CentrePiece Autumn 2007
Higher
education
and the labour market
CentrePiece Autumn 2007
Higher education around the world has expanded rapidly in recent years,
yet graduates continue to command a wage premium in the labour
market. So, as Stephen Machin and Sandra McNally show, there are no
problems of ‘over-supply’ or ‘over-qualification’ – rather there are
‘shortages’ in some fields, which further expansion could alleviate.
n recent decades, there has choose from. But if, for whatever reason, return to higher education suggests that
I
been rapid expansion of higher employers demand more graduates, then ‘under-supply’ is more of an issue and that
(‘tertiary-level’) education the wage premium may not fall. continued expansion is justified. In terms
across many countries. This has The wage premium depends on the of employability, in many countries, there
had important and profound interaction of demand and supply. In has been some catch-up of less educated
effects on labour markets and recent decades, there has been a big groups over the last decade, but graduates
the way in which employers use highly increase in both the demand for and continue to have a much higher
educated labour. supply of graduates. It is the fact that probability of being in a job.
These expansions have, for the most demand has outstripped supply that has
part, been predicated on the assumption given rise to an increasing wage premium Mismatches and shortages
that more education is good for individuals for a university degree. There is Nevertheless, it sometimes takes a long
and for society as a whole, not only in much controversy about the reasons time for some (usually less well
terms of economic outcomes like wages or for increasing demand for graduates, performing) graduates to find jobs after
employment, but also for a wide range of but the predominant view is that ‘skill- leaving higher education and even then,
social outcomes like improved health, biased technological change’ is a major some are not in jobs that appear to be
reduced crime and higher well-being. contributory factor. well matched to their qualifications. At the
But along with expansion of the In most countries, there has been same time, there are shortages in certain
system has come a range of new continued expansion of higher education sectors: this is evident in employer surveys
questions that have emerged as a in the last decade. But the wage premium and in some data analysis that shows a
consequence of there being many more attached to higher education has increased negative wage premium associated with
graduates. Is there now ‘over-supply’ of in most of them. The exceptions are Spain ‘skill mismatch’.
graduates? Is there evidence of ‘over- and New Zealand – two countries with A body of research has attempted to
qualification’ and skill mismatch? particularly large expansion of higher measure these outcomes, and the
Are students studying the ‘right type’ of education in the last 10 years – and Korea, (sometimes misused) terms of ‘over-
subjects? And is there a shortage where the wage premium declined education’ and ‘under-education’ have
of science and technology graduates markedly between 1974 and 1990, a emerged: the former arises if an individual
in particular? period of industrialisation when there was holds higher qualifications than required
In a recent report, we review the massive growth in higher education. by his or her job whereas the opposite
evidence on these questions. The report But even in these three countries, applies for the ‘under-educated’. But
offers some conclusions about the way in there is still a positive return to higher statistics on over- and under-education are
which the expansion of higher education education. Thus, it makes little sense to difficult to interpret as workers are
has had important effects on economic speak of ‘over-supply’ of higher education. matched to jobs based on a range of
outcomes – and draws policy implications The strong, positive and (often) increasing characteristics and not just their education
for the future.
The increasing supply
of graduates
The labour market consequences of
increasing supply can be considered within
a simple demand and supply framework.
Starting from a position where the Concerns about the
demand for and supply of graduates are in
balance, a boost in the supply of ‘over-supply’ and/or
Image: Kevin Lau
graduates should, other things being
equal, lead to a reduction in the wage ‘over-qualification’ of
premium because employers have a wider
range of similarly qualified people to graduates are misplaced
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CentrePiece Autumn 2007
level. What’s more, apparent mismatch the degree for individuals – for example,
may be a temporary phenomenon. higher education has a ‘consumption’
The extent to which such problems are value as well as a value in the labour
seen as temporary varies across studies market; and jobs have non-pecuniary
and countries. But one generalisation that aspects that make them attractive to
can be made is that the fact of observing individuals. Second, students may not be
‘over-qualified’ individuals in the well enough informed about the likely
workforce does not mean that there is returns to subject of degree.
over-supply of graduates. If there were
over-supply, relative wages and The value of science degrees
employment probabilities would fall to the The existence of the relatively high wage
level of their closest substitutes – and this differential for science/engineering/
has not happened. technology compared with other subjects
The indications are that skill mismatch illustrates the high value placed on the
(or inadequate levels of skill) is more of a field by employers and indicates high
problem than over-qualification. In some relative demand for graduates with
countries, there is a need to improve the this field of study. This might be
content and accreditation of vocational interpreted as a ‘shortage’ of science and
qualifications so that they provide what technology graduates and would be
employers need and are recognised to consistent with some reports of
do so. ‘shortages’ that have appeared in several
This is not to say that higher education countries, including Australia, Belgium,
should be geared to providing highly Britain and New Zealand.
