The eco­nomic value of go­ing to uni­ver­sity is not de­clin­ing

Daily Mirror (Sri Lanka) - - DME - Cour­tesy - D. Wil­letts - THE

Mod­ern economies are sup­posed to de­liver im­prov­ing liv­ing stan­dards – in­cre­men­tally year-on-year, with big gains decade-on-decade. That is why it is so shock­ing that a 30-yearold to­day earns no more than a 30-year-old a decade ago did, ac­cord­ing to pre­vi­ous re­search by the Resolution Foun­da­tion’s In­ter­gen­er­a­tional Com­mis­sion.

This is an earn­ings freeze on a scale unpreceden­ted in the UK since the war. The crash of 2008 is key but that is not the whole story. New Resolution Foun­da­tion re­search pub­lished this week helps to ex­plain how jobs and earn­ings have been af­fected since then.

The good news is that un­em­ploy­ment did not rise as much as feared, and that since 2012 the UK has en­joyed a jobs boom that has de­liv­ered record em­ploy­ment. One rea­son is that pay ad­justed it­self by much more than we ex­pected. Af­ter the crash, the un­em­ploy­ment rate for those aged 18-29 rose by four percentage points while their real earn­ings fell by nine percentage points. This is a much lower im­pact on em­ploy­ment and a much big­ger ef­fect on wages than in pre­vi­ous re­ces­sions.

Many of us would see this as one of the ben­e­fits of a flex­i­ble labour mar­ket, en­sur­ing that the pain of ad­just­ing to the re­ces­sion was spread broadly through our wages, rather than be­ing more nar­rowly focused on peo­ple los­ing their jobs. In the 1980s, by con­trast, un­em­ploy­ment was much higher but wages stayed higher too. The pol­i­tics of this shared pain is very dif­fer­ent from the eco­nom­ics, how­ever. Back in the 1980s, the in­cum­bent gov­ern­ment won two land­slide elec­tion vic­to­ries. Now both par­ties are feel­ing the wrath of an elec­torate fed up with the squeeze.

We can dig deeper into these ef­fects on pay and jobs by com­par­ing the em­ploy­ment rates four years af­ter leav­ing ed­u­ca­tion for groups who en­tered the job mar­ket in 2002 and 2008. We find that the em­ploy­ment rates of those ed­u­cated only to GCSE level fell from 68 per cent in 2002 to 56 per cent in 2008, while grad­u­ate em­ploy­ment rates only fell from 91 per cent to 88 per cent. So the un­em­ploy­ment ef­fects of the re­ces­sion were felt al­most en­tirely among the low­est qual­i­fied. Yet the opposite is true of pay. Grad­u­ates faced a 10 per cent earn­ings fall, com­pared with a 1 per cent drop among low­erqual­i­fied young work­ers.

It looks as if grad­u­ates re­sponded to the crash by trad­ing down into less-well-paid jobs. They, in turn, dis­placed the less skilled work­ers, who were more likely to be un­em­ployed. But down at the bottom end, the min­i­mum wage meant that pay fell by less.

Our re­search shows that the cri­sis co­hort of grad­u­ates had a 30 per cent higher chance of be­ing in a lower pay­ing oc­cu­pa­tion one year af­ter grad­u­at­ing, a scar­ring ef­fect last­ing seven years that could still have a sig­nif­i­cant in­flu­ence on their pay and ca­reer prospects. This is the ef­fect of the crash – there was no sud­den in­crease in the num­ber of grad­u­ates that could pos­si­bly of­fer an al­ter­na­tive ex­pla­na­tion of this re­sult.

Our new re­search adds to a grow­ing shared un­der­stand­ing of the ef­fects of the last down­turn, and raises lots of pol­icy ques­tions. One is how we can en­cour­age young peo­ple to move jobs more fre­quently, par­tic­u­larly from low-paid to higher-pay­ing oc­cu­pa­tions. We also need to think about how we can mit­i­gate any neg­a­tive ef­fects for those young peo­ple un­for­tu­nate enough to leave ed­u­ca­tion in the next down­turn.

But there are also plenty of wrong con­clu­sions to draw about what is hap­pen­ing to grad­u­ate pay. The lat­est data from the lon­gi­tu­di­nal ed­u­ca­tion out­comes (LEO) ap­pear to show grad­u­ate earn­ings do­ing badly. But while these data are very use­ful, they start in 2009, the worst year in liv­ing memory to en­ter the world of work. We can now see that a key rea­son grad­u­ate pay has un­der­per­formed over the past decade is the way that the UK’S labour mar­ket re­sponded to the re­ces­sion, with the pay ef­fects focused on grad­u­ates and the un­em­ploy­ment ef­fects focused on the least ed­u­cated. Yet this cru­cial dou­ble im­pact is hid­den if the only com­par­isons we make are on pay be­tween grad­u­ates and non-grad­u­ates who are in work, be­cause it ig­nores that dif­fer­en­tial em­ploy­ment ef­fect.

Some peo­ple ar­gue that the LEO data show that too many peo­ple are go­ing to uni­ver­sity. Ac­tu­ally, they show how a flex­i­ble labour mar­ket re­sponds to a re­ces­sion. This mis­in­ter­pre­ta­tion mat­ters.

When we look at the long-term fac­tors be­hind the slow­down of earn­ings growth, a key one is that the rate of in­crease in ed­u­ca­tional at­tain­ment has slowed too. What the UK needs, there­fore, is more ed­u­ca­tion op­por­tu­ni­ties for more peo­ple. It would be a tragic mis­take to draw the opposite les­son from the re­cent re­ces­sion and make the next one even more dam­ag­ing than it need be.

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