Skills are a risky investment

This post was contributed by Dr Frederick Guy of Birkbeck’s Department of Management.

A shortage of skills is a source of perpetual anxiety within Britain’s political class. Here’s Tory backbencher Dominic Raab, a few months back in the Telegraph:

The next great problem is our chronic skills gap, which saw Britain plummet down the international rankings in maths, literacy and science. Labour’s arbitrary goal of getting 50 per cent of youngsters into university led to the proliferation of what one of its ministers called “Mickey Mouse” courses, which have benefited neither the students nor the economy. A 2005 Ofsted report found that almost half of those in their twenties said their education had not prepared them for their first job. Far from blaming Europe for this, Michael Gove is rightly learning from it – promoting innovative Swedish-style free schools and a more German emphasis on vocational training.

If we put aside the sniping at Labour and the currying of Gove’s favour, most of this could actually have been written by any of hundreds of politicians from any party at any time in the past thirty years: the schools aren’t delivering the goods, and we don’t do near as good a job at vocational training as the Germans. The skills gap feeds an endemic collective anxiety, the root of the county’s endless obsessive-compulsive re-engineering of its education system – because, surely, finding the right curriculum, the right way to teach, to test, or to select and motivate and cull teachers, is the key to setting this situation right. As for vocational education and apprenticeships, the on-going, multi-party failure in that area could lead one to believe that our Oxbridge-educated leaders can’t bring themselves to really care about something so far from their collective experience: true, perhaps, but like the anxiety about primary and secondary education it misses the point.

The lack of a risk insurance system 

The real problem, which no party in recent decades has even tried to face up to, is that investment in skills is risky. Britain does not have a good system for insuring against this risk. At the root of the skills crisis are the benefit system for those who lose their jobs; and the financing of further and higher education, especially for mature students.

Learning a skill is an investment, and a choice: it takes time that could have been used earning money, or in learning something different. A sensible young person, offered the opportunity to train in some specialist area, might frame the risk like this: “if this skill becomes obsolete when I am forty-five, or if the jobs in this industry get off-shored, who will support me and pay for retraining so that I can get another good job? Will I lose my house?” In many countries on the Continent – Denmark and the Netherlands are actually better examples of this than Germany – the answer is that the social welfare system and the education system will work together to see that you have a new opportunity, and that you don’t have to go through a personal financial crisis before you get to your new career.

The benefits debate

Britain’s ongoing domestic quarrel over the benefit system focuses on people who use it for the long term: are they scroungers, or do they deserve our compassion and support? Lost in this debate is the fact that the system, while too generous to some long-term claimants, is too mean with people who need serious midlife re-training in order to again be productive members of the workforce. The UK benefit system is unusual in allowing so many people to stay on benefits for so long. But for a benefit system to move people on to good jobs, it needs to provide for adequate training and education; and, if we want young people to take risks when they select their educational paths, the jobless benefit needs also to provide income insurance which is adequate to make that the investment in skill attractive despite the risk: during the re-training period it needs to be generous, and proportional (up to some cap) to the individual’s prior income.

The differences between Britain and the rest of Europe

Britain’s benefit system does not do that, and for that reason it leads people here to make different choices about what skills to obtain than do people of Germany, Scandinavia, Switzerland, and the Low Countries – the high-skill manufacturing and exporting engines of Europe. The skills employees have then affect such things as the investments companies make in innovation, a question Andrea Filippetti and I address in a study available here.

This difference between Britain and its continental neighbors is long standing: with respect both to welfare systems and skills, it has roots going back at least to the 1920s. In recent decades, however, the riskiness of investment in skill has been greatly amplified by the globalizing knowledge economy. More rapid technological change is making skills obsolete more quickly. Rapid technological change and shorter product life cycles have also increased the volatility in company financial results, and in the size of the typical company’s workforce; this undermines not only “jobs-for-life”, but also employers’ willingness to share the workers’ risk by providing training, and re-training, internally. Offshoring (made feasible by the combination of modern communications and transportation technologies, and trade liberalization) can shift whole industries from one country to another in very short periods, and that produces extreme uncertainty about the demand for the skills associated with those industries. The risk of offshoring can, in the absence of insurance, actually make offshoring inevitable: if risk depresses investment in skills an industry needs, this in itself can make the industry uncompetitive, and offshoring proceeds apace. As if all that were not enough, climate change is now making its own contribution to the volatility of demand for skill, a contribution which will grow as the needs of adaptation and mitigation will compel rapid change in the technologies we build, install, and use. As long as Britain’s social insurance system cannot compensate for the increased riskiness of investment in skill, the skills of Britain’s workforce can be expected to deteriorate in relative terms.

