Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 24 July 2015

Apprenticeships and Conservative Governments

The UK budget included the creation of an employer levy to help finance a large increase in apprenticeships. It is a key part of this government’s belated attempts to deal with poor productivity growth, although lack of workforce skills has been a UK problem for as long as I can remember. I hope the goals are achieved, but this is not my area so I cannot comment on whether they will be. Instead let me tell an anecdote, and reference two good sources.

After I left H.M.Treasury, I found myself in a forum discussing Mrs. Thatcher’s economic policies. The person defending the government was a Treasury economist that I had worked for, and who was no fool. Most of the questions raised were macro, so I had no problem making critical comments. But then a question on apprenticeships came up. In the 1970s there was an apprenticeship levy covering most of British industry, administered by tripartite bodies. The Thatcher government had just begun dismantling that levy.

As this was hardly my field, I feared I would have nothing to contribute. But all my former colleague could say to defend the government’s dismantling of the levy system was that the government believed that individual employers were far better placed to do their own training. I could not believe what I was hearing. Even with the little microeconomics I had, I could see the flaw in that argument. Training employees with non-firm specific skills involved an obvious problem for the employer - the employee can be tempted to move to another firm, and the original firm gets nothing back from their investment. Firms that did pay for apprenticeships would always be vulnerable to others that attempted to free ride and poach their skilled labour.

Yet this ‘why should governments interfere’ mantra was the only justification the government could find for getting rid of the levy. Mrs Thatcher’s policies might have improved UK productivity growth for some reasons, but this was not one of them. As I often say, a neoliberal agenda (or whatever else you want to call it) is anathema to economics, a large part of which is about market imperfections, and how governments can sometimes be instrumental in fixing them. (Not always, as perhaps the German approach to apprenticeships illustrates.)

Two good recent pieces on apprenticeships are this short piece from Hilary Steedman, and something more detailed from Alison Wolf.



13 comments:

  1. In Switzerland, the practical component of apprenticeships is provided by private companies -- and often to young people who have no likelihood of ever becoming employees of the the companies providing the training. This isn't mandated by the government, but simply the result of strong community norms. These programs are viewed as a civic duty, and free-riding is strongly frowned upon. Its a very strong pressure; I think that companies that shirk this duty would have considerable difficulty in recruiting qualified employees.

    The classroom component of apprenticeships is, however, delivered and paid for by the government.

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    1. «This isn't mandated by the government, but simply the result of strong community norms. These programs are viewed as a civic duty, and free-riding is strongly frowned upon. Its a very strong pressure; I think that companies that shirk this duty would have considerable difficulty in recruiting qualified employees. »

      This can only happen if the german companies who do this have "fat" in their corporate structure that can be used to pay for those "strong community norms".

      In the anglo-american cultures companies able to pay for "strong community norms" would be regarded as bloated, fat prime targets for asset stripping by hostile takeover.

      Let me introduce you to the notiuon of "jensenism" which is very well discussed in the very, very good "Wall Street: the book" by D Henwood. The book is available here in full text free of charge nowadays:

      http://www.wallstreetthebook.com/
      http://www.wallstreetthebook.com/WallStreet.pdf

      In that book chapter "GOVERNANCE" (page 266) there is a persuasive and well documented story that the tendency to "downsize-and-distribute" was created or boosted by M Jensen arguing that companies that have ample equity tend to become inefficient as management prefers empire building and feather bedding,
      and that schemes like apprenticeships funded because of "strong community norms" are examples of waste.

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    2. "This can only happen if the german companies who do this have "fat" in their corporate structure that can be used to pay for those "strong community norms".

      Companies which train more than they need have the advantage of getting the best "graduates". And usually most companies try to align demand with number of training slots.

      Ulenspiegel

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    3. It's not waste, it is the market adapting. Training someone has positive externalities as others may gain from their skills if they emply them in the future. This leads to undertraining which is a market failure. Community means that this externality disappears as people are less likely to abandon the company that trained them. Thus the market failure is dealt with without the need for government intervention and in an efficient manner (as far as taxpayers are concerned anyway.).

      Normally I would think it slightly unnecessary to suggest people go read a book, but seeing as it has just been done and is very relevant. Dan Ariely writes very well about this in Predictably Irrational in a chapter entitled "the cost of social norms". He concludes that there is a lot to be gained using this sense of "community".

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  2. «although lack of workforce skills has been a UK problem for as long as I can remember»

    That is highly questionable!!! When managed by foreigners who care about industry, as in the UK car plants owned by german or japanese companies, the UK workforce seems to have internationally competitive productivity and skills.

    Things are very different when managed by english top executives who consider industry a dirty low status waste of time compared to stockjobbing and landlording.

    Perhaps you should watch again a very explicit movie of some decades ago, "I’m All Right Jack": http://media.nationalarchives.gov.uk/index.php/im-all-right-jack-britain-in-1959/

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  3. What are the pros / cons of the German approach to apprenticeships? It would be interesting to get some informationen on this, as it is something that often comes up as a major strength of the German labour market, but with few details.

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    1. A typical apprentice would graduate with 15 years from the third tier Hauptschule and applies for an apprenticeship. He would work in his/her company for three years, during this time he/she would attend for one day per week a trade school (Berufsschule). This school attendance is sometimes blocked.

