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The UK Labor Market Does Not Reward Graduates 

Author: Julius Probst, PhD
21 Nov 23

Except for Greater London, the graduate skill premium has been falling in the U.K. While more and more people graduate from college, the U.K. labor market does not reward this. We examine why.

Too many problems to count 

Let’s not sugarcoat it: the U.K. economy and labor market are suffering from various problems. Many of them are structural — a dysfunctional housing market, low productivity growth, too much debt — while some of them are cyclical. The monetary tightening cycle by the Bank of England is now clearly choking off the economy as surging interest rates are negatively affecting the housing market and the corporate sector. 

Many of the structural problems that the U.K. economy is experiencing are, of course, interrelated. Dysfunctions in the housing market are spilling over into the labor market. The housing shortage is so acute that workers cannot move to the cities anymore where the most high-paying jobs are — in the U.K., this is mostly Greater London — and this is weighing on productivity growth. Despite the government’s best efforts to “level up”, most regions are significantly poorer than the capital. 

In this piece, I will explain how the low levels of productivity in the rest of the U.K. are a result of the underutilization of the country’s highly educated workforce. 

Most regions in the U.K. have a relatively high share of college graduates, but far too many of them are working in non-graduate jobs. Except for London, the U.K. economy is not creating enough high-skilled jobs across the country! 

The graduate population has steadily increased 

The supply of high-skilled workers has increased quite substantially in recent decades. The percentage of graduates in the population rose from about 25% in the early 2000s to about 40% in 2007.  

For obvious reasons, London enjoys the highest graduate employment share, exceeding 60%, followed by Scotland, Northern Ireland, and the South East. What is noteworthy though is that the graduate employment share is around 40% across all regions in the U.K. The gap between the North East, where it is lowest, and the South East is less than 10 percentage points. The supply of graduate workers is thus relatively uniform across the country, with the exception of the capital, where it is much higher.  

Graduates have better employment opportunities… 

Graduates do have better employment opportunities than non-graduates, especially when the labor market is weak. The unemployment rate for recent and non-recent graduates is more than a percentage point lower than the respective unemployment rate for non-graduates right now. Let’s not forget though that we have recently been experiencing a record tight labor market with historically low unemployment. Following the financial crisis of 2008, the unemployment gap was significantly higher.  

…but unlike in the US, graduate wages are not following 

Similar to the U.K., the share of college graduates in the U.S. has increased substantially in recent decades, pushing up the supply of skilled workers. Meanwhile, the college wage premium has increased at the same time from about 50% in the 1990s to more than 75% in the early 2000s. The demand for skilled workers has seemingly risen even more than supply, explaining how the steady increase in the graduate wage premium (the average excess wage a degree-holder earns compared to a non-degree worker). In the U.S., wages for graduates have outperformed wages for non-graduates.    

In the U.K., on the other hand, graduate wages have performed much worse. Average salaries of graduates and postgraduates have not increased as quickly as salaries of non-graduates. 

The graduate wage premium has declined from about 50% in the mid-2000s to just under 45% more recently. The postgraduate wage premium has fallen from about 80% to a little over 70%. 

A detailed analysis by the Financial Times shows that the falling wage premium for graduates is pretty much a U.K.-wide phenomenon, affecting all regions in the country other than London. 

Not enough high-skilled jobs are being created outside of London 

The main problem that the U.K. economy is facing is that there are simply not enough high-skilled jobs being created outside of London. As more graduates end up in roles that do not necessarily require the skills they gained, the graduate wage premium has fallen over time. 

The share of recent graduates in non-graduate jobs comfortably exceeds 40% in most regions in the U.K., a frightening degree of underutilization of skilled labor. 

London house prices prevent the labor market from rebalancing 

Exorbitant house prices in Greater London can explain why the U.K. labor market is not adjusting. Greater London and the South East are the two regions in the country that create the largest number of graduate-friendly, high-skilled jobs in tech, finance, pharma, and similar industries. 

However, the housing shortage is preventing these skilled workers from moving there to take advantage of those job opportunities. Average rent prices in Greater London have increased from less than £1,400to close to £2,200 over the last decade, an increase of more than 55%. Average monthly mean pay, on the other hand, has only risen from £2,190 to £3,060 within the same time, an increase of 40%. According to the ONS, housing costs in Greater London are now well exceeding 30% of household gross disposable income.  

The prospect for buyers is similarly gloomy with mortgage rates being close to 7% now. Even with sub-par wage growth in the U.K. in recent decades, house prices in London have increased from about £425,000 to about to £550,000 today. 

The unaffordability of Greater London when it comes to housing is hurting the U.K. economy and labor market. While a lot of high-paid jobs requiring graduate degrees are created there, exorbitant housing costs now prevent workers from moving there to improve their job opportunities. To make matters worse, young people, single parents, and workers in manual jobs are being priced out of the city, preventing them from access to better opportunities. The housing crisis is destroying lives!   

What does that mean for recruiters? 

The analysis hopefully provides a clear picture of what is happening with the U.K. labor market. London is the only region in the U.K. that is creating an abundance of high-skilled graduate jobs. But housing costs are so exorbitant now that young graduates are forced to move outside the city. Moving to London does not make sense anymore even for reasonably high-paid jobs because the actual net disposable income — after adjusting for housing costs — is now lower in London than in some other U.K. cities (even with comparatively comfortable London wages). 

For employers, the implications should be quite clear: Large companies should increasingly start looking to recruit outside of Greater London. The supply of skilled workers is relatively high across all regions in the U.K. and many workers will actually end up having higher purchasing power in cities like Birmingham because of lower housing costs. With the U.K. being one of the advanced economies with the highest level of regional disparity, a greater emphasis on economic development outside the capital is desperately needed! It should be a win-win situation for both workers and employers. 

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