Business, Energy and Industrial Strategy Committee
Oral evidence: Post-pandemic economic growth: UK labour markets, HC 306
Tuesday 19 July 2022
Ordered by the House of Commons to be published on 19 July 2022.
Members present: Darren Jones (Chair); Alan Brown; Paul Howell; Charlotte Nichols; Mark Pawsey.
Questions 1 - 28
Witnesses
I: Jane Gratton, Head of People Policy, British Chambers of Commerce; Stephen Phipson CBE, Chief Executive Officer, Make UK; Claire Tunley, Chief Executive, Financial Services Skills Commission; Matthew Percival, Director for Skills and Inclusion, Confederation of British Industry (CBI).
Witnesses: Jane Gratton, Stephen Phipson CBE, Claire Tunley and Matthew Percival.
Q1 Chair: Welcome to this morning’s session of the Business, Energy and Industrial Strategy Committee for our first hearing on UK labour markets, as part of our super-inquiry on economic growth in the UK. We have had some jobs figures out this morning already. I understand that there are up to 1.3 million job vacancies across the country today. How is that affecting the businesses and sectors that you represent?
Stephen Phipson: In manufacturing, we are looking at, as of last month’s statistics, around 95,000 skilled job vacancies in the sector. That is historically high. To give you a sense of how we track that, pre-pandemic and the average for the previous 10 years is about 1.9 vacancies for every 100 manufacturing jobs in the country. That is the normal average. We are currently running at about four vacancies for every 100 jobs. That compares with about 3.6 for every 100 in the hospitality sector.[1] It gives you a sense that manufacturing is disproportionately affected at the moment.
The effect of that is that many companies are talking about drag on growth at the moment. They are coping with a lot of other issues around the high inflation costs and energy costs, and everything else that we are familiar with, which we are not discussing in great detail here. The labour shortage, as opposed to what it was before, which was a pure skills shortage, is now cited most often as the reason why it is suppressed in terms of output. We cannot produce enough because we do not have the skilled staff. It is starting to affect people’s investment plans. “Can we build the factory extension here? Can we get the labour to staff it up?”—those are the questions.
I have a point on where those shortages are. They are predominantly vocational skills. Constantly, we are being bombarded with CNC operators or toolmakers. It is that vocational skillset that is short in the country, in terms of manufacturing. As I said, the result of that is a drag on growth, effectively, for the sector.
Chair: Claire Tunley from the Financial Services Skills Commission, are you finding similar vacancies impacting businesses in the services sector?
Claire Tunley: Good morning. Yes, it is a similar picture for financial services—skills and labour shortages creating a similar problem. In the sector, we have around 51,000 vacancies that are unfilled currently. That is around one in 20 jobs, so 5% of jobs are unfilled, creating a real challenge for the sector.
The jobs that are mostly affected for financial services are in highly skilled areas. It is a very highly skilled sector. The gap in those jobs has been growing at twice the rate of other roles in the sector over the last few years. Similarly, jobs related to data and digital roles, software engineering, data analytics, cyber-security and so on, are very much in high demand across the entire sector.
Businesses are investing a lot in training to try to fill the gap—£1.3 billion in 2019, for example—but this is having impact. The gap is affecting transformation. I am hearing from our members that they are not able to deliver some of the digital transformation, transformation services and systems and processes that they would like to in order to keep competitive globally and nationally without the skills they need. It is a real problem.
Chair: Matthew Percival from the CBI, we have heard from manufacturing and financial services. Are you seeing this across the businesses you represent as well?
Matthew Percival: Yes. It is a consistent picture across the economy as a whole, rather than confined to certain sectors or subsectors. I would agree with the picture that Stephen lays out around there having been pre-existing skills shortages that businesses were needing to tackle. Then it is the addition of labour shortages on top of that that is making everything harder to deal with.
In terms of some statistics, particularly around investment, in our quarterly surveys 34% of manufacturers, 35% of companies in consumer services and 24% in business and professional services are saying that the labour shortages are preventing them from being able to make business investment for a range of reasons.
There is something else it is worth bearing in mind, because it is slightly counterintuitive. You might think that, if labour shortages are particularly acute, it only increases the case for businesses to be investing in the skills of their workforce to try to address some of their shortages, but there are actually ways in which labour shortages make it even harder to invest in training. The shortage of candidates for the training programmes offered was the No. 1 factor cited by our members in a survey we recently did around the barriers to increasing investment in training: 41% said it was shortages; 26% said the apprenticeship levy.
Two other factors that are impacted by shortages also come up in this list in other ways, not just the shortage of candidates. If you are releasing somebody from their job to go and do their training while, at the same time, being short of delivering for your existing customers, it is harder to find the time to let people go and do training, as well as the impact on investment affecting money, which came in as the fourth factor.
The way we are seeing labour shortages and skills investment interact is that it is becoming harder to free up the time and the money to deliver the training you need. We are stuck in a Catch-22 of trying to service the existing customers and clients, and not let them down, while building the skills for the future.
Chair: Jane Gratton, on the screen, from the British Chambers of Commerce, you represent a lot of local and regional businesses across the country through your national network. Is this felt in local SMEs and regional businesses as well?
Jane Gratton: Good morning. It is very much so. We have a 97% SME membership base and our latest data shows that two-thirds of those SMEs are experiencing skills and labour shortages. It is across all our regions and sectors. Manufacturing is most affected, as we have heard earlier, but also construction, retail and wholesale.
The main impacts of that are on the ability to maintain profitable operations at the moment. They have seen some real disruption across normal operations. In our latest survey, 78% have reported reduced output, profitability and growth, and they are actually turning down work now.
Skills and labour shortages are having a massive impact, not only on that, but on the morale and wellbeing of their staff members. This is leading to more attrition, as people take on extra work and feel that they also need to leave. There is also some impact on the quality of products and services where they have more junior staff having to take on work. Some firms are telling us they are struggling to meet legal requirements because of the staff shortages. Critically it is fuelling wage inflation. SMEs are really struggling to cope and compete.
Q2 Chair: I am struggling to understand why this is a particular problem now. We are going to come on to this in our second panel later. Suddenly everyone has a labour shortage. Have people retired, died or left? Why do we not have enough people to do all the jobs? Are there any reflections?
