Wednesday, 10 June 2015

What are the benefits to vocational education and training?

Dr Gavan Conlon is a Partner at London Economics. He has an extensive understanding of economics of vocational education and training having spent the last two decades researching the area using quantitative analysis. In this blog he looks at the evidence on the economic benefits to vocational education and training, and the role for the new Centre.

One of the key research strands of the new Centre for Vocational Education Research aims at better assessing the economic benefits to vocational education and training. The existence of significant and persistent labour market benefits – in the form of higher earnings and improved employment outcomes – will at least in part incentivise individuals to undertake VET. On the Exchequer side, evidence on the return on investment – derived from enhanced taxation receipts post qualification completion – will provide confirmation on where best to allocate scarce taxpayers’ resources. This will become increasingly important given the potential reductions in expenditure faced by unprotected government departments (including the Department for Business, Innovation and Skills).  

Therefore, generating robust evidence on the size of the labour market benefits associated with VET is crucial. However, to understand who should and might pay for VET, it is also key to understand the distribution of any benefits between individuals undertaking VET and the government who predominantly fund VET in England.

What do we know already?

There is already a strong body of academic literature that has considered the earnings and employment returns to vocational education and training (see BIS (2013 (here) and BIS (2014 (here)). Using combined information from the Skills Funding Agency (VET) and HM Revenue and Customs (earnings and employment), a relatively recent analysis by Conlon and Patrignani (2013) suggests that there are strong, positive and persistent labour market returns associated with VET. As Figure 1 shows, the earning premium associated with completing VET at Level 2 stood at 2%-4% per annum in the seven years post attainment, while there was also a 3-4 percentage point increase in the probability of being employed (Figure 2).   

Figure 1: Earnings returns associated with vocational education and training

Figure 2: Employment returns associated with vocational education and training

Source: London Economics’ analysis for the Department for Business, Innovation and Skills (BIS RR 106 (here), Feb 2013). Note that the analysis compares completers versus non completers (aged between 19 and 59) using information from the Individualised Learner Record and HMRC P14 earning data. Earnings returns indicate the percentage gain in earnings compared to individuals who did not complete the qualification. Employment returns indicate the difference in employment probabilities for completers versus non completers of the qualification at the specific level.

What does this mean in terms of monetary returns?

Considering percentage improvements in labour market outcomes is clearly useful, but only tells half the story. Having undertaken an econometric analysis of the Labour Force Survey, the financial benefits to the individual and Exchequer associated with VET were estimated for a range of qualifications (see Table 1).

Table 1: Net Present Value associated with vocational education and training

City & Guilds
Level 2
£48,324 - £74,387
£42,618 - £70,991
£40,938 - £64,120
£24,466 - £49,814
£31,484 - £47,540
£26,006 - £42,289
£24,884 - £38,351
£9,065 - £23,652
Level 3
£76,990 - £117,337
£55,281 - £88,967
£44,906 - £63,801
£37,044 - £66,984
£55,632 - £80,661
£29,895 - £48,113
£27,552 - £38,473
£20,878 - £36,965
Source: London Economics’ analysis for the Department for Business, Innovation and Skills (BIS RR 53 (here), Sept 2011). The analysis is based on an assessment of the earnings and employment returns associated with vocational education and training using information from the Labour Force Survey. All estimates presented in 2011 prices.

This analysis suggested that there were significant financial benefits associated with VET to both the individual and the Exchequer; albeit, there was substantial variation depending on the level and the type of vocational qualification. For instance, in the case of Level 3 Apprenticeships, the analysis estimated that the financial value to the individual stood at between and £77,000 and £117,000 in today’s money terms, while the benefit to the Exchequer stood at between £56,000 and £81,000.

Job done? Not quite!

With evidence like this (and there is a lot more!), why is there any need to undertake further research on the returns to vocational education and training?

When trying to estimate the returns to VET, it is necessary to assess the labour market value associated with particular qualifications rather than simply assessing the labour market outcomes achieved by individuals in possession of the qualification. This means that it is necessary to control for as many other factors that might influence earnings and employment outcomes (such as gender, region of residence, age). Most importantly, there are a range of unobservable characteristics (such as ability and motivation) that might play a key role in determining achievement and subsequent labour market outcomes. Failure to control for these characteristics will (at least in part) wrongly attribute the positive labour market outcomes to the training (instead of the person’s innate ability or motivation).

The Centre for Vocational Education Research’s role

This is where the new CVER research centre comes in. The vision of the Centre is to improve the evidence base relating VET – for the general public, practitioners and policy makers. To achieve this, one of the key objectives is to make the best use of all the different strands of data that are available across the various government departments. Having already merged data from the Skills Funding Agency on VET, HM Revenue and Customs data on earnings and employment data; and the DWP benefit data, the opportunity now exists to also incorporate detailed information from the Department for Education’s National Pupil Database. As this data source contains information on attainment levels throughout the learner’s educational career, this will allow us to address a number of the issues relating to previously unobservable learner attributes, with the result that we will be able to better identify the economic benefit associated with VET.

This will provide a significantly better assessment of the economic returns to VET, but crucially allow the assessment of the extent to which these returns vary depending on the characteristics of learners. The end result will provide policy makers with a significantly improved evidence base for the better targeting of increasingly scarce financial resources.