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The following OECD assessment and recommendations summarise Chapter 8 of the Economic Survey of the United Kingdom 2005 published on 12 October 2005.
What effect do skills shortages have on innovation performance?
Recent OECD empirical work highlighted “absorptive capacity” as a particular weakness compared with other countries and the Roberts Review has drawn attention to falling numbers of graduates in science, engineering and technology (SET) subjects. Where the government has a direct responsibility, for example in the provision of science and mathematics teaching at secondary level or in the level of stipends paid to PhD researchers, it has responded to weaknesses identified in the Roberts Review. But given the relatively high number of SET graduates and success in some science based industries, such as pharmaceuticals, it is difficult to argue that a shortage of researchers is a binding constraint.
To raise absorptive capacity policy should continue to focus on raising the low general skill level of the labour force. A relative lack of intermediate and vocational skills appears to be an important impediment to the economy’s capacity to absorb innovations, explaining the comparatively low proportion of UK firms engaged in successful innovations. Indeed, while the number of persons having university and advanced research degrees (PhDs) is not much different from that in comparable countries, the United Kingdom has a large share of pupils leaving school before completion of the upper secondary level and without an education giving specific competence in a professional field. The government’s broad aim that all young people continue in learning until at least the age of 18 and its more specific target for educational participation at age 17 to rise from the current 75% to 90% over the next ten years are therefore welcome.
Educational attainment of the population aged 25-34 years (1)
2003
1. “Low-skilled” comprises persons having primary school, lower secondary school or ISCED 3C short programmes as their only formal qualification. Upper secondary includes post secondary non-tertiary programmes. Tertiary type A includes type B for Czech Republic, Hungary and Italy.
Source: OECD (2005), Education at a Glance.
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Although schools have improved a lot during the 1990s, more could still be done to improve basic literacy and numeracy, thus providing a stronger foundation for continued learning. Tackling school truancy and raising the aspirations of children from a less advantaged background is equally important.
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Continuously improving the relevance and quality of vocational programmes is as important as it is to expand their provision. A key factor determining the success of such an expansion will be that the vocational route gains esteem vis à vis academically oriented secondary education – something that appears to be lacking more in the United Kingdom than elsewhere. The government’s initiative to establish city academies in disadvantaged neighbourhoods with intensive involvement of businesses should help in this respect, but teething problems have to be resolved.
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Unifying the current array of vocational programmes and diplomas into a limited number is important to make them more attractive for students as well as employers. Although the government’s white paper on the educational offer for 14 19 year olds did not take the full step recommended by the Tomlinson Review to unify all vocationally and academically oriented programmes into one type of diploma, it does imply a significant step towards simpler and more up to date vocational diplomas giving students better pathways later on. It is now essential to work with universities to ensure that the new diplomas give sufficient pathways to continued education including with foundation degrees.
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For adults, workplace based training should be expanded nationally as planned from 2006 07 following a pilot introduced in 2002. The programme is focused on the least skilled with public funding of the full cost of brokers and training. In return, employers offer time off for participating employees, although about half of all training hours have been covered by publicly funded wage compensation during the pilot phase, with small and medium sized enterprises typically receiving complete wage compensation. When implementing the programme from 2006 07, wage compensation should be used only sparingly as an “ice breaker” to create a culture of learning within the hardest to reach firms.
Do taxes and benefits weaken incentives to aquire skills?
Whether efforts to expand and improve the offer of education and training will be fully effective, may also depend on financial incentives to acquire human capital. While in work tax credits help to boost labour force participation, their means tested withdrawal leads to high marginal effective tax rates which reach 70% for families with children at below average income. This attenuates market signals for intermediate skills, because even though gross earnings are considerably higher for people with intermediate skills than for the low skilled, net earnings are not very different for households with children. However, for those adults who are functionally illiterate and for school tired teenagers with problems of truancy, incentives related to future earnings are not likely to matter much since more fundamental factors keep them from acquiring intermediate skills. But for others it may be an impediment. While the tax credit reforms over recent years have successfully reduced child poverty while maintaining incentives to work and removing the worst peaks of high marginal effective tax rates, the effect for the average person in a couple with children has been to push up marginal effective tax rates by 5 percentage points. It would therefore be useful to better understand how much taxation of subsequent earnings matters for the propensity of teenagers and adults to make use of the improved education and training on offer. There are also specific issues relating to the short term incentives for young persons. Paying teenagers who continue in education such as with the Education Maintenance Allowance pilots appears to boost engagement in continued learning. An alternative or additional option is to increase the very light taxation faced by teenagers taking a job at 16 rather than continuing in education.
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Return to the Economic Survey of the United Kingdom 2005
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
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For further information please contact the United Kingdom Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Turner and Jens Lundsgaard under the supervision of Peter Hoeller.
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