How much is a degree really worth?

Graduates don't get more buck for a degree from a higher ranking university, it's hard work that counts

At a time of continuing nervousness – and misunderstanding – over the costs of higher education, hard evidence of what a degree is worth for lifetime earnings is critical for the sector. The headlines from our research carried out for the Department for Business, Innovation and Skills (BIS) are clear enough. Graduates, on average, earn around £200,000 more over a lifetime than non-graduates – taking into account all the costs involved of being a 21st-century student.

This is good news for the sector when you consider its rapid expansion since the 1980s. In a typical economic model, increasing supply and a growing range of suppliers would be expected to lead to a lower valuation of the 'product' (graduates), but not in this case. There is considerable evidence from around the world that skills differentials have been rising – technology has reduced the cost of computing power and more graduates are required to deal with the rising complexity of the modern workplace.

Moreover, falling trade costs have offshored many (mostly) non-graduate jobs so demand for unskilled workers has fallen. Even the recession makes a contribution: entrants into a depressed labour market do badly and thee years in, higher education allows you to postpone entry to a different point in the cycle. But a university education has kept its value well through all the changes.

Our research compares earnings and employment of individuals who have a first degree with those with two or more A-levels but no degree, irrespective of the subsequent qualifications of both sets of individuals – so the control group is likely to be doing repetitive administrative work and not white van driving. Besides the Labour Force Surveydataset, we also used British Household Panel Survey data, including information on degree class and subject, as well as institution type and some family educational background information.

We estimate there are very substantial returns on investment into a degree course over a lifetime of earnings. For graduates – compared with similar people without a degree – our best estimates suggest on average an increase in earnings of 28% for men (approximately £168,000) and 53% for women (around £252,000). This is higher than previous estimates, essentially because previous research has failed to capture the important difference between graduates and non-graduates in terms of trends in growth in real wages.

A useful message is that hard work is rewarded. Our salary estimates for a good degree (first or upper second) are significantly larger than for lower degree classes (by £76,000 for men and £85,000 for women, on average). Part of this will reflect pre-existing differences in ability – but part will be because hard working students have made themselves more productive.

Looking around the first year class at any given institution you see students of broadly equal ability as measured by A-level score – but the variation in the proportion getting a 'good' degree doesn't vary much across institutions. So those that do well must be doing something different than those that don't.

Completion is also a crucial factor. Male higher education dropouts earn approximately the same as individuals who never attended higher education, on average. For women, we find that there is small wage penalty – dropping out from higher education is worse than not attending in the first place. Part of this is likely due to lower ability and/or effort by dropouts and part to the adverse shocks that drive both drop-outs and earnings, for example, illness.

A closer look at the detail raises some interesting issues about higher education institutions that trade on their status and ranking positions. Once very limited information about family background and A-level achievement is accounted for, the differences in the rate of return between a Russell Group and another institution in terms of rankings is, on average, small – and in statistical terms, insignificant. There are many lower ranked institutions with good teaching quality and many higher ranked places with low teaching quality. Many of these institutional differences will be driven by the quality of the students not by the quality of the institutions.

The findings also suggest that previous research seriously underestimated the tax revenue from graduates compared with non-graduates. It's an important point when it comes to the government calculating what higher education costs the taxpayer. Rather than looking just at a general average of predicted earnings, we included the range of predicted earnings, capturing the higher rate tax revenue from top earners – which provides a more accurate figure.

The benefit of graduates to the government is large – in the order of £264,000 from male and £318,000 from female graduates – far in excess of likely exchequer costs in subsiding loans. Higher education is an important investment for the government as well as for students.

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