Those who gain most from ÖйúAƬ should fund its growth, argues Richard Pearson

As a nation we produce, size for size, as many graduates as our competitors. The Institute for Employment Studies graduate review, published today, shows that even at the top of the economic cycle, we are not short of graduates. It is the quality, not the quantity, that is the problem.

Last year more than 150,000 new graduates joined the labour market yet, despite the buoyant economy, only a minority got jobs with the major recruiters. One in three went into temporary or short-term jobs; many more got lower level jobs paying Pounds 10,000-Pounds 15,000 a year. Graduates do, however, continue to earn more and have lower rates of unemployment then non graduates.

Few would argue about the need to invest yet more in education if we are to develop our skills base and become a more competitive, knowledge-based society. With rising competition affecting the public and private sectors, challenging on price alone is not the answer. There are millions in the Far East who will work for lower wages. We must focus on higher value-added areas where knowledge delivers the high wages we expect and other developed economies are able to pay.

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Of course, investment in education is not enough. Poland and Latvia have some of the most educated workforces in Europe but their economies lag; in the early 1980s BP and IBM nearly went bankrupt despite some of the world's highest skill levels. Skills, however good, must be used effectively in organisations that can respond to rapidly changing markets, delivering innovation and quality as much as efficiency and price. All this requires better management and a flexible workforce.

This places a premium on skills and their use. So what are the priorities for future investment? Public money can help build infrastructure, facilitate change and help those who cannot help themselves. But it cannot deliver the changes we need, which require people to take more responsibility for their learning and careers.

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Our biggest economic gaps are in terms of basic and intermediate technician levels, while we have vast numbers of all ages who are not functionally literate. This is the biggest challenge and where we should focus public money.

The state should be a heavy investor in basic skills and remedial training, careers advice and information to facilitate flexibility and to minimise disadvantage and its effects - such as high welfare bills or crime rates.

This means that our brightest students should be in the vanguard of change by taking responsibility for their learning and careers and by picking up more of the costs. After all, they can see the benefits of learning as the better educated earn more. Self-financing students will be more demanding customers, driving up standards in ÖйúAƬ.

If we are going to shift to a learning society where individuals take responsibility for their learning, a lead has to be taken by those who benefit most: undergraduates and graduates. They need better learning and careers advice. Higher education can help by focusing on course design and delivery, improving employability and providing careers advice. The priority is quality not quantity. Any future expansion should be student funded and left to the market, not scarce public finance.

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Richard Pearson is director of the Institute for Employment Studies.

* Should future expansion of universities and colleges be paid for by students rather than the government? Email us on soapbox@thes.co.uk