Investing in human capital is a crucial aspect of building an economy that is both more productive and fairer, and any growth strategy must incorporate an agenda for increasing human capital and workforce skills within that. So how should we approach the task of developing a skills strategy that complements a broader economic strategy? In this report, we address this issue by focussing on a set of sectors – Financial and business services, The creative and cultural sectors and Life sciences industries – and technologies – clean technologies and artificial intelligence – that are of strategic importance for the UK.
The strategic sectors are good places to work for everyone. It is striking – and very welcome – that wages are higher, and wage-experience trajectories steeper, for workers at every level of educational qualification in these strategic sectors than in the rest of the economy.
Supporting the expansion of these strategic sectors to boost growth and spread good jobs means ensuring that current and future workers across the country possess the right mix of skills to effectively perform the required tasks. Overall, our analysis points to the growing importance of both general and specific skills that are typically acquired with more formal education. It is thus unsurprising to see that workers employed in the strategic sectors are much more educated than average, with the proportion of workers holding a university degree almost twice as high as the rest of the economy and growing over the last years.
However, there are worrying signals that the current skill mix of workers in the sector may not be adequate. The clearest indicator that demand exceeds supply for skills is the high wage premium associated with higher levels of education. This is clear throughout the educational distribution, and reflects the ongoing need for educational upgrading, such that more people leave the education system with higher education and skills. Without a sustained upgrading of the education and skills of workers, the economy will be unable to grow, especially in strategic sectors.
- It is striking – and very welcome for a country striving to achieve growth that benefits all parts of society – that wages are higher, and wage-experience trajectories steeper, for workers at every level of educational qualification in these strategic sectors than in the rest of the economy. For example, workers in these sectors with no more than GCSEs (i.e. Level 2 or below) earn more than someone with sub-degree level qualifications (Level 4-5) in other sectors, and there is more progression too (average annual earnings for Level 2-skilled workers in these sectors more than double over the course of their careers, growing by 2.1 times against only 1.7 times if employed in the rest of the economy). This suggests that these ‘strategic sectors’ are a source of ‘good jobs’ even for low-educated workers, and is another reason to welcome growth of these sectors in the economy.
- There is evidence of a need for more sub-degree qualifications. Based on the educational requirements measured in O*NET, the current share of workers qualified at sub-degree level in these sectors (7 per cent) should be almost three times higher. The sorts of occupation where too few people have sub-degree qualifications include managerial roles within business and finance, ICT professionals and IT technicians within the creative and cultural sector, and technical roles within Life sciences industries. In contrast, there is only a small excess of workers with a degree (4 percentage points). In other words, this analysis suggests that the main problem faced by these sectors today is too many low-educated workers and a lack of workers at the upper range of intermediate skills.
- The shortage of people with sub-degree qualifications is not confined to the strategic sectors. In the UK, only 9 per cent of 25-64-year-olds hold a sub-degree qualification, and this figure is much lower among younger cohorts. This is lower than in other countries with a similar economic profile in Europe such as France (15 per cent) and in other Anglo-Saxon countries such as Australia (18 per cent) and Canada (36 per cent).
- Apart from the focus on strategic sectors, a consideration of broader trends and transitions in the UK’s economy also highlight the need for workers with higher levels of skill. In particular we look at the challenges presented by decarbonisation of the economy, in line with net zero commitments; and ongoing digitalisation, in light of the latest wave of generative AI. Within IT, AI is one of the largest categories of new skills. In the latest data, 80 per cent of occupations have job adverts that require new IT skills. The rate of churn in IT-related skills, and the extent of their relevance across the economy, suggests that future cohorts of workers will need their education to provide them with flexibility and resilience to change, and that current cohorts of workers will need opportunities to update their skills.
- Increasing the inflow of tertiary-educated entrants to the labour market. This inevitably requires more public spending on education, with an expectation that this should increase over time, given the economic and social return on investment. This would be a reversal of trends over the last 15 years, where educational investment from the state has declined not only as a share of GDP but even in in real terms.
- Enabling more sub-degree qualifications and a better integrated system. The new Lifetime Loan Entitlement – which will allow students a loan entitlement to the equivalent of four years of post-18 education to use over their lifetime – should remove the incentive for students and institutions to systematically favour university degrees over sub-degree qualifications. This is a very welcome policy development. But it is as yet uncertain how this reform will play out. There are two risks. First, universities may not create the type of modular provision in which ‘lifetime’ education is really that practical (there are many types of course in which a long break between modules is not appropriate). Second, four years may turn out not to be long enough, given that a university degree is three years, especially if the expectation is that people might do more than one tertiary-level qualification over their lifetime.
- Improving training for the existing workforce. We need to incentivise employers more to invest in their workers. Currently, there are very few policy levers that incentivise employers, outside the apprenticeship levy. We propose that incentives that are currently used to promote research and development also be extended to people, via ‘human capital tax credits’.
- Empowering individuals to undertake lifelong learning. Among the barriers faced by individuals to upskill through their lifetime are the difficulties in affording it, the availability of affordable childcare and the ability to take time off work. Individual Learning Accounts are a commonly used vehicle to make it easier for individuals to afford training. The idea is that workers have a certain amount of money in these accounts to pay for training, which does not necessarily have to be funded only by public expenditure. However, the UK’s experience in the early 2000s shows that such policies can face formidable implementation problems, so we recommend that such a policy should be piloted and evaluated over, say, five years, before any broader implementation.