This paper proposes a model of competence development required of graduates at work which suggests that universities make a difference when they add value to their students. They add value by ensuring that their modes of teaching and learning, and assessment positively enhance the competencies of their students which are important in the labor market. Our results have clear implications for policy in the Bologna process. One of the main challenges facing higher education institutions in Europe is to transform their current pedagogical practices--the lecture continues to be the dominant teaching method--into competence-based teaching as a response of universities to labor market needs. In this paper, econometric evidence shows that innovative methodologies used by Spanish universities play a key role in competence development. This is consistent with the view that education raises productivity; finding that refutes some theories which suggest that education may be no more than a screening device which allows employers to identify the more able potential employees from the rest. Besides the importance of formal academic institutions, firms appear to be sources of learning and skill formation as well.