Stephen Phipson: There are a couple of points to it. It is a complicated picture. We have always had skills shortages in our sector, as we said, on vocational skills in particular. If you look at the apprentice start data, that is probably quite interesting. We have reached the point where, if I can give you some data, pre-levy—so back to 2016‑17—the country was starting around 75,000 apprenticeships a year in the vocational skills sector. If we looked at the 2018-19 number, post the levy being introduced, that fell to 59,000 starts. In 2021, post pandemic, and continuing on with the levy, we are down to 39,000 starts in the apprentice system.
There has been a lot of push, with us working with DFE, BEIS and others, about how we make that apprentice levy system easier. If you look at the latest data, there was around £2 billion of unspent levy funds in a situation where we are desperate for vocational skills. We need to try to get that working. There is a whole variety of reasons why that particular issue needs addressing.
It is fair to say that some of these skills were coming in from the EU. It is very difficult, with the current shortage occupation list, to do that. Many factories at the moment are resorting to trying to go through the visa system. They are paying £5,000 to try to get toolmakers into the country in a long, protracted visa system. It is proving extremely difficult for them to do that. There is an argument we may come back to about whether the MAC should be tasked to help revise the shortage occupation list for a short-term solution to some of that.
The third point I would point to is that the average age in manufacturing is 52 in this country. Through the latest data we have just seen, the proportion of inactive people has grown substantially post the pandemic. A lot of those are in their 50s, so we have lost a lot of that skilled workforce. We think that there is a combination of factors that is causing the shortage now.
Q3 Chair: Is there anything different in particular from other witnesses, or do you all just generally agree with that?
Claire Tunley: I would generally agree with what was mentioned there. To re-emphasise the point about the skills challenge being here pre‑pandemic and pre-Brexit, this was an acute issue for financial services. It was why the commission was set up. A study was commissioned by the Treasury and then we were set up off the back of that publication, just before the pandemic started.
It has now been exacerbated. There is some previous work we have done with Andy Haldane through the levelling-up work that he has been leading. The size of the labour market has shifted in the last two years. It has shrunk. We are not fully back up to the economic activity that we were at previously. I know you have someone from the ONS coming later who can probably talk more about that. We are still not quite at that level. People, for whatever reason, have decided to not re-enter work or to leave the country, so we are struggling with that labour supply. There may be people who are not employed and looking for work, but the mismatch of skills to the vacancies employees have is the problem there, while we are also dealing with this systemic skills challenge that was here pre-pandemic.
Q4 Chair: Mr Percival, the CBI said this morning, I think—and you agree with Mr Phipson—that you want to see the scheme expanded for migrant labour to come into the UK to help while we have shortages. The Government have previously said that it is your job to train up, automate and invest in technology, as opposed to just importing labour. How do you respond to the Government on that?
Matthew Percival: The word we have not mentioned yet is productivity. That is the longer-term challenge. It is not just about covid; it is not just about Brexit. It was a challenge in the UK economy before then. Largely, we were delivering growth through growing the size of the labour market. That size of the labour market was increasing predominantly for two reasons: immigration and the success in greater longevity and improved health for older workers, meaning people did not have to involuntarily retire because of ill health as often and they could continue working for longer.
If they were drivers of growth in the size of the labour market before then, we were needing to try to shift towards growth through improving productivity, rather than just improving the number of people and the number of hours they are working. We do not really have that environment for business investment at the moment to be driving that forwards. A big issue for us is needing to create the climate for investment in skills and technology.
We are not going to solve this problem just by finding more people. There is a lot of coverage around, say, the missing million people in the labour market. About half of that is people who have become inactive, for a range of reasons. The other half of that is the stopping of the growth in the size of the labour market that we were seeing pre-pandemic.
In terms of the shortage occupations list and the immigration system, we have not yet seen the completion of the delivery of the post-Brexit immigration system. It was always designed to have a shortage occupations list in it. The last recommendations made by the Migration Advisory Committee are now a couple of years ago, before the pandemic. For us, the priority is to commission the Migration Advisory Committee immediately to begin its research, so that the evidence is available as quickly as possible for Government to make an informed decision about where those shortages are. That does not require a change of Government policy and it is finishing the delivery of the new immigration system.
Q5 Chair: As a final question from me before I go to colleagues, I will start with you, Ms Gratton, on pay. We have seen from figures this morning that, predominantly in the private sector, pay has been going up quite a lot, not enough to align with inflation—there is still a real-terms cut in pay of around 2.8%, according to figures this morning—but up, pound for pound. How is that pressure affecting the businesses that you represent? Are they all having to put their pay up to keep the people they have?
Jane Gratton: Our latest data shows a mean average of between 6% and 7% across all business sizes and sectors. Yes, firms are experiencing pressure at starting salaries, with candidates requesting higher salaries on starting. Also, people struggling with the cost of living are asking for higher pay rates when they are negotiating with their employer. Businesses are experiencing a huge pressure to pay more.
As I said earlier, SMEs are really struggling with this. They are carrying a lot of debt from the pandemic, they have less financial resource and they are struggling under the weight of other business costs, energy costs and looking at the national insurance contribution increase on the horizon. They are really worried about how they are going to compete with larger firms that can offer introductory bonuses and things. Lots of firms are saying that they are losing candidates from offering the job at interview and before they actually start they have moved on to another employer for a higher pay.
Chair: Presumably, you are seeing the same here, Mr Phipson. You are nodding.
Stephen Phipson: We are. We are also seeing slightly different trends. The first two quarters, we saw the average at about 3.2% in manufacturing. We are now seeing a second bite of the cherry this year, so a lot of people entering into negotiations for a second round of reviews September time. That is very commonplace, particularly around the larger manufacturers, again around the 3%. I would concur with the 6%. It looks like a cumulative around about that number.
Particularly in the second half of the year, there is quite a lot of action going on around a second pay review at the moment. It looks like settling around about that level, which of course is in an environment where people are suffering 30% material cost increases and incredible energy cost increases. We saw many manufactures able to pass them along in the first quarter of this year and margins were covered in the manufacturing sector. It is getting increasingly difficult to pass those costs along, so we are seeing a lot of people trying to absorb some of those costs now, which is causing quite a degree of difficulty.