specific skills that are currently needed by There are big differences between
employers. Some studies suggest that countries in the proportion of graduates
general education and skills are more who qualify with a degree in science and
valuable because they enable workers to technology. Comparing across continents
respond to shocks to the economy (for (using data from 2000), Asia has the
example, those that require sectoral highest percentage of graduates with
change) and advances in technology. science and technology degrees (32%),
which is just above Europe (28%) and
Degree subjects considerably above North America (18%),
One hypothesis put forward to explain skill South America (22%) and Oceania (22%).
shortages is that individuals are not Within Asia, China has a particularly
choosing the right type of graduate large share of graduates with a degree in
Just because there are
studies (whether this education is science and technology (53%). Even
over-qualified individuals
general/academic or vocational). In other though the EU has a better performance
in the workforce does
words, the choice of higher education than the United States in terms of
not mean that there is
made by individuals does not correspond producing science and engineering
over-supply of graduates
to the needs of the labour market in terms graduates, it lags well behind the United
of field of study. States in terms of the proportion of
As yet, there are relatively few studies among the category of subjects with a science and technology researchers in the
that estimate returns to higher education relatively high return (along with some labour market. Nevertheless, as in other
by subject of degree – especially when we social science subjects and professions countries, there are claims of a ‘shortage’
are most interested in change over time. such as law and medicine) whereas in the United States, which economists
One study looks at changes in returns to arts and humanities are often among have struggled to reconcile with the facts
subject of degree over time in Britain, the category of subjects with a relatively (which belie this concern).
Germany, France and the United States, low return. Further analysis suggests that
and finds that a return to an arts degree So it may be relevant to talk of the underlying issue is that the United
had the lowest relative return within graduate over-supply in relation to some States maintains an adequate supply of
all countries, for two time periods (the subjects of degree. For example, there scientists and engineers only because of
early 1990s and 2000) and for both men have been estimates to suggest that the the sizeable influx of foreign-born
and women. wage return to an arts and humanities students and employees. This could be a
In contrast, the returns to degrees in degree is zero in Britain. risk to US research if there is any
science, engineering and technology are This raises the question as to why interruption of the flow of immigrant
substantial (especially for men). Such people continue to pursue such scientists and engineers.
findings are broadly consistent with what qualifications. There are various possible The ‘brain drain’ to the United States
is found for a number of other countries – explanations: one is that wages do not is also a concern for other countries. For
science/engineering/technology is often capture important aspects of the ‘value’ of example, analysis of migration flows in
8
CentrePiece Autumn 2007
and out of Europe suggests that Europe
has lost out in terms of its own potential
Skill mismatch – or
supply of ‘domestic’ graduates and its inadequate levels
ability to attract scientists and engineers
from other countries. The shortage of
of skill – is more of
personnel in these areas is likely to have a problem than
costs in terms of innovation and
consequent productivity growth.
over-qualification
Conclusions and policy
implications
While concerns about over-education are
largely misplaced, there do appear to be
problems with graduates not always
having the skills required by employers.
One response to this is to make sure that
vocational courses meet the requirements
of employers and to ensure that the
accreditation system is appropriate.
But it would be unwise to emphasise
acquisition of highly specific skills at the
expense of general education. This is a
challenge for whole educational structures
not just higher education since, in many
countries, students have to make a
decision between general and vocational
education long before they reach the
stage of entering higher education.
There is also a question of the balance
between employer-provided training and
education provided by institutions of
higher education. Employers have a role
in addressing concerns about skill
mismatch. And governments have an
important role in improving information
In many countries, there
about training opportunities, setting
is relatively higher
appropriate legal frameworks and
demand for graduates
ensuring portability of skills.
in science, engineering
Potential policy responses to the
and technology
variation in returns to higher education by
subject include differential fees (or
bursaries) by degree subject so that young people do not pursue higher
graduates are encouraged to study education. One possibility is the cost
subjects for which there is high relative both in terms of fees and the
demand in the labour market. There may opportunity cost (the earnings students –
also be a case for the provision of better and possibly their families – must forgo
information to potential students on job while in higher education). Where such The article summarises ‘Tertiary Education
prospects and earnings by degree subject. constraints exist (most likely for students Systems and Labour Markets’ by Stephen
More generally, given the positive from poor social backgrounds), there is a Machin and Sandra McNally, a report
relationship between education and good case for bursaries. prepared for the OECD.
economic growth, and the fact that Another possibility is that there is The full report is available here:
returns to higher education are strongly insufficient information available to [Link]
positive, there is a good argument for potential students about the returns that [Link]
continuing to expand higher education. might be gained from pursuing higher
This could be achieved by public education (or returns in certain subject Stephen Machin is CEP’s research director
provision of more places in higher areas). In this case again, the appropriate and director of the Centre for the Economics
education. Where capacity constraints policy response would be to provide this of Education (CEE). Sandra McNally is
are not the issue, then an important information at appropriate stages of an director of CEP’s research programme on
matter for investigation is why more individual’s education. education and skills.