More on the Browne stuff

Tweet Part of the justification used by Lord Browne for his proposals on student fees was that the average graduate can expect to earn over £100,000 more than the average non-graduate over his or her working lifetime. The argument is that this is a ‘private benefit’ accruing to those individuals as a result of their education, and that they should therefore contribute towards the cost.

I wonder. The closest to an explanation of his figure comes in footnote 11, which makes it clear that the figure is based on an analysis performed by the Department for Education and Skills in 2002.

The idea that graduates can, and do, earn more on average certainly passes the reasonableness test; but I’d like to know a bit more about the way in which the size of the ‘graduate earnings premium’ is calculated. In particular – how sensitive is it to change in the proportion of graduates in the population?

Any historical evidence is likely to be based on those who graduated when a much smaller proportion of young people went though university. The higher the numbers so doing, the more one would expect that premium to reduce; not least because an increasing number of graduates find themselves doing jobs which do not specifically require a degree.

There is no question that the proportion of young people with a degree has increased and it will, I hope, continue to do so; which means that I would expect that graduate income premium to reduce over time. And of course, since it’s future graduates who’ll be paying the increased amounts, it’s the future salary premium which is important, not the historical one.

It’s a ‘whole working life’ premium as well, and it’s a pre-tax figure. Assuming that the ‘average’ (and I understand that that word can cover for a multitude of variances here, but it’s a reasonable starting point) graduate will pay around 35% tax on that (somewhere between basic rate and higher rate, plus NI contributions), that makes the lifetime net benefit more like £65,000.

With student debt on graduation expected to reach £30,000+, and interest due at closer to commercial rates, the actual private benefit received by the ‘average’ graduate looks to be significantly eroded to me. And the repayments are ‘front-loaded’ – they are made in the early half of a person’s career when salaries are lower, rather than the later half when salaries are likely to be higher. That means that the proportion of the graduate salary premium being used to repay debt is higher than it looks taken over an earnings lifetime.

I doubt that many young people will decide whether to pursue their education on the basis of an economic calculation of this nature. It’s probably just as well.

Incidentally, the calculation of the £100,000+ is based very explicitly on a comparison with those who pass A levels but do not go on to graduate, because that group in turn do better financially than those less qualified than themselves. So if we are going to charge HE students for their education, what, exactly, is the underlying principle which does not also lead to charging sixth-formers?