To go back to the point on automation, this is important for the Committee. We see a lot of automation schemes going on now, around particularly certain sectors. Food and drink manufacturing is a good example where the labour shortage is being addressed by automation. However, one interesting fact is that, when we see factories automating or bringing in robotics, for example, we often see them increase their outputs and productivity, but also increase their employment. These are not where we are replacing labour.
The challenge for these companies is the type of replacement labour they need—things like digital analysts, digital engineers and technicians who can repair and maintain robots in what was a simple manufacturing operation. It is a different skillset and those skills are of course just as difficult to find as the traditional vocational ones. It is not an automatic answer to the labour and skills shortage.
Chair: Do you have any further comments on pay, Ms Tunley?
Claire Tunley: It is a similar picture to the other colleagues who have already said something. We are a small business ourselves at the commission. We have only six people and it is incredibly difficult to recruit at the moment. To add to what others have said, from our members I am hearing the concern about what this will mean in terms of increased cost for a wage bill. What does that mean in terms of reduced funds for training or other investment and so on? It is a bit unclear at the moment, but certainly all our members are concerned about it.
Matthew Percival: We have seen a shift in the mood from the beginning of the year through to the summer. A little like Stephen was saying, at the start of the year more people were confident they would be able to say, “Let us try to offer the best pay rises that we can, more than we would have done otherwise, and then pass those costs on through prices to our customers”.
Now we are seeing a lot more businesses saying, “Actually, we are worried that, if we pass those costs on, our customers will not be able to afford them, whether they are consumers or other businesses”. Therefore it begins to put the size of the business at risk if you increase and pass those prices on too much. It is shifting from being thought about as just a labour supply problem to a potential future demand problem, knowing that you already have households in recession and it is business investment that is keeping the UK economy in positive territory.
Q6 Alan Brown: Stephen, you mentioned that vocational skills are where we have a real shortage. Can you define what roles fall within vocational skills and why that is such?
Stephen Phipson: It is the traditional skills that you would train on in an apprentice programme, one below going to a degree level. It is toolmakers, CNC operators and metalworking type skills. It is that sort of area. As it has been pointed out to me by many of the advanced manufacturing chief executives, if you have automated your plant or you have 1,000 welding robots sitting in a car plant, you need technicians who can fix those robots. You need to have toolmakers who can design and produce the tools. It is that sort of skill level.
We seem to be very strong on graduate engineers. That is great. We are very good with that. There is a lot of that that has been coming through the system, although there is an argument about moving that more towards digital skills than we have done in the past, but, nevertheless, we are good there. We are desperately short of these traditional toolmaking and machine operation type skills, which are really critical to advanced manufacturing.
Q7 Alan Brown: Anecdotally, when I hear about apprenticeships advertised, I know that the number of applicants is way in excess of the number of apprenticeships that are advertised. Is it therefore that, although the number of applicants seems to be there, they do not have the right skillset deemed to be suitable for embarking on an apprenticeship?
Stephen Phipson: It is a combination of things. It is quite complicated. Generally speaking, it depends where you are in the country. It is about whether your local FE provision is there to be able to offer an engineering apprenticeship. Very often, it is much easier for an FE institute to offer a different sort of apprenticeship that does not require investing in the capital you need for an engineering apprenticeship, for example. There is not the flexibility in the levy scheme to allow you to invest in capital equipment if you are an FE college.
People find that it depends on where you are in the country as to whether you can actually place those apprentices into apprenticeship programmes. People find that complicated. They find the application process complicated. There is a definite need—I think that it is recognised, to be fair, by Departments—to reform where we are with the labour system to make it more accessible to many of the smaller companies.
Q8 Alan Brown: Jane, you made some comments about profitability being at risk now because they do not have the labour to take on the work that is required. How many companies or sectors are at that kind of cliff edge, where they are at risk of going under, effectively, if they cannot get enough people working for them?
Jane Gratton: I would think that there is a very large number of businesses at the moment, as I said earlier, that are struggling to maintain normal operations. The labour costs on top of all the other costs are fuelling into their prices. They are worried about price inflation and competitiveness. It is a combination of all the other cost pressures that they are experiencing at the moment, aggravated by a shortage of labour, which is impacting on their ability to compete profitably.
We know that over 75% of businesses are looking at reducing their investment plans now. They are predicting less profitability, no increase in investment and lower growth over the next 12 months. There are some very serious warning signs out there now.
Q9 Alan Brown: Has any analysis been done of what the growth lost means in terms of tax take? You have a reduced workforce. Clearly there are fewer people paying tax to the Government as well. Has any sort of analysis been done on what the financial impact is to the wider economy?
Jane Gratton: I do not have any data on that.
Q10 Alan Brown: Has anybody else looked at that at all? That brings me to a broad-brush question. Do you get the impression that Government really understand the scale of the problem? It is limiting growth. As I say, it limits tax take for the Government as well as preventing growth of different sectors. Stephen, do you get the impression that Government understand that? I will throw in as well that the slogan for a while has been that we want to create a high-wage, high-skilled economy. Is that possible and what needs to be done? Do Government understand what is needed to get there?
Stephen Phipson: My sense, in talking to all the Departments involved in this, is that many of them get the problem. They understand the issues. They have not yet registered the urgency of it properly—the fact that this is immediate and we need to address it now. The effect is on growth and investment in the country, and that is something that is going to happen in future years.
It is the message about the urgency of it that we struggle with. This is a constant conversation, almost on a daily basis, with different Departments. They understand the thing and it is about thinking through what the solutions are and completely understanding the process. We need to move very much more quickly than we are at the moment. There is a real sense of urgency in business about this right now.
Claire Tunley: I would agree. There is no misunderstanding of the problem, but how we need to move, and how quickly, is where the conversation needs to be. Also, there are potentially quick fixes, but a lot of this is systemic around the skills that the whole economy needs.
Take the point about the high-wage, high-skilled economy. That is absolutely the case for financial services. Over 60% of our jobs in financial services are highly skilled—degree level and above—and that is only going to continue to grow, similar to other professional services perhaps. We need to be producing individuals with the skills that are in demand. They are very much in the IT and the digital space, whether that is digital automation, data analytics or software engineering—wherever that might be.
The other point is that we need to focus on reskilling the existing workforce, because jobs are changing so quickly. I agree with Stephen’s point. In financial services, we are looking at automation and it is a net replacer of jobs: there is going to be no reduction of the number of jobs in the sector; it is that the nature of the jobs will change. If we look forward, 80% of people working in financial services in 2030 are already working in financial services. They have left full-time education, so it is up to the employers to work in partnership with Government to reskill individuals and work with the individuals themselves to change these skills for the jobs required.
