Employers are feeling the squeeze. Increasing energy prices, rising wage settlements and higher interest rates are putting pressure on their cash flow. Many will be assessing whether they have sufficient funds to funnel towards skills training and wider forms of investment in human capital.
A counter-cyclical activity
What history tells us is that, in general, employer training activity is broadly procyclical. Employer training rises in line with the strength of the economy.
Some studies, though, have found spending on training by employers to be occasionally countercyclical. Some employers invest in training during the downturn to take advantage of the future upturn.
Discretionary employer training
In the UK, while the data shows the mainly procyclical nature of employer training activity, there is also evidence that variations in training are often muted.
This is because a significant proportion of all training is focused on non-discretionary activities, such as health and safety or induction training.
Indeed, the 2019 Employer Skills Survey found that for almost a third of employers, induction and health and safety training accounted for at least half of all training provided by UK organisations.
The implication is that the volume of employer-based training in the UK is relatively ‘inelastic’ and that only some of the resources devoted by employers to training are truly discretionary.
The question is whether the current economic crisis will reduce discretionary spending on training by employers.
The recession will be a long one. Earlier this month, the Bank of England forecasted negative growth for the next two years.
And the recession is different this time round. Rather than a financial crisis, the economy is suffering an energy price shock, rising nominal wages, labour shortages and higher borrowing costs.
Crowding out of discretionary employer training
Energy costs have multiplied many times for employers, threatening the viability of some and constraining plans for investment and growth among most. These rises in costs are ‘crowding out’ capital expenditure and investment in people, including skills training.
Workers who have already experienced stagnant real wage growth for at least a decade all want pay rises to help them manage in an era of double-digit inflation, with higher mortgage or rental costs and to help them heat their homes. Even though wages are increasing by over 5% in much of the private sector, almost all workers are feeling the squeeze. For most employers, raising wage costs will again ‘crowd out’ some discretionary spend on training.
Consumer expenditure will continue to be severely constrained, meaning that revenues and profits in some sectors will continue to be constrained. As customers seek out bargains and discounts, employment costs in already low paying and low skill sectors such as retail and hospitality will reinforce what skills analysts term the ‘low skill equilibrium’. In this context it may not be rational for businesses to invest in skills right now.
Overall, the recession will incline many employers to delay or cancel non-essential business expenditure, including discretionary spending on training.
Employer training and apprenticeship demand
It is debatable whether employers view apprenticeships as an area of discretionary spending or a business investment.
Even so, we can expect employers confronted with increasingly squeezed cash flow to carefully consider whether they can afford to a make a 5% cash contribution towards apprenticeship training in England.
And although employers will continue to pay the apprenticeship levy and non-levy payers are registered on the digital account service in England, in the face of rising business costs they may also decide to cut back on apprenticeship training.
The poaching problem
While these dimensions of the economic landscape ebb and flow, one other factor seems to dominate the behaviour of many businesses when it comes to training investment. Some economists have called this the ‘externality problem’.
The fear among many employers that investing in skills makes employees more likely and able to leave to join a competitor, especially in a tight labour market.
This anxiety, coupled with a historic scepticism amongst employers that they will ever see a return on their investment in training, seems baked into the psychology of many employers and has, for too long, acted as a brake on employer funded skills formation.
So long as businesses fear poaching more than they do the business consequences of skill shortages it seems that many sectors will be trapping themselves avoidably into a situation in which a structural skills deficit acts as a permanent block to any aspirations they have to grow their productivity and competitiveness.
Autumn Statement
In the build up to the Autumn Statement this week, the mood music has been that the Prime Minister and the Chancellor recognise the need to prioritise skills during these difficult times.
So far so good.
But the Autumn Statement needs to deliver an employer skills strategy.
At the centre of such a strategy should be incentives to encourage employer spending on discretionary training, employer participation in apprenticeships and tackling the poaching problem.
Stephen Bevan is Head of HR Research Developent at IES