Technical fault: Options for promoting human capital growth

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Executive summary

Since its launch in June 2016, the Intergenerational Commission has uncovered a wealth of evidence raising questions about the extent to which we should expect the steady generation-on-generation living standards progress experienced during the 20th century to continue into the 21st. Whether looking at pay, progression, housing, consumption or wealth, the research has shown time and again that today’s young adults are facing challenges that differ from those of their predecessors – raising the need for a fresh approach to policy.

This is the 20th paper for the Intergenerational Commission and the fourth in our policy options series that explores potential ways of providing that fresh approach. It focuses on the role of human capital development in underpinning living standards progress, and is informed by discussion with leading researchers, practitioners and policy makers in the area of technical education and skills.

Levels of educational attainment have risen over recent decades, but the pace of progress has slowed
The second half of the 20th century in Britain was characterised by steadily rising levels of educational attainment: public expenditure grew seven-fold in the five decades to 1995, and literacy and numeracy rates tracked consistently upwards. This progress was central to continual generation-on-generation improvements in living standards, helping to drive productivity and pay growth in particular.

However, educational advancement appears to have slowed in the 21st century – contributing to a stalling of gains in pay among younger cohorts that pre-dates the financial crisis. In the six years separating the 1966-68 and 1972-74 birth cohorts (both sitting within generation X), the proportion holding qualifications by age 25-28 at A level-equivalent or above increased by 14 percentage points (from 37 per cent to 51 per cent). Yet in the six years between the 1981-83 and 1987-89 cohorts (both parts of the millennial generation), the improvement was just 4 percentage points (from 62 per cent to 66 per cent).

Further gains become harder to achieve the higher the starting point, but the fact that young adults in England have literacy and numeracy levels that are below the OECD average suggests considerable room for further improvement. This is especially the case given that this gap is at the bottom end of the skills distribution and only opens up with other countries after the age of 15. There is a specific problem with England’s post-16 educational offer for non-higher education students. That is what we need to tackle.

Alongside this slowdown, younger groups have faced diminished opportunities for workplace development of human capital

This underperformance goes back some time, but has been offset in previous decades by a post-education period of catch-up among lower-qualified young adults in England. As a result, the skills gap with similarly-qualified contemporaries abroad has been significantly narrowed by the time the group reaches its mid-30s. This suggests work and training have substantially boosted human capital in England during early adulthood. However, this model is now under threat because of four recent developments in the UK labour market.

First, the share of lower-qualified millennials who are unemployed has increased relative to similarly-qualified adults in previous cohorts – despite overall unemployment reaching a four-decade low. Among those with no more than GCSE-equivalent qualifications, unemployment at ages 25-30 rose from an average of 6 per cent for those born during the mid-1960s (the beginning of generation x) to 8.7 per cent among the millennials born in the mid-1980s. This matters because unemployment clearly removes the opportunity to develop human capital through work and work-related training.

Second, growing shares of lower-qualified people, and in particular lower-qualified men, are shifting into insecure and part-time employment. While better than having no job at all, such patterns of work again lower opportunities for in-work skills development due to the nature of the roles taken on and the willingness of employers to invest in their workforce.

Third, millennials are increasingly filtering into lower-skilled occupations and industries that offer fewer opportunities for progression and skills development. At age 25-34, 82 per cent of mid-qualified people (those with A level-equivalent or sub-degree tertiary qualifications) born during the early-1960s worked in high- or mid-skilled occupations outside of caring (such as professional, associate professional, technical and skilled trade roles). But that share dropped to 65 per cent among those similarly-qualified people born between 1981 and 1985, and 59 per cent of those similarly-qualified people born between 1986 and 1990.

Fourth, rates of work-related training, and the length of that training, are on the decline. The proportion of 28 year-olds reporting having “recently” received work-related training fell from 32 per cent among those born during the 1970s, to 29 per cent and 27 per cent of those born 1981-85 and 1986-90 at the same age. And the duration of training programmes has declined even more: the proportion of those 28 year-olds receiving work-related training who reported it lasting longer than a week dropped from 72 per cent among those born in the late 1960s cohort, to 70 per cent of those born 1981-85 and just 64 per cent among the 1986-90 cohort. Importantly, these are trends that appear to hold across all occupations and job-types, not just those lower-skilled and less-secure ones that younger people are increasingly entering.

Restarting generational progress on human capital depends on a ‘twin-track’ approach that improves both the non-higher education offer and skills-development opportunities for those already in work

Faced with a slowdown in educational attainment gains and reduced in-work development opportunities for younger workers, there is a need to adopt a ‘twin-track’ approach to reforming the skills landscape in order to restart generational progress on human capital. This involves both ‘fixing’ the technical (non-A level/university) education offer for future generations of young people, and providing additional support for those lower-qualified young adults who have already passed through the education system but who find themselves less well-served by the development opportunities available in the workplace than earlier cohorts were.

