A Christmas Riddle

BOM is closing down for Christmas. But before we go let's leave you with a riddle to ponder over the mince pies.

Tyler has been doing some more work on the pay gap between the public and private sectors. As everyone surely knows by now, average public sector pay is considerably higher than private sector pay. When we last blogged it, we reckoned the public sector premium stands at an astonishing 50% - once we take account of the full cost of those gold plated pensions.

How did we reach that conclusion? We based it on the following analysis from the Office for National Statistics, which compares the public and private sectors in terms of both gross pay and total reward (ie including employers' pension contributions):

The conclusion is overwhelming - for both men and women, for both high and low earners, for incomes including and excluding pensions, public sector employees do much better than private sector. The median full-time employee in the public sector gets nearly 30% more than his/her counterpart in the private sector, once we take account of the employer's pension contribution.

And in truth, the public sector does even better than the ONS numbers suggest. That's because the ONS only takes account of the employers' explicit pension contribution, a contribution that hugely understates the true cost of public sector pensions.

As we blogged here, the true cost of public sector pensions as a percentage of salary averages around 25% more than current pension contributions. Which means that we need to gross up the public sector total reward numbers even further. At the median income level that takes the public sector premium up to a staggering 50%+.

All of which is pretty shocking.

But the public sector unions and their supporters have come up with an answer. They say that the public sector premium reflects the fact that public sector employees are on average better qualified than their private sector counterparts.

Here for example is what the TUC says:

"The obvious retort to the small-state brigade when they harp on about average pay [do they mean us?] is that the private and public sector workforces are different. As the private sector employs more unskilled workers on the minimum wage than the public sector, and the public sector has a high proportion of professional workers (such as teachers and doctors) it is not surprising that average pay is higher in the public sector...

...there has been a big growth in employment of graduates in the public sector over the last ten years � much bigger than in the private sector. Even in 1998 the public sector was already employing more graduates. Given that graduates are paid more than others, this in itself would tend to make average public sector pay higher. There are quite significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity) and those with other qualifications."

And the TUC is quite right - the proportion of public sector employees who are graduates is indeed much higher than it is in the private sector. In fact, at nearly 40%, it is twice as high.

Now, the TUC reckons that explains why public sector pay is higher. They're better qualified than the dolts working in the private sector, so naturally they get paid more.

Whether qualification and other differences really do explain the earnings gap is the very thing Tyler is currently attempting to bottom out. But it raises another perhaps even more critical question - in our current parlous economic state can it possibly make sense to have so many of our expensively educated graduates working in the public sector?

Because as the TUC highlights, although the public sector "only" employs just over 20% of Britain's manpower, it employs 40% of our graduates. 40%.

Can we afford to have 40% of our best brains working in the non-wealth producing public sector? Don't we need them in the private sector creating the prosperity that will power us out of Labour's economic crater?

That's a real Christmas riddle.

What's that?

Most of those supposed public sector grads are no such thing? Their growth merely reflects the "significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity)"? Many of those new public sector grads are merely redesignated diploma holders (like nurses)?

Hmm. You've probably got a point there.

Hmmm...

The mince pies are calling. Happy Christmas everyone.

New Cake Slicer Required

That doesn't look fair somehow

When all else fails, look at the facts. Tyler has been spending so much time screaming at those free-loading students on the telly, that he temporarily forgot that vital insight.

As we blogged here, Lord Browne's recommendations on higher education funding were spot on, and we strongly support their swift implementation by the government. It simply isn't fair that taxpayers should pick up the tab for uni courses, when it's the students themselves who get the lion's share of the benefits. Why should we pay for them to schlep their way into higher income jobs?

As Browne's report shows, the average male graduate can currently expect to receive a boost to his lifetime income of around $200,000. And although the boost for female grads is less, it's still well worth having.

But the question we taxpayers need answering is how much do we get? Given that we've been paying the bulk of the costs, what have we had back?

Because although we keep hearing students and academics telling us that we'll all benefit from graduates "boosting the economy", there is a distinct lack of fact to go with such assertions. How much benefit, and how does it stack up against the costs?

So here are a few facts, taken from this paper produced for the European Commission.

The critical calculation goes by the snappy title "the public rate of return to tertiary education". No, don't switch off. All it means is we're comparing the extra income generated by these higher earning grads in future (as against the income they'd have generated without a degree), to the costs of putting them through uni (including the loss of income they'd have generated had they been out working). And we express that return as an annual percentage, just like the interest rate on your building society account.

Anyway, despite the explosion of M Mouse degrees and the general dumbing down we all know about, it turns out that this return is still quite respectable. According to the OECD, the average UK graduate currently generates a public rate of return of around 6.5% pa. In other words, by investing in his university education, society gets a return of 6.5% pa over the next 40 years*.

