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Declining return on investment for UK degrees explained by market fundamentals

Posted by Michael R in ,

Latest data from the Complete University Guide highlights that UK graduates have seen their starting salaries tumble by a considerable 11% over the last five years. The study shows that graduates earned on average £21,702 ($36,268 or €26,227 at the time of writing) in their first job in 2012. This compares to a figure of £24,293 in 2007, pre-financial crisis. The annual average salary in the UK was £26,664 in 2012, according to Office for National Statistics data.

The report indicated that there are clear winners and losers when looking at the data on a degree-discipline basis. Over the period, salaries for graduates of Middle Eastern and African Studies fell by 25%. Perhaps more surprisingly, salaries for Medicine graduates fell by 15%, and close behind this Dentistry graduates experienced a 9% decline over the period.

Demand and supply 101

Many publications have already commented on these statistics, but surprisingly, few if any, have attempted to rationalise the decline in earnings relative to simple market fundamentals. Over this study period, the total number of students at UK institutions (undergraduate and postgraduate), according to the Higher Education Statistics Agency (HESA) has increased by 8.3% to a figure of 2.497 million in the academic year 2011/12.

On the demand side, this five-year period spans across one of the most severe economic crises in history, where demand for employees, never mind just graduates, tumbled as businesses across most industries were forced to scale back to reduce costs. Of note, the net outflow of people working in the financial services industry over this period, being a historically high-paid sector, could contribute significantly to the falling graduate salary figures alone.

Is government policy really to blame?

Many commentators on this data further indicate that the government has a responsibility to support graduate salaries to ensure that the value of a UK university degree is not compromised. Alongside this, many are happy to highlight that the government should reconsider the removal of the cap on tuition fees to reduce the burden on student debt for graduates. It must be highlighted that these two strategies are conflicting.

In pure financial terms, assuming that the only value derived from attaining a degree is the marginal increase in salary achievable as a graduate (the "graduate premium"), then the return on investment calculation is quite simple. Reducing tuition fees reduces the barrier to entry of a degree, increasing student population numbers, which in turn will increase the number of graduates entering the job market on completion of their degree. This will put downward pressure on graduate salaries. Conversely, rising tuition fees should, ceteris paribus, lead to higher graduate salaries into the medium term.

If nothing else, this type of analysis should encourage students to at least consider their desired return on investment of going to university. Monitoring changes in tuition fees is the easy part, whilst tracking earnings potential for possible career paths is a challenge, especially when having to look 3-5 years ahead. However, included in the return on investment calculation should be aspects beyond the "graduate premium" on salaries, also taking into account the overall expected value of the university experience.

It is far too easy (and fundamentally flawed) to blame policy makers for lifting the cap on tuition fees and for falling graduate salaries. It is about time to shift some of the responsibility to the student, who is the one making the decision on which course to study, and at which institution. Prospective students are surrounded by a wealth of free information on degree courses and career information. They have more information than ever before to make an educated decision.

Are you a recent graduate on a low-income? We would love to hear your thoughts. Please comment and share your views below.

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