It is a huge effort, and that is why the commission has been created. We only focus on reskilling a domestic workforce. We look at attraction and retention, making sure the skills are in the supply of talent, but we have a million people working and we need to focus on reskilling those 1 million people. To add on, this is a longer-term challenge as well as the immediate labour market issue.
Stephen Phipson: If I could come back on your general economic point, as a broad brush, if we look at the 95,000 vacancies in manufacturing and the average output per worker in the manufacturing sector, that equates to, at current numbers, about £7 billion of lost output, or about £21 million a day of lost output on GDP. That is the current scale of it.
Alan Brown: That is eye opening.
Matthew Percival: I will add to the broader question first. In conversations I was having with businesses pre-covid, when they knew that the immigration system was changing, it was always expected to bring a degree of greater tightness into the labour market. There was a higher path from where we were pre-covid and pre-Brexit, where some degree of tightness within the labour market, combined with the right incentives in place for businesses to invest in technology and skills, could be a way to try to fire the engines of productivity up again and get us growing through growth in the output per worker, rather than just the number of workers, as I said earlier.
We have a labour market that is tight to the extent, at the moment, that it is tipping businesses into crisis management mode, rather than having that confidence to get out there and invest. That is certainly a big challenge.
On Claire’s point about skills, the adult reskilling bit is a really serious gap in our skills policy at the moment. We have a skills policy system that is still far too based around giving people skills before they enter the labour market and crossing our fingers and hoping that they will still be relevant by the time they retire. There are some steps that are a positive direction from Government on that—things like the lifelong loan entitlement that is about trying to boost this. There is going to be an awful lot more adult investment in training required than will be funded through that mechanism. That is where things like the apprenticeship levy become a real barrier.
To give an example that I think is quite well understood, we are in the middle of a transition from combustion engines to electric vehicles. All the workers that work on those cars at the moment do not need to repeat their entire apprenticeship. They just need to learn the new module around battery technology. We cannot fund that through the existing levies around giving people skills. We need to be able to find a way to invest in young people and adults, to invest in whole qualifications and more modular top-up learning, and to invest in apprenticeships and various other forms that might be more appropriate to others.
Q11 Alan Brown: Some colleagues will come back on the levy. Claire, in an international context, how much is the labour shortage peculiar to the UK, or is it across the board?
Claire Tunley: I am not sure that I have an answer on that one.
Stephen Phipson: We look across Europe with our sister organisations across Europe. It is fair to say that there are labour shortages everywhere. It is the mix of shortage skills that is interesting. In Europe, we do not see the level of vocational skills shortages that we have here. There is a difference there. Their programmes are kicking out a lot of toolmakers and CNC operators, and we are not doing that. Generally, there is a labour shortage everywhere. It is the mix of it that is the important thing.
Claire Tunley: Can I add the point on economic output as well? I have found my figure now. There was some research we did last year with the financial services sector and professional services. We projected that, if we can tackle the skills gap, you will have an extra £38 billion of economic activity per year. The sector would be 12% larger by 2038. It is a big prize if we can fix this.
Matthew Percival: I would not say that we have original data beyond official statistics on international comparisons.
Q12 Paul Howell: You and Mr Brown just picked up exactly where I was going to go, in terms of trying to get the international comparators. Sometimes we talk too much about ourselves and we need to make sure that we get a consideration of where that is going. I am listening to what you are saying. Pre-covid, it was all about, or more about, skills. Now it is about quantity and skills. Is that fair to say? Do you think that, in some ways, industry has dug the hole for itself by not having enough skills and training in the pipeline historically? We have not been good enough at our training schemes and efforts.
Stephen Phipson: There is a combination of things, to be honest with you. There was a fairly easy route for lots of smaller companies to get a skilled toolmaker in from Bulgaria. That was quite an easy route to take, rather than investing in the training itself. There is a bit of that in there. The larger companies have continued to invest very heavily in it, but it is just not the volume that you need overall. There is no one answer to that. It is quite a complicated picture in many respects, but there is no doubt that business has its role to play in this, absolutely.
Q13 Paul Howell: I am going on to a slightly different subject. Has there been any quantification of the numbers of people who have decided through covid that actually—change of life—“I am going to exit the market”? It seems that there have been quite a number of people at the older end of the age spectrum. Has that been quantified?
Stephen Phipson: Yes, that is right. We have about 2.5 million people in the manufacturing sector. About 200,000 of those have become inactive, whatever “inactive” means, so there is a whole load of debate around that number, whether they have taken early retirement or are just not coming back into the workplace for whatever reason. They tend to be in their 50s. We know that, with an average age of 52, that disproportionately affects that skillset that we are looking at. That is about as far as the data that we have in the sector goes.
Claire Tunley: We only have the national statistics data, so we would be relying on Government data to show that. Going back to your previous question, for financial services there has been a shift, pre-pandemic, on this. This was the work that predated the commission’s creation. The Treasury, back in 2018, asked, “What is the skills challenge for financial services remaining competitive globally, leading and so on?” That work, published in January 2020, found that there is a skills crisis, which some people called existential, and every role in the sector will be changing. The investment in training, upskilling and reskilling is not keeping pace with the change.
Since then, the industry is responding. We have been created solely to try to tackle that across the sector. Firms are investing a lot in training. There is further to go, but it certainly needs to be done hand in hand with Government policy. We are very much industry-driven, industry-led, solely focused on skills. There is a recognition that there is more to do. Firms perhaps were always able to get the skills they needed and, for the last five years or so, have not been able to do that. They are thinking on this. This is a priority. We know that chief executives in the sector are saying that skills are one of their top three priorities.
Matthew Percival: We are in a situation where we need to pull every lever to be able to tackle the labour shortages. That is around investing in technology, investing in skills and doing everything we can to get people who have become inactive back into the labour market, which is the area that you are focusing on here.
There is a change in the people who have recently become inactive. A number of them are off long-term sick, which you could assume is related, for example, to waiting for operations and dealing with NHS backlogs, or it is impacts of things like long covid. The other change is people choosing to retire early, although there are early signs of that unwinding somewhat with higher inflation maybe leading to people thinking again about whether they have the financial security they want to be able to retire early.