Now that's not bad in today's circs - much better than the 0.5% pa paid on a typical bank savings account. In fact, it's much better than Tyler assumed (hence the need for facts). So we really shouldn't knock it.

But the key question is how does that 6.5% return get divvied up? Who gets it - the individual student or society as a whole (aka the taxpayer)?

It turns out that here in the UK, the graduate does very well indeed. Although the overall public return is only 6.5%, the average graduate's return (according to the OECD) is 14.4% pa - well over twice as much.

How? How can the grad get so much? Simple - he doesn't have to pay anything like the full cost of his university education.

But if the grad gets much more than 6.5%, that means the rest of us must be getting less - we know the size of the cake, and if he gets a bigger slice, we get a smaller one.

So is that fair? Is that a fair division of the spoils?

I submit to you that it isn't. And when we look at other countries, we can see that the division is much less fair here than it is elsewhere. Here are the OECD figures for a range of European countries, showing how the gap between the private return (the slice going to students) and the social return (the fixed cake) is higher here than anywhere else, except the Czech Republic, Portugal, and Switzerland.

Looked at in that light, it seems pretty clear some rebalancing is required. We need to reallocate some of the return away from the students themselves back to society in general. And higher fees are an excellent way of achieving that.

There's one other interesting factual snippet in this EC paper, on the question of whacking students from poor backgrounds.

We've been hearing a lot about how the higher debts driven by higher fees will put off poor students from going to uni. And how that isn't fair.

But it turns out that from a financial standpoint - even when they can access higher edcuation - students from poorer backgrounds don't get nearly as much out of it as richer students. It seems that the return for richer UK students is getting on for three times that for poor students.

Why?

Here's the long version:

"Overall, the expansion of tertiary education in OECD appears to have had little impact on the relative prospects of young people from less advantaged backgrounds. This is hardly a surprising finding. Parental and school influences are extremely important determinants of participation at post-compulsory level. In most countries tertiary education requires prior qualifications -- generally at upper-secondary level � so that attainment in the compulsory phase of education, as much as anything which occurs subsequently, is a key to tertiary participation. Therefore, the expansion of capacity at the tertiary level will not, in itself, have much impact on these factors. The challenge to public policy of delivering equality of opportunity in tertiary education is sizeable, and falls not only on the system for tertiary education itself, but also on support for children and their families, reaching back to pre-schooling and into compulsory and upper-secondary schooling."

The short version? The damage is done long before university level. If we really want to help kids at the bottom, we need a radical improvement in our state schools.

Sounds familiar somehow.

*Footnote. Yes you're right - the OECD numbers are based on what yesterday's graduates of different ages are earning today. And actually that may not be a good guide to what today's grads will earn over their lifetimes tomorrow. So with dumbed down degrees etc, the OECD's numbers may very well overstate the prospective return to uni education today.

University Finance Sorted

Time to break out the port?

As long-time readers may recall, Tyler was never Mr Cam's biggest fan*. But this government is showing a degree of can-do radicalism that is starting to make even Mrs T's initial steps look timid (let alone the spineless foot-dragging of vacuous fantasy reformer Bliar).

In five whirlwind months they've gripped the fiscal crisis, pushed through their promised free schools reform, launched an untrailed but fundamental market-orientated restructuring of the NHS, faced down the Luddites in the police force, announced a revolution in welfare, and signed death warrants on hundreds of useless and unaccountable quangos. There's more, but space is limited.

Yesterday they announced the much needed reform of university finance. Lord Browne's excellent report cuts straight through the BS. His recommendations manage to combine proper funding for the unis, with affordability, with competitive pressure, with... well, to coin a phrase... fairness for all (especially taxpayers). So hurrah.

We've blogged the shambolic state of higher education many times (see all previous blogs gathered here). In summary:

• Taxpayers now spend �12bn pa on higher education, up around 50% in real terms since 1997; the students themselves spend a whole lot more.
• There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies).
• The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog).
• The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%
• Courses have been dumbed down and grading standards slashed - the proportion gaining first class degrees has nearly doubled under Labour ( see this blog)
• Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-traditional graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind; and see this blog)
• The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about �30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.

Now, it's on that last point - the financial return to a degree - that Labour misled us most egregiously. Back in 2008 we attended a meeting of the Public Accounts Committee (under its previous esteemed chairman), where Bliar's claim that a degree was worth an average �400 grand was brutally exposed for the fabrication it was. And the Browne Report gives us some chapter and verse on just how the number was cooked up (see Report footnote 11).

