Economic impact of apprenticeships - Cebr · 1 Introduction For centuries a method of training in...

Economic impact of apprenticeships A Cebr report for the Skills Funding Agency November 2014

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© Centre for Economics and Business Research

Disclaimer

Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and

Business Research Ltd nor the report’s authors will be liable for any loss or damages incurred through the use of the report.

Authorship and acknowledgements

This report has been produced by Cebr, an independent economics and business research consultancy established in 1992. The

views expressed herein are those of the authors only and are based upon independent research by them.

The report does not necessarily reflect the views of the Skills Funding Agency London, November 2014

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Contents

Executive Summary 4

1 Introduction 5

2 Economic contribution of apprenticeships 6

2.1 Apprenticeships in a long-run context 6

2.2 Who gains from apprenticeships? 7

2.3 What do apprentices do? 8

3 Estimating costs and benefits 9

3.1 Additional employment 9

3.2 Total economic returns 10

4 The future of apprenticeships 12

4.1 Benefits by scenario 12

5 Which regions and sectors are seeing the greatest impact? 16

5.1 Sectoral analysis 16

5.2 Regional analysis 16

6 Conclusion 19

7 Appendix: Methodology 20

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Executive Summary

The apprenticeship system has been in use for centuries. For much of the 19th and 20th centuries it was a common method of training workers for manufacturing employment.

Recently apprenticeships have seen a renaissance, as the government has massively expanded the scale of the apprenticeship programme partly in response to high youth unemployment. The recent expansion has centred on service industries.

Currently around half a million people start apprenticeships every year, up on levels of around 100,000 between 1950 and 1970. This declined to a low of 34,000 in 1994.

Evidence links apprenticeships to a higher chance of finding employment (“employment premiums”) and a higher wage once employed (“wage premiums”) than similar groups without apprenticeships. There is a net gain to the employer while apprentices train, and a higher output once employed. The apprentice, the employer and the state all benefit from the arrangement.

The annual economic impact of apprenticeships through these channels is estimated at around £34 billion. The greatest part of this results from the wage premium and its associated output gain, which is worth £31 billion across all those who have completed apprenticeships.

Research has found benefits of £16–£21 for every £1 of government spending; the present findings accord with this. In 2010, with government funded apprenticeships worth £1.2 billion, the benefits are estimated at £25.3 billion, a ratio of £21 in benefits for each £1 of public spending.

By 2050, our central estimates find an increase in the annual economic impact of apprenticeships of £101 billion at 2014 prices. This assumes a relatively flat trend in apprenticeship starts.

An upside scenario, under which the Apprenticeship Programme is expanded, would lead to gains of £109 billion per year. If the programme shrinks, our downside scenario has this impact gradually diminishing to £91 billion.

We examine a “super-downside” scenario where the lowest levels of apprenticeships on record (i.e. early-1990s) persist into the future. We find gains would be just £16 billion in 2014 and only £11 billion in 2050.

The region making most use of apprenticeships is the North West, and the highest concentrations of apprentices per population all occur in Northern and Midlands regions.

Sectorally, apprenticeship starts are most concentrated in health and social care. They broadly follow the pattern of the economy as a whole, with most apprentices in service industries, some in manufacturing and a smaller number in construction.

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1 Introduction For centuries a method of training in the crafts and a crucial institution in the UK’s old, manufacturing-

based economy, apprenticeships have recently received a new lease of life. This was partly a response to

a crisis – the huge loss of jobs during the Great Recession and especially the disproportionate impact that

this had on young people. With over 1.2 million 16–24 year olds not in work, education and training

(NEETs) in the latter half of 2011, the government raised the funding for the apprenticeship programme

further. Over the period from 2007 to 2012, apprenticeship starts increased from just 184,000 to

496,000. Participation in the programmes jumped to 950,000 from 419,000 over the same period

(because most take over a year).

There is ample evidence that apprenticeships are effective. We look at evidence on their economic

impacts from various sources here and combine it with Cebr’s in-house models to look at the past and

the future. This gives a long-run picture of the gains from apprenticeships, starting in 1950 and projecting

current trends to 2050 under different scenarios for the evolution of the programme. The greatest

returns appear to come from the wage premium that apprentices gain once in post-training employment.

