1. DannyWalton - The rate of returnto educationinthe UK
Rate of returnto educationmeasuresthe gaininincome oninvestmentsineducation.Highereducation
isoftenconsideredaninvestment,asstudentsincurlarge costsintermsof tuitionfees(increasedfrom
0 to £3,000 in2006, and then£9,000 in2012), accommodationfees,andthe opportunitycostof work.
The Departmentof Educationand Skillsbelieve the difference inlifetime earningsbetweengraduates
and non-graduatestobe £400,000 ($592,000). (GreenawayandHaynes2003)
O’learyandSloane (2004) use an ordinaryleastsquareshumancapital model basedondatacollected
fromthe LabourForce Survey(LFS) bythe Office forNational Statistics(ONS) toestimatethe hourly
earningsof individual iwhograduatedinsubject j. The LFSaims to produce dataabout labourof 60,000
householdseachquarterinGreatBritain.The formulausedtocalculate the hourlyearningsis:
𝑙𝑙 𝑙 𝑙𝑙 = ∑
𝑙
𝑙=1
𝑙 𝑙𝑙 𝑙 𝑙 + 𝑙 𝑙 𝑙 + 𝑙 𝑙
In thisequation,Eij representsthe hourlyearningsof the individualbasedontheirsubject.Sij isadummy
variable wherebythe value isequal to1 if individual Igraduatedinthatsubjectandtakesthe value of 0
if not, αj is the amountearnedhigherfromgraduatinginsubjectj,relative toanindividual withno
degree.‘χi isa vectorof personal characteristicswhichaffectsbothsubjectchoice andoccupational
earnings,βisa conformable vectorof estimatedrewardstothese characteristicsandεi is a random
error term’(O’learyandSloane 2004).
Thisequationdoesnotrealise differencesinstudent’sabilitywhichcoulddisruptthe resultof the
ordinaryleastsquaresmodel,therefore,twonew variablesare addedintothe equationtohelpaccount
for differencesinstudent’sability.The Leslie’sdegree acceptance qualityvariable(A),and(γ),whichwill

2. representthe returntostudentability.The Leslie hypothesisisthatstudentswill selectsubjectsbased
on difficultybasedontheirability.DatacollectedfromUCASapplicationswasusedtocalculate the
value.Now,α will onlyreflectthe returntosubjectj basedonmarketforces.The new equationwiththe
Leslie’sdegree acceptance qualityvariable is:
𝑙𝑙 𝑙 𝑙𝑙 = ∑
𝑙
𝑙=1
𝑙 𝑙𝑙 𝑙 𝑙 + 𝑙 𝑙 𝑙 + 𝑙 𝑙 𝑙 + 𝑙 𝑙
Thisequationcanbe usedtocalculate the average future earningsof anindividualbasedontheir
undergraduate degree subject.Basedondatacollectedbythe LFSbetween1994 and 2002, using
informationfromapproximately17,500 malesand15,200 females,O’learyandSloane (2004) foundthat
a male witha degree wouldenjoya113.76% increase inhourlyearningsthanamale withno
qualifications,and131.56%. The increase inhourlyearningsformaleswithA-level standardeducation
standsat 30.03% againsta male withnoqualifications,and25.33% for females.Findingdataaboutthe
rate of returnto educationisimportantsothat studentscandecide whethertomake the investmentof
highereducation,andwhetherthe increase inearningsoveranindividual’slifetime wouldbe greater
than the cost of educationboththroughcost of living,costof tuition,andopportunitycostof missing
out on3 years(UK) of paidwork.It is alsoimportantsothat studentscanbe encouragedtojoincertain
degree subjectstoequibrilatethe supplyanddemandof labourwithindifferentmarkets,basedonthe
differencesinearningseachsubjectreturns.
The amount of male undergraduatesincreasedbyathird,and the amountof female undergraduates
doubled,between1990/91 and 2000/01 (O’learyandSloane 2005), thismeansthat there isan
increasingnumberof universityeducatedworkersjoiningthe labourforce eachyear.Giventhat
graduatesgainso much fromhavinga universityeducation,the increase innumberof applicantsand
therefore the increase insupplyof workerswithdegreesmayreduce the superiorwagespaidto

