Apprenticeship training in England – a cost-effective model for firms?

A major new report by internationally renowned economist, Professor Dr Stefan Wolter (University of Bern), produced in partnership with the Education Policy Institute (EPI) and Bertelsmann Stiftung with support from the JPMorgan Chase Foundation, examines the potential benefits of alternative apprenticeship models in England.

Apprenticeships form an integral part of the government’s plans to improve technical skills among young people, and ensure that the UK is sufficiently equipped to meet the needs of the labour market post-Brexit. Despite this, firms in England have expressed varying degrees of confidence with current apprenticeships policy - with some conveying uncertainty over the purported benefits.   

Published on the first anniversary of the Apprenticeship Levy, Apprenticeship training in England – a cost-effective model for firms? examines the benefits of a Swiss-style apprenticeship model for English firms. 

The Swiss model for training apprentices includes longer training programmes, more ‘off-the-job’ training, and is recognised for creating an effective transition from school to the labour market. Switzerland outperforms many European countries in the area of skills. 

Different variations of the Swiss model were examined, with the cost-benefit analysis assessing ten occupations over a range of sectors in England.

Key findings

Cost-benefit analysis: employers and apprentices

Combining over a decade of Swiss apprenticeship data with the latest UK data, our analysis finds:

  • Apprenticeships of longer duration are likely to bring higher returns for both employers and apprentices, due to productivity increases over the course of training. Shorter apprenticeships are common in England - yet companies could benefit significantly from three-year apprenticeship programmes.
  • Employers and apprentices are likely to see more positive economic returns from training beginning at an earlier age. Combined with a longer apprenticeships programme, the chances of a firm breaking even, or making gains at the end an apprenticeship are highest for apprentices that are younger than 19 years old.  
  • Large companies may be more likely to experience net benefits from hiring apprentices than small and medium-sized companies, due to economies of scale and different salary structures. For those sectors or areas in England with a high proportion of small and medium-sized companies, additional policy interventions may be therefore required to offset costs.

There is a wide variation across occupations, sectors and firms – with benefits highly dependent on factors such as the apprentice’s salary:

  • Providing apprentices are on the minimum wage (£3.50), by the end of their training period a benefit for firms is generated in virtually all occupations. However, if a higher wage apprentice model is applied (rising to £7.05 after the first year), about half of the ten occupations produce costs for firms of around one month’s wage of a skilled worker.
  • Some apprenticeship occupations in particular produce considerable benefits - such as bricklayers, electricians, and IT/software developers –– with employers still able to see positive economic returns even after awarding higher pay to apprentices on these programmes.  
  • Despite this, other, higher wage scenarios are not financially sustainable when applied to certain occupations. Instead, we find significant costs for firms for car mechanics, commercial bank employees, cooks, retail cashiers and waiters.
  • In order to ensure apprenticeships are profitable for all employers in the long-term, the retention of apprentices after training is complete is crucial. Regardless of whether a minimum wage or higher wage model is adopted, if firms keep apprentices on after their training is complete, any costs arising in the near term would eventually be compensated by saving on hiring new workers from outside the firm.
  • If they face net costs when initially hiring apprentices, employers should assess whether an apprenticeship could be regarded as an investment in future middle management positions.

Policy recommendations 

  • Instead of arbitrary apprenticeship targets, the government should direct its focus on driving up levels of quality in training programmes. Such a move would have the potential to increase productivity, ensuring training programmes are more attractive to firms, and could also deliver gains to apprentices, through improved wages and skills.
  • The government should consider the case for expanding apprenticeships in England among 16 to 18 year-olds, in line with other advanced economies - given the overwhelming benefits generated to both firms and apprentices.
  • Further interventions must be made to tackle high apprentice dropout rates. For apprenticeships to be profitable for employers, companies need to retain a substantial proportion of apprentices. High dropout rates may mean firms are reluctant to train in some occupations because they would increase costs.
  • As the benefits of apprenticeships for employers is contingent on employer size, the government should consider policies to support smaller and medium companies, who are likely to experience fewer benefits than larger firms.

Commenting on the report, Rt Hon. David Laws, Executive Chairman of the Education Policy Institute, said:

“This report brings some much needed evidence to debates on the future of apprenticeships policy. In learning from countries with successful training programmes, England can ensure that a sustained expansion in apprenticeships sees positive returns for both employers and young people.  

The government should ensure that its significant investment in this area is guided by some of the report’s recommendations – in particular its call for a concerted focus on driving up quality of provision. It should also consider the economic case for expanding the length of apprenticeship courses, and increasing the number of apprentices that begin their training from an earlier age.”

Dr Stefan Wolter, Professor of Economics at the University of Bern and author of the report, said:

"This study shows that English firms can benefit financially from training apprentices in very diverse occupations and sectors. In particular, in occupations with a demand for a high level of skills, apprenticeships can constitute an interesting alternative to fully school based programmes for both the firm and the trainee.

However, we have also identified cases where the current situation is not favourable to an expansion of apprenticeships. Here, substantial increases in the quality of the training programmes would be needed in order to create a win-win situation for firms and apprentices.”

Hang Ho, Head of Global Philanthropy (EMEA & LATAM), at the JPMorgan Chase Foundation, said:

"A skilled workforce is integral to the economic stability of the UK, especially during this period of rapid global change. Good quality apprenticeships are a bellwether for the effective upskilling of the workforce and how prepared we are for the future demands of the economy. It’s crucial that the UK current apprenticeship system works for firms as well as the individuals and it’s the joint responsibility of employers and policymakers to ensure the correct steps are taken."

The JPMorgan Chase Foundation has supported today’s report as part of its New Skills at Work programme, a five-year $250 million global initiative, which aims to identify strategies and support data-driven solutions that help improve labour market infrastructure and develop the skilled workforce globally.

Alongside the full report, a policy brief/report summary can also be found here

The ten English apprenticeship occupations examined for the cost-benefit analysis are:

  • Bricklayers
  • Car mechanics
  • Care workers
  • Commercial bank employees
  • Cooks
  • Electricians
  • Financial analysts and advisors
  • IT/software developers
  • Retail cashiers
  • Waiters/waitresses

The simulation model consists of three components, for which the analysis uses data from the most recent Swiss cost-benefit survey, which are complemented with UK wage data.

These are:

  • The costs that arise during the training period
  • The benefits that firms can generate during the training period by letting apprentices substitute unskilled and skilled workers
  • The benefits that a firm can potentially generate after the training period has ended, i.e., by filling vacancies for skilled workers with their own apprentices.

Apprentice pay rates:

  • The National minimum wage for an apprentice is £3.50. This applies to all apprentices under the age of 19 and any apprentice, regardless of age, in the first year of their apprenticeship. Apprentices are entitled to a higher minimum wage for their age if they are both aged 19 or over, and have completed the first year of their training.

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