You can look at the stock of people who say that they are inactive and would like to get a job as a measure of where the potential opportunities are. There are lots of people inactive who would have wanted a job pre‑covid. There, the big factors become caring responsibilities and health. There is an opportunity for an on-ramp and an off-ramp, if you like, on health.
A lot of employers are looking at being more proactive around supporting employee health and wellbeing, given their experiences and learnings through covid. That can help prevent more people from going off long-term sick in the future. They are thinking about what the steps are to get people the operations they need and the occupational health support to be able to get back into work, and about things like childcare support for activating that pool of people who say that they would work but it is a caring responsibility that stops them from doing so.
Q14 Paul Howell: You have just opened up a slightly different angle of thought there, and I would like to pursue that a little bit, in terms of employers and which part of the labour market they go to. I was in Jobcentre Plus the other week and the staff there were finding that there were people who did not necessarily have the qualifications, but they had experience. Employers are much more willing now to take those sorts of people in and give them the training themselves. They could actually move through and you were not getting this, “You must have a degree” sort of approach—the tick-box exercise before you even get the chance. I have seen those sorts of initiatives coming through, maybe into the SMEs as well.
Also, as another thought on the same theme, if you like, I went to visit a small company in my constituency in Sedgefield. It basically works in getting people who are deaf into business, into organisations, and tries to educate the businesses in how to work best with deaf people and how deaf people can work in those environments. Are you finding that businesses are fishing in different markets now to try to find people that they might have not really explored as much with? Maybe I will start with the SMEs, because I have not spoken to Jane much.
Jane Gratton: Yes, very much so. We are supporting businesses to fish in broader talent pools, so to speak—to try to adapt their recruitment practices and introduce flexible working policies—in order to make it easier for people who have traditionally found it more difficult to access work to get into the employment market.
For example, many firms now are looking at ex-service personnel, ex‑offenders and people with disabilities, and doing everything they can to hold on to people in the workplace who might become ill—looking at occupational health programmes and the like. Businesses are doing everything they can to hold on to the skills they have, because they are precious, but they are also looking at ways of bringing in other people from different groups as well. Older workers have a lot of skills and experience. We would really like to see programmes to encourage those who have left the labour market to come back in and support SMEs to do that.
Can I go back to your previous point about SMEs investing in skills? We know from our data that investment in skills has declined year on year for many years in SMEs. We had a commission to look into why that was and how businesses could resolve their own skills problems. We found that a very large number of businesses were not planning for skills. They did not have the HR or learning and development resources to help them understand what skills they had, or the change management skills to help them bring people in the business to support the innovation and technology that they would need to become productive.
Because firms were struggling to find the skills they needed locally, many of them have become completely disengaged from the system. Our commission had a number of recommendations. The skills system needs to be much more agile and responsive. It can still be very clunky. While businesses really value full qualifications, they are not always the right solution. As has been said earlier, a much more modular, accredited approach helps people coming into work to get into work quickly and upskill quickly.
We also found that employers were struggling to engage staff in learning and development. It was because they had a job and other commitments outside of work. Much more agile training would help employers get people back on the learning ladder, with short bits of training that they could build into a qualification over time.
The other thing that we found is that this skills and training mismatch at the local level needed a stronger business voice. We were delighted when LSIPs were introduced. Chambers of commerce ran the eight LSIP trailblazers. We managed to engage with over 10,000 businesses during those few months and they were really keen to get involved, and to change and help shape that local skills system. We also found that they needed that practical, impartial support to help them identify and articulate what they needed.
Q15 Paul Howell: I want to come back to something that you raised earlier, Matthew, in terms of the transitional work and moving people into almost the green energy economy. I would like to tease out from all of you if there are any particular skillsets and things that we need to make sure are working, in terms of the transition. Up in my part of the world, in the north-east, there are some tremendous job opportunities going in the transition to things like hydrogen and the green economy, but you need to have the skills there. Are there any particular initiatives, gaps or whatever you want to comment on that need to be looked at and actioned in that space? I will start with you, Matthew. I see a lot of nodding from Stephen, but I know it is your space.
Matthew Percival: There is a mix of certainty in businesses about what green skills means for them. Some are closer to the frontline of those big transitions. I mentioned the transition to electric vehicles already, but it can be decarbonising power networks as well. For those sorts of transitions, those organisations are more confident about what sorts of skills they will need and how, through more modular learning, they can convert their existing workforce of people on a natural gas network to think about working on a hydrogen network, for example.
The thing that comes through from those big transitions a lot is that sometimes green skills are thought about as skills for using new technologies being created that are about decarbonisation. Sometimes there is that sort of narrow view, whereas we are keen on taking the broader view of what skills we need to deliver the net zero transition, rather than just green technologies skills. For a lot of those transitions, the businesses we speak to are really worried about things like complex project management skills, because those transitions are big, complex projects. If we can encourage thinking about the skills for those transitions, rather than just skills for green technologies, that would be hugely positive for delivering those big transitions.
On the other side of things, a lot of businesses are aware that they will have their own transitions to make, but, because they are not on the frontline of those big obvious transitions, they are aware of green skills without really knowing what it means for them. A lot of businesses are conscious of it without really knowing what it will mean for them. It is just on their future risk radar.
Paul Howell: They are slightly further down the supply chain. It has not quite got to them.
Matthew Percival: Yes.
Stephen Phipson: I was up in Teesside at the opening of the monopile factory, the first ground-breaking of that fantastic investment up in Teesside. I have had the opportunity of seeing carbon capture, use and storage plants being set up and what we are doing in the hydrogen generation area.
There are two points to make there. Many of them still need those traditional, normal skills. The monopile plant needs CNC operators and toolmakers. Guess what? For them, that is going to be a new training programme and it is a green production site. A lot of these are advanced engineering type jobs. Of course, the UK is one of the most advanced manufacturing countries in the world. They come here to invest here, and, when they invest, they are looking at that skills agenda.
There are some specialist skills, which I think Matthew mentioned. EV engineers is a good one. There are two others that are generally new skills that many factories need right now. One is digital. We are going through a big digital transition. We are seeing the fourth industrial revolution and initiatives such as Made Smarter, which is partly funded by Government—by BEIS—are really valuable. One plea would be to scale that up, because many factories need to get on that journey to net zero to digitise their operations. That is absolutely critical.
