Manufacturing was at the beating heart of the British economy and is at the centre of our long-term recovery from the pandemic. It is also a key part of Britain becoming more self-reliant in a challenging geopolitical climate and growing its GDP by improving exports. Rolls-Royce and GSK are great examples of British excellence – companies making significant contributions to local employment, investing in innovation, and helping UK exports.
The sector accounts for 10% of GDP and represents huge potential for growth, with the manufacturing trade body Make UK saying that “if manufacturing output as a share of UK GDP were to increase from 10% to 15% this year, that could result in an extra £142 billion to the UK economy.” That output is colossal. It is comparable to Hungary’s entire GDP and it is achievable with the right government policy, investment, innovation, and, critically, skilled staff to help the sector grow. But where have our skilled workers gone?
This article will explain how reform of the Apprenticeship Levy is critical to attracting a talented, diverse range of workers to fill job vacancies and drive business growth.
Manufacturing is a high-skill sector. As a result of this, manufacturing companies pay significantly higher wages than the national average. Yet despite attractive pay, job vacancies in 2022 remain high. They are at the highest they have been since records began, with the ONS reporting in August that there are 93,000 job vacancies in the sector. These vacancies matter because of their impact on inflation. Wages will increase if manufacturers cannot find enough skilled workers to keep their operations churning at maximum capacity meaning their input costs rise, which can, if supply and demand remains unchanged, cause price increases for consumers.
Whilst we can look to global imports to keep the costs of goods competitive, labour scarcity is not just a UK issue, with a shortage of labour endemic globally. In Germany and the US, job vacancies have also reached an all-time high this year. With many job vacancies and a current UK unemployment figure of 1.3 million, you would expect that there was a surplus of workers available. This raises the question of why cannot manufacturing firms find enough skilled workers.
‘The Great Resignation’ began during the pandemic as a trend of people either changing careers or leaving the workplace entirely. Many workers took stock to reassess their lives, with an exodus of older workers from the labour market. Others chose to start up their own businesses, with the number of business start-ups registered on Companies House at an all-time high during the pandemic. More women than men have left the workplace post-pandemic, with many citing increasing childcare costs and the lack of availability as the reason.
The impact of the pandemic and Brexit on UK worker shortage are interlinked. One of their challenging after-effects on business has been a smaller UK labour market and, consequently, strong competition for skilled workers. Pre-pandemic manufacturing obtained 11% of its workers from the EU but Brexit made labour mobility from the EU more complicated and costly. A report by UK in a Changing Europe, Manufacturing After Brexit, highlights that “EU citizens wishing to work in the UK not only need to obtain a visa, but also to obtain recognition of their qualifications by the relevant UK regulator.” The International Monetary Fund reported in 2022 that there is “a mismatch between the types of jobs available and the willingness of people to fulfil them.”
Whilst the sector is adapting to attract talent, offering flexible working patterns, in-depth training, and educational opportunities, government help is also needed to attract workers back to work.
The government can help by nurturing our skills economy to aid our unemployed and economically inactive people in getting back into employment. Apprenticeships develop specialist skills and Make UK’s State of the Industry report revealed that “28% of manufacturers said that greater investment in apprenticeships would make a big difference to their ability to grow.”
The Government’s Apprenticeship Levy was introduced in April 2017 and was implemented to increase the level of employer investment in training and drive up the number of people accessing the workplace through apprenticeships. The Apprenticeship Levy is a tax paid by large companies at a rate of 0.5% of an employer’s annual pay bill. The levy funds raised are used to subsidise apprenticeship training for all employers. While the Government’s intention was there, the Levy has not increased the number of apprenticeships, with the number of manufacturing and engineering apprenticeships falling from 36,170 (pre-apprenticeship levy) in 2016/17 to 32,000 in 2020/21, and total apprenticeships falling from 494,900 in 2016/17 to 321,400 in 2020/21.
Manufacturing firms have fed back that levy fund application can be restrictive, not reflective of the true costs of apprenticeships, burdened with government red tape processes, and too short on time frame, with firms only having 24 months to spend their allocated levy funds before they expire. There is a compelling requirement for the process to be changed to reflect the full cost and time frame of training apprentices. This could be achieved by doubling the time companies have to spend their levy funds from 24 months to 48 months and reviewing levy funding band limits. Raising the band limits to reflect full training costs would act as a stronger incentive for companies to take on apprentices.
Giving employers greater flexibility to apply levy funds to a wider curriculum of training would also ensure that the Levy works to cover bespoke training requirements. The CIPD (Chartered Institute of Personnel and Development) has called for it to be replaced by a “flexible training levy” which empowers businesses to have greater autonomy and spend levy funds on whatever training best meets the needs of their business. Some firms do not spend their levy allowances, meaning apprenticeship training funds are wasted. Increasing the amount of levy funds that larger businesses can transfer to smaller firms to pay for apprenticeships would help to tackle this problem.
Rishi Sunak announced in his Spring 2022 Statement as Chancellor his intentions to review and consider the effectiveness of the scheme after acknowledging that “the current tax system may not be doing enough to incentivise businesses to invest in the right kinds of training.” With Liz Truss making strong commitments to the levelling up agenda, boosting productivity, and economic growth, it is likely she will look to review the scheme as the new Prime Minister.
The CIPD said in a report produced by the BBC in 2021 that, since the levy was introduced, apprenticeship numbers have fallen and fewer have gone to young people, with its CEO Peter Cheese saying that “On all key measures the apprenticeship levy has failed.” It is clear the Apprenticeship Levy needs urgent reform to reflect the actual training requirements that business needs.