But there are also important benefits stemming from the avoidance of unemployment and the gains

companies make thanks to the work apprentices do while training.

The last section looks at sectoral and regional splits of this economic impact. The regional distribution is

different from patterns of economic activity or population, being concentrated in the North West.

Sectorally, apprenticeships correspond relatively closely to our economic structure. The main sectors

taking apprentices are now service ones, with some manufacturing and a little construction, as opposed

to the former model where they were concentrated in industry.

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2 Economic contribution of apprenticeships 2.1 Apprenticeships in a long-run context

As a method of training, apprenticeships date back to medieval times. The first mention of this system in England is from the 13th century, so its economic contribution can be assumed to have a similarly ancient heritage. At around this time, apprentices would work for a master in one of the guilds, or associations of workers, until completing their training.

They persisted into the modern era in a largely unchanged form, although the sectors that most apprentices worked in evolved gradually, reflecting the changing structure of the economy. By the 1950s most apprentices worked in manufacturing industries, learning trades such as metalworking and engineering.

Modern apprenticeships1 were introduced in the mid-1990s. This created a formal structure for training, both on-the-job and off-the-job. The number of modern apprenticeships grew rapidly between the mid-1990s and the present day, reaching levels of around 150,000–200,000 starts per year before the financial crisis.

The financial crisis and the recession that followed saw unemployment climb to its highest level since the early 1990s, with youth unemployment topping one million and becoming a major priority for the government at the time. In response, the government increased funding for a new apprenticeship grant for employers (AGE 16–24). Having dwindled to just 34,000 starts in 1994, the lowest levels since modern records began in the 1950s, apprenticeships have attracted renewed focus as their important role in creating a modern and highly skilled workforce becomes clear. Figure 1 shows the long-run trend in apprenticeships.2

Figure 1: Apprenticeship starts by year, 1950–2014

Source: House of Commons Library: Olympic Britain – social and economic change since the 1908 and 1948 London Games

1 Now known simply as apprenticeships.

2 Source: House of Commons Library: Olympic Britain – social and economic change since the 1908 and 1948 London Games. Figures for missing

years interpolated by Cebr.

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2.2 Who gains from apprenticeships?

The three main parties involved in organising and funding apprenticeships are the apprentice, the employer and the government. There is substantial evidence on the size of the initial training costs and on the economic effects of apprenticeships. We review the evidence base to find the total economic impact of apprenticeships for the economy as a whole, accounting for all three parties.

Table 1: Benefits and costs for apprentices, employers and the government

To the apprentice To the employer To the government

Benefits Higher employability,

Higher earnings Higher productivity,

Incentive subsidy Reduced benefit costs, Taxes

Costs Lower earnings compared to non-apprentice employment

Training costs Subsidies, Grants, Possible foregone earnings in short

term

Apprentices

The most substantial gains go to the apprentices themselves. Evidence from a National Audit Office (NAO) study on the subject3 finds that apprentices forego a slightly larger salary in the short run in order to receive higher earnings later on. Since it is a training scheme and therefore workers are less productive, apprentices temporarily receive less than they would, were they employed in other jobs available to those with the same level of qualifications. Apprentices must spend a certain number of hours per week doing off-the-job training, which represents a cost in terms of time to them.

There are two levels of apprenticeship – intermediate and advanced. The NAO study mentioned above on apprenticeships found wage premiums for advanced-level apprentices of on average, 18% compared to those with the same level of qualification but no apprenticeship. Intermediate-level apprenticeships were associated with a gain of 11%.

Employability was analysed in the same way. The study found an increased likelihood of being in employment, compared to similar people without an apprenticeship, of 3.6 percentage points for those studying at the advanced level and 1.6 percentage points for those studying at intermediate level.

Employers

Employers gain in the long and short run from taking on an apprentice. The annual output gains that accrue to businesses through hiring apprentices have been estimated by Cebr at £1.8 billion for 2012–13,

in a report for the Association of Accounting Technicians.4

In the short run employers have to provide a certain number of hours per week of on-the-job training. This requires the participation of a trained worker who must supervise the apprentice during their own working hours. This represents a cost for employers, but firms gain cheap labour as the minimum wage for apprentices is below that for other workers.

