Up-skilling the middle

Successive governments have certainly placed skills policy at the heart of strategies to raise living standards and tackle low pay. Yet now there are growing doubts about whether upskilling workers will be enough to bring about genuine improvements in the living conditions of people currently on low to middle incomes (LMIs). In a new paper for the Commission on Living Standards, hosted by the Resolution Foundation, I re-examine the links between skills, the changing labour market and wages, arguing that in the long run, skills policy has a crucial role to play in equipping LMIs to thrive in the modern labour market.

It’s worth noting, however, that in the short run skill levels are unlikely to play a major role in improving the economic well-being of the LMI group. There has been a “hollowing out” of the labour market, with a decline in the number of intermediate level jobs. In this situation, with a limited number of intermediate jobs available, there is relatuively littleskills policy can do to move large numbers of individuals currently in low-skill jobs up into more valuable higher skilled jobs. The implication of this for the LMI group is that to improve their skills sufficiently to access the higher level jobs, they will have to take a very substantial leap up in terms of cognitive and non cognitive skill levels. Only then will their improvement in skill be sufficient to provide individuals in the LMI group with access to a high-return job.

So in the short run I argue that there is a case for looking at alternative ways to raise the incomes of the LMI group. For example, some kind of redistribution of income to narrow the gap between high and middle income households would undoubtedly be easier to implement, though not without its challenges.

In the long run however, skills policy can play a crucial role in improving the prospects for the LMI group. The evidence suggests that at the national level, skills policies do make a large difference to both productivity levels and the distribution of income within a country. And, to my knowledge, there is no evidence of a serious trade off between focusing on the mean level of skill in an economy and the distribution of skill (and hence income). Hence in the longer term we can be confident that careful design of skills policy can indeed make a difference to those living in low to middle income households.

Skills policy should therefore be seen as the long haul approach.

So in practical terms how can we raise the skill levels of the LMI group? Investments in the early years are the surest route to later achievement but are not sufficient to achieve good long run outcomes. Beyond the early years, children really do need to acquire excellent cognitive and non-cognitive skills in school – waiting until after they leave school is not a good option. Hence there is no substitute for continuing to push for improvements in the education system.

At the same time, previous government policy has tended to focus on the level of qualification acquired by workers, with targets for the numbers of workers at level 2, level 3 etc. There is a clear need to shift our policy focus from quantity to quality. Some qualifications are less valuable in the labour market than others at the same apparent level and we need to really improve our understanding of why some qualifications on offer do not apparently meet the needs of employers in some sectors.

We also need to recognise that not all skills are the same. Some skills are more valuable in the labour market, including basic skills and literacy and numeracy qualifications. We should be encouraging young people, their parents and schools to be more critical when choosing qualifications. Certainly we should also be devising policies that encourage individuals and firms to train and by doing so helping them make better decisions about which education and training to invest in. On the provider side, the government could also do more to encourage training providers to improve their offer and focus more on its impact on real outcomes for their students. The funding system could encourage this behaviour by, for example, rewarding training providers on the employment outcomes of their students.

Lastly, we could also do more to increase employers’ demand for skills and there is a general view that involving employers more (and more effectively) in the education and training system will tend to increase employers’ demand for skill. To achieve this, we need to be imaginative and look at a range of policies, including industrial policy, to stimulate greater demand for skill.

So in conclusion in the short skills policy is unlikely to provide a major support to living standards for LMIs, but in the longer run we can do far more to help this group by focusing out investments on children in schools, and by focusing on high quality skills which are in demand from employers.

Read Anna Vignoles’ report to the Commission on Living Standards: Up-skilling the middle