Issue 155: 2018 05 24: The Source

Black and white of French Cobbler's Apprentice in the 19th Century with his master

24 May 2018

The Source of the Apprentice

The Apprenticeship Levy is counterproductive.

By Frank O’Nomics

At the heart our low productivity conundrum lies a simple problem – the UK economy is hamstrung by a skills shortage.  This is something that is only going to get worse as a result of Brexit, and already we are losing droves of talented overseas workers.  Both the City UK and the Engineering Employers Federation have warned that the UK faces a “recruitment crunch” after we leave the EU – a prospect that comes as no surprise to most.  It was in an effort to tackle this and the perennial low productivity that the Apprenticeship Levy was introduced in April 2017. The problem, however, is that not only is the levy not working to produce the desired number of skilled workers, it seems to be operating to actually reduce the number of apprenticeships. Recent data shows that the overall new apprenticeships fell over 26% year/year (to 194,000 from 259,000), with those at the intermediate level down by closer to 40%.  This is a situation that needs to be addressed now, before the Brexit exodus reaches its climax, but that can only happen with a greater understanding of the causes of the failure and the measures that might correct it.

Since 2017, all UK firms with an annual wage bill of greater than £3mn have had to pay 0.5% of their payroll costs as an apprenticeship levy. This builds up a fund that the firm can use to invest in training its workforce, thereby (hopefully) improving productivity. The money has to be spent within 2 years, otherwise it just becomes a tax like any other.  So what’s wrong with this?  Such a levy seems very modest and would appear to be forcing companies to do something that is in their own long-term interest.

The first problem is that there are just not enough courses available.  In a recent EEF survey, 75% of employers said that they were unable to spend the money set aside.  It is proving hard to get government approval for schemes, with one engineering company reporting that it had only spent £20,000 of £800,000 set aside because it could not get its (world renowned) scheme officially approved.  Another firm in Hampshire found that the nearest recognized scheme that it could send its apprentices to was located in Birmingham, hardly a practical prospect.  A further problem with the current system is that it has a cap per individual of £27,000.  This may sound like a lot, but it is not enough to support the high tech training programmes that would make such a difference to skill levels and long-term productivity. Further, the average apprenticeship in engineering is four years, yet firms have to spend the levy within two, making it hard for them to enroll employees into schemes that are really going to make a difference. In addition, firms who wish to use the money to help workers at firms in their supply chain are not allowed to do so.  The net effect of all of this is that many apprenticeships  will be merely at lower skill levels.

For the apprentices themselves there are also deterrents, particularly for those looking at entry-level apprenticeships in the house-building sector.  The minimum wage for apprentices is £3.50 per hour for those under 18, compared to £4.05 for other young employees, making it a big step for them to look at the bigger picture.

There are other consequences of the current system that would also seem to go beyond the original intentions.  Rather than taking school leavers into apprenticeship schemes, many companies have been using the levy to fund extra training for their managers.  Universities are busily setting up new MBA courses to accommodate the 15% of apprenticeship levy spending committed at the higher level, including foundation and master degrees.  There is a danger then that we finish up marginally improving the skills of those at top and bottom of the workforce and doing little to develop proper occupational training.

There are of course companies that have developed impressive schemes. The brewer Greene King has put 10,000 of its employees through its apprenticeships scheme over the past seven years and has 2,500 working in current schemes. Others such as Barclays and Boots have highly regarded management apprenticeship schemes, but these examples further illustrate the bias towards the retail and services sectors, rather than engineering and technology.

The Department for Education argues that the levy is making a difference, with 60% of those starting new schemes being levy supported.  They seem, however, to be missing the point.  The real test is how much of the levy is being spent and how effective the training really is.  The official target is for 3 million apprenticeships to have been created by 2020, which seems extremely optimistic.  Further, without reform it has been estimated that £600 million could be “wasted” on schemes incorrectly labeled as apprenticeships.  Without creating and approving more schemes, allowing longer periods to spend the levy, as well as removing the cap, it is likely that the apprenticeship levy will prove to be anything more than yet another tax on British business. The CBI has recommended allowing local companies to get together to pool their levies and the Federation of Small businesses wants large companies to be able to share their levies with suppliers.  Such changes make great sense.  With the struggle to find skilled labour about to get much harder, an additional tax that merely exacerbates the problem is the last thing needed.

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