The government should get over its university hang-up – our future prosperity depends on it

The economic travails of the recent past are sobering. Sluggish GDP per capita growth – just 0.6 per cent annually between 2008 and 2019 – has dampened the prospect of higher living standards and real wages have stagnated.

As our recent report highlights it all could have been much worse still.

Graduates drive growth

Using a technique known as “growth accounting”, our team calculated that annual GDP per capita growth would have been closer to 0.1 per cent had we not seen an expansion of higher education in recent decades.

Growth accounting allows us to identify the relative contributions of different inputs to economic growth. Broadly speaking, there are three such inputs: human capital, physical capital and a residual category that includes technology and “knowhow”. Since 2008, human capital has accounted for most of the growth we have seen in our economy. But what is even more striking is that, within this bracket, it was the expansion of education, specifically, that was driving pretty much all observable gains.

The expansion of HE, then, has been a rare green shoot in an otherwise bleak economic landscape.

What about the future?

It is perfectly plausible that other drivers of growth will contribute more in future. But the last decade suggests we cannot count on this, and all the while the government has a clear lever it can pull in the form of higher education policy.

There is also only so much we can rely on the pre-existing wave of HE expansion to fuel further growth. As people with below-average education retire, the skill level of the workforce will continue to climb. But that trend has a shelf life and will tail off quickly from the end of this decade.

And so, we need to expand further. The potential prize if we do this is substantial. For instance, if we raised the participation rate to 70 per cent, the economy would be around 4.5 per cent larger by 2050 and tax receipts would soar by £57bn, in today’s money.

Of course, volume alone won’t cut it; achieving these sorts of gains rests on meeting the needs of our emerging economy. So, what do we know about the direction of travel and are we confident that HE can complement it?

Direction of travel

We already lack enough high-skilled workers today, professionals in particular – a detail that often escapes those who argue that too many people go to university and should pursue alternative routes. If we do not expand the number of high-skilled workers, that deficit will only grow because the trend for high-skilled jobs is very clearly rising and the government’s own commissioned forecasts suggest that they will continue to grow as a proportion of the workforce in the decade ahead.

That doesn’t mean we don’t need to think about filling roles at lower skill levels. But demand for many lower-level roles is falling, not least when it comes to the mid-skill occupations, and so proportion is required.

All of this underlines a crucial point when considering appropriate skills policy: we cannot afford simply to view skills needs through a static prism of the economy as it is today – we must plan for tomorrow’s world or we will end up missing opportunities to boost living standards.

Automatic for the people?

That world will, increasingly, be infused by new technology. Tasks that are more routine in nature are much more likely to be automated than those that are not. Some high-skilled jobs will be affected by this, but not nearly as many as those at lower levels. It is perhaps unsurprising, then, that people with higher qualifications are far less prone to having their roles automated – according to the ONS, for instance, 87 per cent of low-risk jobs are held by people with degrees.

While some roles are prone to displacement, others are booming. Predictions about the nature of change vary, but there is a widely held view that certain skills are becoming more valuable. For example, studies by the OECD, World Economic Forum, EU Commission and Harvard suggest that people who can meld digital, high-order cognitive and non-cognitive skills are best positioned to thrive.

Employers clearly still think that graduates are getting what they need to justify a healthy earnings premium – between £100K and 130K on average over their lifetimes, after taxes, student loans repayments and foregone earnings while studying are factored in. And there is every reason to think they will continue to be well positioned. Given the breadth and depth of experience graduates have at their disposal, they are ideally placed to develop the combination of skills that are increasingly in demand – and not just when pursuing academic subjects, but technical courses too as many universities offer diverse options.

Not all courses

Yes, we can’t dismiss the problem of poor returns for some courses and there is always more that can be done to pair courses with good opportunities. But the answer is to learn and refine, not to abandon further expansion. We must also be careful about how we define value. While private financial returns to students are a crucial benchmark, we can’t ignore the non-financial returns for graduates nor the benefits that employers get from this investment.

Given the role education has played in snatching a measure of economic growth from an otherwise bleak scenario in recent years, and the clear need for us to invest in high-level skills, it is disappointing that the government seems so downbeat on having more graduates. Rather than flirting with the prospect of student number controls and grade floors, it should instead build an ambitious, positive agenda to boost participation and realise our potential as a leading knowledge economy.