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Policy-makers in almost all countries agree on one thing: namely on the importance of education and skills to ensuring future economic prosperity. A fruitful line of research has focused on determining the impact that acquiring education or training has on an individual’s labour market productivity and earning prospects: this is known as rate of return analysis. In this paper we summarise current understanding on the returns to qualifications, focusing specifically on differences in the economic values of qualifications by sector. First, we explain what we mean by rate of return analysis in section two. In section three we then discuss how rates of return estimates might be useful for policy-makers, and in particular how those who are trying to understand and meet the skill needs of different sectors of the economy might use such information. In section four we describe how rates of return are actually calculated in practice, before going on to summarise the evidence base. We start with a discussion of aggregate supply and demand in section five, before focusing on the rate of return to specific qualifications and types of education in section six. We conclude with an analysis of what the empirical evidence implies for policy-makers working on sector skills issues (section seven). A complex picture emerges from the evidence base. In the UK, there has been a massive expansion in the supply of qualified labour. This expansion has not led to a fall in the average return to a year of schooling in the UK, suggesting that the demand for qualifications in the UK is still sufficiently high to justify further expansion. Qualifications that are supposedly tailored to employers’ skill needs, such as [National Vocational Qualifications] NVQs, are actually valued less highly in the labour market. On the ground, it is the traditional vocational qualifications and academic qualifications that have the greater economic value. Newer vocational qualifications (particularly NVQ2) yield a zero or minimal return in the labour market, although they do increase an individual’s likelihood of being in employment. The return to lower level vocational qualifications varies substantially across sectors. NVQ qualifications yield a respectably high return if they are acquired through a Modern Apprenticeship. Rapid expansion of the supply of graduates has resulted in much more variation in graduate outcomes. Although the overall return to a degree has not declined, it does appear that some types of more recent graduates are seeing a small decline in the return to their degree. Much of the apparent fall in the return to a degree for very new graduates is concentrated specifically on graduates who fail to get graduate level jobs.

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