The government has made a commitment to 3 million new apprentices in England between 2015 and 2020. This target, contained first in the Conservative Party 2015 General Election manifesto, and subsequently enacted in law in 2016, is front and centre of the government’s plan to boost skills and productivity.
Higher skills and productivity are admirable aims, with our productivity lagging behind comparable countries such as France, Germany and the United States, and measures of workers’ skills comparing poorly with other developed countries. Expanding high quality apprenticeships should certainly play an important part in tackling these problems.
To help meet this 3 million target, starting in May the government is introducing a new set of subsidies for the training costs of apprentices. From April, the government is also introducing a new tax on employers – called the apprenticeship levy – designed to raise tax revenue to pay for the expanded subsidies. At the Institute for Fiscal Studies, we have analysed the government’s reforms to shed light on their potential effects on incentives to invest in training, and on skills, wages and productivity. And there are a number of potential reasons to be wary.
First, let’s take the apprenticeship levy itself. The levy is a 0.5% on employers’ paybill over 3 million per year, and is set to raise £2.8 billion per year by 2019–20. It is not an unreasonable way to raise tax– it is not that different from employers’ National Insurance, another payroll tax levied on employers. But just because employers pay the tax, does not mean it will not affect employees. Higher costs of employing workers are likely to drive down employees wages - by 0.3% by 2019–20 according to the Office for Budget Responsibility. We estimate at least 60% of employees work for an employer that will pay the levy.
Second, while there are some technical details about how the new subsidies are administered, the big picture is this: employers will pay either nothing, or at most 10%, of the training costs of apprentices, up to certain per apprentice cost caps set by the government. These high subsidies give employers an increased incentive to employ apprentices aged 19 and over, for whom employers paid at least 50% of training costs prior to 2017.
However, these high subsidies have some potentially bad side effects. They encourage employers to re-label existing training schemes as apprenticeships in order to receive government funding for them. This means the taxpayer will, to a large extent, be subsidising training that would have happened anyway. In addition, with employers bearing little or none of the training cost, they have essentially no reason to seek out a good value provider for the training of their apprentices. Both of these side effects lead to the government risking poor value for public money from these subsidies.
The third issue is that the government is introducing additional apprenticeship targets. Each year, each public sector employer with at least 250 employees in England has a target that 2.3% of its staff must start an apprenticeship in each year. The government wants the public sector to contribute its “fair share” towards the 3 million target. But while 2.3% might sound small, unless existing staff start doing apprenticeships, it means one-in-five new hires must be an apprentice. It is also worth remembering that most public sector employers are already highly skilled, with 63% having completed post-secondary education. This blanket approach, imposing the targets on all large public employers, is absurd and will lead to costly and pointless reorganisations of training. While this might be a way to hit the 3 million target, it is no way to boost skills and productivity, or the quality of public services.
Apprenticeships are important. They provide a way of gaining skills and education outside academic higher education. There are good reasons that government should support them, in part because they show significantly higher returns than other vocational qualifications. However, numerical targets distort policy towards increasing the quantity of apprenticeships without sufficient regard for increasing their quality. . A more gradual expansion, focussed on high quality apprenticeships, would be much more welcome than a focus on reaching 3 million apprentices by 2020.
Neil Amin-Smith and Jonathan Cribb are Economists at the Institute for Fiscal Studies (IFS)