Graduates and the finishing school effect

“Kiss that graduate pay rise goodbye,” says the Times’s financial editor Patrick Hosking. He was commenting on a recent Bank of England report on the composition of the UK workforce which noted that, while the proportion of graduates has gone up over the last two decades, their pay premium has gone down.

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The Bank comments:

There are a number of possible explanations which would be consistent with this finding. For example, if demand for highly skilled workers has not kept pace with an increase in supply, an increasing number of graduates would also lead to a decrease in the wage premium for those with degrees. Alternatively it is possible that the large increase in individuals studying for a degree in the United Kingdom has led to a fall in its signalling value (the ability of degrees to correctly identify more talented individuals) and thus the amount of pay which those with degrees can command.

There is something in both of these explanations. As the number of graduates has risen, a lot more of them have gone into occupations that, at one time, we would not have described as graduate jobs. CIPD research published last summer found that the percentage of graduates had increased in all occupational groups since the early 1990s.

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We would expect the graduate share of professional and managerial jobs to increase but their colonisation of the administrative, skilled and personal service occupations is perhaps more surprising.

At a Resolution Foundation event last year, Andrea Salvatori presented some findings from his work on job polarisation. He found that here are more graduates doing middle skill jobs now than there were 30 years ago while “non-graduates have also seen a major shift in the distribution of their employment from middling to bottom occupations.” Not only are there fewer mid-level jobs but a lot of those that used to be done by non-graduates are now filled by people with degrees.

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The CIPD research found that the growth in the number of graduates had outpaced the growth in the number of high-skill jobs in most European countries but that this trend was particularly marked in the UK. This left the UK with a relatively high number of graduates overqualified for their jobs.

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Does this mean that the UK has produced too many graduates? Perhaps, although there are other good reasons for getting degree aside from landing a higher paying job. I wonder, though, whether some of this is due to the number of graduates from elsewhere in the EU coming to the UK and doing non-graduate jobs.

Some of this is due to the difference in pay levels. Graduates can earn more in the UK doing a middle skill job than they can get at home doing a graduate job. But there is also something going on that I call the finishing school effect.

My data for this is largely anecdotal but bear with me. A number of European graduates I have spoken to recently explained that having worked in London means they get better jobs when they return home. One even told me that employers are now looking askance at people who haven’t left the country for a stint abroad. Graduates will, she told me, take any job in London. They are not bothered whether it is a graduate level job and, for the most part, neither are their employers. If you take a job on reception, in finance support or course administration for a big firm it might lead to bigger things but, even if it doesn’t, the mere fact of having worked in the City, West End or Canary Wharf adds cache to your CV.

McKinsey’s recent globalisation report concluded that the world only has eight truly global cities. Only one of them is in Europe and that city is London. It’s no surprise that young people are drawn to it from elsewhere in Europe.

A UCL CReAM report found that the UK has become a magnet for well educated EU migrants.

Even more remarkable is the immigrant population’s educational achievement, which has been consistently higher than that of the native population since 1995, with an increasing gap ever since. Whereas in 1995, about 13% of the UK born and 14% of the EEA immigrant population (excluding those still in full-time education) held a university degree, such was the case for 15% of the non-EEA population. By 2011, the percentage of natives with a degree had nearly doubled, to 24%, while the percentage of EEA and non-EEA immigrants had increased even further, to 35% and 41% respectively.

So the proportion of migrants with degrees is higher than that of the UK born population. As the CIPD found, in a 2014 study, a lot of those EU graduates are working in low- to middle-skill jobs. Screen Shot 2015-07-07 at 10.05.07

The report also found that EU migrants are concentrated in mid-twenties to early thirties age band. In other words, most come to the UK when they already have some work experience. A job in London can then be a stepping stone to a future career here or a gold star on the CV making a graduate more marketable back home or anywhere else.

OK, my data for this is anecdotal and circumstantial but surely some of the UK’s relatively high graduate over-qualification must be due to the attraction it holds for foreign graduates who are prepared to do all sorts of jobs. It is true that some UK born graduates are also finding themselves having to take lower-skilled and lower-paid jobs but that isn’t the only reason for the graduate colonisation of lower skill occupations. It’s yet another symptom of the UK’s, and especially London’s, idiosyncratic labour market.

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9 Responses to Graduates and the finishing school effect

  1. marek says:

    The first chart is a bit misleading – it goes from covering about 60% of the total in the early years to about 90% by the end. It would be interesting to see how the slopes changed if the don’t knows were put back in. The basic message that there are more graduates than there used to be won’t change, but it would be otherwise rather less dramatic.

  2. Graeme says:

    Other factors:

    1) A lot of careers that used to be open to non-graduates, from nursing to accountancy, have become either much harder to get into, or entirely closed, to non-graduates. Vocational degree courses have expanded to cater to this so people who would have gone into a job or training are now doing degrees intending to do exactly the same job.
    2) The quality of degrees may have fallen as part of the expansion in numbers (particularly as it has not been matched by an expansion in resources).
    3) People have not become more talented, so people are still doing jobs that suit their talents, simply more of them adding a degree en-route. Similar to the signalling effect, but with the causation running a different way.

  3. Graeme says:

    It would also be interesting to see the number of non-EU immigrants, who are more likely to have degrees than EU immigrants. Are they also willing to take lower level jobs? Do they have similar motives of getting some experience and returning home (I know some do, but not what proportion).

  4. Andy says:

    Still anecdotal, but I’ve heard a similar finishing school theory from a friend who works as an office manager in a London architects. The vast majority of the junior architects are from other EU countries and have told her it’s an unwritten requirement of senior jobs back home that you’ve spent some time in London after graduation. It seems they consider a year or two in London in the same way that someone else might get a vocationally-relevant Master’s degree to boost their employability.

  5. guthrie says:

    Wait, I thought average graduate salaries were forever trending upwards, reaching nearly 30k? You mean we’ve been lied to?

    (2 years ago I saw job adverts wanting science graduates and offering 15k a year. That’s the same salary I was looking at 16 years ago when I left uni)

  6. Steve Williams says:

    What are the other global cities?

  7. SimonF says:

    It would be interesting to see these numbers by STEM and other degrees. I suspect STEM graduates don’t face anywhere near the same problems.

  8. George Carty says:

    Steve Williams, they are (from west to east) San Francisco, Los Angeles, New York, London, Dubai, Singapore, Hong Kong and Shanghai.

  9. Late to this, but I have another hypothesis — that Say’s law (i.e. the notion that supply creates its own demand) does not necessarily apply in labour markets. Does an increase in the supply of skills automatically lead to an increase in the demand for those skills? John Philpott and others have maintained that employers don’t really care about skill level, and Ewart Keep has been banging on about this for years. Not suggesting that I agree with all of this, but if John van Reenen is right about the quality of British management then the responsiveness of firms to an increase in the supply of human capital could be questioned.

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