Why we need a radical rethink of Skills Policy

For over 40 years, Human Capital theory has underscored the various UK skills policies implemented by different governments. While a number of institutions and initiatives have come and gone, the underlying rationality has stayed the same. It is the idea that skills markets operate in perfect liberty (equilibrium).

In this article, Tom Bewick argues that skills markets are largely imperfect and the UK experience has mainly been one of a race to the bottom – comparatively low skills and poor productivity growth. The piece discusses how the FE and skills sector might shift the status quo in policymaking and take a more radical approach to skills reform than has been the case over recent decades. 

Questioning the Rationality of Skills Markets

Let’s begin with a provocation… ‘If a failed factory is torn down but the rationality which produced it is left standing, then that rationality will simply produce another failed factory. If a general election removes a government, but the systematic patterns of support that produced that government are left intact, then those patterns will repeat themselves… There is so much talk about the system. And yet, so little understanding.’

These words are not mine. They are (slightly remodelled), taken from a book that you may have heard of: Zen and the Art of Motorcycle Maintenance. By Robert M. Pirsig.

As it happens, I’m a keen motorcyclist. I love the freedom that the open road can bring… but that’s not what I’m here to write about. Nor do I want to go into the philosophy of ‘quality’ and ‘truth’ in the world: that’s what Pirsig’s book is for.

Instead, I want to put forward a simple proposition: that until we genuinely develop a lifelong learning and skills system in this country, we will keep on repeating and making the same old mistakes.

Why?

Because policymakers will keep on relying on the same rationality, and failed policies that have guided 40 years of human capital development – a rationality that may have served us well in the past, but has now caused the predicament that we all find ourselves in.

Of course, you instinctively know the predicament I’m referring to. Take just one important metric: productivity growth since the 1950s.

If growth in real incomes had continued on the path that they were on between 1955 and the global financial crisis of 2008, then every single UK worker reading this would be at least £900 better off in their wage packets each month.

Think about that for a moment.

What has caused this unprecedented malaise in British living standards? And if you’re thinking, well… it must be the pandemic… war in Ukraine, or even Brexit… then reflect on this sobering fact.

From 1955 to 2008, total per capita income in the UK grew by 39 per cent. It explains why we were able to rent or buy those reasonably priced homes. As well as enjoy the bargain travel that came with the expansion of cheap airlines and regular holidays.

What we now call the era of the Great Moderation also meant, of course, that our growing number of graduates and qualified apprentices could look forward to getting well paid jobs, at least until 2008. The majority of graduates do still enjoy a wage premium over their working lifetimes. But too many – perhaps a fifth – are in jobs after 5 years of leaving higher education that pay below the median wage.

Since 2008, the average UK per capita income grew by just 4 per cent. It is why economists refer to the past 15 years as the Age of Stagnation…. the longest period of stuttering growth since the Napoleonic Wars!

There isn’t space in this article to develop the complete argument for why we find ourselves in this predicament. I’ve written about the skills and productivity puzzle elsewhere.

But one thing is becoming abundantly clear. We have not even started to build a post-18 tertiary education and skills ecosystem in our country that is fit for the demands of reversing this worrying trend. Similarly, the current approach to skills policy is ill equipped to helping our fellow citizens square up to the challenges of generative AI, ageing demographics, declining life expectancy, mass inward migration and training for jobs of the future.

I believe the reason for this is because many of our policymakers and political leaders are stuck in the rationality of the past. They are caught up in a kind of prisoners’ dilemma; seemingly impotent and marooned on the rocks of uncertainty. Instead what they should be adopting are alternative models – encouraging co-operative and higher trust behaviours – that would result in far better outcomes for everyone.

I blame Gary Becker.

The Nobel prize winning economist, Gary S Becker, published his seminal work, Human Capital, in 1964.

Since then, policymakers tasked with providing ministers with advice about the rationale for investing in post-18 education and training, have slavishly followed Becker’s theories, even if they have never read or heard of his works.

