It doesn’t require a close examination of economic statistics to be aware that US incomes have far outstripped those in Britain in recent years. A few minutes on Instagram or TikTok will do the trick; you’ll be met with a sea of clips of conspicuous American consumption against backdrops of palatial and pristine residences. We get it.
It doesn’t require a close examination of economic statistics to be aware that US incomes have far outstripped those in Britain in recent years. A few minutes on Instagram or TikTok will do the trick; you’ll be met with a sea of clips of conspicuous American consumption against backdrops of palatial and pristine residences. We get it.
But without digging into the data, you would miss a key and under-appreciated nuance: America’s yawning earnings advantage is exclusive to the graduate class. Britons who left the education system at 18 without a degree were paid an average of £14 an hour in 2022 (about $18 after adjusting for price differences). Their US counterparts earned only marginally more, at $19 an hour.
That note of relative optimism aside, I would advise British graduates to avert their gaze. Last year their median hourly earnings were £21, or just over $26. A healthy 47 per cent premium over their non-graduate compatriots, I hear you say. Why all the doom and gloom? Because across the Atlantic, US graduates pocketed almost $36 an hour. On the eve of the global financial crisis 15 years ago, British graduates made just 8 per cent less than US grads; that gap has ballooned to 27 per cent.
These are essentially the same people. Same age, similar educational milestones achieved, increasingly inhabiting the same culture as the internet and social media blur national boundaries. Yet one group is paid 40 per cent more. What can explain such a dramatic divergence?
Are British graduates simply less skilled than their US counterparts? Or less skilled in the most lucrative fields? A common moan here is that people study too many junk degrees. But the mix of subjects studied is similar: 34 per cent of American graduates aged 25-60 studied science, technology, engineering and maths (Stem subjects) vs 30 per cent in the UK. Britain’s graduates, by and large, have the skills to pay the bills.
The problem is that those skills are in much higher and more lucrative demand in the US than in the UK.
In a pioneering Harvard University study published this year, Anna Stansbury, MIT assistant professor of work and organisation studies, showed that as the share of graduates in the UK workforce has expanded over the past 25 years, the wage premium they command relative to non-graduates has fallen. We can thus infer that in the aggregate, Britain’s supply of skilled workers is outstripping demand in the form of skilled jobs. Only in London has the number of high-wage jobs kept pace with the growing number of high-skill workers.
I have extended Stansbury’s analysis to the US, and the contrast could not be clearer. Across almost the whole country from Boston to San Francisco, the graduate wage premium has held up — or even risen — as the supply of graduates has increased. America has mountains of highly lucrative and skilled jobs chasing the best candidates, while Britain has mountains of skilled candidates chasing a small number of world-class graduate employment opportunities.
The result is that across most of Britain, more than a third of graduates are working in jobs that do not require a degree — even in London, the figure is 25 per cent. Extracting a premium for your skills is much harder when they’re surplus to requirements.
Solving Britain’s graduate woes will be neither easy nor quick. On the demand side, it needs to finally take seriously the project of levelling up the country outside London, and to make the creation of graduate jobs part of that agenda. Graduates in the capital command a much higher premium for their skills than those anywhere else because London is just as attractive a destination for investment in high value jobs as it is for each wave of graduates. For too many of Britain’s other cities and regions, decades of neglect by Westminster means neither of those things are true.
On the supply side, some argue that Britain should reduce the number of people going to university, but this is not borne out by the data. The UK’s skilled workforce is clearly underutilised, but America’s far better results with a similarly sized and skilled labour pool suggest Britain is burdened with weak demand for valuable skills, not oversupply of skills. The correction needs to be through the supply of suitable jobs.
Ultimately, the graduate wage premium problem is downstream of a wider UK malaise: the failure to reinvigorate the economy following the financial crisis, and decades of under-investment.
