Steve McIntosh, from the Department of Economics at the University of Sheffield, is an applied labour economist, with a particular focus on education issues and how they relate to labour market outcomes. Here he asks why the focus on apprenticeships in the recent election, and what are their apparent benefits?
The basic methodology shared by all research in this area looks at the wages and employment rates of those who complete an apprenticeship, compared to the same outcomes for a comparison group, controlling for as many other wage-deterrmining characteristics of the two groups as possible. Where different studies vary is in their choice of comparison group. Those studies that use survey data, such as the Labour Force Survey, typically compare apprentices to those who have not undertaken an apprenticeship, and whose highest qualification is one level below. For example, for advanced (level 3) apprentices, the outcomes of those with a level 2 qualification as their highest is taken as the estimate of what would have happened to the apprentices if they had not undertaken their apprenticeship. Those studies that use administrative data often compare the outcomes of those who complete an apprenticeship to those who undertake an apprenticeship but do not complete.
The headline figures for the estimated returns are encouraging, and justify the attention given to apprenticeships by the political parties. Before I present the results, however, it is important to recognise that they could be over-estimates of the true effect of apprenticeship training. Because many apprenticeship programmes are oversubscribed, employers can choose from the list of applicants, and are likely to select the best candidates in terms of ability and motivation. The individuals we observe undertaking an apprenticeship might therefore be the sort of people who would have done well in the labour market anyway. Similarly, when comparing those who complete an apprenticeship to those who begin an apprenticeship but do not complete, the completers are likely to be of higher ability, and so again would likely have earned more even without the apprenticeship. In both cases, some of the observed wage differential could therefore be due to the characteristics of the apprentices, rather than the apprenticeship training itself. Future CVER work will investigate ways to control for any such biases. For now, though, we can say that the estimated returns, below, are probably large enough to accommodate partly being due to favourable learner characteristics, and still yield a worthwhile return to training.
What
the results say
The
earlier studies were more likely to be ones that use survey data. For example, McIntosh
(2007) used the Labour Force Survey for 2004-5, and found individuals whose
highest qualification was an apprenticeship at Level 3 earned on average 18%
more than those who highest qualification was at Level 2, while for a Level 2
apprenticeship, the wage premium was 16% compared to individuals whose highest
qualification was at Level 1 or 2.
Summing over the working lifetime, taking into account the probability
of being in employment at each age, and also the costs of apprenticeship
training, the net value of obtaining an apprenticeship in current monetary
terms was found to be £105,000 for Level 3 apprenticeships and £73,000 for
Level 2 apprenticeships.
This
research was updated by London
Economics (2011), using Labour Force Survey data for 2004-9, with very
similar results. The observed wage premia were 22% for a Level 3 apprenticeship
and 12% for an apprenticeship at Level 2. This produced net present value
results for the lifetime benefits of between £77,000 and £117,000 for Level 3
Apprenticeships and between £48,000 and £74,000 for Level 2.
More
recent estimates of the labour market benefits of apprenticeships have used
administrative data, matching data from the Individualised Learner Record (ILR)
to wage information from HRMC. The
results obtained are reassuringly similar to those produced when using survey
data such as the LFS. London
Economics (2013) report one such analysis, estimating wage premia in the
years following completion of an apprenticeship. They find that an individual
who obtains a Level 3 apprenticeship earns 15-20% in each of the first six
years following the completion of the qualification, relative to an individual
who fails to complete. At Level 2, the wage premium to an apprenticeship is
around 10-15% in each year following completion, except for the first year when
the initial return is much higher. A
similar analysis of apprenticeship completers versus non-completers at the same
level was undertaken by Bibby
et al. (2014), using a similar matched data set covering the period
2002-2012. They report a 16% wage premium for Level 3 apprenticeship completers
and an 11% wage premium for Level 2 apprenticeship completers, averaged over
the period 3-5 years following the completion of the apprenticeship.
Variation in returns
Studies
therefore suggest large individual wage benefits to undertaking and completing
an apprenticeship, irrespective of which data set, methodology and time period
are studied. It is such results that have been used to justify the extension of
the apprenticeship programme. However, it must be noted that these results do
not mean that all apprenticeships have high payoffs to the individuals and to
the exchequer. We must recognise that these figures are averages, and that
there will be variation around these averages. Further analysis has
investigated the characteristics of apprenticeships that are associated with
high and low returns. The framework area
of an apprenticeship has been shown by a number of the studies mentioned above
to be strongly associated with the estimated wage premium. Construction and engineering apprenticeships
have consistently been shown to have higher wage premia, though their relative
strength is slightly lower in a full cost-benefit analysis, once the higher cost
of provision of such apprenticeships is also taken into account. At the other
end, apprenticeships in the areas of retail, hospitality and tourism are often
observed to yield small and insignificant returns. In addition, though not studied specifically
with respect to apprenticeships, previous studies such as Bibby
et al. (2014) show higher returns
to vocational qualifications at all levels when they consider 18-24 year olds
than for 25+ year olds. It is therefore
of some concern that the big increase in apprenticeship numbers since 2010 is
for the 25+ age group, with a smaller increase for the 19-24 age group, and no
increase at all for the 16-18 year old age group (see Figure 1). Similarly, data
by sector subject area show that the areas seeing the largest increases in
apprenticeship numbers over the previous decade have been retail and caring,
together with business administration. Engineering apprenticeship numbers have
seen a much smaller increase, while numbers in construction are falling. We therefore cannot assume that the average
wage returns observed in earlier periods, as described above, will be earned by
many of the additional apprenticeships that have been observed in the recent
growth period.
Therefore,
while the benefits to apprenticeships are, on average, very pleasing,
reflecting the value of the training received, and the growth in apprenticeship
numbers is also a good sign, it is important that apprenticeship quality is
maintained or even enhanced, that attention should be prioritised where value
is greatest, and that in the efforts to increase apprenticeship numbers, the
brand is not diluted by classifying ongoing training, specifically of older
workers who are already employees, as apprenticeships. Apprenticeships must
remain an intensive training experience, of significant duration, and providing
the apprentice with a new set of skills with which to practise in their chosen
profession, and not become just a validation of existing skills.
Figure
1: Apprenticeship numbers over time by age
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Source: SFA, Statistical First Release SFA/SFR29
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