3 National Audit Office, Adult Apprenticeships, 2012

4 Centre for Economics and Business Researach, The Value of Apprentices – A report for the Association of Accounting Technicians, 2014

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Government

The government subsidises apprenticeships to the tune of £1.2 billion per year5. The government pays for the off-the job training to varying degrees dependent on age, while employers must cover the on-the-job costs such as time and equipment. In order to make the deal more compelling for employers, the government introduced an incentive of £1,500 in 2012.

The indirect fiscal consequences of apprenticeship funding are important. Unemployment is reduced and higher taxes result from the higher wages in the long run. In the short run, the tax take is temporarily reduced and the government must pay for the scheme.

2.3 What do apprentices do?

Apprentices’ tasks at work depend on their sector of employment and on their level. Most receive both on-the-job and off-the-job training of a few hours every week.

For example, Electrical Apprentices will carry out electrical installations under supervision as part of their on-the-job training. This will be supplemented by off-the-job training, often in a further education college, or away from college via video or computer. The degree of training depends on the employment sector, with those learning highly technical occupations required to spend a greater proportion of their time training than others.

A study by the University of Warwick into IT apprenticeships carried out case studies. It found that apprentices started out performing basic tasks within the organisation, gradually progressing as they gained experience in the same way as other new employees: “his company had become involved with apprenticeships when he realised that he had been providing de-facto apprenticeships over a number of years”.6 Apprentices are assessed at regular intervals through their contract.

5 2010–11 figures from National Audit Office

6 Warwick Institute for Employment Research, ‘The Net Benefit to Employer Investment in Apprenticeship Training: IT Apprenticeships’, 2009

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3 Estimating costs and benefits This section examines the above-mentioned economic effects in more detail, using evidence from existing studies, government data on apprentice numbers and Cebr’s own models.

The long-run costs and benefits have been estimated based on our scenarios for apprenticeship starts. Where data were available to calculate other totals such as unemployment benefits saved, we have input them; otherwise, we have used their long-run trend.7

The main costs and benefits of apprenticeships to be considered are:

- Higher wages for apprentices - Higher tax contributions - Higher lifetime employment chances - Net benefits to organisations while hosting the apprenticeship.

3.1 Additional employment

Apprenticeships have been shown to increase lifetime employment chances for people who complete one. This means that a large number of jobs can be attributed to past participation in an apprenticeship scheme. We estimate the extra employment associated with past completions from 1950 to the present; Figure 2 graphs our findings.

Figure 2: Additional jobs associated with past apprenticeships over time

Source: BIS/SFA Further Education data library, National Audit Office “Adult Apprenticeships”, Cebr analysis

The totals are cumulative, as they account for all extra employment associated with apprenticeships started since 1950. They exclude employment associated with apprenticeships that happened before 1950, as we do not have data on starts pre-1950.

7 See Appendix for more details.

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3.2 Total economic returns

Using the employment estimates, totals for the economic impact from the various different sources can be calculated.

Table 2 tabulates these for four key years up to the present. The largest benefit by far in all years but 1950 is the net gains through higher wages, profits and taxes, cumulatively known as gross value added (GVA). This takes the total in extra wages earned by apprentices compared to others without an apprenticeship, and increases it on the grounds that companies earn a profit margin on employees’ wages and also pay taxes. The total output comes to significantly more than just the wages.

The gains through saved unemployment benefits are modest by comparison. They amount to £370 million this year, thanks to approximately 99,000 extra employed people compared to the counterfactual scenario of having no apprenticeships.

Benefits to organisations from training start out as the largest category of benefits, but do not increase as rapidly and end up being dwarfed by the gains in extra output. The other two categories of impact accumulate each year as more apprentices complete schemes, whereas the training benefits only apply for apprentices currently training, rather than the cumulative figure. Benefits to organisations from training have nevertheless increased more than tenfold between 1950 and the present.

Table 2: Economic impact per year by category, over time8

1950 1975 2000 2014

£ billion, 2014 prices




Net gains through higher wages, profits and taxes (gross value added / GVA)

0.159 7.1 19 31

Gains through saved unemployment benefits 0.006 0.16 0.24 0.37

Benefits to organisations from training 0.175 0.31 0.49 1.9

Total 0.340 7.6 20 34

These gains must be set against the costs of running apprenticeship schemes. Subsidies for apprenticeships were around £1.2 billion in 2010–11. (A precise figure is not available as the apprenticeship schemes operating today are numerous and operate across government departments and industry associations; consolidated figures do not exist.)