Skills investment from pre-school to university

Skills that are risky investments are found not only in vocational and technical training, but among university subjects. Wang et al find that students view STEM subjects (science, technology, engineering and mathematics) in that way. In response, students flood degrees in Business and Management – they are not Mickey Mouse, they are Low Risk. They are, for those who can’t go to Oxford, the modern and democratic equivalent of PPE or Classics, qualifying one to work in any industry, in a wide range of roles, up to a point. Often we pretend that this is a virtue, labeling low-risk skills as “transferable”. We do all need some transferable skills, but in education, as in entrepreneurship or in battle, some things can only be accomplished by taking risks.

Risk aversion shapes not only the choice of subjects to study, but also the way in which particular subjects are learned and taught. British employers complain that they can’t find skilled computer programmers, despite years of policy directed at improved IT training at all levels (and I do mean all: six years ago, when my son started nursery at the age of eleven months, that little institution was scrambling to deal with the one black mark in their Ofsted report – a lack of IT training. For better or worse, they fixed the problem.) Part of the problem, infamously, is that UK IT training has emphasized the use of shrink-wrapped software, the administration of Microsoft packages at the expense of the skills needed to program, and to customize collections of open-source software. This dismal offering is actually what many students want, because it economizes on investment in risky skills. In industries from banking to race cars to computer graphics, the skill shortage then shows.

Why don’t children in Britain learn enough math and science? It’s common to blame the schools, but however good the teaching a child could be expected not to concentrate on those subjects, if her literacy skills are sufficient to read the writing on the wall of the job market: knowledge of math and science may be transferable but, as we have just seen, many of the skill sets that benefit most from math and science are relatively risky investments. Universities teach a lot of overseas STEM students, in part because UK students don’t fill the places. Many of those foreign students stay on; through this avenue, and others, the UK relies on imported skills. The supply of imported skills, however, is insufficient to the task, and skills shortages remain.

All of these problems could be substantially alleviated by a generous, earnings-linked, time-limited jobless benefit, conditional on participation in an education or training program. But, even if we had that, who would pay for the training itself? Tuition fees and loans shift the risk inherent in educational choices from the state to the student, and that compounds all of the problems addressed here. The problem has been magnified by the Equivalent Learning Qualification (ELQ) rule, a foolish Treasury decision late in the last Labour government, which removed state funding (and subsidized loans) for students earning a qualification at or below a level they had already attained, with exceptions for certain subjects. There is now a good prospect that the ELQ rule will be reversed, which would be a small improvement, but still the fees remain.

One solution would be to include full fees for the duration of the approved programme, along with the jobless benefit: support the jobless as full time students. A drawback to that approach is that it punishes people who anticipate the need for re-tooling, rather than hanging on to a precarious job until they are sacked and thus eligible for benefit; it’s also not clear how it would apply to the self-employed, and if it can’t be it punishes entrepreneurship. The best way to avoid these perverse incentives would be simply to eliminate tuition fees or, short of that, to do so at least for students over some age threshold – 25, say.

Today’s educational choices are affected by expectations about what social insurance will give, and what tuition fees will take, at some unknown moment ten, twenty, or thirty years from today. The hard part of all this, for Britain, is that its majoritarian electoral system is given to extreme policy swings, making it hard to produce confidence in social policy decades hence. Short of a constitutional earthquake in favour of a more consensual system of government, it seems unlikely that the skills shortage can be solved unless there somehow emerges a cross-party understanding that a combination of good social insurance and affordable continuing education are needed if we want young people to take chances when investing in skills.

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