Apparently the �400 grand referred not to the value of a degree per se, but to the value of a degree plus all other education beyond the average, which would certainly include A Levels. That is a gross deception, especially when you remember that all reputable research in this area has always and correctly calculated the value of a degree as being the difference between what you earn with A Levels alone and what you earn with a degree (and Tyler does actually know about this, having researched the area for the old Department of Education back in the 70s).

Browne wisely takes his estimate of a degree's value not from HMG or the unis but from the OECD. And they reckon that the lifetime value to a male graduate in the UK is currently running at just over $200,000, or about �120 grand (note that the OECD's calcs are published in purchasing power parity dolllars). Here's Browne's summary chart (click on image to enlarge):

So there is a financial return overall, which is not to be sniffed at (although note that the return for female grads is estimated by the OECD to be 25% lower).

However, there are some very important points to note here:

1. These estimates are based on the lifetime earnings of previous graduates, the ones who got their degrees long before the explosion in graduate numbers and M Mouse degrees. The returns looking forward are almost certainly going to be lower.
2. Brown quotes only the returns to the grads themselves. As taxpayers, what we need to know about are the returns to us. What do we get out of the muti-billion subsidy we currently provide?

And even though the report doesn't spell it out, that second point lies at the heart of the Browne reforms. In future, our unis will be funded much more by the fees they can earn from their students, and those fees will be financed not by taxpayers but by the students themseleves, via higher student loans. Which is exactly as it should be.

Because not only are the students the principal beneficiaries of their degrees, but by forcing students to think seriously about the value of a degree, we will force the suppliers to deliver that value far more effectively than any number of quango funding councils (in case you don't know, this is called the market).

Poor students being put off?

Well, at the margin you might worry about that. But as Browne was pointing out all yesterday, a university education will still be free at the point of use. And there will be no credit check on first time students applying for a loan. What's more, graduates who earn less than �21 grand pa (indexed against average earnings), will not have to pay anything.

Education is about more than cold hard cash?

Well, yes, it is. And Tyler is a big fan of the so-called "non-pecuniary benefits".

But by the time we get to degree level (ie assuming we've already taught everyone the 3Rs and a bit of shared science and culture), most of those wider benefits again accrue to the individual.

So we think the Browne reforms are spot on. Congratulations to him and his team.

And to St Vince for having the balls to accept reality.

PS Yes, yes, hypocrisy. Tyler got not one, but two free degrees, from not one but two top Russell unis. How can he now kick the ladder away? Well, (a) a much smaller percentage of pupils went to unis in those days so the taxpayer bill was much less, (b) Tyler has since paid sick-making amounts of tax that would probably have funded several entire lifetimes at uni, (c) Tyler does make voluntary contributions to both his two unis. Apart from that, you do have a point. In truth, the taxpayer should never have funded uni education, other than through loan provision.

*Footnote While Tyler was never Mr Cam's greatest fan, Mrs T (T as in Tyler, that is) always was. She backed him from the very first time she heard him speak back in 2005. And she now greets each new brilliant radical announcement with a triumphant "that's my boy". Very irritating.

A Surfeit Of Grads

BA in Hat Studies (First Class Hons)

Following comments on Monday's uni post, we've taken a closer look at the graduate employment stats. Is it true that increasing numbers of grads are unable to find full-time employment in graduate jobs? And what exactly gets counted as a "graduate job"?

The latest official stats are contained in the Higher Education Statistics Authority (HESA) report Destinations of Leavers from Higher Education Longitudinal Survey, 2004/05. Their survey was conducted during 2008/09 among students who completed a higher education course in 2004/05. It aimed to find out what they were doing 3.5 years after graduation.

Overall, the survey found that 76% of grads were in full-time employment of some kind. Which means of course that 24% were not.

And how many of those in full-time employment were in graduate-type jobs?

It turns out that of those who had gained full-time undergraduate degrees, and were in employment 3.5 years later, just 36.5% were in traditional grad jobs - ie the professions like law, medicine, architecture, teaching, etc etc. Which implies that of those who originally graduated, only 27% (equals 36.5% of 75%) had found full-time employment in traditional graduate jobs.

Now, that's a fairly alarming conclusion. As the Major would say, it shows we're turning out - and paying for - far too many grads.

But HESA itself doesn't say that. HESA - and indeed the entire Higher Education industry - says that the world has moved on a long way since we measured a graduate job by whether it is in the traditional professions. These days, there are all kinds of other jobs - like company manager, or software programmer, or derivatives salesman - that require a degree.