The National Audit Office’s evaluation of the programme found that the benefits of apprenticeships were £16 and £21 per £1 of public spending, for intermediate and advanced level respectively. The main apprenticeship scheme, the BIS–Department for Education Apprenticeship Programme, received £1.2 billion from the government in 2010–11. The above findings concur with this: the total economic impact for 2010 was £25.3 billion. Therefore the total benefit-to-cost ratio for each £1 of public spending found in the present study is £21.

For comparison with other investment types (these are purely indicative, as definitions vary), total returns to other forms of further education are estimated at £7 to £33 to every £1.9 Total returns to construction of schools have been estimated at between £3.87 to £5.04.10 Transportation and power have been estimated to create returns of around $14 for every $1 spent over a twenty-year-period in the

8 Totals may not sum correctly due to rounding.

9 National Audit Office, Adult Apprenticeships, 2012

10 LEK Consulting, UKCG LEK report on the business case for UK construction, 2009

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US economy. Total economic activity increases by £2.8 for each additional £1 invested in construction. Other research finds that total economic returns to innovation, research and technology spending lie between £4 and £7 per £1.11 Expenditure on R&D research within an organisation creates benefits to that organisation of around £1.25 for each £1 spent. By any standards, returns to investment from apprenticeships are high.

11 Oxford Economics, ‘The impact of the innovation, research and technology sector on the UK economy’, 2014

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4 The future of apprenticeships This section looks forward at likely future developments in the world of apprenticeships.

The recent past was strongly influenced by the recession and the high unemployment rates that accompanied it, especially among young people. Companies became cautious and less willing to hire or to invest in training, while greater numbers of young people needed employment. The government stepped in to bridge the gap, investing in many more apprenticeships and actively encouraging companies to apply for grants.

Apprenticeships grew most recently, then, as a response to the crisis. There has been a shift towards apprenticeships in any case in government policy. Assuming that some apprentices chose to take apprenticeships partly due to the absence of other opportunities, the number starting would be expected to fall slightly as other employment opportunities reappear. But because of the shift in government policy, we expect them to fall but remain above pre-crisis levels. Therefore we model the central forecast as falling away with youth unemployment, and both the upside and downside forecasts doing the same over the near term.

We assume, on this basis, a central forecast where apprenticeships stay on an approximately level trend, growing but not as rapidly as during the recession, and not quite meeting the peak reached in 2011, as that year was exceptional. Numbers fall to around 400,000 by 2030, at which point we assume the trend returns to a gradual increase at a rate slightly below the population growth rate. An upside scenario sees the programme contracting a little, before growing at a rate similar to the population. On the downside, the number of starts would fall towards levels of the early 2000s.

Figure 3: Apprenticeship starts, 1950-2050, by scenario

Source: BIS/SFA Further Education data library, Cebr analysis

4.1 Benefits by scenario

Having defined the scenarios in terms of apprenticeship numbers, it is possible to estimate the future economic impact of apprenticeships, provided we make assumptions about certain other economic parameters going into the future.

Figure 4: total economic impact of apprenticeships by scenario

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Central scenario

The central scenario, under which current trends in apprenticeships continue, would lead to a yearly impact of approximately £50 billion by 2025, increasing to £101 billion in 2014 prices by 2050.

Table 3: Annual economic impact under central scenario

1950 1975 2000 2014 2025 2050








0.159 7.1 19 31 48 98

Gains through saved unemployment benefits

0.006 0.16 0.24 0.37 0.53 0.9

Benefits to organisations from training 0.175 0.31 0.49 1.9 1.7 2.0

Total 0.340 7.6 20 34 50 101

Upside scenario

Assuming a different scenario under which the number of apprenticeships grows over most of the timeframe, the yearly impact by 2025 would be £51 billion, higher by £1 billion than it would be under the central scenario. By 2050, it would grow to exceed the central trend’s projected impact by £8 billion per year, at £109 billion compared to £101 billion.

