes economic sense. But I would argue that we also have a moral duty to give more people this individual opportunity (and make sure it happens equitably).

In the UK, the expansion of the system has made a real change to the distribution of opportunity. In the period since 2005, the proportion of pupils receiving free school meals who go on to university has grown from 14% to 29%; the proportion of students from the lowest participation backgrounds has grown from 12% to 28%. In the last 15 years, the number of students from BAME backgrounds at our universities has increased by over 200,000, and there are over 250,000 more students with a disability.

These are the people who have benefited from the expansion of higher education. These graduates are likely to achieve higher earnings, better health and a longer life as a result. These are the kids who would not have gone to university had expansion not happened.

And yet, you are still twice as likely to go to university in the UK if you are from the most advantaged social and economic group, than if you are from the least advantaged. That cannot be right.

This is one argument for continuing to expand participation, not reverse the progress of the last 30 years. The middle classes are highly unlikely to step aside or tolerate being pushed aside by public policy. To widen participation, history has shown you have to expand participation.

Fortunately, there is good evidence that this is what we NEED to do in any case to meet the needs of the evolving labour market.

A recent study by the DfE predicted that the UK will need more than 11 million extra graduates by 2035 and that 88% of new jobs will be at the graduate level. Within this, we will need about 1m more health professionals, and 1m additional teachers.

But the future labour market is an unpredictable thing, especially in the age of AI. It is impossible to know exactly how AI will change the landscape – but it is a fair bet that it is the kind of transversal skills: creativity; the ability to work in teams; critical thinking and perhaps above all, the ability to learn and adapt that will position the graduates of today for the workplace of tomorrow.

But given everything I have set out, why is it that we – and other higher education systems around the world – are dogged by the suggestion that there are too many people going to university? Why might Rishi Sunak make such an argument?

I think it all comes down to money, and to the unfinished business of massification.

There is an understandable obsession with the individual rate of return to the graduate, and in the English system, the extent to which the Treasury recoups the loans laid out to finance income-contingent loans to pay tuition fees for undergraduates.

I think it is time to put these issues in the spotlight.

It’s understandable that with the way higher education is funded in the UK, the debt burden to the individual – and so the perceived return on investment (i.e. graduate premium) – is the focus.

However, if we NEED more graduates, and the whole country benefits in a variety of ways from increased participation, is it time to think differently about using graduate premium as the primary measure of value?

And surely we should do a better job of quantifying the benefits of higher employment, better health, satisfaction, public and community service, equity of opportunity, and all of the other non-financial benefits of expanded participation. We should count the national economic benefits of participation and the contribution to productivity, as well as the economic benefits to the individual.

And what of the Treasury? In England, the loan system was conceived as a system in which the costs of supporting higher education were shared by the individual and the state. It was a co-payment system, in which the state effectively underwrites the individual risk that going to university may not pay off for them. It says: we want you to go to university because we need more people to be educated to a higher level. But if it doesn’t work out, if you take a career break to have children, or take a job which pays less but may have high social value, we’ll pick up a bigger part of the tab. This is achieved through the combination of upfront grants to universities to cover part of the cost of teaching, which have been much reduced in recent years, and the income-contingent nature of the repayment scheme, plus the loan write-off.

After the financial crash in 2008, the balance changed dramatically towards the individual shouldering a higher proportion of the cost.

Today, the UK has one of the highest proportions of HE funded by private households. The limitation on the extent to which it is politically tenable to ask for a larger contribution is now producing a significant squeeze on university finances, with universities making a loss on domestic teaching of about £1bn a year.

And we may, for the first time, be seeing an impact on the decisions by individuals about whether to go to university, with falling application rates. Maintenance funding has fallen way behind inflation and is at the lowest level for 7 years.

Surely it is time to move the conversation on – towards a better balance of understanding of the public and private benefits of expanded participation, and perhaps a better balance in the sharing of costs?

We need to judge a healthy higher education sector by more than just individual labour market outcomes and re-examine the balance between public and private investment.  

If we don’t grasp this, we may see the slow erosion of demand; slowing the progress of widening opportunity; and perhaps too the slow erosion of the quality of supply as a result of the limits on the funding governments are prepared to invest.

Secretary General, I am grateful to you, not only for your remarks this evening, but for the contribution that the OECD makes to helping us to understand ourselves, and to make better policy as a result.

And so, on behalf of all of us here, I would like to offer you our thanks.