3. universitygraduates.Thishowevermaynotbe the case.There is evidence tosuggestthatwagesof
graduateshas remainedrelativelyconstantWalkerandZhu(2003), whichcan onlybe explainedby
demandforeducatedworkersmatchingthe increase insupply.Thisisthe case for the mostsubjects,
but subjectssuchas maths& computing,engineering&technologyandarchitecture have seen
significantincreasesinmedianearnings.Increasingreturnsinsome subjects,combinedwithdecreasing
returnsinothersubjectssuchas social sciencesandarts will resultinconstantaggregate returnsto
highereducation.Supplyanddemandshiftswill playacrucial role indeterminingwhichsubjectswill
showincreasinganddecreasingreturns.
The amount of newgraduatesthat take architecture increasedby44.86% between1994 and 2002 for
males,and25.00% for females(O’learlyandSloane 2005).There is therefore anobviousincrease in
supplyof architectures,whichwouldsuggestthatthe wage of architectureswouldfall relativelytothose
withoutdegrees,butthere hasbeenasignificantrise inmedianwagesrelative tothose with2+A levels,
11.64% for males.The change insupplydoesnotconnectwiththe changesinwages.Thisisbecause of
time lagsbetweenstudentstakingarchitecture andthe returninwagesinadultlife.Like anymarket,
once suppliersrealise there are gainstobe made,theywill enterthe market,butthe difference intime
betweenthe suppliers(students)realisingthatthere are gainsto be made from architecture degrees
and those studentsrealisingthosegainscouldspan20 years.Hence whythe increase inrelativewages
has increasedby11.64% between1994 and2002, but the no.of male studentstakingarchitecture has
increasedbya muchhigheramount,almost45%.
Rate of returnalsovariesbetweenregions,aswell aschoice of university.Returnstothose whoattend
longestablishedinstitutionscanearnupto 11% more than those otherwise(O’learyandSloane 2006).
Data showsthat inLondon,the nominal returnoneducationis20.7% per yearfor menand 22.2% (the
highestinthe country) forwomencomparedtoan individualinthe westmidlandswith2+A-levels,and
thisassumesthatduringstudygraduatesmade no income andincurred£3,000 pa tuitionfees(O’leary

4. and Sloane 2006). It it therefore obviousthatowningadegree inLondongivesthe highestreturns.
Although,otherdatashowsthatthe difference indegree returnsrelativetoA-level qualificationsinthe
same regionismuch lower,asmenonlymake a 1.5% increase and3.5% forfemales(the lowestinthe
country)(O’lrearyandSloane 2006).Therefore,the wagesavailable inLondoncomparedtoother
regionsare much higherhoweverthisdoesnotnecessarilydependonwhetherthe individual hasa
degree.Inotherregionsthere isasignificantdifference inreturnsdependingonwhetherthe individual
ownsa degree,sothe worthof owningadegree variesdependingonlocation.
Sloane,PJ.O’Leary,NC.(2004) “The Returnto a UniversityEducationinGreatBritain”
Sloane,PJ.O’Leary,NC.(2005) ”The ChangingWage Returnto an Undergraduate Education”
Sloane,PJ.O’Leary,NC.(2006) ”Ratesof Returnsto DegreesacrossBritishRegions”
Walker,I.AndZhu, Y. (2003) "Education,EarningsandProductivity:RecentUKEvidence",LabourMarket
Trends,March, pp. 145-152.
GreenawayD.and HaynesM.(2003) "FundingHigherEducationinthe UK: The Role of FeesandLoans",
EconomicJournal,vol.113, pp.F150-F166