      After three yeas there is an external exam (Lehrabschlußprüfung), passing this gives the apprentice an certificate and the ability to apply Germany-wide for his trade. He is now journeyman (Geselle).

      The company which want to trains apprentices needs a mastercraftsman. To becam one you have to work as Geselle for some years in your field of expertise and then to pass an exam (Meisterprüfung). Master craftsmen in industry (Industriemeister, foreman) are well paid and have an high social status.

      It is not uncommon that highschool students with Abitur (graduation at the first tier 13 year highschool) apply for apprenticeship, they get usually one year reduction and larger companies often combine this with internal and external training programmes which give the graduats the equivalent of an diploma from a university of applied sciences.

      An apprenticeship in a good company is much better than more schoolish alternatives, the guys see the reality and OTOH the companies have usually an interest to provide a good programme for their future employees.

      Ulenspiegel

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    2. One might add that these days older apprentices with higher school graduation are becoming more common. Many companies request A-Levels/Abitur which also qualifies for university/academic career. It depends on the kind of apprenticeship.

      As mentioned above by David companies that don't train have a smell. The same in Germany as in Switzerland. The systems are very similar in general. Many companies even advertise with their training efforts. Especially in the countryside that's also part of the professions tradition.

      In the public trade schools apprentices from very small and very large companies get together and this broadens the horizons. Even employment possibilities and connections may arise there. Teachers often have good contacts for apprentices that don't get a contract afterwards.


      An important factor is the chamber of industry and commerce (Industrie- und Handelskammer/IHK). It elaborates the training and examination rules, supervises the apprenticeship and executes the final exams.

      Premature termination of apprenticeship is possible if the apprentice fails totally, but it is not very common. Bad grades are seen pretty often, especially with very young apprentices. But companies also know how they have to interpret a 16-year olds results.

      The IHK also rewards the top graduates and for larger companies it's often deemed a question of honour to have a good amount of apprentices rewarded. When companies go bankrupt IHK helps apprentices to finish their apprenticeship at another company. As far as i know this works in 99% of the cases.

      The whole system has its weaknesses. But having a system allows for permanent critic and optimization by social monitoring after all

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  4. From an ideological standpoint, the comeback of apprenticeships is a bit risky for the Tories. Apprenticeships are very useful in transmitting manufacturing skills. I believe Germany's great advantage in specialized manufacturing comes from the system of apprenticeships. But manufacturing will also mark the return of a working class. It de-emphazises the British focus on the financial industry and the service sector. A strategy focused on the manufacturing sector will require some time and patience. The skill gap won't close immediately. The financial sector will have to be reined in for a while until enough expertise has been accumulated to see a financial payoff. That's why Thatcher's revolution was such a two-faced process. The good went out with the bad, the thread of the tradition of manufacturing was cut.
    However, it should be noted that apprenticeships in Germany are not just reduced to the manufacturing sector, but can be found frequently in services as well, for example, in communal banks and especially in the health care industry.
    A whole new interest group will be created if apprenticeships are meant to make a comeback. This group will have to be represented. In Germany, the institutional setup is strong enough so that unions and the chambers of commerce together look out for the interests of these people. After all, the industry needs good apprentices for the future (immigration might alleviate this problem, but it would be a difficult and less efficient secondary solution.).
    To make the system work, the industrial chambers of commerce will not only have to keep the interests of the shareholders and managers in mind, but also those of its workers. Apprenticeships are an investment into the future. It acknowledges that human capital is not just there for the taking, but that it needs to be created.

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  6. As I often say, a neoliberal agenda (or whatever else you want to call it) is anathema to economics, a large part of which is about market imperfections, and how governments can sometimes be instrumental in fixing them. I think you would be hard pressed to find a Labour politician who understood what this means let alone who was willing to say it in public.

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  7. In the States we have seen a decrease in blue collar training as well so I think the US/UK have had similar realities. My guess is in the short most Apprenticeships training probably saved money and allowed people and firms to organize themselves. This was especially true when the US/UK had a lot more Blue Collar labor in the early 1980s with the Baby Boomers.

    However, in the long run, the dependable blue collar labor is disappearing for the other side of the same coin of why there was too much in the early 1980s. The Baby Boomers are retiring and younger generations are not trained to fill the positions. In the states, there is a shortage of diesel mechanics and we are hearing how bad our education system is causing this shortage. In reality, our economy offers little for a good worker to become a diesel mechanic.

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  8. Training opportunities such as day release have become very rare for the young. I did an open university degree with help from my employer thirty years ago, and my husband did a day release Chemistry degree equivalent. My children have no such training, and are in terrible debt for their university degrees.
    This is the real debt that we are leaving to our children - a lack of training and skills. The deficit burden is all nonsense.
    On a macro economic scale, any government input in the form of grants to supports employees and production, otherwise businesses, like households, are completely dependent on bank credit. Getting into debt would be another disincentive to train staff, as it creates more risk and reduces profits.
    The post Keynesians and MMT economists tell us (from sectorial balances), that bank debt does not increase our assets, but government money does. So any cut would drive down growth. But grants for training have specifically lead to fewer skilled workers, which is detrimental to our productive economy.

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