How have changes in higher education participation and degree class awards impacted graduate earnings?
Research on graduate earnings has typically focused on how this has, on average, changed over time compared to the earnings of non-graduates, with such studies based on data relating to individuals born prior to 1990. More recently, there has been increasing attention paid to how graduate earnings vary by subject of study and provider attended, so that additional information can be supplied to prospective students who are deciding whether to enter higher education and what course to study. Less attention has been given, however, to how graduate earnings differ by class of award.
This insight outlines our findings from an investigation into the trajectory of the average graduate premium at age 26 (i.e. the extent to which the annual earnings of graduates exceeds that of non-graduates in percentage terms), as participation in higher education has changed. To extend previous work conducted in this field, we use data on cohorts born up to the early 1990s. We also look at how the evolving levels of participation, alongside shifts in the proportion of graduates with at least an upper second class award, has impacted the premium for at least an upper second class award relative to a lower second class award or below (i.e. the extent to which the annual earnings of those with at least an upper second class award exceeds the annual earnings of those with a lower second class award or below in percentage terms).
A paper discussing our methodology and results in further detail can be downloaded below or from the Warwick Economics Research Paper Series. This builds on previous work released by HESA and the University of Warwick in this area (see The return to a degree: New evidence based on the birth cohort studies and the Labour Force Survey and How does the return to a degree vary by class of award?).
Download Graduate Earnings Premia in the UK: Decline and Fall?
Why does this matter?
Disparities in graduate earnings by degree classification is an important area of consideration from a social mobility standpoint. In their State of the Nation 2018/19 report, the Social Mobility Commission highlighted that social mobility is about ensuring equal opportunity for all and that future outcomes should not be determined by childhood background. With governments in all nations expecting higher education to play an important role in enhancing social mobility, there has been significant work within the sector to improve access among those from more deprived households. However, this is only one stage of the student lifecycle. Previous studies have found that disadvantaged students have a lower probability of leaving university with at least an upper second class award (i.e. an upper second or first class) relative to their advantaged peers, even after accounting for factors such as prior attainment and course of study.
If employers sift graduate applications on the basis of whether the individual has at least an upper second class award, a growing gap in earnings and future employment prospects could emerge between graduates with at least an upper second class award compared to those with a lower second class award or below (i.e. those with a lower second/third class award or pass/ordinary degree). As a result of this, those graduates with a lower second class award or below (who are also more likely to be disadvantaged) may not find higher education meets their initial expectations around the extent to which it boosts their labour market opportunities. In future, the greater uncertainty in the benefits associated with spending three to four more years in education could mean prospective students from disadvantaged backgrounds may no longer consider studying for a degree as the pathway for them. Such patterns could inhibit the extent to which higher education can advance social mobility and thereby help ensure an individual’s chances in adulthood are not largely defined by their background at an earlier point in their life.
Secondly, should an increasing proportion of graduates qualify with at least an upper second class award, this could lead to greater worry among employers over how reliable and valuable higher education qualifications are with regards to illustrating the potential of job candidates. This fall in value could become evident in the labour market if organisations respond by being less willing to assess job applications and remuneration packages on the basis of degree classification, as this no longer provides an accurate means by which to identify the strongest applicants.
What has happened to participation and classifications awarded for first degrees over time?
In the late 1980s, there was a vision and commitment among policymakers to enhance the availability of places to prospective students within the higher education sector. The UK subsequently witnessed a steep rise in participation during the late 1980s and early 1990s, primarily affecting those born in the early 1970s. Since then, while we have continued to see growing numbers of young people go to university, expansion has occurred at a steadier pace. This trend has led to a constant inflow of young graduates into the labour market. Coupled with an outflow of retirees from earlier birth cohorts (who generally did not hold degree level qualifications), this has resulted in the proportion of graduates in the workforce having increased in an almost linear fashion between the early 1990s and 2013, as Figure 1 illustrates.
Figure 1 - Proportion of graduates in the working age population.
Over the same time period, there has also been a persistent rise in the share of graduates with an upper second or first class award – with a more pronounced acceleration evident in the latter half of the two decades we consider, driven by the growing proportion of graduates with a first class award (Figure 2).
Figure 2 - The proportion of classified first degrees by class of award in HESA data.
How might these trends impact the average graduate earnings premium? What about the premium for at least an upper second class award relative to a lower second class award or below?
The pattern we see in Figure 1 will lead to the share of graduates relative to non-graduates in the labour force increasing over time. Such a rise in supply would be expected to put downward pressure on the average graduate earnings premium and we would therefore anticipate observing a reduction in this premium during an empirical exploration into this matter.
However, the trajectory for the premium for at least an upper second award relative to a lower second class award or below between the early 1990s and 2013 is less clear-cut from a theoretical perspective. An expansion in the number of graduates entering the workplace is likely to weaken the extent to which having a degree can be relied upon by graduate employers as an informative selection criterion in the recruitment process. For students, the higher levels of participation therefore mean that they now must find other ways of demonstrating their potential. In response, we are likely to see organisations placing increasing importance on class of award and related aspects the graduate’s transcript to identify the most promising candidates. The increased value attached to degree classification will raise the premium for at least an upper second class award relative to a lower second class award or below. Conversely, a higher proportion of graduates qualifying with at least an upper second class award will have the opposite effect. In this instance, employers are likely to find that the value of degree classification to assist with sifting job applications has declined, which shall reduce the premium for at least an upper second class award relative to a lower second class award or below.
In the two-decade period we investigate, both participation in higher education and the proportion of graduates with at least an upper second class award continuously increased. Hence, a quantitative analysis is required to understand how these two trends influenced the trajectory of the premium for at least an upper second class award relative to a lower second class award or below.