The next one that is coming up—and we have not quite got there yet—is design engineering for a circular economy. A lot of companies are starting to get their heads around what skillset is required for that. We have not really designed that, in terms of what we are doing for skills provision in this country at the moment. There are a couple of ones coming along, but we still need a lot of those toolmakers and CNC operators.
Q16 Charlotte Nichols: Ms Gratton, I want to go back to the point you made around the Workplace Training and Development Commission that you reported on earlier in the year—about the fact that investment in training is falling year on year. You said that one of the key barriers was actually getting employees to engage in some of the training programmes and opportunities that are on offer.
I was a trade union officer for a number of years before I came into Parliament. Schemes like Unionlearn were often, because they were peer-led and delivered in the workplace, much better at getting people from perhaps non-traditional backgrounds, who perhaps had not engaged in other workforce training, to take part. Have you done any research or had any thoughts on what the withdrawal of the Government funding for that scheme has meant for making this situation worse?
Jane Gratton: The commission heard very good reports about the impact Unionlearn had had in engaging people in the workplace. As I said earlier, part of it is that the managers in SMEs need more confidence around people skills. They are struggling to engage. Also, because people have been away from education for a long time, it can be quite daunting for them.
When we spoke to employers, we also found a worrying lack of basic digital, English and maths skills in the workplace. Some of those were, unfortunately, preventing employees from applying for jobs. Where managers were identifying someone with potential to progress in work, take training and increase their earnings capacity and career development, the individuals were reluctant to do so. It was not until the manager probed that they found that some of the digital skills that would allow them to use the online application form were a barrier.
There are some fundamental issues in ensuring that people, when they leave school, have really good basic maths, English and digital skills, but also looking at interventions to support adults in work. As the workplace becomes more digital and automated, people will struggle to progress unless we can support them in keeping up. The transformation process that businesses are having to go through now, not least with the net zero processes and automation, means that we are not going to be successful and increase productivity unless we bring everybody with us in the business. Anything that we can do to support businesses to upskill everybody in the workplace would be really welcome.
Q17 Charlotte Nichols: Do you think that this is something that should be covered in the Government’s upcoming employment Act—rights to access that sort of training and support in work time?
Jane Gratton: I certainly think that employers would welcome opportunities and support to bring training in. When we have spoken to employers, they are very keen to engage all their staff. They understand that all their staff will need to be upskilled and reskilled. It is a matter of making sure that there are no unintended consequences around that and no barriers for employers or employees in engaging with training.
Q18 Charlotte Nichols: Mr Phipson, you spoke earlier around some of the specific challenges in manufacturing. I have a number of manufacturers in my constituency, including a few large textile manufacturers. One thing that they have said to me is that there is actually no specific apprenticeship scheme for textile manufacturing any more. There used to be qualification routes for machinists and so on, but changes in Government policy over the years have meant that those qualifications no longer exist, so they can pay into the apprenticeship scheme, but there is no apprenticeship that they can put their employees or potential new hires on to. Do you think that the changes being made to the BTEC programme at the moment could risk similar impact going forward for other parts of the manufacturing sector?
Stephen Phipson: Yes, I do. We need to be very careful about not losing those skills. One thing that is very interesting across the country is that the idea of place is becoming more important. We are seeing clustering happening and clusters of expertise. Textiles has not quite got there, but construction would be a good example of that. Those pathways have not been available, but they have set up their own training centres to be able to offer a bespoke type apprenticeship for those kinds of skills.
We are seeing that. Some of them are being supported by their local combined authorities or LEPs and some of them are not. There is a very inconsistent picture across the country around that local provision. There is a lot to do there, but we must avoid losing those more traditional skills. Although we keep thinking about automation, 3D printing and all the other great things that we are world leading at in many respects, you still need a lot of these basic skills. We should not lose sight of that. We saw that in these big green investments up in the north-east, for instance.
Q19 Charlotte Nichols: Mr Percival, one thing that is being discussed today is around strategies to engage older workers in the workforce, including bringing people back in from retirement. One thing that I have not heard mentioned and would be interested in your view on is the use of things like phased retirements to retain workers within the business who are perhaps getting older and wanting to transition into retirement, but allowing them to pass on their knowledge and expertise to younger people in the workplace. Is that something that the CBI supports?
Matthew Percival: Yes, it absolutely is. It is another branch of flexible working. It is something tailored specifically to older workers. We had a software company that we were speaking to the other day. They said that they had a conversation with their older workers. It was one of those businesses, looking at it, where, as Stephen says, the average age is rising every year and you are seeing this potential problem. To create you the time and space to invest in developing new skills of younger workers, you are thinking, “How do I help my older workers stay in work for longer?”
They did a bit of a discussion with their workforce and found that more than 50% said, “If there are some flexible pathways for us to be able to stay in work longer, we would be interested in doing that”. Of course, the business benefits more from its previous investment in those workers’ skills the longer it can retain them. That is absolutely something that businesses would be looking to do.
On the BTECs point that Stephen was responding to, the important thing for us is that you do not remove the existing qualifications until the new qualifications have proven themselves. It is not quite a case that you can just create an alternative and then immediately remove the other one. You need the confidence in the new qualifications before you are ready to remove the existing ones to make sure we do not risk taking a potential step backwards in those sorts of skills in manufacturing, but across a range of industries as well.
Q20 Charlotte Nichols: On new qualifications, I have been quite struck, within social care in particular, but I am sure it is an issue in other parts of the workforce, that there has been no qualification that is transportable across the sector. The only specific training that they have to have on a statutory basis is in manual handling. Most of the training that they get is within their own individual employer, which means that, should they move to another one, that training is not recognised. They then have to start over again.
Is that something that we are seeing in many sectors? Is there more of a need for the kind of modularised qualifications that you spoke about earlier, Matthew, in order that people can take qualifications for a certain sector that are recognised right across the sector, rather than individual, piecemeal, employer-led programmes of potentially varying quality?
Matthew Percival: This is one of those big, longer-term problems in the skills system. You also have businesses trying to buy their training programmes at bulk scale prices, because that is what is affordable for them, but going to providers and asking them to deliver completely bespoke individual training. You do not get bespoke training at bulk prices. You have a systems problem here.
