Incentivising employers to invest in skills for a strong and sustainable recovery

The labour market is showing signs of recovery as the economy reopens. But there’s a great deal of uncertainty about the nature and strength of the recovery.

What will happen as the furlough scheme comes to an end?

Will the 2020s be another lost decade of real pay growth and living standards?

A strong recovery, where we ‘build back better’ with more high-quality jobs and pay growth, will require investment in skills to drive innovation and productivity growth. Employers are major investors in learning and skills, but investment has been falling and there are stark inequalities in who gets training at work.

The pandemic led to the deepest recession in history, a sharp rise in unemployment and saw millions furloughed. It also meant many employers halted their investment in training.

Our new report [Learning at Work: Employer Investment in Skills], supported by NOCN, shows employer investment in training fell more sharply during the pandemic than after the financial crisis, with over 40% of services firms reporting a decline in training expenditure.

But employer investment in skills was falling in the decade prior to the pandemic. Employers delivered 99 million training days in 2019. If 2011 levels were maintained, they would have delivered 20 million more.

And while a relatively high proportion of employers in the UK provide training compared to other European economies, average training costs per employee are half the EU average.

Matching the EU average for investment would mean UK workers benefiting from an extra £6.5 billion investment in their skills each year.

Reversing these trends and raising levels of investment is crucial to sustaining the recovery from the pandemic.

Addressing inequalities in access to training is also vital if the Government is to succeed in ‘levelling up’ opportunities.

Higher value, more knowledge intensive sectors, including business services and IT, have increased investment in training, while investment among lower wage sectors, including retail and hospitality, has fallen. On an individual level, graduates are nearly twice as likely to undertake job-related training compared to those qualified to level 2 and below. These disparities are likely to put low paid, low qualified workers at a further disadvantage, as it means fewer opportunities to upskill and earn more.

The Government plays a significant role in employer investment in skills, investing an estimated £6.8 billion per year, but increasingly this follows or even reinforces existing inequalities rather than tackling them.

1. Funding training provision has fallen by 26% per worker

Firstly, on funding training provision, overall spending on work-based learning for adults, including apprenticeships, has fallen by about 18% in real terms since 2009/10. This equates to a 26% decrease per worker, as the numbers in employment increased. Cuts to the adult education budget mean fewer opportunities for people to learn at lower levels: participation in adult basic skills provision is down 40% in the last five years.

The more recent introduction of the Skills for Life Guarantee is good news, but we need more investment in learning at all levels if it is to help low qualified workers less likely to access training at work. It also excludes qualifications in sectors like retail and hospitality, where an increase in skills could help raise productivity.

2. Fall in apprenticeships has hit the young hardest

Secondly, the Government’s involvement also includes setting the framework and rules for the apprenticeship system. Spending on apprenticeships, including the levy, rose by about 50% in real terms between 2009/10 and 2019/20.

But reforms have led to a fall in the number of apprenticeships and opportunities have skewed away from young people and lower levels of learning. It’s worth noting here that young people have seen the largest declines in job-related training more generally, both in the pandemic and over the longer term.

3. Tax reliefs are missing the mark

Thirdly, tax reliefs on investment in training for businesses and self-employed people also constitute a substantial form of support. Our calculations estimate the total value of these reliefs may have been £1.3-2 billion in 2018-19.

But they passively follow employer decisions and do little to tackle underinvestment in those with the fewest qualifications. It also only provides incentive for employers making a profit.

Greater action is needed to build back better and level up opportunity 

Overall, government policy isn’t doing enough to tackle falling levels of employer investment and inequalities in access to training.

These trends will hold the economic recovery back, impacting on pay and living standards.

We need greater action if we’re to build back better and level up opportunity.

Naomi Clayton, Deputy Director for Research and Development, Learning and Work Institute