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Table 4: Annual economic impact under upside scenario

1950 1975 2000 2014 2025 2050








0.16 7.1 19 31 49 105


0.01 0.16 0.24 0.37 0.54 1.0


Total 0.34 7.6 20 34 51 109

Downside scenario

In the downside scenario, we assume apprenticeships fall compared to today. But since the recent expansion of the programme has been so dramatic, the numbers taking apprenticeships each year will still be comfortably higher than the long-term average. As the benefits derive more from past apprenticeships than from current activity, we would still be gaining far higher annual benefits than we do today. This is helped along by growth in productivity over the timeframe.

But compared to the other two scenarios, we will lose out. The total economic impact at the end of the forecast horizon, at £91 billion per year, is 10% lower than the central forecast and 17% below the upside.

Table 5: Annual economic impact under downside scenario

1950 1975 2000 2014 2025 2050








0.16 7.1 19 31 47 88


0.01 0.16 0.24 0.37 0.52 0.8


Total 0.34 7.6 20 34 49 91

Continuation of early-1990s levels instead of the boost from modern apprenticeships

Throughout the 1980s and early 1990s, the decline of UK manufacturing saw apprenticeships fall to their lowest levels since records began. In 1978, a record 156,200 started apprenticeships. By 1988 this had fallen to less than half, at 76,000. The trend continued until 1994, when they reached their lowest level on record of just 34,000.

The near-disappearance of vocational training was reversed thereafter. 1994 saw the launch of modern apprenticeships, and the number starting schemes increased in almost every year between then and now. An alternative scenario could have seen persistence of the levels of that time.

We compare to the central forecast one further scenario, whereby the pre-modern apprenticeship record-low levels seen in the early 1990s continue. Part of our comparison is therefore comparing the

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large recent rise to a counterfactual situation in which it never happened. The average number of starts during 1990–1994 was 44,000. In this “extreme downside scenario”, we assume that the extra people doing apprenticeships since the programme was scaled up in the 1990s take no further qualifications instead of the apprenticeship.

This policy would have foregone very important gains to the economy. By 2000, the gains from apprenticeships would already be lower by almost £1 billion per year. This year, 1990s-level apprenticeship funding would mean £17 billion in annual gains would be lost. By 2050, we would receive yearly gains of just £11 billion from apprenticeships, compared to the £101 billion which we expect under the central forecast thanks to the upscaling of the project.

On the other hand, the funding levels would be lower. But the savings made here would be far smaller than the gains that could be captured.

Table 6: Annual economic impact under extreme downside scenario (i.e. continuing 1990s-level apprenticeship funding until 2050)

1950 1975 2000 2014 2025 2050







Net gains through higher wages, profits and taxes (gross value

added / GVA) 0.16 7.1 19 16 13 11


0.01 0.16 0.23 0.18 0.13 0.10

Benefits to organisations from training

0.18 0.31 0.16 0.16 0.18 0.21

Total 0.34 7.6 19 16 13 11

Loss compared to central forecast

0 0 1 17 37 90

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5 Which regions and sectors are seeing the greatest impact? 5.1 Sectoral analysis

Traditionally apprenticeships were concentrated in the manufacturing sector, but the new generation of government-subsidised schemes reflects the relatively deindustrialised economy of the UK today. In 1950, 59% of apprenticeship starts were in the manufacturing sector. That proportion has fallen to just 11% in 2014.

Figure 5: Apprenticeship participation by sector, 2012/13 and 2050


Health and social care was the largest category for apprenticeships during 2012/13, followed by customer service and business administration. This illustrates how the system has evolved since its origins, starting in crafts and moving on to become focused in manufacturing occupations, reflecting the changing nature of the economy.

5.2 Regional analysis

Figure 6: Apprenticeship participation by regions, 2012/13

Source: BIS/SFA Further Education data library, ONS Regional Labour Market, Cebr analysis

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Figure 6, which shows participation in apprenticeship schemes in 2012/13, illustrates the regional mix. It is out of step with economic activity and population, which are both concentrated in London and the South East. Participation in schemes varies from 0.6% in Northern Ireland to 2.3% in the North East – the clearest pattern appears to be higher concentrations in Midlands and the North of England, which are the top five regions by apprenticeship-to-population ratio.

