The market failure of UK apprenticeships can't be solved with a levy on employers

Britain is on the hunt for new apprentices. George Osborne recently unveiled a levy on large employers to pay for an increase in the number of apprenticeships from 2m to 5m. And as he made the announcement, the chancellor signalled one of the key problems with workplace training, that while many companies do a brilliant job “there are too many large companies who … take a free ride on the system.”

This statement is an important one because Osborne explicitly acknowledges that there has been a market failure. In fact, there has been a shortage of investment in vocational training, including apprenticeships, over a number of decades in the UK.

Compared to their French and German counterparts, British employers spend respectively 70% and 55% less on vocational training. One cabinet minister, who preferred to remain anonymous, was quoted in the press as saying there was a need “to kick British businesses up their lazy arses”.

Keeping options open

Sajid Javid, the business secretary, will be responsible for the new apprenticeship levy on large employers. Javid, who was appointed after the May 2015 general election, has a reputation for being a “free marketeer” and on a mission to further deregulate the British labour market. He is also firmly anti-EU. Will he be the right person to boost the number of apprenticeships in the UK in the future? Or put another way, will his political convictions and his negative stance towards other European countries get in the way of making British industry more competitive?

Business secretary Sajid Javid at the FT summer party.Financial Times, CC BY

Clearly, Britain has something to learn from the rest of Europe. Osborne has identified the problem: this is about businesses free-riding on competitors’ efforts by poaching highly-skilled employees.

So why is this a problem in the UK, but less so in France and Germany? There are at least two reasons for this. First, the UK labour market is much more deregulated and flexible than in France and Germany. This means that employees are much less secure in their jobs, and have the incentive to constantly trawl for other jobs as a way of hedging their bets; the focus is on what makes them externally marketable, rather than what is specifically useful to their current employer. This in turn makes it easier for unscrupulous companies to poach employees from competitors who have spent effort, money and time to train their workforce. The effect is that employers will refrain from training their employees.

Incentives

A further consequence of this flexibility is high staff turnover rates in the UK – it is no accident, for instance, that our research has found that British firms devote a much larger proportion of their training budgets to basic induction training as they rush to get new starters up to speed. By contrast, French and German employers and employees are more likely to stay with each other so employers have a greater incentive to invest in their human capital and have a greater likelihood of a reasonable pay-off. It’s also less easy to poach trained workers from other firms.

Learning the levers.SoundTransit, CC BY-NC-ND

Employees, meanwhile, have more job security and therefore the right incentives to climb up the career ladder within their organisation rather than by regularly changing employers – and have more incentives to develop specific skills aimed at the current firm. In Germany, there is the added protection of powerful employer organisations who police entire industries to ensure that no business free-rides on the efforts of other businesses in the same industry.

So the lack of investment in vocational training is not due to British businesses being lazy. It is due to labour markets being too flexible. This means that employers and staff don’t have the right incentives to invest in company-specific training of the type that is conducive to high value added production. In the last century, apprenticeships in the UK were relatively tightly regulated, and tended to be consistent, but this was dismantled as part of the “freeing up” of UK industry. Nowadays even the apprenticeships registered with the National Apprenticeship Service – which means that employers and training establishments can apply for government grants – can range from one to four years, with disparate levels of academic qualification from GCSE to degree, and organised by arms-length private bodies.

Skill base

In Germany, by contrast, apprenticeships have to take several years to complete and are part of a dual education system where up to 50% of the time can be spent in formal education. Apprenticeships are more tightly regulated and it is very difficult to find employment without one. In short, the whole process is taken more seriously. Consequently, there is demand for apprenticeships not only from employees, but also from employers.

More generally, the lack of vocational training in Britain cannot be isolated from the country’s broader institutional context. Firms’ lack of interest in vocational training reflects the lopsided nature of the UK economy. Most jobs are low-wage, low-skill service sector work and increasing the supply of skilled labour will not solve this labour demand.

Skills shortfalls cannot be remedied via something as simple as a levy. Our research suggests that there is a correlation between national socio-economic systems and the amount invested in human capital. What is needed is a rethink of the UK’s deregulated labour market and the government’s approach to it. We fear it is unlikely that Javid will be up to this task and he will doubtless have a hard job achieving the new targets he has been set without further cheapening the precarious value of the British apprenticeship.

Marc Goergen is a Research Associate of the European Corporate Governance Institute (www.ecgi.org).

Geoffrey Wood receives funding from the ESRC for a study on Supply Chain Accounting in the Automotive and Textile Industries in South Africa and Brazil.

Chris Brewster does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.