Apprenticeship policy will distort the market

Eye-watering headlines last week in The Sun highlighted the Institute for Fiscal Studies’ (IFS) findings on the value and potential impact of the apprenticeship levy. The IFS’ sober assessment – part of its green budget series – probably wasn’t expected to garner such attention, but struck a chord with the press. The IFS’ target is of course HM Treasury. The IFS believes in the value of the apprenticeship route and is concerned planned growth rates risk the quality of provision and of services delivered.

In making these points, the IFS highlights some aspects of training policy, construction economics and demographics that shine a piercing light on the challenges associated with the construction industry’s skills agenda. As the Construction Industry Training Board (CITB) consults on revisions to its levy scheme, it is increasingly important the industry understands how the skills market is developing and how incentives built into the apprenticeship levy scheme could make construction’s skills challenge harder to resolve.

The first issue raised by the IFS in its analysis is the size of the training target – 600,000 new apprenticeship places created per year during the five years to 2020. That’s a 20% increase from levels seen in 2014/15. The IFS highlights the strain that further growth will place on the institutions responsible for the quality of delivery, including Ofsted and the Institute for Apprenticeships.

Crucially, the growth in apprenticeship numbers has not occurred in the 16-18 age cohort, which remains at around 120,000 a year, but the over-25s, which has grown to a market of more than 200,000 apprentices per year in six years. Industries that rely on a traditional apprenticeship structure to develop craft and technical skills risk being drowned out of an expanded market focused on intermediate skills for older trainees.

The small size of construction’s stock of apprenticeships, typically 25,000 placements a year, is a perennial concern, particularly given the active role of the industry in devising and promoting its own training channels through the CITB. Looking at incentives, the IFS highlights the double disincentive created by the casual labour model adopted by construction. Workers paid in accordance with their skills are likely to be the main beneficiaries of their training but may not recognise the benefits or be in a position to fund the training themselves. At the same time, employers have little incentive to invest if they can’t retain their labour force. The apprentice levy isn’t designed to crack this problem, and in an industry where more than 50% of the directly employed workforce works in businesses with fewer than 50 people, it is a huge structural aspect of the skills challenge.

The IFS’s view is that the apprentice market will grow too fast and the public sector labour market will be distorted to enable these targets to be met

Another dimension is the sustainable size of the apprenticeship market. There are around 650,000 18-year-olds in the UK and around 50% will go to university. This means 600,000 apprenticeship places will be chased by a maximum of 300,000 young people a year. The future looks as if there will be a focus on upskilling and reskilling older workers – with growing competition for younger workers due to the incentives that are built elsewhere into the taxation and minimum wage systems. Will construction be able to attract its fair share? The IFS points out that the employment costs of an apprentice aged 18+ in their first year will be around 60% of the costs of a typical employee on a minimum wage – highlighting again the increased competition for younger employees being driven by government incentive.

Possibly the most concerning element of the apprenticeship scheme highlighted by the IFS also potentially affects the size of the available labour market. Under the reforms that come into force in April 2017, public sector organisations with more than 250 employees will be required to create apprenticeships for the equivalent of 2.3% of their workforce per year. As these employers typically only create apprenticeships for 0.5% of their workforce, this is a huge shift, implying that either 20% of new recruits into these organisations will need to be apprentices or that existing staff will be “retrained”. Not only will this make it harder for public sector employers to sustain their current skills base but it will also increase competition within the labour market. This requirement is the area highlighted by IFS as most wasteful and potentially most distorting for labour markets.

In summary, the IFS’s view is that the apprentice market will grow too fast and the public sector labour market will be distorted to enable these targets to be met. I believe these issues are relevant and that the changes in the dynamic of the skills market need to be factored into future skills policy.

The first of these changes is the explosion in the size of the apprenticeship market over the past five years – construction feels as if it has been left behind – even if most new places created since 2010 deliver only intermediate, level 2 skills. The second is the continual pressure planned growth will place on training infrastructure to deliver quality outcomes – this could crowd out the providers construction relies on. The third is that young people are a scarce and increasingly valuable resource.

The final insight, buried in the analysis, is the challenge of our employment model. Only 60% of the workforce is directly employed, and less than 20% of the total workforce is employed outside of the SME sector. Even excellent initiatives such as the 5% Club, which sets a minimum target for apprentice employment, won’t deliver the growth in trainees needed unless a much wider group of employers is incentivised to invest in training. Given that this challenge is rooted in our employment model, the industry owns the problem. The sooner that the CITB can refocus on this challenge, the better.

Simon Rawlinson is head of strategic research and insight at Arcadis