We often talk about a skills market failure in engineering construction, but what does it look like in practice and how is the industrial training levy helping to tackle it? As Government-sponsored skills body the ECITB prepares to celebrate its 30th anniversary this year, Director of Strategy and Policy, David Nash, discusses how the Covid-19 pandemic has underscored the value of the training levy to the industry.
David Nash – ECITB Director of Strategy and Policy
For decades, studies have found that UK employers underinvest in skills. In a recent report, the UK Parliament’s Education Committee found that employer-led training had declined by half since the 1990s, with 39% of employers not training any of their staff in the previous year[1]. Lack of training is often given as a reason for Britain’s poor productivity performance and why skills shortages persist.
Over the years, this has led to various policy responses, ranging from Employer Ownership of Skills pilots to training subsidies and most recently the Apprenticeship levy. All have been introduced in an attempt to correct the factors that inhibit employer investment in training; often referred to as a skills market failure[2].
Market failure is also the reason why the Industrial Training Levy was established, leading to the formation of the ECITB in 1991. As was identified at the time, the way in which the engineering construction industry is structured creates significant disincentives for employers to invest in workforce skills.
In many respects not much has changed. Work in the industry is almost all project-based and undertaken by a relatively small but highly-competitive contractor community. With the exception of some longer-term maintenance projects, contracts are relatively short in duration, leading many firms to take a short-term outlook. Large parts of the industry are subject to commodity price volatility, most notably those operating in oil and gas, which can quickly erode profit margins and dry up order books.
This business model has in turn created the industry’s own particular labour model. The Government’s 2017 review of the ITBs identified regular peaks and troughs in demand for people. Workers are mobile and regularly move between employers to where the work is. This is not just true of craft disciplines, such as welders, but also offsite roles including design engineers and project managers whose skills are highly transferable. In addition, many workers are employed through employment agencies or as labour only subcontractors – roughly one third of all workers according to ECITB’s latest workforce data.
The work itself is often highly-skilled and site-based staff must be regularly assessed to verify their competence, not least because of the safety-critical environment in which they operate. Training can be expensive and for employers the return on investment is uncertain, particularly if those employees leave and take their skills with them.
All of the above factors explain why, despite requiring highly skilled workers, employers might be discouraged from investing in skills. Why would an employer pay for costly training when their worker might be poached by a competitor or they simply may not require them in a few months’ time due to a lack of guaranteed work?
This in a nutshell is why the Industrial Training Levy was established. By requiring all companies over a certain size to pay in, and enabling all to access the resulting funds, it incentivises and enables training that may otherwise not occur. In other words, it is designed to correct market failure.
The Covid-19 crisis has exacerbated the market failure for training and in doing so reinforced the value of the levy. When times are tough, the levy ensures there is funding available to train and develop staff in anticipation of economic recovery. This is exactly what we have seen over the past year. Despite the pandemic, in-scope employers drew down £22m worth of training support from the ECITB in 2020, giving their workforce vital skills at a time when many companies would otherwise have been shedding training budgets. At the height of the lockdown, and with many cash-flow constrained companies imposing restrictions on external expenditure, our decision to directly purchase training on behalf of employers ensured workforce training could take place.
Levy funding has also been used to counter the negative effect of the Covid-19 crisis on the recruitment of young talent into the industry. New apprentices fell by nearly 40% last year compared to 2019, while the number of new graduates declined by 30%[3]. In response, the ECITB devised the Scholarship, a two year off the job training programme designed to give learners technical and craft skills required by employers. Over 100 young people started the programme in September with further cohorts to follow this year.
Quantifying the impact of the levy is challenging. Ideally, we would be able to compare the training activities of in-scope employers with a control group of identical employers where no levy is applied. More empirical research is needed, but the examples highlighted above shed light on the positive impact of the levy. This is reinforced by the findings of our recent Customer Satisfaction Survey, conducted by IFF Research. 73% of employers said that ECITB support had helped them close skills gaps and shortages, while 76% of employers said the levy ensured training took place that otherwise would not.
What is more, industry have consistently voted in favour of paying the levy – at the last consultation in 2019, 75% of employers backed the levy, while only 10% voted against.[4]
Outside of our industry, there are signs that collective approaches to investing in training are gaining greater traction. The UK Government’s recent skills white paper sets out plans for Chambers of Commerce to lead employers, colleges and other providers to articulate a shared view of skills needs in their areas and enact Local Skills Improvement Plans. Whilst this is several steps short of a move to regional or more sector-based training levies, the rationale is built on a similar premise that recognises the benefits of a collective approach to skills.
Looking ahead, the ECITB’s collective skills fund will continue to support employers train and develop their workforce. As our recent strategy update sets out, the challenges of a post-Brexit labour market, coupled with the need to transition our energy systems for Net Zero, means that investment in skills over the coming years will be paramount. The levy will therefore remain a vital tool – both for correcting known market failure and ensuring there is sustained investment in the industry’s skills base in the future.
[1] The report draws on data in the 2019 Employer Skills survey published by the Department for Education https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/925744/Employer_Skills_Survey_2019_research_report.pdf
[2] For an excellent discussion on market failure in the context of skills, see Ewart Keep, ‘Market failure for Skills’, SSDA Catalyst, February 2006 https://www.voced.edu.au/content/ngv%3A11252
[3] https://www.ecitb.org.uk/wp-content/uploads/2021/02/Strategy-Update-2021-FINAL-030221.pdf
[4] The remaining 15% did not vote https://www.ecitb.org.uk/blog/2019/10/23/industry-backs-extra-investment-in-skills-training/