The variation in participation does not seem driven by a higher concentration of the sectors which take apprentices. There is little difference across England in terms of what apprentices do; each region is dominated by the same four sectors – business administration, engineering, healthcare and retail.

Neither is it strongly driven by employment. Apprenticeship participation is only very weakly related to youth unemployment in each region. Given the observed efficacy of apprenticeships in improving employment chances, this trend suggests that some of the regions that have high youth unemployment but low apprentice scheme participation, such as Northern Ireland and London, could benefit from more apprenticeships.

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Figure 7: Estimates of the economic impact of apprenticeships by region, 2012/13


Economic gains are split in a similar way as participation is between regions. This is largely because the regional split of apprenticeships is only available going back for a few years, and it does not vary significantly over that period. Most of the gains, on the other hand, derive from a period further back, for which we do not have detailed regional breakdowns – thus Figure 7 must be treated with some caution.

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6 Conclusion At £34 billion per year, the economic impact of apprenticeships is already large, and it is likely to rise as

time goes on to reach some £101 billion by 2050. By expanding the ambition of the programme, the

government could increase those benefits by about £8 billion – or conversely, we could end up with

around a reduction of £10 billion if apprenticeships are curtailed compared to the central forecast.

The numbers starting apprenticeships each year is set to fall slightly as the effects of the Great Recession

– in particular, youth unemployment – recede, over the next few years. But given government policy and

renewed policy focus on apprenticeships, this suggests a higher long-run average than pre-crisis, and

further out, a rise in apprentice levels. The evidence certainly suggests this is warranted, at benefits of

around £21 for every £1 invested.

The regional bias in favour of the North West may be related to a worse situation in terms of youth

unemployment; however, apprenticeships are popular throughout the North and Midlands of England,

even in the low youth-unemployment East Midlands. The most important finding in relation to

apprenticeships is that their benefits far outweigh their funding costs.

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7 Appendix: Methodology The principal data source used was the Department for Business, Innovation and Skills (BIS) further education data library, which contains statistics on apprenticeship starts and completions and breakdowns by region, sector, level (advanced or intermediate) and many other variables.

The main economic effects to assess were:

Higher wages of those who have taken apprenticeships. This is a “wage premium”, based on research by the National Audit Office (NAO) in its study Estimating economic benefits from apprenticeships. The premium is applied to the average wage of a representative apprentice completer, as given in the NAO’s study – at a rate dependent on whether the apprenticeship is at advanced or intermediate level. The study found evidence of a further wage premium associated with advanced apprenticeships, whereby wages increase by an additional 1.5% for every year after completion. However, the study establishing this effect is based on recent apprentices. It is not clear whether the additions would continue accumulating over an entire working life, and to assume that on the basis of this evidence would be unwarranted.

Savings in unemployment benefits due to apprenticeships. Using Jobseekers’ Allowance, and before that unemployment benefits, we calculated the total savings due to people having taken apprenticeships who would otherwise not have been employed. The “employment premium” came from the National Audit Office’s Estimating economic benefits from apprenticeships. These were lifetime employment chances; therefore the savings recur each year over the course of their working lifetime. After 45 years, we assume the individual would have left the labour force to claim a pension rather than unemployment benefits. We also assume that in the counterfactual, prior to retirement they remain on unemployment benefits rather than becoming discouraged and dropping out of the labour force altogether (which would probably entail switching to claim another type of benefit).

The organisational net benefit to firms of hiring apprentices. These were calculated by taking training costs, apprentice hours and wages from the BIS Apprenticeships Pay Survey. Training costs include on-the-job training, which represents time sacrifices for other employees. These were combined with wage rates from the Annual Survey of Hours and Earnings to find the wage value of sacrificed time, which was scaled up to include profits and converted into gross value added terms.

Projections out to 2050 of the number of apprenticeships were made by using unemployment as a proxy variable for youth unemployment, and assuming the number of apprentices responds to that in the short run. In the long run, projections rise at the rate of population growth.

All economic costs and benefits were inflation-adjusted to convert into 2014 prices, either using Cebr’s forecasts for consumer price inflation or historic time series for the same.

The central scenario extrapolates the current trend in apprenticeship starts. Downside and upside scenarios are discretionary adjustments to that trend.

Economic impact of apprenticeships - Cebr · 1 Introduction For centuries a method of training in...

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