Dr Stephen Coulter, Head of Industrial Strategy, Skills and Sustainability, Tony Blair Institute for Global Change and James Scales, Policy Lead, Skills and Future of Work, Tony Blair Institute for Global Change.
Higher education (HE) is more popular than ever. In 1994, there were around 405,000 applicants for undergraduate places through UCAS, but that figure has now almost doubled.i And thanks to the more expansive HE policies of recent decades, more and more of those applicants are finding places: while around 271,000 were accepted in 1994, for instance, that figure was eclipsed by the 562,000 who succeeded in 2021.ii
This is precisely the direction of travel we ought to be taking. We need more graduates.
One of the main reasons for this is that graduates boost prosperity. This is important because we have a problem of low growth in this country. Our GDP growth rate has been well below its long-term trend since the Financial Crisis.
It’s therefore worthwhile finding out where the growth that we do have is coming from. In our recent paper on the economic value of HEiii, we use growth accounting techniques to break growth down into its main elements: human and physical capital, and a residual category, known as total-factor productivity, which includes technology and knowhow. You can further break down human capital into its constituents, including experience, size of the labour force, hours worked and, most importantly for our purposes, education.
What we find is that the economy has become progressively more reliant on human capital over the last 25 years as growth in capital investment has declined and the rate of technology adoption has slowed. The crucial role of human capital is not particularly surprising as we are a primarily services-based economy. But the extent of this reliance is still striking.
Moreover, the bulk of growth in human capital has been supplied by improvements to education. This dependence on education to drive growth in human capital has increased since the Financial Crisis. In fact, since 2008 it accounts for almost all the improvement to human capital, and a big chunk of overall growth.
Overall, therefore, while our economy has performed unimpressively over the past 14 years, it would have been in far worse shape had it not been for the boost to human capital through expanding HE in recent decades.
Even then, we still lack enough high-skilled workers today — a detail that is often quietly side-stepped by those who argue against more HE. And all the indications are that demand for higher-skilled individuals will only continue to grow as a proportion of the workforce, a position backed up by the government’s own commissioned forecasts.iv
The main reason for this is that technology is rapidly reshaping the contours of our labour market. Broadly speaking, this is happening in two ways. First, we are experiencing “skills-biased technological change”, which means technology increases the productivity of high-skilled workers and therefore raises demand for them relative to lower-skilled workers. Second, technology displaces jobs that involve many routine tasks, a phenomenon that can affect all skills levels but does so more prominently in relation to lower levels.
The precise balance between these two forces is hard to determine, but it appears that the former is taking an increasingly strong hold. The most up-to-date analysis from the Resolution Foundation and othersv suggests that most sectors are upgrading their skills requirements right across the board. This is producing rising demand for high-skilled workers and stagnant or declining demand for both mid- and low-skilled jobs.
Certain skills are becoming particularly valuable. There is a widely held view (including, for example, in studies by the OECD,vi World Economic Forum,vii EU Commissionviii and McKinsey)ix that the market handsomely rewards those who can mesh digital skills with high-order ones like collaboration, communication, creativity and critical thinking — skills that HE is primely poised to deliver given the breadth and depth of experience it offers. And financial returns are just part of HE’s success. Various non-pecuniary returns are linked to graduate status, too. Better health, greater social engagement, intergenerational mobility, lower propensity to commit crime, higher levels of entrepreneurial activityx — the list goes on. In addition, some courses that offer lower financial gains have profound social value — nursing is a particularly apt example.
The take-home, then, is clear: we should think about skills needs in a dynamic, not a static, way. And the expansion of HE should play a central part in any strategy for future growth.
This message should resonate now more than ever as we face the toxic concoction of economic travails served up by Brexit, Covid and now rampant inflation. Get this right and the prize could be substantial — for instance, if we raise the HE participation rate to 70%, our economy could be around 4.5 per cent larger by 2050, generating some £57bn more in tax receipts.xi
None of this is to say that any old expansion will do. Instead, achieving these potential rewards rests on meeting the specific needs of our emerging economy. And framed in those terms, our current system does sometimes fall short.
For instance, the HE system is arguably too inflexible and will need to adapt to a future student population that may be older, lacking conventional entry qualifications and needing to combine study with work.
In the context of this challenge, the government’s proposed Lifelong Loan Entitlement, which would extend the range of student finance and offer more flexibility, is a sensible proposition. However, a deft touch will be required to make it work. For instance, policy makers will need to resolve the many snags that could prevent the smooth transfer of modules between institutions.
More degree apprenticeships, too, would diversify routes into HE. But for this to happen, the government needs to help boost supply, including by emulating previous market-maker initiatives. And more should be done to improve access for disadvantaged individuals, who are less likely to undertake degree apprenticeships than well-off peers.
As well as addressing the lack of flexibility in the system, we also can’t dismiss the problem of poor returns for some courses. And some universities and colleges could do a better job of blending different types of knowledge and combining hard and soft skills.
But where challenges exist, policy makers should refine the system in measured ways rather than countenance blunt instruments like student number controls.
Given the role education has played in rescuing economic growth from an otherwise grim prognosis, and the prevailing wind when it comes to the skills employers prize, the direction we should take is clear. We should be mindful of how we do it, but we should craft an ambitious project for expanding higher education in the years to come.
iHouse of Commons Library (2022), Higher education student numbers.
iiIbid.
iiiTony Blair Institute (2022), We don’t need no education? The case for expanding higher education.
ivSee, for example: Wilson, R et al. (2020), Working Futures 2017-2027: Long –run labour market and skills projections for the UK.
viOECD (2017), Skills Outlook.
viiWorld Economic Forum (2016), The Future of Jobs.
viiiEU Commission (2019), The changing nature of work in the digital age.
ixMcKinsey (2018), Skill shift: Automation and the future of the workforce.
xiTony Blair Institute (2022), We don’t need no education? The case for expanding higher education.
Head of Industrial Strategy and Skills, the Tony Blair Institute for Global Change
Dr. Steve Coulter is Head of Industrial Strategy and Skills at the Tony Blair Institute for Global Change where he works on TBI’s Prosperity agenda. He is also a Visiting Senior Fellow at the European Institute of the London School of Economics, where he previously taught political economy after a career as a business and economics journalist.
Policy Lead, Skills and Future of Work, Tony Blair Institute for Global Change
James focuses on skills policy and the future of work. His work examines how education and training systems could be reformed to boost prosperity in a changing jobs market, and ways we could secure protection for workers in the digital age. Before moving into public policy, James practised as a lawyer. He has degrees from the University of Cambridge and the University of Bath, and his academic background blends politics, economics and law.