What has previous research concluded on this matter?
Researchers have explored the average graduate earnings premium among those born between 1970 and 1989. The 1970 birth cohort will have mainly entered higher education in the late 1980s, while those born close to 1990 will have started their degree around the late 2000s (Figure 1 therefore essentially represents those born between these two decades). Their results have indicated that the average graduate earnings premium has remained constant over time and have not aligned with theoretical predictions. The typical explanation given for this is that technological and structural change in the labour market has simultaneously increased the demand for graduates (relative to non-graduates).
The premium for at least an upper second class award relative to a lower second class award or below has only been examined for those born between 1970 and 1980. The research found evidence of this premium having increased across the decade – suggesting that the impact of higher education participation dominated the effect of more graduates having at least an upper second class award in this ten-year period.
What additional analysis have we done and what do the results tell us?
The average graduate earnings premium
We begin by examining a birth cohort born in 1990 and find that the annual earnings of graduates were 10% higher than those of non-graduates (i.e. the average graduate earnings premium). When replicating the analysis for a 1970 birth cohort, we observe the corresponding premium to be 17%. Taken together, these results suggest that over the two decades separating these two birth cohorts, the average graduate earnings premium had declined by 7 percentage points. Exploring an additional dataset consisting of birth cohorts covering the period 1980 and 1993, we see evidence of the fall having occurred among those born between 1988 and 1993. That the decline has occurred only among the most recent cohorts for whom earnings data are available explains why our findings differ from the previous consensus that the average graduate earnings premium has remained constant over time.
The premium for at least an upper second class award relative to a lower second class award or below
To the best of our knowledge, our research is the first to assess this premium among those born after the early 1980s. Starting with an investigation into the 1990 birth cohort, we observe the premium for at least an upper second class award relative to a lower second class award or below to be 10%. This is 4 percentage points higher than the same premium for a 1970 birth cohort. We again evaluate the timing of this change across the two-decade period. In contrast to the average graduate earnings premium where the change occurred among those born in the late 1980s/early 1990s, we conclude that the premium for at least an upper second class award relative to a lower second class award or below increased within the birth cohorts born between 1970 and 1982, but remained constant thereafter.
This finding aligns with what theory predicts. Participation in higher education expanded particularly rapidly among those born between 1970 and 1980, while the proportion of graduates awarded at least an upper second class award rose at a steadier rate across this decade. Rising participation would therefore have had a dominating effect, causing the premium for at least an upper second class award relative to a lower second class award or below to rise. However, in the second half of these two decades, entry into university increased at a slower rate. In contrast, there was an acceleration in the proportion of graduates qualifying with at least an upper second class award. With the latter trend now starting to have more of an impact, we would expect to see the premium show signs of stabilising.
The increase we observe in the premium between 1970 and 1982 was driven by a rise in the premium for an upper second class award relative to a lower second class award or below. This also represented the boundary commonly used by employers over this period to assist with sifting the growing number of applications they were receiving from graduates.
What are the implications of these findings for the premium for a lower second class award or below relative to no degree?
A decline in the average graduate earnings premium of 7 percentage points, alongside a rise of 4 percentage points in the premium for at least an upper second class award relative to a lower second class award or below has resulted in the premium for a lower second class award or below relative to no degree falling by 11 percentage points.
For the 1990 birth cohort we study, the premium for a lower second class award or below relative to no degree was just 3% (compared with 14% among those born in 1970). This illustrates that a degree, by its own, no longer ensures an immediate earnings premium for graduates relative to non-graduates. Alongside course of study, academic performance will be a key factor in determining the extent of the earnings premium received by a graduate relative to having no degree.
With disadvantaged students more likely to qualify with a lower second class award or below, such a low premium may reduce the extent to which higher education can help improve the socioeconomic circumstances in adulthood for those who enter higher education from deprived households. Prospective disadvantaged students may also no longer perceive university as a guaranteed route to improving their labour market prospects. Consequently, this will inhibit the ability of higher education to advance social mobility within society.
Will you be carrying out further research and why?
Existing data in the public domain has enabled us to explore the earnings of graduates as recent as those who began their degree in the early 2010s. Over the last ten years, participation in higher education has continued to rise. There has also been particularly strong growth in the proportion of graduates with at least an upper second class award, which is mainly the result of an increasing share of graduates with a first class award.
This has led to growing concerns within the sector over the possible impact this may have on the perceived reliability and value of higher education qualifications. With the advancement of social mobility through higher education still a key policy objective across the UK, this topic remains of high importance to both researchers and policymakers alike.
We intend to conduct further research into this area with more recent birth cohorts and at a later stage of the lifecycle, once the relevant data is made available. This will enable us to understand whether the decline we note in the premium is a short or long-term phenomenon and to also assess the premium during middle-age when graduates/non-graduates are further into their careers.
 The datasets we use for our analysis are UK-wide, aside from the 1990 birth cohort study, which is based on those born in England only. Full details of the datasets we use can be found in the detailed paper accompanying this insight.
 Data source for Figure 1 is: Office for National Statistics (2013). Graduates in the UK labour market: 2013 [online]. Newport: Office for National Statistics. Available at https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/graduatesintheuklabourmarket/2013-11-19
 HESA was established in 1993 and administered its first full student data collection in the academic year 1994/95. Prior to this, degree classification information was collected through the Universities’ Statistical Record. Analysis of this source in 1991 illustrates that 9% of graduates were awarded a first class, 44% an upper second and 47% a lower second class or below.
 These figures differ slightly to those we reported in our first paper. The reason for this is that we have since been able to access a more detailed dataset on the 1990 birth cohort that enabled us to also take into account cognitive ability when exploring the relationship between higher education and earnings. This led to no material change in our qualitative and quantitative findings.