Russell Group… or not? – What economics has to say!

 If you were choosing between the University of Manchester and a non-Russell Group university, you’d probably lean towards Manchester, the safer option, the smarter investment, the one that will “pay off” later. But why does that instinct exist in the first place?

As it turns out, Economics provides a clear explanation for this bias.

Degree or signal?

Choosing a university is one of the costliest decisions of your life. Degree costs reach over £27,000, excluding living expenses! Tuition fees have ascended from a mere £1000 in 1998 (Teaching and higher education act 1998) to a whopping £9,250 annually. When applying for a job, many require a “top university degree” which begs the question why do employers ask for that?

When observing the job market however, we can expose the value employers place on degrees. The most obvious evidence being the graduate wage premium where grads earn 30-35% more by their thirties than non-grads and earn a lifelong additional income of an outstanding £200,000 (Department for Education, 2023). Moreover, statistically, a degree increases your likelihood of employment by 18% (ONS, 2024).

Sounds like a no-brainer, doesn’t it? so why doesn’t everyone have a degree?

Well, what if we told you that not everyone receives the same economic benefit that degrees provide. Tuition fees, the time and effort required and most importantly; the opportunity cost of starting on a full-time job salary, all attribute to individual’s economic cost. This means for some people, making that commitment isn’t worthwhile given that everyone bears a different economic cost. Michael spence illustrated this phenomenon, which he described as a separating equilibrium.

The numbers and calculations are ignored in the graphs, yet the idea prevails: everyone faces different opportunity costs. For “low ability” students, a larger investment of energy is put in to achieve the same degree, meaning their costs exceed benefits.

 

 

The Modern Dilemma – is a degree still enough??

With increasing rates of graduation and credential inflation, the labour market has become saturated and signals diluted. Employers don’t know the productivity graduates possess. They can’t distinguish intelligence, work ethic, creativity or reliability. At least not before making a hiring decision anyways…

Akerlof’s famous “market for lemons” suggests they base their decisions on average expected quality instead. The result? - High productivity graduates are underpaid and low productivity graduates are overpaid. High productivity workers exit the market, causing what Akerlof referred to as Adverse selection. He described this scenario as a pooling equilibrium. Fortunately... or unfortunately, this isn’t the case for the current graduate market, signals have become more complex.

Enter Russell Group Signal:

This is where it gets interesting. Michael Spence developed the theory of signalling, which explains this. He suggests that employers can’t distinguish ability, therefore rely on signals, so Russell Group becomes a proxy for ability. They’re evidence of “higher academic standards” and “more rigorous selection”.

The outcome? – A separating equilibrium, describing when signals differentiate “lemons” from “peaches”. Russell group graduates receive better job offers and higher wage premiums but is this fair? Not entirely, the uncomfortable truth’s that between two equally capable grads, the stronger signal’s more likely to succeed. That doesn’t make the system fair, but until employers can perfectly observe ability - which they can’t – they’ll continue to rely on signalling.

The evidence?

When we shift our focus to high-skill occupations, education clearly paves the pathway, as 68% of grads vs merely 24% of non-grads achieve top level jobs (Department for Education, 2024). Russell group grads however are predicted to earn a wage gap of £513,000 over an average working life in comparison to non-Russell grads. (Nisa Lsm, 2019). Additionally, most employers require a 2:1 minimum, separating top achieving and bottom achieving students within the Uni’s themselves. Academic performance thus filters candidates (Highfliers Research, 2024), leaving grads and non-grads with weaker signals, relatively limited options.

Degrees evidently take precedence over longer horizons, but male grads see an additional £130,000 in lifelong earnings, whereas female grads earn a smaller £100,000 (Britton et al., 2020). We see another layer to the cake here, a further pay gap. This likely emerges from statistical discrimination, following incomplete information that makes assumptions inaccurate. Yet this addition to the bias makes us feel that success is only reserved for male grads with 1st’s from elite universities, which Is partially true!

 

 

Consequences of degrees dominating:

Over time, we witness a self-reinforcing cycle. High-ability students work harder to enter prestigious universities. Employers, seeing this, place greater weight on those institutions. Non-Russell Group degrees therefore become weaker signals, not because the education’s worse, but rather because markets treat them as such.

The real system costs hidden. Just as high-quality goods disappear from markets plagued by adverse selection, talented graduates outside Russell group institutions can be overlooked. This limits access to top opportunities and fair compensation, encouraging individuals to exit competitive paths. Meanwhile, employers lose excellent candidates, making the overall allocation of talent less efficient. All over a signal…. Sounds unfair, doesn’t it???  Those with more money and private education gain the advantage from the get-go.

A Positive perspective on the matter

Not all hope is lost for you hard workers, who are limited by weak signals!!!

You see, when you wonder why job applications ask about your parent’s income, whether you went to a state school or received free school meals and a host of other seemingly irrelevant questions.

We find that it’s because hiring markets are evolving to filter through the signals and recognise true ability. Moreover, apprenticeships are beginning to get their fair share of the spotlight. Unis only considered a shortcut, but recognition is being handed out for alternatives in the UK e.g., trades where you get a shot at the ladder!

So, is graduate hiring a gamble?

In many ways, yes. From the employer’s perspective, every hiring decision involves uncertainty. From the student’s perspective, years of effort are distilled into a handful of signals that might not fully capture their true ability. Economically, the entire systems shaped by imperfect information.

On the bright side, hope is on the horizon as graduate filtering becomes more advanced and apprenticeships receive more recognition.

So, the next time you see “Russell group university preferred” on a job application, it’s worth remembering it’s not just about what you learned. It’s about what your degree signals.

Reference List:

Teaching and Higher Education Act 1998 (c. 30). London: The Stationery Office. Available at: https://www.legislation.gov.uk

FE News, Ism, N, 2019

Available at: https://www.fenews.co.uk/skills/russell-group-grads-earn-up-to-513-000-more-than-non-russell-group-over-a-working-life/

Department for Education (2023) Labour market value of higher and further education qualifications. Available at: https://www.gov.uk/government/publications/labour-market-value-of-higher-and-further-education-qualifications

Office for National Statistics (2024) Graduates in the UK labour market. Available at: https://www.ons.gov.uk

Department for Education (2024) Graduate labour market statistics 2024. Available at: https://explore-education-statistics.service.gov.uk/find-statistics/graduate-labour-markets

Highfliers Research (2024) The Graduate Market in 2024. London: High Fliers Research. Available at: https://www.highfliers.co.uk/download/2024/graduate_market/GMReport24.pdf

Britton, J., Dearden, L., Shephard, N. and Vignoles, A. (2020) The impact of undergraduate degrees on lifetime earnings. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/impact-undergraduate-degrees-lifetime-earnings

Spence, M. (1973) “Job Market Signalling”, Quarterly Journal of Economics, 87(3): 355-374