ISER Working Paper Series 2006-58
The wage effects of graduate competition
18 Dec 2006
The most commonly cited explanation for the huge expansion of higher education in the UK and other countries in recent years is that these countries are moving into what has been called the 'post-industrial' phase which requires a new, better trained workforce. There is a premium on higher skills, greater flexibility, and improved management, while employers are prepared to pay more for those who fit the bill. Graduate wages go up and people respond to these market signals, so that despite the greater costs demand for higher education continues to rise. At the same time, governments invest in universities in order to ensure that the system as a whole can expand.
This demand-led account of change is a reasonable story which, though, in its emphasis on material motivations underplays social factors. Not everyone seeks to go to university because they believe it will pay. Not everyone has even a clear idea what sort of financial benefits they will obtain. Their motivations are probably guided by some notion of the general status of a job rather than the salary attached to it. This status can be identified by the typical education of those doing that work. For instance, the more graduates in the occupation, the more obviously graduate the work expected for that job is, and so the more attractive to graduates this sort of job will be. However, this also means that graduate jobs are likely to become overcrowded as their graduate densities rise. Instead of getting higher wages, as the story about demand for more technical and managerial skills implies, they face an increasingly competitive environment and as a result receive somewhat lower wages. This is a supply rather than a demand led view of the graduate market.
This is tested using Labour Force Survey data over a number of years. The results show that on average graduates earn no premium for working in an occupation with a high graduate density, but non-graduates do! This implies that there is some productivity effect, but it is not graduates who gain. Further, the costs and benefits of graduate density are not distributed equally. Men appear to gain very little if at all, while women gain something. However, when graduate density is extremely high women appear to lose out - suggesting perhaps that they do less well in sectors dominated by male graduates. Further, while some gains can be made by working in relatively new types of graduate job, people who work in traditional graduate occupations suffer a pronounced penalty. They benefit from working in a graduate job but lose some of this gain through overcrowding. These results seem to support a theory which suggests that the social demand for education is important. We need a more complex story than that provided by simple material explanations for the expansion of higher education.