So HESA uses a new classification of grad jobs which goes by the snappy title of SOC(HE). It includes three additional job categories beyond the traditional professions: "modern professions" such as IT and journalism; "new graduate occupations" such as management accountancy and therapy; and "niche graduate occupations" such as nursing and graphic design, where a degree is not essential but might conceivably come in handy.

And when you count graduate jobs on that basis, you come up with some much healthier looking results. In fact, the proportion of full-time undergrad degree holders now in full-time graduate type jobs more than doubles, from 36.5% to 76.8%. And right across all the categories of HE qualification the picture now looks approximately respectable (click on image to enlarge):

Fine.

Except there are one or two slight problemettes with HESA's numbers.

First, their data is entirely survey based. And of the 400,000 or so students who graduated in 2004/05, HESA only got data from about 10%. Moreover, since the response rate from their initial sample was so low, they had to top it up with a subsequent sample drawn from graduates for whom they happened to have an email address. All respondents were self-selecting, and we should probably assume grads who'd become Thai beach bums did not bother to reply. The survey is almost certainly biased towards post-uni success.

Second, it isn't at all clear that HESA's new categories of graduate jobs actually require a degree to do them. Jobs like nursing, physiotherapy, and retail management all used to manage perfectly well without requiring degree level qualifications.

Which brings us back to the issue of educational qualifications as a signalling device: the idea that the economic value of a degree lies not in its content, but in its ability to signal to potential employers that you are bright and hard-working. While at one time you might not have needed a degree to become a Tesco store manager, runs the argument, these days you won't even get the chance to apply unless you have said degree.

But while an ambitious 18 year old might consider that a good reason to do a degree, from the perspective of taxpayers, spending �12bn pa on a personal signalling system isn't at all attractive.

Moreover, there's also a real question mark over whether a degree in one of the "new subjects" from a "new university" is actually worth anything either in terms of content, or as a signalling device.

Take a couple of Britain's new industries - computer games and video animation. You'd think that these would be precisely the kind of sunrise industries that our non-traditional degrees would equip people for. And indeed, there are many specialist degree courses in both animation and computer games.

Yet in the last couple of days Tyler has heard independently from senior participants in both industries that even first class honours grads from such courses are next to useless. They may have the piece of paper, but in general they lack the drive, imagination, and... er... yes, intelligence, to be attractive recruits.

Which is why such employers rarely even mention degree qualifications among their requirements when they advertise jobs (eg see the current vacancies at leading UK games producer Lionhead Studios).

So do we have a surfeit of grads?

The long and the short of it is there are no definitive stats - it's certainly not something the government wants to own up to.

But a couple of years back, the OECD published this interesting international comparison of "overqualification" in employment. It was done in the context of a migrant labour study, but if you just focus on overqualification among native-born workers, you will see that the UK's are the most overqualified, bar Spain, Austrailia, and Ireland:

So if 15% of Britain's native employees are already overqualified for the jobs they do, and if the new degrees from the new unis are not valued by our new employers, and if our kids are clocking up humongous amounts of debt on degrees that will never pay back, and if it's all costing us taxpayers �12bn pa, you may be wondering WTF we're doing?

To which I can only reply, I don't know.

The University Of Real Life

M Mouse 101

We've blogged Labour's appalling record on higher education many times (see all posts gathered here). In summary:

• Taxpayers now spend �12bn pa on higher education, up around 50% in real terms since 1997; the students themselves spend a whole lot more


• There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies)
  
• The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog)


• The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%


• Courses have been dumbed down and grading standards slashed - the proportion gaining first class degrees has nearly doubled under Labour


• Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind


• The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about �30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.

A madness like this could never continue, and now the money has run out. Reality has finally intruded.

So what to do? How is higher education going to take its share of the pain?

One obvious step is to charge students the full cost of their government funded loans. That has already been proposed in the TPA/IOD cuts paper and the earlier cuts paper from Reform. It would save taxpayers �1.2bn pa.

Now the CBI is recommending the same thing, only it would increase university fees at the same time. If fees were increased to say �5,000 pa (from the current maximum of �3k), university funding could be bolstered without costing taxpayers a bean. Everybody's happy... well, everybody except the students, that is.

Naturally, there's been a huge outcry from students and the lower tier unis, who reckon it would put a lot of people off university altogether. To which taxpayers might say a good thing too.

But when you read the CBI report, you realise its concerns run far deeper than simply the current waste of taxpayers money.

For one thing, they are very concerned about the dearth of so-called STEM graduates - ie people who've chosen to do the "hard" subjects in Science, Technology, Engineering, and Maths. It seems the CBI does not value media studies any more than the Major.

