International students: we couldn’t do without them

In two previous analyses for the Higher Education Policy Institute and Kaplan, we looked at the determinants of international students coming to the UK and the net benefit to the UK economy generated by international students during study.

Our new analysis, published today, focuses on the outcomes of international graduates in the UK labour market after completing their studies at UK universities.

What were our main findings?

Using Longitudinal Educational Outcomes (LEO) data on the earnings achieved by international graduates, we estimated these graduates’ income tax, National Insuranc,e and VAT contributions to the UK Exchequer in the first 10 years post-graduation. We found that:

  • The average contribution to the UK Exchequer per international graduate working in the UK labour market post-graduation (between 9% and 28% depending on domicile and time since graduation) was estimated to be £106,000.
  • With 235,000 international students commencing their studies at UK higher education institutions in 2016/17, the total tax revenues to the UK Exchequer associated with this cohort were estimated to be £3.173 billion.

Post-graduation tax revenues associated with 2016/17 international student cohort – by level of study and domicile (per graduate and £m total)

Where are the skills shortages in the UK labour market?

To understand (broadly) where skills shortages exist in the UK labour market, we used Home Office information on the number of applicants using sponsorship certificates for Tier 2 visas – by industry – in 2017. 40% of applications occurred in ICT occupations, 17% in Professional/Scientific/Technical occupations, 12% in Health and Social Care and Finance and Insurance sectors (each), and 6% in Education. These 5 sectors account for 86% of the total.

Number of applicants for Tier 2 (general work) visas using sponsorship certificates by industry, in 2017

What subjects did international graduates in the UK labour market study?

To analyse the extent to which international graduates fill these skills gaps, we compared the above shortage industries with the subjects studied of international graduates in the UK labour market (assuming that graduates are likely to work in industries broadly related to their subject studied). We find that these graduates contribute to filling several key UK skills shortages, with high numbers of graduates in subjects related to ICT, Professional/Scientific/Technical Industries, and Health and Social Care entering the UK labour market post-graduation.

What are the earnings of international graduates compared to UK graduates? We also looked at the earnings of international graduates in the UK labour market compared to UK graduates. In aggregate, at undergraduate level, five years post-graduation, international graduates post median earnings of £29,000, compared to £25,700 for UK graduates on average (a premium of 13%). These international graduates outperform their UK counterparts at each of the 1,3 5 and 10-year markers. The same outcomes were identified for postgraduate qualification – though to a lesser extent.

In terms of variation by subject, in more regulated labour markets (e.g. Health and Education), despite the many job vacancies, we would expect to see limited differences in the earnings between UK and international graduates (because wages cannot adjust). In contrast, in more deregulated markets, we would expect to see wages bid up to combat skills shortages – and potentially see the greatest wage premiums in those sectors where shortages are most acute. Our analysis confirms this – again assuming that graduates typically enter sectors related to their degree subject. In those sectors where there are acute skills shortages (e.g. ICT) and the market can respond (i.e. is more deregulated), the earnings of international graduates are generally higher than UK graduates. In more regulated markets where pay is collectively determined (e.g. teaching and nursing), the wage premium is more muted or non-existent.

Median earnings of graduates with undergraduate degrees five years after graduation (in 2015/16), by domicile and subject studied

London Economics’ analysis of Longitudinal Educational Outcomes data

What does all this mean?

Our analysis suggests that the UK labour market actually functions quite well, as it responds to mismatches in the demand for and supply of skills (depending on the sector). The analysis also suggests that international graduates support the UK economy by helping to reduce some of the most acute skills shortages, and that there is limited displacement of UK graduates by international graduates.

However, there are still severe skills gaps in a number of sectors. Wage premiums simply reflect the characteristics of the UK labour market and the skills shortages that continue to exist, as well as the difference in the skills and proficiencies of UK and international graduates.

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