60-second summary

The government is seeking to build an economy that works for everyone. As we leave the European Union, we will need to ensure that our country can compete in a global economy, and the government has set goals of boosting living standards, growth and productivity, and addressing deeply engrained regional inequalities. However, England’s adult skills system is ill-equipped to deliver this, or to address the trends that will affect our economy between now and 2030.

  • Demand for skills among employers is low. Employer investment has fallen in recent years and there is a large investment gap with the EU average. Poor skills utilisation means improvements in qualifications haven’t delivered improvements in pay and productivity.
  • Too much provision is low quality with poor outcomes. In the absence of clearly articulated employer demand, providers have relied on government-designed funding and regulatory systems. This  has led to perverse incentives, mismatched supply and demand, and a focus on courses with poor labour market outcomes. Efforts to build a more ‘employer-led’ system risk exacerbating this.
  • The training system has failed to tackle regional and social inequalities. Adults who stand to benefit most from training are the least likely to participate. The adult skills system has failed to support regions scarred by deindustrialisation, and it has failed to address stark regional disparities in economic performance. The apprenticeship levy may accentuate regional skills inequalities by boosting investment most in London and the south east.

The apprenticeships levy as currently formulated would fail to restore employer investment to the levels of a decade ago. The government should therefore expand its apprenticeship levy into a ‘skills levy’, set at 0.5 per cent of payroll for employers with 50 or more employees, and 1.0 per cent for the largest. This would raise £5 billion. Contributions from larger employers should be top-sliced and devolved to provide a regional skills fund for high quality vocational education and training.

Key findings

Our economy is set to change significantly between now and 2030. The prime minister has pledged to build an economy that works for everyone, rooted in a more proactive industrial strategy. With two-thirds of the workforce of 2030 having already left full time education, the adult skills system1 will be crucial in helping us compete in a global economy. But as currently configured it is incapable of delivering the government’s objectives of increasing living standards, productivity, and growth across the country.

In the past, policymakers in England have left decisions on training to the market: the assumption has been that with the right incentives, employers will invest in training for the benefit of all. Successive governments have invested in training in the hope that a more skilled workforce will drive growth.

However, our market-led system has neither delivered the quantity nor the quality of training that we need, and it has failed the people and the places that need it most.

If we are to build a skills system fit for the future, we need to overcome three key weaknesses:

  • First, levels of employer demand for skills are low, and employer investment in continuing vocational training per employee in the UK is half the EU average; investment in training and learning per employee fell by 13.6 per cent per employee in real-terms between 2007 and 2015. Neither are employers using the skills of the workforce effectively: the UK has the highest levels of overqualification in the EU. While the apprenticeship levy will stimulate investment, it will only affect large employers, and questions remain about the quality of training and the extent to which skills will be utilised to improve business performance and job quality.
  • Second, in the absence of strong and clearly articulated employer demand, providers have relied on centrally set funding and regulatory systems. These have led to a focus on lower-quality courses which often fail to meet the needs of learners or employers. Half of qualifications taken by adult learners are below NVQ level 2, and many offer poor wage or employment returns. Yet at the same time, many skilled sectors face persistent skills shortages that are not met by current provision. Efforts to build a more ‘employer-led’ system risk exacerbating these problems.
  • Third, the current system has failed to tackle entrenched regional and social inequalities. It has not supported those affected by economic change in the past, leaving many post-industrial areas trapped in low skills equilibria. While the devolution of adult skills training will help, proposals are poorly coordinated and the budget has been slashed. The apprenticeship levy will stimulate investment most in the areas where it is needed least; London and the south east have more businesses who will pay the levy and invest in training, but they have higher levels of qualifications, and lower skills needs. The levy will raise less, and stimulate training less, in the regions which have greater need. Adults who would most benefit from training – those with low skills, in low-pay occupations and in lower socio-economic groups – are the least likely to participate. Individuals looking to upskill can face numerous barriers, and the decision to charge adults for the full cost of some courses has led to a 31 per cent fall in participation.

Many of the problems with the adult skills system stem from England’s relatively ‘hands-off’ approach to vocational training, including low training standards and a reluctance to intervene in the quantity or quality of training used and delivered by employers.

A shift to a more innovative, higher skilled economy that works for everyone and can help us compete in a global economy will require far more focus on how the skills of the adult working population are being developed and utilised in the workplace. A more ambitious adult skills policy should be informed by the following goals:

  • improving investment in, and utilisation of, skills among employers
  • increasing the availability of high quality specialist vocational provision
  • supporting industries and communities facing economic decline to adapt to the demands of the global economy.

The first order problem we tackle here is underinvestment in the skills system to deliver on the government’s objectives. The apprenticeship levy could help boost investment in skills. But it would neither bring spending back to the levels of a decade ago, nor would it bring us close to the EU average. In the absence of further public investment and demonstrable underinvestment by employers, we recommend that the government expands the apprenticeship levy into a wider skills levy, which would:

  • apply to all employers with 50 or more employees
  • be set at 0.50 per cent of payroll for employers with 50 or more staff and 1.0 per cent of pay roll for the largest employers with 250 or more staff
  • be more flexible, and redeemable against the cost of high quality training beyond just apprenticeships
  • top-slice contributions from larger employers to form a regional skills fund, devolved according to local need, to invest in high quality, specialist vocational training.

We estimate that the skills levy would raise over £5 billion in 2017/18 – double the £2.6 billion raised by the apprenticeship levy. Top-slicing a quarter of the contributions of the largest firms would create a regional skills fund worth £1.1 billion, to be devolved to regions with lower skills. While the apprenticeship levy may accentuate regional inequalities, top-slicing the skills levy would narrow them. It would also restore the adult skills budget to close to the levels of 2010/11 in real terms and it would increase employer investment from 52 per cent of the EU average to at least 80 per cent.

The introduction of a skills levy will also provide greater scope for tackling the second and third order problems we identify here: a collective action failure and persistent regional and social inequalities. We will set out how government can address these failures in our next report.

1 This paper is focussed on the publicly funded further education system for adult learners and employer-funded training; it does not include analysis of the higher education system. For previous IPPR work on higher education see Pearce N, Muir R, Clifton J and Olsen A (2013) A critical path: Securing the future of higher education in England, IPPR.