Is University Funding by Taxpayers a Waste of Money?

This article appeared on the UK Telegraph on April 20, 2018.
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It slipped under the radar, but the UK has almost hit Tony Blair’s 1999 university pledge. The higher education participation rate (an estimate of those who would have gone to university by age 30) was 49pc in 2016, a whisker from Blair’s 50pc aim. In 1993, just 13pc of those in their late 20s had degrees.

Conventional educational wisdom heralds this trend as a boon for Britain. An army of skilled graduates will surely be utilised in highly productive jobs, propelling economic growth for the future. Emboldened, education expert Nick Hillman last year proposed targeting a 70pc participation rate by 2035.

For George Mason University economics professor Bryan Caplan, this trend wouldn’t elicit celebration. In a provocative new book, The Case Against Education, he suggests that university, while individually profitable, is largely a waste of time and resources from a societal perspective.

His story is straightforward. There is a significant graduate earnings premium. Across the OECD, adults with a tertiary degree earn on average 56pc more than those who merely finish secondary education. In the US, on which his book is focused, it’s 73pc. A 2016 Institute for Fiscal Studies report on the UK found graduates in their late 30s earned 60pc more per hour than those who left school at 16.

Why? Blair believed the traditional story that education builds human capital, developing skills crucial to our job performance. This might be job-specific learning for doctors or engineers, but may include transferable skills like research or teamwork. Seen this way, higher education is an investment in workforce upskilling.

Undoubtedly there’s some truth in all this. Education delivers some marketable qualities. For certain subjects, such as maths, engineering and medicine, skills are acquired, practised and honed. But what if a major or even the lion’s share of the graduate premium arises because degrees are merely a “signal” to employers of our inherent talents, skills and attributes?

Think about it. When someone with undergraduate and masters degrees in history from Cambridge University applies for a job at a management consultancy, does their in-depth knowledge of the Roman empire really matter? Or does their educational history signal to the employer that they are intelligent, diligent, and conform to social norms and conventions?

Caplan concludes overwhelmingly the latter. If university was really about human capital, students attending before dropping out would still earn a significant premium. They earn a bit more than high schoolers, but nowhere near what this theory would predict. “University as credentialism” also explains why lots of students do the bare minimum studying. In the US, the typical student spent 40 hours a week in class or studying 50 years ago, but this has fallen to an average of 27 hours today. Evidence suggests graduates just don’t remember or use much of what they learn either. So why would we expect it’s skills or knowledge learned which drive the wage uplift?

If his signalling theory is correct, expanding access primarily just creates an arms race for degrees and grade inflation, while encouraging top students to study yet longer to differentiate themselves. It’s akin to the highest skilled revealing themselves in a cinema by standing, only to then tell a majority of the cinema to stand, making it no clearer how to differentiate for society as a whole.

The consequences are profound. A Chartered Institute of Personnel and Development report claimed 58pc of UK graduates were in non-graduate jobs compared to only 10pc in Germany. Academics Francis Green and Yu Zhu likewise found a third of graduates were overqualified for their roles. As Caplan concludes, “a great majority of the extra education workers received was deployed not to get better jobs, but to get jobs that had recently been held by people with less education”.

It’s perhaps unsurprising then that the civil service expects the graduate premium to fall in the UK in the coming years. Yet even though the signal will still be valuable to many graduates, that does not mean it’s a good deal for taxpayers to contribute so much through fee subsidies and debt forgiveness.

The signalling theory suggests swathes of undergraduate funding is actually socially wasteful. We debate ad nauseam whether taxpayers should cover around 40pc of the cost (as today) through to Jeremy Corbyn’s 100pc. But really we should be thinking about cutting taxpayer support, allowing individuals to pursue courses they think add real value to them.

To ensure upfront costs are still not a barrier, a starting point would be for universities to have a real stake in their students, allowing them to set their own fees but with repayment flows going back to the institutions themselves rather than the Student Loans Company as a proportion of salary. This would encourage universities to focus on activities which add genuine value, with a contract market developing.

But the main benefit to cutting funding would be fewer people wasting three years of their lives to meet a social norm. Firms and managers would instead devise their own means of evaluating qualities and skills. It would also end the stigma against learning on the job and apprenticeships, maligned by the educationalists today. One can quibble of course over whether Caplan over-eggs the “signal” component of the wage premium. But his evidence, trends and intuition suggest he has an important point. Too few policymakers see the significance of the implications and the costs and consequences of the status quo.

Ryan Bourne

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute.