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The Apprenticeship Levy won't close the productivity gap

    The UK’s productivity problem, which the CPS has recently addressed, is an alarming one.

    The solution is going to have to be multifaceted, but apprenticeships will be a crucial element. The Government evidently thinks so, and this is reflected in its introduction this year of the Apprenticeship Levy.

    The policy was formulated and announced by the Cameron-Osborne administration but came into effect in April this year. It applies to companies with a payroll of over £3 million a year and requires that they pay 0.5% of their wage costs into a fund that must be used solely for apprenticeships.

    Certainly both this Government and its predecessor have the right intentions. Apprenticeships hold the key to a number of Britain’s problems.

    In a recent report, the National Audit Office exposed the fact that some university graduates are receiving lower pay than school leavers, yet are nevertheless still burdened with university-sized debt.

    One third of these graduates, according to the Institute for Fiscal Studies, will never pay their full debt back. This is therefore a problem for both the Government, which is losing money through an increasing non-repayment rate, and those students that are just able to pay a debt that they might not have needed to incur in the first place.

    Moreover, the UK on the whole is seeing a fall in wages coupled with a growing economy – a situation that marks it as unique amongst the world’s advanced economies.

    A rise in highly skilled apprenticeships would cause prospective university students who aren’t sure whether their course is right for them to reconsider. They would instead receive vocational skills that they could apply immediately, whilst plugging gaps in businesses, which would provide a boost to their salary, their firm’s productivity, and in turn the UK economy as a whole.

    Source: Financial Times

    But, despite the importance of high-level apprenticeships, the newly implemented Apprenticeship Levy is severely misinformed.

    The complicated nature of the scheme has confused a number of businesses, some of which have found themselves rejecting apprentices because they simply don’t know how the fund works. This has been blamed for the massive 59% drop in apprenticeship starts that took place in the three months after it was introduced.

    Furthermore, the Levy stipulates that firms have 24 months to access the funds, after which they will be confiscated by the Government. Not only has this led to accusations that it is little more than a benevolently clothed corporation tax, but it also spectacularly misses the point.

    Firms that are close to the 24-month limit will, rather than lose the money, choose to offload it into whatever they can, rather than taking the time to think where it would be best invested – namely, the longer-term, high-skill apprenticeships.

    It must be remembered that a well-trained apprentice, whose skills make him/her more productive and consequently a more valuable asset, benefits the firm who employs him/her more than it does any other party. It would therefore only make sense for government to not interfere with the process.

    It is high-level apprenticeships that will also push up wages. A report by the National Audit Office in 2016 showed that Level 3 apprenticeships (the most highly skilled) brought with them an average wage premium of 32%.

    Perhaps the most convincing argument against the Levy is that far before it was even announced the number of people starting Level 3 apprenticeships was on the rise, whilst the number starting the lower-skilled Level 2 was declining.

    Source: The Telegraph

    The current economic climate of the UK is one that positively encourages employers to invest in Level 3 internships. As the country edges closer to full employment, which it may have already reached, firms will not be able to plug the gap by hiring new workers: instead they will have to concentrate on investing in both capital and human resources, and the answer to the latter is apprenticeships.

    The market is already headed in the right direction; the addition of a complicated scheme that confuses businesses and may ultimately confiscate their money is questionably an incentive and certainly unnecessary.


    Daniel Burgon is a CPS Economic Research Intern. He holds a BA in History from Royal Holloway, University of London and an MA in Modern History from King’s College London.

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