How to explain the graduate wage premium
What are the benefits and costs of going to university?
Looking at median nominal (2023) salaries in the UK, university graduates earn £10,500 more per year than non-graduates, when looking at workers aged 16-64. Why is this?
- Human capital
- People acquire skills and knowledge through education.
- This includes technical skills as well as non-technical skills including social skills and critical thinking.
- Signalling theory
- This suggests a university degree signals to employers that a graduate may have desirable qualities.
- This includes work ethic, discipline or underlying ability.
- Such skills may not be linked to the content of the university course.
- In this scenario, the degree still has value to the employer as a signal.
- Network effects
- Attending university can provide attendees to meet with peers or alumni of the university, who can help to find well paid jobs.
However there is also a selection bias. Students who attend university, who may already have characteristics such as motivation, may have earnt higher earnings even if they did not have a degree. So just comparing average wages of graduates and non-graduates may exaggerate the financial benefit of attending university.
Other factors influencing university choice
This return may be different depending on which university course is taken. There is some evidence that the graduate wage premium in the UK has been falling for some subjects from the 2000s through to the 2020s, while it has remained the same for STEM subjects.
In weighing up the financial effects of going to university, there may also be an opportunity cost arising from working less (or not working) during the degree. Instead of doing a degree, someone could be receiving an apprenticeship or start work right away. This would need to be taken into account.
Whether attending university or not, people have to pay living costs. It is possible that attending university increases living costs, for instance moving to a more expensive area or not being able to share costs with others. The interest on any loans taken out (such as maintenance loans) to cover living costs would also count here. Note this does not rule out that university attendance may lower living costs in some cases.
Students pay tuition fees, which will accumulate interest over their lifetime. However some students will never pay off the tuition fee in their lifetime, while others won’t have to pay any interest if their family pays the tuition fee upfront.
There may also be on-the-job training and networking without a degree, depending on the exact counterfactual (the alternative scenario).
Of course, the economic return to attending university is just one aspect of decision-making. Student preferences and whether a desired career path requires a degree also matter.
Further reading on the return to university education
- The section in this paper on education (pages 16-27) in the UK shows how the graduate wage premium may have declined.
- An introduction to the human capital vs signalling debate in a short YouTube video.
Questions to consider
- Should students go to university?
- The UK Government currently subsidises university attendance. Should the UK Government increase, decrease or adjust subsidies?
- Are the signalling or human capital benefits larger from attending university?
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