A plan for Britain? The role of a smart skills system in a modern industrial strategy

The UK has a lost decade of wage growth. Real terms earnings for the period 2007 to 2016 have seen the biggest average contraction since the period 1851 to 1862.

This long squeeze is in part the result of the stall in productivity growth in the UK. While productivity often takes a hit during a recession, it usually bounces back and returns to pre-recession trend growth. However, since the financial crisis, productivity has flat-lined in the UK. The average worker in the UK now produces less in five days than the average worker in German and France does in four. A return to strong and sustained wage rises will require a return to strong and sustained productivity increases.

That’s why boosting productivity is now so high on the Government’s agenda. Their green paper on industrial strategy in January set out their objective of improving living standards by increasing growth and productivity across the whole country. Developing skills is one of the ten pillars underlying the industrial strategy, and they have set out a vision for ensuring everyone has the basic skills needed in a modern economy, boosting STEM skills, addressing regional skills gaps, and building a new system of technical education for those who don’t go to university.

But boosting skills alone is not enough. In 2006 the Leitch Report set out some ambitious targets for boosting skills in the UK. A decade on, we’ve performed well against these targets, with a big increase in the proportion of the workforce with level 2 qualifications, and a massive rise in the number of adults with degree level qualifications. Yet over the same period productivity has stalled and average pay has declined. Leitch warned of this in his report, saying that his ambitious targets for boosting skill levels ‘will not deliver economic benefits unless they are based on economically valuable skills that are effectively used in the workplace’. Herein lies the problem. While the UK skills system has helped increase the level of qualification and skills among the workforce, too often these skills are not economically valuable, and too often they are not used effectively in the workplace.

In Another Lost Decade, the final report of the New Skills at Work programme, we set out the challenges facing our adult skills system, and what government must do to address these.

First, we showed that the UK suffers from low demand for, low investment in and poor utilisation of skills. Employers invest half as much as the EU average in continuing vocational training, and investment is falling. We suffer from poor skills utilisation, with one in three employees in the UK saying they have a level of qualification higher than that which is required by their job; the highest level in the EU. The government is seeking to reverse the decline in employer investment in training through the apprenticeship levy, but we believe more needs to be done.

Second, we showed that the UK suffers from a lack of high quality vocational training. The vast majority of apprenticeships and further education courses are delivered at low level, many don’t lead on to further study and much of existing vocational provision has poor labour market returns for adults. As OECD have shown in their Getting Skills Right report, the UK suffers from poor linkages between supply and demand in the skills system. The government is seeking to make the vocational system more responsive to employer needs through the levy and the wider reforms to apprenticeships, and they are seeking to boost availability of higher-level vocational provision through introducing institutes of technology and degree apprenticeships. But again, we believe more needs to be done.

Third, we showed that the UK skills system is failing to tackle deep social and regional inequalities that scar our country and hold our economy back. Adults who could most benefit from participation in learning – including those who left school early and those with lower levels of qualification – are least likely currently to be taking part. The skills system has failed to address the stark regional inequalities in qualifications, productivity and pay. We believe that the government’s reform may make social and regional inequalities even worse. The restriction of entitlement to public funding for further education introduction of Advanced Learner Loans – similar to student loans – led to a fall of nearly a third in participation in affected courses. The Government’s apprenticeship levy may actually widen regional inequalities, as it will raise less, and stimulate training less, in the regions where it is needed most.

IPPR have set out a bolder approach to skills as part of a modern industrial strategy that transforms our economy and boosts productivity.

In Another Lost Decade, we called for the apprenticeship levy to be broadened into a productivity and skills levy, and for a top-slice of the contributions of the largest employers to provide a regional skills fund. This would be devolved to local areas to drive skills devolution and boost investment in high quality vocational provision. We’ve called for a personal learning credit, worth up to £700 a year, to give individuals control over their learning and career, and to support them to invest in their skills. We’ve called for the creation of strong regional and sectoral institutions to oversee the system. And with the rapid advancement of technology and the prospect of automation transforming our labour market, we’ve called for a personal retraining allowance worth £2,000 to support low-skilled workers who are made redundant to re-train and return to the labour market.

Beyond skills, we’ve set out a wider vision for a modern industrial strategy that boosts investment, supports innovation and drives productivity in every region and nation of the UK, as part of the latest report of our Commission on Economic Justice.

It is welcome that the government has recognised the need to set out a modern industrial strategy. It is welcome too that they have put skills at the heart of the industrial strategy, and that they have been willing to intervene to boost declining employer investment. But they need to do much more to recognise and address the failed assumptions that underlie the weaknesses of UK skills policy. This calls for a bolder and more ambitious role for government to stimulate demand for, investment in and utilisation of skills, so that we can boost productivity across our country.

Joe Dromey is a Senior Research Fellow at IPPR.