Encouraging employers to take on apprentices
1 Feb 2014
Stefan Speckesser, Principal Economist and Jose Vila-Belda Montalt
Increasing the number of apprenticeship places available in UK workplaces is a key goal for the government, in the context of high youth unemployment and the ongoing need to develop skills. IES undertook a cost-benefit analysis of a government-funded programme aimed at encouraging employers to provide apprenticeship places. It found that the programme has resulted in significant benefits to both apprentices and society as a whole.
The AGE programme
The Department for Business, Innovation and Skills supports small and medium sized firms in England, by means of an Apprenticeship Grant for Employers (AGE) of a value of £1,500 if they create a new apprenticeship for a 16 – 24 year old. Between April 2012 and February 2013, AGE was paid towards a total of 24,420 newly-created apprenticeships.
IES undertook a cost-benefit analysis of the programme, aiming to understand whether public spending in AGE provides value for money. A cost-benefit analysis aims to compare all measurable costs and benefits associated with a specific policy or programme and assess whether the benefits are greater. In particular, government agencies investing in educational or other types of programmes like to compare the cost-effectiveness of different policies, looking at the monetary gains that arise per each pound invested. This can be done from the perspective of different stakeholders. In the case of apprenticeships supported by AGE, costs and benefits arise for apprentices, employers, the exchequer and society at large. Below, we examine the findings in relation to apprentices and society in general.
The idea of comparing the costs and benefits stemming from different possible options available to us is familiar to everyone. In the decision to devote effort or money to something, we evaluate both immediate and longer-term costs and benefits, and this implicit assessment can sometimes be very complex. Some costs and benefits are nonmeasurable, others have to be forecast, and there is always some degree of uncertainty. These types of challenges are faced when attempting to compare the costs and benefits associated with a programme such as AGE.
One of the first questions to be addressed was the benefits of embarking on an apprenticeship for the apprentices themselves. Apprentices are, of course, at the heart of this policy intervention and should therefore be reaping benefits that are substantial enough to make public investment on AGE worthwhile. But assessing the impact of apprenticeships on programme participants is far from straightforward: earnings gains and improved employment outcomes from apprenticeships have to be estimated compared to a counterfactual outcome if people had not undertaken the apprenticeships. Since the counterfactual cannot be observed, we estimated returns to achieved apprenticeships relative to people at lower qualification levels, using data from the Annual Population Survey (2011). We estimated multivariate regression models, which control for differences among apprenticeship achievers and non-achievers in a range of sociodemographic characteristics affecting earnings and employment. This approach captures the influence of other variables, so that remaining differences in outcomes represents the genuine impact of undertaking an apprenticeship.
The results of this analysis suggest an average earnings premium of 15.1 per cent per hour of people who have achieved an Intermediate Apprenticeship, compared to Level 1 qualifications. Moreover, their probability of being employed as opposed to unemployed increases by 6.8 percentage points. In the case of Advanced Apprenticeships, the effects are even stronger: earnings per hour increase by 22.9 per cent relative to Level 1 and the probability of being employed increases by 9.7 percentage points. These estimated impacts are a rough measure that refers to the average wage and employability gains that would accrue to apprenticeship achievers over their working life. Over time, therefore, the economic gains associated with achieving an apprenticeship can be very large. Our estimates suggest that achieved apprenticeships raise lifetime earnings by £138,800 in the case of Intermediate Apprenticeships and by £209,000 in the case of Advanced Apprenticeships (at present currency values). However, not every young apprentice actually achieves apprenticeship qualifications and so the expected value of lifetime earning for every person starting an apprenticeship is in the region of £103,000 for Intermediate and £164,000 for Advanced Apprenticeships.
These long-term gains greatly surpass the costs that programme participants face in undertaking an apprenticeship. Because remuneration for apprentices tends to be lower than pay levels in regular employment, the main measurable cost is a short-term income loss. We calculated that, over the duration of the apprenticeship, this income loss amounts to between £8,900 and £15,400, which constitutes a small fraction of the longterm benefits. From the apprentices’ point of view, therefore, undertaking an apprenticeship is a very profitable investment.
Benefits for society
Increased apprenticeship take-up constitutes a policy goal for the UK and many other European countries, and private gains accrued by apprenticeship participants are an essential incentive. But from a government’s perspective, it is the fiscal and social impact of public investment that really matters. Higher earnings and improved employment prospects among apprenticeship achievers result in additional revenues for the public purse through taxation on incomes and consumption, as well as substantial savings in unemployment benefits. These are the main mechanisms through which public investment in AGE can be recovered, and our estimates show that substantial fiscal gains are obtained in the long term.
But even a policy intervention with net fiscal costs can be an adequate investment if the programme yields net benefits for society at large. Assessing this is the purpose of social cost-benefit analysis, which focuses on the costs and benefits for all stakeholders involved. This type of analysis, however, poses even greater methodological challenges, given that there can be substantial unmeasured effects. For example, the diffusion of knowledge to non-participants can produce efficiency gains at the level of the firm, and there are non-market effects such as those on personal or family welfare that result from improved socioeconomic conditions. Our social costbenefit analysis was based on direct costs to employers and the exchequer and direct benefits to participants, and therefore it is likely that we underestimate the true net social gains that result from AGE-supported apprenticeships.
The social costs of AGE include regular public funding of further education and the costs of the AGE grant as such. In the short term, there is also a production loss, given that apprentices would produce more if they were in regular employment, with no or less time devoted to training. Estimates of the total costs for every AGE apprenticeship amount to £14,500 for Intermediate and £16,900 for Advanced apprenticeships. However, the comparison of these costs with the net benefits to individual apprentices over their working life shows that AGE yields large social gains. Taking into account achievement rates in apprenticeships and that only a part of the supported apprenticeships are genuinely additional, there is a social return of around £5 for every pound initially spent by society at large in AGE-supported Intermediate Apprenticeships, and a return of £7 for every pound invested in AGE-supported Advanced Apprenticeships. If production loss is ignored and social benefits are related to direct public spending, every pound spent on AGE creates social benefits of £18 for Intermediate and £24 for Advanced Apprenticeships.
To summarise, our analysis confirmed that the creation of new apprenticeships yields substantial gains for society at large. More particularly, we believe that AGE has been an effective way of increasing social benefits as many of the apprenticeships created by AGE have been genuinely additional and at low costs compared to the present values of future benefits.