Understanding the drivers of productivity: Skills 

This blog is the first in our new series on the drivers of productivity. The drivers of productivity include skills, investment, innovation, enterprise and competition, and land. This blog focuses on skills, and complements the blogs on GVA and Productivity published in the summer 2024. 

This series adds to our Understanding core concepts in local economic growth series, and is aimed primarily at those working in local and central government. The series provides deep-dives into various components of economic growth, and some key concepts to consider when thinking about local economic growth. 

What are skills? 

Skills are the ability to do something well. In an economy, skills capture the “quality” of labour available while jobs measure the “quantity” of labour. 

Skills can be divided into hard and soft skills:  

• Hard or technical skills are specific abilities and knowledge needed for specialised tasks, often developed through education and training and can be objectively assessed and accredited.  

• Soft skills include communication, problem solving, teamwork and traits such as adaptability, flexibility, and positively.  

Skills can also be classified as transferable or non-transferable:  

• Transferable skills can be applied across different industries and roles – e.g., soft skills such as communication, relationship building or problem solving, and hard skills, like coding or data analysis. 

• Non-transferable skills are specific to a particular job role, company or industry.  For example, plastering skills or legal compliance are only used within their respective industries and do not have broader applicability. 

Why do we need to think about skills?  

Skills are an important driver of productivity. Productivity measures how efficiently inputs (resources, or factors of production) are converted into outputs (goods and services). Local economies grow faster when workers improve processes, adopt new technologies, or solve complex problems. Workers need skills to take advantage of investment in new technologies and innovation. For example, new machinery needs workers who know how it works, and a new process requires workers who know how to implement it. Organisation of resources can also improve productivity, which requires management and leadership skills. 

Workers with more skills can produce more (i.e. work more efficiently) than unskilled workers or produce higher value goods and services. For example, a skilled bricklayer should be able to construct a wall more quickly than an individual without these skills, and a skilled website designer can produce a higher quality website and can charge more for their services. 

Skills can also affect employment rates and numbers of businesses. When local people have the skills employers need, more residents can access those jobs. Higher skilled workers also tend to get better jobs with higher pay and better long-term prospects. Businesses choose to invest where there is workforce which has the skills they need. If the area lacks the right skills, they may struggle to attract businesses, and existing businesses may relocate or outsource jobs elsewhere. 

How can we improve skills? 

Private and public investment in education, skills training, and professional development leads to a higher skilled and productive workforce. 

Local authorities have some policy levers that can help:  

• Evidence-based local skills strategies can map out future industry needs and workforce capabilities, and provide the framework to coordinate efforts across education, economic development, and local businesses. 

• Working with colleges, schools, and training centres can ensure more courses align with local economic priorities and reduce skills shortages (for example, green jobs, digital, construction). It can also improve the quality of education and training in the local area, ensuring residents are better qualified and have better job opportunities both locally and elsewhere. 

• Apprenticeships programmes can promote and signpost to national schemes 

• Business programmes can incentivise internships and on-the-job training. 

• Partnerships with employers can identify local skill gaps and help shape training programs that match real job market needs. 

• Some Combined Authorities have control over devolved Adult Education Budgets which can be used to support life-long learning. 

Local authorities can also widen employers’ access to skills by supporting in-migration of high-skilled workers. Some policy levers that can help in-migration are:  

• Investing in transport infrastructure to allow for more in-commuting by workers 

• Investing in services, amenities and better housing to make the local area more attractive to live in. 

What to consider when thinking about skills? 

• Consider supply and demand – The labour market mediates between demand for skills (from employers) and supply of skills (by individuals). Where demand and supply are not equal, there will be a mismatch. Often when we think of skills, we only think about the supply—ie., the local workforce and the skills they have (or don’t have). It’s important to also understand the demand for skills—e.g., do businesses in the area have a lot of high-skilled or low-skilled jobs? Is there a large proportion of businesses in the area that require non-transferable skills?   

• General level of skills – skills usually build on each other. A good level of basic skills such as literacy, numerical literacy or digital skills are essential to build higher level skills. Often data will focus on one portion of the population, such as proportion with level 4+ skills. Consider the whole picture to get a sense of the skills pipeline. 

• Incentives for training and development – Because generally skills build on each other, we need people to access skills (e.g. soft skills like leadership or hard skills like data analytics) to progress and be more efficient. However, the immediate rewards for both the employees and the employer may be minimal (employers may worry that people will leave once they are trained, and employees may not have time or money to seek training outside of work). This means lots of people may not be offered training or development, which could lead to more opportunities later on. This can keep people stuck in low skilled jobs. 

• Out-migration, in-migration and in-commuting – People moving in or out, either for a daily commute or to relocate can affect the level of skills of a local area. What’s best for residents’ outcomes may be in tension with what’s best for business productivity. For example, attracting new residents (in-migration) and supporting in-commuting of non-residents can widen access to skills and boost productivity for businesses, but won’t address the employment opportunities for existing residents. On the other hand, some residents with high qualifications may find better opportunities elsewhere if there are not many high-skilled jobs in the area.  

• Skills stocks and flows – For skills supply, the skills currently held by the population are the ‘stocks’, whilst the skills being developed (through different types of educational and training provision) are the ‘flows’. The ‘flows’ can also include people moving in or out of the area. Thinking about skill stocks and flows can help understanding the performance of the current labour market and policy development. 

• Skills can be difficult to measure – Some skills can be difficult to measure (e.g. leadership), while others could be measured but the data can be difficult or costly to collect (e.g. coding skills). Often qualifications are used as a proxy and data available includes DfE data, and the Annual Population Survey. 

• Tension with other growth factors – focusing on increasing employment rate can sometimes lead to lower productivity, if those joining workforce have lower skills than current workers.  

Where can I learn more about skills? 

• Skills England – a government agency focused on skills. 

• ONS has a number of pages to access data around skills, such as their subnational indicators explorer which includes GCSEs, apprenticeship starts, level 3+ qualifications, and skills participation among others.    

• The Economics Observatory article on How can education and skills policy in England boost productivity? 

• Learning and Work Institute is an independent organisation that conducts research on policy topics such as apprenticeships, lifelong learning, and in-work progression.  

• Institute for employment studies conducts research and analysis on policy topics such as education, skill demand, and in-company learning.  

• The House of Lords Importance of skills: Economic and social benefits and Higher education: Contribution to the economy and levelling up 

The next blog in our drivers of productivity series will be on capital and investment. Sign up to our newsletter to get an update on our next blogs, briefings and events.