University has become an arms race: We must give students an alternative

THESE are not great times to graduate from university. Against the backdrop of a declining graduate premium (the difference between the earnings of graduates and non-graduates), university fees have shot up, and both the graduate unemployment rate and the share of graduates who have ended up in non-graduate jobs have increased (from 37 per cent in 2001 to 47 per cent today, according to the Office for National Statistics). Taken together, this means that university education is now considerably more costly for students, but it “buys” less in extra earnings and in facilitating graduates’ entry into the jobs market.

Does this mean Britain just has “too many” graduates? The UK has seen a large increase in the number of students in higher education over a relatively short period – from 1.9m in 2000-1 to 2.5m in 2011-12, according to the Higher Education Statistics Agency. In a sense, there are too many graduates. But the reason is not that young people are making the “wrong” choices. There is a more subtle mechanism at work.

Broadly speaking, higher education has always served two distinct purposes. The most obvious is that it allows students to acquire skills. But independent of this, degrees also have a signalling function. They show employers that the degree holder possesses, or is likely to possess, a set of (unobservable) characteristics which employers tend to value.

If an employer chooses an applicant with a physics degree for a job that requires no knowledge of physics whatsoever, we see this signalling function at work. The employer may not care about positrons or the Schrödinger equation, but they do care about the unobservable qualities (like a capacity for hard work) that have enabled the applicant to acquire such knowledge.

The rise in the number of graduates affects these two functions in different ways. As far as skill acquisition is concerned, more people graduating (from high standard courses) is a good thing. For those with a rare skill, an increase in the number of people possessing similar skills may be uncomfortable, since it increases competitive pressures. But these people also benefit from the fact that other skills have also become more widely available. Skills are complementary and mutually-reinforcing, so there are gains to be had from being part of a highly-skilled workforce, even if it means that no single “skill holder” is indispensable.

As far as the signalling function is concerned, however, an increase in the number of graduates is not unequivocally positive. This is because a university degree can have the properties of what economists call a “positional good”. Very simply, this means a good that people acquire in order to stand out from the crowd – to differentiate themselves from others. But a positional good loses its purpose, of course, if most members of that crowd also begin to acquire it. That is why the quest for positional goods can turn into an unproductive arms race.

As long as only a few people graduate, a job applicant with a university degree stands out from the crowd. But when most other applicants also have degrees, the degree loses that function. The signalling now works the other way round: not having a degree becomes a disadvantage.

Some people will feel compelled to go to university. They will not do so because they really want to, but because they think that, in order to avoid conveying that negative signal, they simply have to. As a result, too many young people end up doing a job they could have done without a degree. But worse, they’re saddled with student debt, and have suffered the opportunity cost of entering the job market several years later. These are the dynamics of an arms race.

In order to find a way out, we have to give those who demand university education primarily for its signalling effect a possibility to convey an equivalent signal at a much lower cost. In a lot of other countries, high-quality apprenticeships fulfil such a function, and there is no reason why it should not work that way here. But in order to get there, we have to make it a lot more attractive for companies to provide vocational training. This means we have to stop treating apprenticeships as mini-jobs. They are not. They are an alternative form of education. An hourly minimum wage of £2.68 for apprentices may not sound like much. But historically, apprentices used to pay for the training they received, which made apprenticeships much more attractive to employers.

An expansion in vocational education would give more people the chance to acquire the type of skills they actually want. As a nice side effect, it would also increase competitive pressures on universities. As anyone who has wrestled with a university bureaucracy knows, some could do with a good dose of that.

Kristian Niemietz is senior research fellow at the Institute of Economic Affairs, and author of Redefining the Poverty Debate.

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