Second, the CBI worry that the present cap on fees is starving our top unis of the resources they need to remain world leaders. World leaders? Sure. As things stand, the UK has a disproportionate number of the world's top unis - at least according to the Times Higher Education - QS World University rankings:

The names of the 17 UK unis in the world top 100? You don't really need to ask, but they are (in order) Cambridge, Oxford, Imperial, UCL, King's, Edinburgh, Manchester, Bristol, LSE, Warwick, Glasgow, Birmingham, Sheffield, York, St Andrews, Nottingham, Southampton. (Hmm... you say... where's Leeds? 104th. And Durham? 122nd. Hmm...). None of our former Polys make the top 500.

The CBI reckons it is far more important to sustain our top unis, than to continue the mad pursuit of Labour's arbitrary 50% participation target. Indeed, it goes further. It:

"...does not believe that the push to increase participation in higher education to 50 per cent of 18-30 year olds in England and Wales should continue to be a target in the current economic environment. The priority should be to ensure that those who go to university continue to receive a quality education. This should go hand-in-hand with greater efforts to deal with educational disadvantage at the secondary school level, and to support young people through apprentice and other vocational training programmes."

Which could easily be Tyler talking. Or Tyler senior. Or indeed, virtually anyone you meet out here in the real world.

The overwhelming educational priority is not more M Mouse degrees, but to fix the dire state of secondary education for low achieving kids and to help them into the real world of real work.

To summarise, real universities are academically elitist, and we should value and support them for precisely that quality. They should charge realistically high fees, and the students who attend them should be expected to pay the full cost of their funding: after all, they're the ones who'll reap the bulk of the benefits.

Meanwhile, we need a radical improvement in secondary education for less able kids, something we can achieve via real parental choice (ie school vouchers) and awarding higher value vouchers for lower ability pupils.

Footnote warning from HypocrisyWatch - Yes, it's true, Tyler did receive full taxpayer funding for his degrees from not one, but two, of the unis listed above. And yes, he undoubtedly benefited hugely. And yes, he does feel a tad uneasy about that, even though he has since paid humongously sick-making amounts of tax. So yes, he is making some financial contribution back to his old unis, albeit not exactly on a JP Getty scale.

Legacy Of Ruin

Things can only get better

Sources close to My Lord Mandy have told BOM that the government will shortly introduce measures to make Britain's boardrooms more equal.

When selecting directors in future, FTSE 100 companies will have to give preference to candidates who are qualification-poor.

An official at the Department of Bollocks told BOM "His Magnificence is determined to help people who have been denied the educational and work advantages enjoyed by traditional main board directors."

The official added: "Just because someone has suffered from going to a pisspoor state education factory and has subsequently proved to be unemployable does not mean he - or she - should be denied a board position. In selecting their directors, companies must not discriminate against those whose underachieving backgrounds and lack of qualifications might in the past have precluded admission to the board room."

*****

Having destroyed educational excellence in our state schools, Labour is well on the way to doing the same to our universities.

Last week we learned that the percentage of students getting firsts has virtually doubled under Labour - despite the fact that student numbers are up by a staggering 30%.

And now Mandy has apparently decided that university applicants from poor families should be given a two-grade "head start" to help them secure a place. A two grade head start for students who may very well then stuggle with their uni course... unless that too is dumbed down.

Out here in the real world, most of us can see that we've already got far more university graduates with dubious degrees than we can ever use. When last sighted - before the slump - unemployment among new grads was 8.2% and rising fast. And if you add in all the grads employed in non-graduate type jobs, the true figure is much higher.

As we've blogged many times (eg here), Labour's 50% uni participation target is absolutely bonkers. It is entirely arbitrary, and far higher than the 34.8% OECD average: when last sighted, the US was on 33.6% and Japan on 36.1%, both behind us on 39.3% (graduation rates - see here).

And it's not cheap. On top of the c�15bn pa direct cost to taxpayers for the courses, we are also losing all the output from these students. And that's both while they're at uni, and while they're tooling around for a year or two afterwards reconciling themselves to the awful truth that a degree from a UK uni is no longer a meal ticket.

Gah!

The real screaming priority is obvious to everyone out here. It's not more uni places for underperforming students. It's to improve the lamentable standards in our state schools.

Gove had better deliver on those school vouchers, that's all. Because the Major's starting to get very agitated.

PS Yes, we realise this may all be another wind-up from the Master of wind-ups. But the damage Labour has inflicted on our education system is all too real.

As you may know, His Magnificence himself was educated at a state grammar school in a leafy North London glade. But shortly after he left, the school was forced to go comprehensive, and as a 1200 pupil state education factory, it now struggles to produce good A Level results, scoring well below the national averages. Maybe HM might reflect on that as he's oiling his pecs out there in the sun.