The earnings from learning: economists weigh up the relative returns from undergraduate degrees

Going to university represents a significant investment – and one that is only likely to increase in significance with impending tuition fees rises. So should prospective students be thinking more pragmatically – taking a long, hard look at what they study in terms of how it can enhance their earnings over their lifetime? Are some degree subjects more lucrative over the long term than others, in terms of what graduates can expect back?

The answer to that last question would most definitely seem to be yes, according to research by Professor Ian Walker of Lancaster’s Department of Economics and Dr Yu Zhu of the University of Kent.

Using UK Labour Force Survey data from 1994 to 2009, Walker and Zhu have modelled how HE qualifications affect the earnings of graduates in the UK, according to the type of subject studied. This builds on earlier work they did to assess whether the rapid expansion of higher education in the late ‘80s, and subsequent increased supply of graduates, was driving down graduate wages – which they found not to be the case. 

As Walker explains, their calculations went further than any previous studies, modelling the student loans system and factoring in the cost of repayments: 

"The conventional literature really just stops at examining what the impact of a degree is on gross earnings. We went several steps further: applying the appropriate arithmetic to get the net impact over your lifetime. From the model we were able to predict what a lifetime of earnings would look like for different sorts of graduates. We applied the tax system to it, and the loan repayments system, to work out how much money you had to spend each year of your working life.’"

‌They compared their graduate sample with a set of individuals who did not do a degree but whose school qualifications would, in principle, have enabled them to go to university – typically two or more A-levels. 

Degree subjects were divided into four major groupings, mirroring those used in the Labour Force Survey: science (including health-related degrees), technology, engineering and mathematics (STEM); law, economics and management (LEM); arts, humanities and other social sciences (OSSAH); and combined degrees (COMB). 

"If you think of higher education purely as an investment," says Walker, "our prior was that the rate of return across these different investments – i.e. different subjects – would be broadly similar. If markets are efficient you shouldn’t see significant differentials across similar kinds of 'assets'. While human capital is presumably less malleable than financial capital, we nevertheless thought that people would broadly be making sensible choices and that we would not be seeing big differentials."

Differences in lifecycle  

‌Yet the picture that emerged was far more complex. Earnings levels did differ markedly between different subject groupings, and these differentials varied by age for both men and women. 

"The differences in age-earnings profiles are complicated," says Walker. "They do not appear to be parallel, which is what the literature typically assumes. Male LEM graduates, for example, enjoy faster growth in wages early in the lifecycle compared to other majors, including STEM."

This is true, he adds, even for those with poor degrees. The model showed that STEM graduates, or those with combined degrees, would eventually catch up with those who did LEM but not till much later in the lifecycle. So early-career wage levels are not a good predictor of lifetime earnings – something the government is assuming in using first destination earnings data. 

For those opting for arts or social science degrees, the lifetime returns are markedly lower – especially for men. In fact, on average male non-graduates did better than men with arts degrees: the findings suggest there is actually a small negative financial return from doing this type of degree. 

For women, the picture was significantly different. Once again LEM graduates saw the highest and fastest rate of return. But women who did a degree – irrespective of which subject they chose – enjoyed substantially higher lifetime earnings than those who did not. What this indicates, says Walker, is the level of discrimination female non-graduates still face in the labour market.


For Walker the results raise some interesting questions about which subjects are currently seen as priority areas.

"We were particularly interested in capturing what was going on with STEM graduates because we knew that the government felt this to be somehow different from other subjects. We were keen to see whether the rate of return to investing in a STEM degree really was bigger than to other subjects, which might conceivably justify subsidising STEM relative to other subjects. If the rate of return is high, that might be an indication that there are too few students studying those subjects and so provide grounds for a subsidy. 

"If so, we’d expect to see a big differential in the rate of return to STEM graduates relative to non-STEM graduates. What our results show is that’s actually not true. So we don’t see a big argument for subsidising STEM from the point of view of market failure. This particular argument doesn’t seem to hold water."

Effects on choice

So will all this affect what students actually choose, when it comes to the crunch? For some perhaps yes, but in general Walker thinks not – because young people, he argues, tend to take a fairly short-term view, attaching more weight to current experience than to more distant events. 

"Young people are typically very impatient: they want to have things now, and they don’t really care very much how they pay for it in the future. This suggests that subjects that are easy are more likely to be taken by students who discount the future heavily. They’d rather have the fun now and pay for it, in terms of lower wages, in the future."

Even the current reforms of the UK fees system will not, he believes, have a huge impact on the economic returns to be expected from degrees. 

"The strong message that comes out of this research is that even a large rise in tuition fees makes relatively little difference to the quality of the investment – those subjects that offer high returns (LEM for men, and all subjects for women) continue to do so. And those subjects that do not (especially OSSAH for men) will continue to offer poor returns."