Taking a bit more of a modular approach could be a way through that. If you are saying that 70% to 80% of it is consistent across the employers, we can deliver those modules in a bulk way. Yes, you need to be able to use the particular systems and working processes in a company. That will be different, company by company. Trying to make it completely uniform across sectors is probably going to be counterproductive and might be where we are a little bit stuck with our approach to standards at the moment. Trying to modularise some of the consistency, so we can bring down the cost of delivering the training, then get more people through it and help to upskill more people, would be a good thing to do.
Claire Tunley: I was going to add something on the older workers. It is some research that we carried out last year on the impact of the menopause on women’s participation. We looked at the ages 45 to 55. That is generally when women transition through menopause. The findings were really startling and fit with other research that has been carried out in a similar way.
Around a quarter of women of that age in the workforce would leave it because of the impact of menopause on work. That is a huge loss. If we look at financial services, that is over 120,000 women who we could lose just because of the menopause. The measures that employers can take to mitigate those impacts to support employees are very simple, quite cost-effective and quite cheap.
On that older worker piece, I know that many of our members are looking at that, not just in financial services but elsewhere. Similarly, some firms are going further. I know that one of our members undertakes a three‑way MOT for people over 50 in their workforce—a career MOT about where you are going; what your health looks like; and then a financial MOT as well, to support workers to think about what they need to study to remain relevant and how they can manage their finances. I do not want to lose the impact of the menopause, because I was quite startled by those figures and many employers are looking at that really seriously now.
Charlotte Nichols: That is something we had a recent Westminster Hall debate on. It was very interesting. As you said, there were stats coming back, particularly for WASPI women and that cohort as well. Changes that allow people to perhaps phase their retirement might be a way of squaring that circle.
Q21 Mark Pawsey: I wanted to finish off with some questions about the role of apprentices in dealing with labour and skills shortages. Matthew, on a couple of occasions you have already said that the apprenticeship levy acts as a barrier. Can you explain that a little more fully please?
Matthew Percival: The first thing to say is that we think that it is really important. There is a role for Government in helping to support SMEs to deliver apprenticeships. That is what the Government’s apprenticeship programme does. At the moment, it is funded by the apprenticeship levy, which is a tax on the largest businesses, based on their payroll.
Because the message from Government was, “If you are a good business and you do the right things, you will get your money back”, a lot of businesses used their training budgets to pay for their apprenticeship levy. It was a tax increase for Government, but paid for by moving the training budget and the expectation that they would be able to spend it on the skills they need.
Because that budget is also relying on being used to fund the SME programme, rather than the SME programme being funded from general taxation, we are in a slightly silly cat and mouse game. Every time a business manages to spend more of its levy funds, there is a shortfall in the budgets for delivering support for SMEs. We want to try to break away from that trade-off, by saying, “Fund SMEs’ apprenticeships from general taxation”.
Then set up a levy that challenges the levy payers to spend every penny of it on increasing the skills of their workforce. That is where we think it has to go broader than apprenticeships. Some sectors make much greater use of apprenticeships, for the relevance of that method of training to the skills they need, than others. We have this sectoral cross-subsidy at the moment, which is also depriving the skills budgets from some of the lowest-paid workers in the economy to sectors like accountancy and professional services, to manufacturing and the like. If we weaken the focus of that levy on skills, we can get a lot more of the adult reskilling done. We can get a lot more of the skills for workers going across the whole breadth of the economy, rather than just in some sectors, while continuing to support SMEs.
Q22 Mark Pawsey: Stephen, in manufacturing the number of apprenticeship starts now is less than it was in 2017. Is that because of the problem that Matthew has identified?
Stephen Phipson: It is a couple of points. When we look across the piece, it is fairly complicated for a small company to navigate the system in order to claim some of the levy money to run an apprenticeship. That needs to be simplified. It is quite a short term, the two-year period, and quite a lot of people would like to do it over a longer period. That puts people off.
Also, the further education provision is very patchy. It depends on where you are. In the current apprentice levy system, you are not allowed to spend any of the funds on capital. If you are an FE college, it is much easier to run a different sort of apprenticeship than it is an engineering apprenticeship, where you need to go and buy a £100,000 machine to do the apprentice training on.
That has caused a lot of manufacturers, including organisations such as ours, to set up training centres ourselves to try to help, because we can use other funds to try to invest in capital and not the levy funds. Where they work, they work very well, but there are very few of them. It is a combination of factors causing this problem in terms of traditionally where the apprentices were, which was in manufacturing.
Q23 Mark Pawsey: Do Government need to bin the current system and start again, or is it capable of reform?
Stephen Phipson: We have been producing a lot of reports around the apprenticeship levy reform. We are engaged with DFE about apprenticeship levy reform. It is recognised that reform is required. It is there. We just need to move on with it at a faster pace.
Q24 Mark Pawsey: Do you think that Government get the urgency of that, given the way that numbers are declining and the very serious skills shortage that we have heard about from all our witnesses?
Stephen Phipson: No. They understand the issues. It is about moving forward at pace. That is the challenge.
Claire Tunley: I have similar thoughts. There is a similar trend in financial services. The number of apprentices has gone down since 2017. The amount of input to the levy that comes from financial services is huge, but the amount firms spend on training compared to the apprenticeship levy is massive. It is about a fifth of the overall training spend.
It is still significant. One challenge that is slightly different for financial services compared to other sectors is that, where we are looking at a reskilling challenge, it is training within an existing job role. It is changing the skills of somebody's work. That can be transformative. Apprenticeships are very much built around, “You will be trained to do a new job role”. It is very inflexible in some of those ways.
Some firms want to have a short, sharp intervention to train someone in automation skills or data analytics, for example, but it is quite hard to pick a module from an apprenticeship and just train in that space. It is quite inflexible. Many firms really struggle to use it. Only one of our members spends over half of the levy. The rest spend less than half of the levy, because they just cannot make it work in their own situation.
Q25 Mark Pawsey: Jane, your members should be the beneficiaries of the levy. Is that happening?
Jane Gratton: Yes, apprenticeships are really important to our members. We would like to see funding for them protected. While we agree that greater flexibility is needed for levy payers, we want to make sure smaller firms always have access to apprenticeships. They are important.