In short, Gary Becker developed a theory of human capital that made the case for why the state (via general taxes) and individuals (via loans) should invest in general education. He also extended his theory to explain why employers will usually act rationally and invest in firm specific training.

It’s fair to say, Becker took a highly rational view of employment and skills markets. Like Adam Smith, 300 years before him, Becker believed that his scientific models showed how the optimal amount of training would take place in firms, because it was always in employers’ own interests to do so. Similarly, he argued that people were also driven by self-interest… guided by Adam Smith’s ‘invisible hand’, into a position where they would develop the skills needed for the living standards they wanted to enjoy.

Good societal outcomes would be achieved, skills gaps eliminated, his empirical data showed, if government dealt with the credit constraints that many adult learners face, e.g. by offering subsidised college loans. And his message to government policymakers – particularly those looking to meddle in employer related training – was largely to just leave them alone.

Challenges with Human Capital Theory

The problem with Becker is that his models no longer stand up to the economic realities we face. Contemporary economists, like Daron Acemoglu, have shown – through observational experiments – that the operation of perfect labour and skills markets simply does not exist. And the ONS data on declining (UK) employer investment in training since 1995 would appear to back up this claim.

Because it is not just per capita and productivity income growth that has tanked in this country since the 2008 crash. So too has the number of training hours offered by employers to their employees. Since 1997, training hours have actually declined by a staggering 60 per cent.

What all this adds up to is not only declining access to workforce training, poor productivity and stagnating wages. But it is being made worse by government itself following employers down the same road, in a relentless race to the bottom. When you look at all forms of government investment in education and training since 2010, the exchequer is currently spending 8 per cent less in real terms than it was back then, according to the Institute for Fiscal Studies.

Urgent Need for Policy Reform

So now is not the time for sticking with the old ways of doing things. We have to develop a different rationale – a new economic paradigm – for supporting lifelong learning and skills training across the UK. As that doyenne of liberal free market thinking, F. A. Hayek, once wrote: ‘We shall not grow wiser before we learn that much that we have done was very foolish.’ (The Road to Serfdom, 1943, p. 246).

We also have to move to a different model of human capital development. It is going to require that we join up the whole post-compulsory system in England, in future – to create a single and integrated post-18 tertiary education and skills delivery system.

That will require at least the following:

• The basic employment contract has changed little in 40 years; it’s time the lop-sided relationship between hire and fire firms and insecure employees, was looked at afresh, especially in the context of statutory entitlements to lifelong learning.
• Reform of the Apprenticeship Levy and the HE financial system is long overdue. Every firm needs to financially contribute to our national renewal, and not just the 2 per cent of firms who pay the levy currently.
• In an era of tight public spending, colleges and universities will have to look to merge, perhaps to become powerful regional polytechnics of higher and technical education. This will deliver the productive skills regions need, as well as free up resources that a future government, operating at the centre, will be reluctant to invest.  
• Crucially, we need to take a swinging axe to the over-regulation of the post-18 sector, replacing the current quangocracy with a single, slimmed down body.

Talk to anyone in the sector and they will tell you that over three decades of top-down policies, exemplified by the “Whitehall-knows-best mentality”, has sucked the life out of the professional workforce – so often demoralised and underpaid.

Above all what we need is more systems thinking. This will win the day, not fragmented action, the ‘low skills equilibrium’, or outdated dogma about the operation of markets.

Proposed Solutions for Skills Reform

We need to ensure firms support individuals to be able to properly plan for their futures, via a co-investment skills account model (just as we do with pensions), that puts purchasing power for learning more firmly in the hands of companies and individuals, not civil servants in Whitehall.

I believe we can create a new policy rationality for post-16 education and skills: a new system that is more like Zen, and less like Becker.

By Professor Tom Bewick

Tom Bewick is visiting professor of skills and workforce policy at Staffordshire University and an independent skills policy consultant available here.