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Training subsidies might not be enough

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By Elena Magrini, Researcher at Centre for Cities

In April 2017 the UK government introduced the Apprenticeship Levy, a financial incentive system to promote apprenticeships and boost productivity across the country. But is this enough to convince employers to take apprentices on board?

Under the new Apprenticeships Levy scheme, employers are guaranteed pretty much free training for their apprentices, up until a maximum cap, agreed according to the different needs of different standards. The system, together with the 3 million apprenticeships target, was set up to make the long-awaited turn towards technical education a reality.

Financial incentives – either in the form of wage incentives for apprenticeships or as subsidies for employers – are regarded as a powerful tool to increase apprenticeships take-up and completion, but, as the What Work Centre review has shown, the evidence around their impact is weak. Compared to general employment training, financial incentives for apprenticeships appear less likely to improve take up and completion. However, the lack of any systematic review of effectiveness of financial incentives for apprenticeships makes it hard to predict what will be the impact of the new Levy.

One thing we know though is that the levy is a small incentive, as the costs of an apprenticeship go well beyond the formal training. Having an additional apprentice means paying an additional wage, devoting resources to on-the-job training, and additional costs in terms of Human Resources (HR) and administration. All these costs summed up might be quite high, and might discourage employers from getting involved in apprenticeship provision, irrespective of the availability of subsidies for training.

The real cost of an apprenticeship varies depending on the business size and industry. Research by the Centre for Cities found that constraints on HR and administration are big barriers for Small and Medium-sized Enterprises (SMEs), as the marginal costs of recruiting and managing a new apprentice is higher for them. The cost of on-the-job training also varies, as some industries like retail and hospitality require more supervision than others. This might be quite costly, especially in the beginning. And of course these costs increase the higher the number of apprentices recruited, and the less work experience they have. Lastly, finding the appropriate apprenticeship standard might be more time consuming and costly in sectors not traditionally involved in apprenticeship provision.

If on one hand those extra-costs can be high, on the other, the lower minimum wage the government allows for apprentices might create an incentive for employers to recruit apprentices rather than standard employees. Currently, the minimum apprentice wage is at £3.50 compared to a national minimum wage of £5.60 for 18 to 20 years old workers that goes up to £7.50 for workers over 25. This makes apprentices considerably cheaper than other employees.

On top of the overall costing analysis, it is also important to stress that the levy is likely to create different incentives for different sizes of businesses, as small employers can benefit from training subsidies but are not required to pay the levy. On the other hand, employers with a payroll over £3 million are forced to pay the levy. The amount of the levy they pay is then made available to them on a digital account and they can only dispose of it in the form of off-the-job training for apprentices. This could induce large businesses to offer apprentices and/or rebrand current training scheme into apprenticeships to avoid wasting money.

It is too early to say whether the levy will have a positive effect on apprenticeships, but given its revolutionary nature, this is a unique opportunity to learn more about how to make apprenticeships work best. Furthermore, even if the apprenticeship system was successful in increasing the number of apprenticeship starts, that would not say anything about their quality, which, ultimately, is what matters the most.

Ensuring the system is flexible, and closely monitoring and evaluating its impact from the beginning, will prove paramount for its long-term success, not only in terms of numbers but also for quality.

This post originally appeared on the Centre for Cities blog.