Universities follow perverse incentive models out of touch with the labour market

The days tick by to the summer ritual of the announcement of A-level results. Yet panic is already spreading among those wanting to start university in the autumn.

The number of applicants has risen by 5 per cent this year, according to the university admissions service (UCAS). In addition, many universities are cutting back the places on offer. The net result is that more young people than usual will be disappointed.

As prime minister, Tony Blair was famous for setting a target of ensuring 50 per cent of students head off to the hallowed halls of university. He has doubled down on this and said it should, in fact, be 70 per cent.

Last week, a row broke out after Sheffield Hallam University suspended its English literature course due to lack of demand.

For all the criticism, at least they, in sharp contrast to Blair, were responding to the demands of the labour market. Most students graduating from the elite Russell Group universities continue to command the so-called graduate premium. Their lifetime earnings will be higher, often considerably so, than non-graduates. But for many others traipsing heavy textbooks around, this is simply not the case. Their degree adds little to their value in the labour market.

Student loans are repaid under a complicated formula, but as a rough guide you have to make more than national average earnings before you have to make any noticeable repayments.

In a briefing paper in April, the House of Commons library noted that only 25 per cent of current students will repay their loans in full. From 2023, the changes recently made by the government ease the terms of the loans. Around half of future students are expected to repay in full, while the other half may never have to repay.

The amount of debt outstanding is staggering. At the end of the 2020/21 financial year, it was £141bn. The government predicts that even in today’s prices this will reach well over £500bn by the middle of the century.

Many graduates will only be paid national average earnings over their working lives. And the average debt for each student on finishing his or her course is £45,000. So why go to university? Of course, if you are in the top 25 per cent, it is financially worthwhile.

For the other students, they will have a loan, but may never reach the threshold to pay it off, and the skills they acquired won’t equip them for the labour market. The universities themselves have an incentive to keep them on. Otherwise, they will lose the money attached to each student in the form of tuition fees.

In other words: the money keeps flowing to them, regardless of how they help their students for their future career. This is a grossly inegalitarian outcome. The bottom 50 per cent of students will never pay off their debt and they won’t graduate with any appreciable difference in their earning capacity.

There is an argument, of course, to be made that humanities subjects should not be the purview of the wealthy.

Indeed, economics, the underpinnings of this very argument, are a crucial tool for young people’s lives.

But the incentive model universities are built on has been inflated by a loan system designed to only look at a target number of students in higher education, not the benefit of what they are receiving – or the debt the government is taking on.

Blair’s target was built on the basis that high education would drive social mobility. Instead, it has done the opposite, with a significant cost to the taxpayer.

As published in City AM Wednesday 6th July 2022
Image: Wikimedia
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