In developing this ‘twin-track’ approach, we identify three challenges at the forefront of policy reform: clarity, quality and funding.
The technical education pathway is too complex, with no equivalent to the very clear transition from GCSE to A levels to university in the standard academic route. Moreover, the financial returns to technical education are variable and it is hard for learners to understand these. Clarity is of little use without quality though, and here there are problems too. For example, Ofsted rates apprenticeship training providers lower than their counterparts in secondary schools, sixth form colleges or higher education. And these challenges of clarity and quality are compounded by funding. Spending in the further education (FE) sector has fallen faster than any other stage of education since 2010, with levels of per-student spending nearly £900 lower today than in 2011/12.

The government should ensure that the apprenticeship reforms are underpinned by quality

The good news is the government has already introduced a series of reforms designed to improve technical opportunities. For example, the apprenticeship levy and its accompanying reforms could help to root out poor quality programmes that do little to build future generations’ skills. A rise in the number of mandatory off-the-job training hours (to 20 per cent of an apprentice’s time) will require many employers to train more than they had in the past. While challenging for firms, the government should remain firm on this requirement and ensure that statutory bodies like the Institute for Apprenticeships (IfA) both monitor whether employers are following through and, where they are not, respond with appropriate sanctions.

Of course, training hours alone do not guarantee quality; the organisation providing that training also matters. And here there is cause for concern: over the past year, a majority of the apprenticeship training providers that Ofsted inspected were found to be either inadequate (11 per cent) or in need of improvement (40 per cent). Since the levy came into force last April, the number of providers on the apprenticeships training register has nearly doubled to 2,622 – and 65 of these are entirely new organisations.
This surge in new providers could result in a further reduction in training quality. This is exacerbated by the fact that Ofsted managed to inspect just 189 apprenticeship training providers in the last academic year – the fear is that it will be unable to keep up with the rapidly rising number of providers. This needs to be tackled with Ofsted required to inspect every apprenticeship training provider within the next three years.

Since 2015 the government has had a target to achieve 3 million apprenticeship starts by 2020. The target was set in the hopes of boosting provision and it is important that the apprenticeship levy does not reduce the stock of opportunities for young people, especially for those on a non-university track. However attention to the numerical target has detracted from wider questions about apprenticeship quality, skills development and apprentice outcomes.

The government should therefore replace its specific quantitative target with three directional targets focused on: boosting the number of starts each year; boosting the share of starts at more advanced levels; and boosting the share of apprentices who progress from one level of training onto the next. If in the medium term the current drop in the quantity of apprenticeship starts is sustained, the government should review its causes, including whether they are linked to the funding system.

T levels could offer clear, quality routes to skilled work and higher learning – but implementation will be a challenge

T levels are expected to come online from 2020, replacing the current Level 3 college-based technical system. Students will choose from of a series of 15 streamlined, two-year technical routes, all of which include substantial work experience. They are expected to benefit younger learners outside of the A level-to-university track by giving them a clearer understanding of the educational routes that sit before them, by requiring them to have core skills in areas like maths, English and digital, and by offering them a substantial element of work experience. This is all very welcome.

However, there are challenges. For example, it is important that a balance is struck between simplifying the number of courses on offer and maintaining high-quality, specialist provision. There are also difficulties bringing employers into the work placement system. Each and every T level student will be required to undergo a work placement that lasts a minimum of 45 days. This will require a substantial step change in the way employers engage with the skills system, and with younger people.

And while we are still four years from when most T levels come online, polling commissioned by the Resolution Foundation finds that getting employers to provide these work placements will be a very real challenge indeed. 73 per cent of senior businesses decision makers reported being unaware of T levels. And more (25 per cent) report that their workplace is ‘not suitable’ for 16-18-year-olds than said they would be willing or are already set up to provide placements (18 per cent). The work placement process is currently being trialled, with colleges being provided incentives to find willing employers. It is vital that the government ensures that the lessons learned from the work placement trials inform future policy.

Not all T level students will have access to employers in their sector of choice – particularly those living in rural or economically deprived areas. The DfE should build flexibility into the T level course design to deal with this issue. This could include utilising online training courses or homestay options for students.

Complexity in the technical system prevents students from identifying clear progression routes. It is important that prospective students can understand which higher-level courses different T levels will lead on to. The government should provide this information. It should also ensure there is the promised ‘bridging’ provision that will allow someone to switch between the ‘academic’ and T level tracks.

Complexity is not the only hindrance to decision making: a lack of clear, comparable information on course availability, content and outcomes can prevent prospective students from selecting the programme that offers them the highest returns. The government already provides comprehensive course comparison data for prospective higher education (HE) students through the Unistats website; it should provide a similar one for the wider post-16 sector. This would allow students on technical routes to deliberate between options like apprenticeships and higher level technical courses.

