Good for business, but at whose cost?

Basic skills are expensive to provide to full-timers - and besides, employers don't see them as thei

Are skills good for business? The body representing employers' interests in the skills area, the Sector Skills Development Agency (SSDA), certainly thinks so. In its latest campaign to sell skills to British business, "In Skills we Trust" is "tattooed" on the upper arms of prominent business leaders. "Believe or be left behind" is the message they bring. And indeed, there is plenty of hard evidence that skills and high productivity go hand in hand.

In 2000, a Treasury survey of the UK's productivity performance and the reasons for its lag behind other industrialised countries identified skills as being key to increased productivity in recent years. Comparisons show that the British workforce is less qualified than the workforce in Germany and France. A third of the British workforce has not reached level 2 (5 GCSEs, grade A*-C or equivalent) compared to just over a fifth in France and just under a fifth in Germany. Both countries have consistently higher productivity levels (calculated as output per hour worked) than Britain. So does British business still need persuading of the case for skills? And if so, why?

A recent survey carried out for the European Commission found that British businesses do not appear to be investing markedly less in training their employees than businesses in other European countries. But a more worrying finding is the result of the government's own survey of the skills needs of British businesses. The survey, which provides much of the evidence for the government's newly published skills strategy white paper, showed that nearly a quarter of British businesses suffer from skills gaps - that is, gaps between the capabilities that their employees possess and the capabilities that the business needs if it is to survive and prosper. This indicates that, even if British business investment in employees' skills is close to the average for Europe, it is still insufficient to ensure that they have the skills needed to face an increasingly competitive global environment.

Whose job is it to ensure that the "skills gap" is reduced and eventually eliminated? Why are businesses not tackling the gap? The answer from the Confederation of British Industry is that basic skills - which constitute a large part of the "skills gap" - are the responsibility of schools and colleges and not of business. The CBI's message is in line with standard economic theory that general, transferable skills such as literacy and numeracy should not be financed by employers who cannot capture the return to that investment. But the third of all adult workers who do not have the recognised standard of literacy and numeracy are no longer at school. If employers are unwilling to subsidise their employees' needs, then the task of finance must fall upon individuals themselves or, failing that, upon government. While there has always been a steady stream of individuals gaining skills and qualifications through study in their own time, self-improvement has never been a sufficiently powerful force to lead to the wholesale improvement in standards needed.

In 2002, the Chancellor announced that government funding would be made available to try to jump-start investment by business and individuals . The high cost of providing such support helps us to understand why employers and employees were reluctant to meet that cost. The Employer Training Pilots aim to spend £290m by the autumn of this year and hope to reach 80,000 employees in 15,000 businesses. The pilots are designed to evaluate whether employers will be encouraged to train employees if they are subsidised for the cost of giving them paid time off work to study, and whether employees are more likely to train if they can take courses during working hours. The proposed spending amounts to £3,600 for each employee - the cost to an employer of releasing a member of staff to improve basic skills and the cost to an employee who has to forgo earnings in order to participate in such courses. These figures help to explain the reluctance of employers and employees to meet the costs when the benefits appeared uncertain.

The high cost of training adults already in employment, many of whom have dependent families, underlines the importance of taking full advantage of the period of initial education and training that all young people are entitled to up to the age of 19. The improvement in workforce quality in Britain - from less than half with level 2 qualifications or higher in 1994 to two-thirds with those levels in 2003 - has resulted almost exclusively from the improved qualification levels of young people as they enter the workforce. But that source of improvement, which resulted from the growth spurt in post-16 participation in full-time education and training between 1988 and 1993, has now disappeared. Participation has stagnated and Britain figures near the bottom of OECD countries on that measure.

The general, transferable skills that are increasingly important to business are costly to provide to full-time employees. If government has to compensate for what are, essentially, the responsibilities of schools and post-16 provision, the cost will be huge. It is with those costs in mind that we need to appreciate the implications of what happens in schools and colleges for workforce quality. The government's latest education white paper explicitly makes this link and recognises the need to prioritise efforts to ensure that all young people achieve recognised literacy and numeracy levels while still in school. The half of British teenagers who do not enrol on A-level courses are promised a set of coherent alternative pathways with planned progression designed to raise overall achievement levels and provide relevant occupational skills.

If these goals are to be achieved, British businesses will need to be involved in all sorts of ways, providing guidance on learning objectives and work experience placements. But this investment of time and energy will directly benefit business in the form of more able employees capable of further learning and development. If these goals can be achieved, it will then be up to British employers to invest, jointly with employees, in the specialised skills needed to compete at world-class levels.

Hilary Steedman is a senior research fellow at the Centre for Economic Performance, London School of Economics