Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Retraining: which are the best policies for getting people back to work?

Many people are expected to lose their jobs in the aftermath of the pandemic. Retraining will be one important way to get them back into work. There is a good economic case both for subsidising individuals and giving firms incentives to invest in training programmes.

The need to increase people’s skills, often through retraining, comes about because the skills required in jobs change as new types of jobs emerge while others disappear (Autor, 2015). Many economists link this transition to technological change (especially automation) and to changes in trade.

Recessions and other unexpected events – such as Covid-19 – can precipitate changes or accelerate existing trends. For example, it seems likely that remote working will now be more commonplace and that the trend towards automation will be accelerated in the aftermath of the pandemic. This has substantial implications for people’s working lives and increases the need for retraining opportunities.

Is retraining worth it?

Individuals re-entering formal education may face significant costs, such as tuition fees (or loans) as well as forgone wages during the time they are back studying. There are also costs to the UK government if adult education is publicly subsidised. It is therefore important to understand whether adult education or retraining pays off. While many studies estimate the benefits of initial education and training, there are fewer studies that provide convincing evidence about the effects of adult education (Midtsundstad, 2019).

The most convincing evidence is found with administrative data where it is possible to follow the same adults over time. One example is a study of Norway that investigates the effects of reforms enabling a return to high school for individuals over the age of 25 (Salvanes et al, 2020). The impact of the reforms is stronger for women, and the additional education increases their employability in later life.

Another study from Sweden looks at the impact of a government policy offering unemployed adults one year of formal education between 1997 and 2002 – the ‘Adult Education Initiative’ (Stenberg and Westerlund, 2008). The researchers find that the increase in post-programme earnings was enough to match the costs of the programme itself.

There is also a large body of evidence about training in the context of ‘active labour market policies’ – that is, a set of government programmes aiming to help people to find work. Average effects are negligible in the short term, but become more positive two to three years after the training programme’s completion (Card et al, 2018). A review of over 200 recent studies also shows that effects vary across context and types of participant. The effects are, for example, greater for women.

Sectoral training programmes in the United States have had some success too (Stantcheva, 2021). These are specifically geared towards the needs of local employers, who are involved in the design of the training. They are also combined with other measures, including follow-up services after job placement to ensure employees get a sufficient wage.

There is evidence that the type of skills acquired by workers matters for earnings, with returns for analytical skills (such as maths, science and critical thinking) and interpersonal skills (such as active listening, speaking and persuasion) increasing over time in the UK (Dickerson and Morris, 2019). In fact, so-called ‘soft skills’ are particularly relevant for people in low-skilled occupations and can yield relatively high rewards (Aghion et al, 2020).

One recent experiment shows that in some contexts, training in interpersonal skills leads to higher returns than training in technical skills (Barrera-Osorio et al, 2020). This suggests that even short-term training that targets specific skills might be beneficial for programme participants. This is good news for adults who need to retrain but for whom lengthier technical (or higher) education is not realistic or attractive.

What is the role of government?

Since individuals reap the benefits of lifelong learning, should they pay for retraining themselves? While this may seem plausible to some extent, there are several reasons for government intervention in this context.

First, individuals with low incomes may struggle to access loans: they may be ‘credit constrained’. This means that individuals cannot afford to finance their education, even if they expect it to help them find a better job.

These concerns are especially relevant for those on low incomes who do not already have high qualifications. Research shows that the price of tuition really matters for whether students choose to participate in college education (Denning, 2017).

We do not know the extent to which this applies to low-income adults in the UK, but the Augar Review has attributed a large part of the decline in adult education at level 3 (A-levels or vocational equivalents) to the government policy of obliging adults to pay for their first full level 3 qualification.

Measures outlined in the ‘Skills for Jobs White Paper’ will reverse this for a subset of level 3 qualifications (Skills for Jobs, 2021). But it will not facilitate retraining for anyone who already has a level 3 qualification. Further, the ‘Lifetime Loan Guarantee’ currently applies only to tertiary-level education (at levels 4 or above). As post-secondary education in England can have a narrow curriculum content, this leaves many people without any help from the government to retrain if they need to.

A second reason for government intervention is that employers do not have an incentive to invest sufficiently in easily transferrable and verifiable skills. This is because employees may move and, in that case, the employer will not reap back the rewards of their investment (through their employee being more effective in their role). In fact, training may facilitate employees to move to better opportunities with other employers.

This is a reason to provide public subsidies for training that occurs within firms. While there are some such incentives, the UK tax system is much more favourable to investment in capital (such as new machinery, technology, buildings, and research and development, R&D) than to investment in labour (such as retraining).

The possibility of ‘human capital tax credits’ should be given serious consideration (Costa et al, 2018), and this could be directed at particular types of training. Human capital tax credits are a type of subsidy and operate like R&D tax credit. A firm making a profit can reduce their tax liabilities by a certain percentage (over and above the direct cost of the investment). A firm making a loss receives a ‘credit’ or direct subsidy.

The main type of government-funded training is in apprenticeships. While this is one way to retrain older workers, it is a restrictive model. In most countries, apprenticeship programmes are used to facilitate transitions to work for younger workers. In fact, in the UK, the payoffs from doing an apprenticeship are higher for younger workers (McIntosh and Morris, 2018).

The 2017 Apprenticeship Levy – a tax on large UK employers with an annual pay bill above £3 million – has led to an increase in higher-level apprenticeships. But so far, the funds available have been under-used and employers have long been calling for the cash to be used for a wider array of training options (Patrignani et al, 2021).

A third reason for government intervention is that employer-provided training is mainly accessed by people who are already highly educated. This is despite the fact that less highly educated individuals may benefit more from additional training. This has been shown recently for women in the UK (Blundell et al, 2021a).

For adult education and training to become a vehicle for social mobility (rather than leading to further inequality), the constraints facing less educated people from engaging in adult learning and retraining need to be overcome. While part of this might be about the price (as discussed above), other considerations include affordable childcare and ‘joined-up services’ allowing training to lead people to jobs with good prospects.

For example, it has been suggested that policies regarding the public funding of courses at further education colleges should be considered not only by the Department for Education in isolation, but alongside civil servants in the Department for Work and Pensions when they are thinking about how to combat rising unemployment (Blundell et al, 2021b).

For retraining and adult learning, a more integrated approach to policy-making is needed. Policies that encourage participation should be considered alongside the needs of the local economy as well as those of particular sectors. For example, the agenda to reform social care or to move towards a greener economy should have adult training as one of several components that build on each other. It would be useful to have further policy discussions about adult education and training in this broader context.

A properly designed adult training policy has multiple dimensions: it helps to support people into good jobs, thus combating inequality and alleviating poverty. With other complementary policies, it can also contribute to a broader agenda of economic transformation – for example, as part of reforms to adult social care and to facilitate transition to a ‘net-zero’ economy.

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Authors: Chiara Cavaglia, Sandra McNally and Jenifer Ruiz-Valenzuela
Photo by Sam Balye on Unsplash
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