We should also provide targeted support for lower-qualified young people who are struggling in today’s labour market
These measures would help to restart generational progress, but would come too late to benefit those young people who have already left formal education with lower-level qualifications and now find themselves in a labour market that has fewer opportunities for skills development and progression than their predecessors enjoyed. Unlike the 16-24-year-old technical education system, where the apprenticeship levy and T levels offer something to build on, policy thinking in this area is less developed. We highlight a number of options.

There has been little progress recently in reducing the share of people who are only qualified to Level 2 (GCSE-equivalent or below) by the time they reach their late-20s. Over a third of people born 1987-89 are qualified only to GCSE-level or below. And there are at least two significant barriers stopping those who have left the formal education system from returning. First, on top of the inevitable challenges involved in balancing work and caring responsibilities with study, anyone aged 24 or older would need to pay fees for a Level 3 qualification.

Secondly, they may find it hard to piece together different modules, taken over long periods of time and sometimes with different education providers, into a full qualification. These are disincentives for individuals to develop in their own skills. The government should tackle both, making this a priority of its current review of post-18 education. It should work towards a new mechanism for funding lower-qualified adults’ education, alongside a universal system of education credit transfer.

This individual-led approach could help to bring young, lower-skilled adults back into education. But there is a need to focus on what more employers can do too. A long tail of UK firms operate on a lower-wage, low-productivity business model, with little scope to utilise a better-skilled workforce and thus little incentive to invest in the development of their workforce. And this workforce is large: nearly 1 million 18-35 year-old non-graduates work in lower-wage, low-productivity sectors. To tackle this problem, government should establish as part of its Industrial Strategy dedicated deals with sectors like care, retail and hospitality. These deals would incentivise firms to make better use of the skills they have and to improve the skills of their workforce. They would also help firms to fill skills shortages.

Notwithstanding these sectoral approaches, many individuals will continue to find that their human capital will be most developed by moving into a new sector or occupation. That is why a previous Intergenerational Commission paper included an option for a ‘Better Jobs Deal,’ through which the government should develop mechanisms to help young, lower-qualified career ‘switchers.’ This would include publishing information on in-demand occupations and the skills required together with providing support for retraining.

Underpinning all of this is a need to fill the current shortfall in funding

Restarting generational progress on human capital will not come cheap. While many of the headlines surrounding the government’s post-18 education review have focused on university tuition fee loans and higher education funding, this paper contends that the review should focus on boosting the skills of the majority of young people who do not attend university.
Moving to a system of high-quality educational routes like T levels will require high-quality educational institutions, and the relative level of underfunding that exists today will not suffice. At a minimum, FE funding should be brought back to the (real terms) level of 2011-12. To do so today cost roughly £765 million in current prices. Finding additional funds to boost young adults’ human capital is also a challenge: the teaching element of the adult education budget has fallen 54 per cent since 2011.

To fund this the government should cancel some of its planned cuts to corporation tax. Since 2010, the government has delivered a series of cuts, lowering it from 28 per cent to 19 per cent today. It is already one of the lowest in Europe and one of the lowest in the OECD. It now plans to cut it to just 17 per cent by 2020. The cuts have been sold as a means of increasing the UK’s international competitiveness. Yet, given how far the rate has already been lowered, the extra gains associated with moving from 19 per cent to 17 per cent may not be as great as the benefits accrued from investing in the skills of the labour force.

Halving the remaining corporation tax cut to 1p and taking it to 18 per cent rather than 17 per cent would raise £2.9 billion by 2022-23. £1 billion of the savings could be directed towards the ‘Better Jobs Deal,’ which will offer support and funding for younger workers most affected by the financial crisis to train up or to move jobs. A further £1.5 billion could strengthen technical education provision in England, with consequential funding for other parts of the UK. This £1.5 billion would:

  • Bring further education funding levels in England back to their 2011/12 levels, at a cost of £846m (2022-23 prices);
  • Allow the DfE to finance a substantial T level employer engagement campaign; and
  • Provide Ofsted with any additional resources required to cover inspections on the rapidly growing number of apprenticeship training providers.

Skills do not just determine a person’s ability to get into – and move up in – work; they also underpin wage growth and living standards. The second half of the 20th century was characterised by steady rises in human capital but that pace of that growth has slowed and many of the options facing young people in technical education are complex and of a low quality. The policy options that we advance aim to improve the education and training offer for future generations outside of the university pathway. They also aim to boost the skills of those who have already passed through the education system and are currently struggling in the labour market. The final report of the Intergenerational Commission will reflect on these and other options and propose a package of policies for a renewal of Britain’s intergenerational contract.