31 October 2016
by Francis Green

Should governments worry about graduate underemployment?

This blog is co-written by Golo Henseke. Every few weeks a new report emerges raising concerns about the graduate labour market in Britain. Should we be worried?

Only recently, the CIPD came out with a plea for a halt to the expansion drive in higher education. Earlier in the summer an Institute for Fiscal Studies report, while noting that the earnings premium had remained steady or increasing for many years, warned that the future might not seem so bright. Indeed, there seems to be growing concern that, maybe, higher education has expanded to the limit over the last 20 years and can take no more.

So, should governments be worried about the underemployment of graduates – that is, graduates doing supposedly non-graduate jobs? Our short answer to this question is: ‘Yes, but …’. Let us explain why.

‘Underemployment’ – sometimes referred to as ‘overeducation’ – is by no means a new phenomenon. It has always been the case that some graduates find themselves working in non-graduate jobs. This happens partly as a result of inefficient skills matching in the labour market, often because workers are constrained by family circumstances or stagnant housing markets to relocate where their graduate skills are demanded. Sometimes, a situation of underemployment is merely temporary, though the evidence suggests that this is not the case for most people. We should always try to improve the ability of labour markets to match people with jobs. But real concern arises if underemployment is spreading or becoming more costly to the taxpayer. For these reasons, we have undertaken two studies recently to look into this question.

We found that the frequency of underemployment, which had been increasing during the 1990s, was more or less stable between 1997-2001 and 2006-2012. This happened because, although the proportion of graduates in the labour force rose from 30% to 42%, the proportion of graduate jobs also rose, from 31 per cent to 41 per cent – a roughly similar amount. Not only did top jobs, such as managerial and professional occupations, expand faster than others, some jobs became more skilled and were consequently redefined as graduate occupations. Graduate underemployment was held in check at around 30 per cent of graduates. So far, so good.

Yet we also found that, for graduates, the wage ‘penalty’ of being underemployed increased by about 12 percentage points during the same time period. This rise reflects an increasing dispersion in the earnings gap for graduates. Even if, on average, the earnings gap of graduates over those with only lower secondary education (GCSE level) has remained approximately steady over the years (at about 68 per cent), there have been more graduates doing worse than the average and more doing better. The dispersion is sometimes also seen in the differences between graduates’ earnings according to subject studied or to university attended.

Although studies of the past shed only a partial light on the future, the increasing penalties for being underemployed are a source of concern for students, particularly when seen alongside the remarkable increase in their debt levels in recent years, which are certain to rise even further. Going for a degree is becoming more risky. That is why our first answer to the question posed above is ‘yes’.

But, from society’s perspective, it is important to remember that a higher education has other purposes than just training people for employment. And consistent with this observation, economists have often found that education has benefits beyond those of the individual, for example in terms of volunteering, social trust, better citizenship (lower crime) or in other ways that are hard to measure. We wanted to know whether these findings were true for graduates, even if they ended up working in non-graduate jobs.

Using data for 21 countries collected by the OECD, we found that 34 per cent of graduates in England and Northern Ireland were working in non-graduate jobs – more than all other countries in Europe except for Ireland. These graduates were earning less than their fellow graduates in graduate jobs. Yet compared with non-graduates they earned more, were more satisfied with their jobs, had better health, higher levels of social trust, greater political efficacy and engaged more often in volunteer activities. Similar patterns were found in many other countries, and indeed in all countries we found substantial social benefits from higher education even for the graduates who do not work in graduate jobs.

This last point is crucial. From society’s perspective higher education has substantive advantages, and this is why many believe it should be subsidised by the state. Any political decision to cap the number of pupils going into higher education needs, therefore, to make sure that major new alternative routes (such as higher apprenticeships) will also deliver on the social front, and not be confined to a narrow vocational training.

This blog was also published in Times Higher Education.