Around 27% recruited with apprenticeships last year. They struggle to find the apprenticeships they need locally for the reasons you have just heard. They also struggle with the digital apprenticeship service, and the complexity and increased bureaucracy that has been introduced with the new levy system.
Q26 Mark Pawsey: Is it capable of being reformed? From your point of view, does the way we fund apprenticeships need a fresh start?
Jane Gratton: It can be reformed. We have come a long way, and it is not quite right yet. Government can listen to businesses of all sizes and get it to work much better.
Q27 Chair: I just want to finish. There has been a lot of discussion here about what the Government can do. I am often a proponent for those recommendations, but, Ms Tunley, your commission did a report that showed that businesses were not adequately forecasting their labour needs. We have heard from the British Chambers of Commerce that business investment in training has gone down. On average, it has gone down by about 18% between 2011 and 2017. Is this not all your own fault for not investing in training and not forecasting what you need? Does anybody want to answer that question?
Claire Tunley: I can come in on that one. Forecasting is absolutely essential. As I mentioned, there is a shift happening, within financial services certainly, around addressing skills needs on a longer-term basis. You cannot train if you do not know what you are training for. We very much advocate that forecasting.
Some of our firms forecast five years ahead; most do it two or three years ahead. We would really encourage firms to do that. We are producing a toolkit on this. A lot of what we do is quite practical. That is coming out in the autumn; we will be publishing that. Any firm can access it. You do not have to be in financial services. That will allow firms to look ahead. Where will they need skills in the future?
As I have mentioned before, a lot of the work we do is around reskilling. It is not saying that the skills and experiences people have are redundant. No, they are not. They just need to be augmented, because job roles are changing; systems are changing; different process are being automated. That forecast, that horizon, that piece about where we are going on skills, allows firms to invest.
For example, some of our members are looking at where they have acute skills gaps or where they can see that they will have gaps because the workforce will be retiring, for example. They are building in programmes that run three or five years ahead to get people in their workforce the qualifications that are relevant.
The good thing about the work of the Financial Services Skills Commission is that all of our firms are doing this together. We are producing content on skills priorities and agreeing collectively across our firms, which employ over 300,000 people—“This is what good looks like for cyber-security”; “This is what good looks like for data analytics”; “This is what good looks like for coaching”—so that firms can all go in the same direction. People move around the sector or in and out of the sector, but, if we are all working in the same direction, ultimately we will grow the pool for everybody.
Q28 Chair: Are you doing the same in the manufacturing sector?
Stephen Phipson: You can think about manufacturing in two groups. The large companies—the very well-known brands that will come off the tip of your tongue—are doing a great job. We are world leading in many areas of manufacturing. The Rolls-Royces and the Jaguar Land Rovers have fantastic future skills programmes.
The challenge has been the very large community of SMEs and medium-sized businesses. The Government have done a fantastic job with the catapult system. The High Value Manufacturing Catapult and the MTC at Coventry are world-class innovation centres. Thousands of smaller businesses have been working very closely with those centres, and they have now learned about 3D printing, and other new technologies and things that they can implement in their business to become more productive.
The join-up has not happened with DFE about skills provision. Those companies are saying, “This is interesting. We need you to start helping us to invest in those skills now, because they are the skills we need to implement this new technology that we have just learned about in a Government catapult”. We have not joined those agendas together.
This is well known, but, with the catapult system, we are now bigger than the Fraunhofer Institute in Germany in terms of what we are doing on the operationalisation of new technology and advanced manufacturing. We have not caught up with the skills agenda. That is the challenge here.
Matthew Percival: It is definitely true that business has to step up in a lot of ways here. There is no free pass. It is really about how business and Government get the right partnership going. When we looked at how skills were expected to change between now and 2030, which was an analysis we did pre-pandemic, we found that nine in 10 workers would need to gain new skills, but we also found that there is not going to be a return on investment in about a fifth of those cases for any one business to invest in the updating that is required of that worker’s skills, because the worker will have moved to another job before they see a return.
That is why we need partnership. For a lot of it, there is a great return on investment for businesses. It is about helping them build the partnerships with providers to deliver and the skills and capabilities to do that sort of assessment of what their future skills needs are. Larger businesses, if they have the best HR leaders, will have the people who can help them in-house with that. Where does the SME go? We were big supporters when DFE was looking at the idea of college business centres as the place for small businesses to be able to go, where they might access that support to talk about their skills needs.
When we are talking about investment, there is an onus on the climate that Government creates for business investment. Even when we look at some of the big multinational companies we have in the UK, they are not different companies in the UK relative to other countries. If they are underinvesting in the UK, it is because that company is choosing to make investments in other markets rather than here. How do we create the environment where we can make the best possible bid for the international company's investment to come to the UK rather than to another country?
Claire Tunley: We did some work last year on the business case for reskilling. We identified that firms can make a saving of £49,000 for each employee they reskill instead of looking to the wider market to recruit them, which has been taken quite seriously by many of the leaders in the sector.
There is good evidence that the financial services sector is doing this for itself. However, Government could support the sector particularly on common definitions around skills, identifying where those skills are, really getting into the detail of that and reflecting that in frameworks and standards. We are sharing it with IFATE—the Institute for Apprenticeships and Technical Education—and other bodies. If we recognise that, it means the effort is done once rather than everyone defining skills differently.
I was at a roundtable in Leeds recently, and I have been in Scotland and Northern Ireland previously. I have been all around the country. There is really good evidence of working together at a regional level to tackle skills issues. Businesses are coming together with institutions, colleges, universities, local government, city government or city mayors, whatever it might be, to focus on this. There is a very good geographical level where it seems to work very well.
We have seen businesses working together with institutions to pledge jobs at the end of it and put in the skills they require, so the institutions can invest in that training, people will have jobs at the end and businesses will get people who have relevant skills. There are some really good examples. Northern Ireland has a fantastic example going on with the college there. There are initiatives. We just need to grow them and do more.
Jane Gratton: We have to create the right conditions to help businesses invest, releasing some funding by removing some of the upfront costs they are facing elsewhere, but also creating that flexible, agile and responsive system. We have to help them plan, because they do not have the resources to plan for themselves and identify their needs—some support is required to help them understand what they need and a stronger voice locally so they can make sure that people can train for sustainable jobs.
Chair: Thank you to all of you. That brings this first panel to an end. We are grateful for your contributions. Thank you.