The apprenticeships levy and apprenticeship targets: the economics of the cargo cult
In modern conditions, where restrictions on employee movement are virtually non-existent, where minimum wage legislation (albeit with a lower rate for some apprentices) puts a floor on pay, and when the costs of many types of training are beyond family resources, a shortage of apprentices can arise. The obvious government intervention, if this is a problem, is to provide income-contingent loans, as we do for undergraduates, and allow young people to look for apprenticeships which suit them.
Governments like ours don’t think about apprenticeships as rational career investments by individuals, but rather as the key to higher productivity for UK plc. Anecdotal arguments about shortages of highly-skilled workers are quoted, but the argument that 3m apprentices by 2020 will produce big productivity gains is really the economics of the cargo cult.
Recent governments have spent a lot of money subsidising apprenticeships: in England, £1.6bn in 2014-15. In an odd way, too: a government-funded organisation, the Skills Funding Agency, has contracted with “providers” (such as further education colleges or other private organisations) to sign up a certain number of employers.
Employers have been fairly passive in this set-up, with much paperwork and assessment of apprentices being dealt with by providers. Formal training programmes relate to standards laid down by the Skills Funding Agency and other external bodies.
The incentive for providers has been to generate large numbers of low-level apprenticeships, which are short (some only a few months), cheap and easy to complete: payments are made for successful completion. In 2013-14, only 2 per cent of apprentice starts were at the higher level, the equivalent of most German apprenticeships. Two-thirds of the 440,000 starts were at the lowest (misleadingly termed “intermediate”) level. Rather than new apprentice jobs being provided, some employers were simply rebadging existing staff, as in the notorious case where over 20,000 existing Morrisons supermarket workers, 88 per cent of whom were over the age of 25, were enrolled as “apprentices”.
The government plans a new Delivery Board, 150 new “employer-led standards” (no doubt written largely by the usual suspects, consultants and redundant lecturers) and so on. But it’s still the same mindset.
Given budgetary constraints, it’s easy to understand the rationale for offloading the cost of apprenticeships onto employers, through the new apprenticeships levy. But the focus on apprenticeship numbers is nonsense. The sort of high-level manufacturing, construction and technology apprenticeships which ministers fantasise about can only ever, given the structure of UK industry, realistically run into the low tens of thousands. To make up the numbers and reduce firms’ costs, we will just get variations on the Morrisons story.
This isn’t only a wasteful policy. There will be other negative consequences. In practice, as the OBR recognises, the apprenticeships levy acts as a crude payroll tax. Although such taxes hit profits in the short run, they are eventually passed on in reduced wages and/or reduced employment, probably – paradoxically – for the lower-skilled. This is, then, a tax on shelf-stackers which is based on a fundamentally flawed approach.
Prof Len Shackleton is a Visiting Fellow at the IEA, and professor of economics at the University of Buckingham. This article first appeared in City AM.