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The Value for Employers in training their staff

Devon & Cornwall Training Providers Network

7th October 2011

Chris Evans

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Benefits of training

Private Public

Monetary Increased income and wealth

Increased productivity and profitability

Increased tax revenues

Increased employment

Reduced health costs

Reduced crime

Non-monetary Improved health status

Greater life satisfaction

Reduced crime

Increase in individual wellbeing

Social capital

Social cohesion

Social trust

Well functioning democracy

Political stability

Child poverty

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Rationale for public investment

Rationale for public sector investment in training is ‘market failure’

Market failure exists where the workings of the market are such that individuals and firms do not optimise their investment in learning or training.

There are a number of reasons for this. Main ones are:

a)Poor information – people do not appreciate the extent to which it is in their interests to invest in learning, due to poor understanding of the labour market etc;

b)People are not ‘rational’ – may appreciate long-term benefits of learning but still not invest, due to culture, desire for immediate gratification in terms of use of their time, money etc.

c)Externalities – the return on the investment does not just accrue to those making the investment.

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Who benefits?

1. Society - higher employment, healthier population, civic participation, less crime;

2. The economy - increasing the productivity of the workforce and increasing employment rates, tax revenues;

3. Organisations - more productive and innovative workforce, more competitive and more able to adapt;

4. Individuals – more likely to be in employment, improved wages, improved health and well-being

These outcomes are, clearly, inter-related:

• Employer investment in an individuals’ skills can raise productivity & profitability;

• And raise that individuals wages chances of promotion, remaining in continuous employment;

• Which raises their contribution to tax revenues

• And reduces their chances of being in receipt of benefits, and in ill health etc

The interlinked benefits / considerable ‘externalities’ mean that responsibility for investment is complex and shifting (e.g. Train2Gain, Student Fees).

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Skills Utilisation

It is not merely the presence of skills and training which is important.

IF training is relevant to people’s work, and the new skills are utilised,

then the over-riding message is:

Training has a positive effect on productivity

and job satisfaction

and a reduction in absenteeism.

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Leadership & Management

Is perhaps THE critical determinant of the performance of organisations.

Leaders and managers must make decisions on the products to be produced, the methods of production (e.g. capital v labour intensive), the number of people required, how they are to be deployed and the skills that they require to fulfil their roles.

However, managers in the UK are less well-educated and undergo less training than their counterparts in competitor economies.

Training of Managers in selected countries

Source: Value of Skills, UKCES (2010)

UK USA Japan Germany France

Average terminal educational age 19.5 22 21 21 22

% who are Graduates 49 74 78 72 61

Off-the-job training (days/year) 4 7 5.5 5.5 6

On-the-job training (days/year) 4.5 8 6.5 6.5 6

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Training & Productivity

There is a strong positive correlation between high levels of skills and high levels of productivity within companies

“High levels of skill and knowledge are prerequisites for success in high value added production” Mason, 2005

Top performing manufacturing firms hired workers with at least one extra qualification level compared to lesser performers, supporting innovation, more sophisticated production processes & higher quality products. Haskel and Hawkes (2003) and Haskel et al. (2003)

More productive companies in the UK had workforces with on average two years additional schooling than less productive firms. Haskel et al. (2003)

The higher the qualification level the more robust and positive the impact on firm productivity Galinado-Rueda and Haskel 2005

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Training & ProductivityCompany level

Matched Plant Studies

Compared organisations in the UK with other countries in Europe and US within the same sector.

Sought to differentiate impact of skills from other factors, e.g. capital investment etc, Found:

•a clear positive relationship between skills and productivity, particularly at the intermediate skill level and for management skills;

•gaps in labour productivity of up to 60% exist between the UK companies and their competitors, due to lower workforce skill levels.

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Training & productivity- industry level

A 5% increase in the proportion of workers trained in an industry raises the value added per worker by 4% Dearden et al. (2000)

A1% increase in the proportion of workers trained is associated with an increase in value added per worker of 0.6% and an increase in wages of c. 0.3%.

Increasing the number of training days per employee by 1% was found to increase productivity by 3% (Barrett and O’Connell, 2001).

In Italy, an increase of 10% in the average number of training hours per headincreased value added productivity by 1.3% Brunello (2004)

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Knock-on benefits

Interestingly, the benefits of higher-level skills do not just accrue to one employer. The evidence suggests that individuals and firms alongside them also benefit.

Firms in ‘better-educated’ areas attain a boost in productivity because they are surrounded and take on more efficient ways of working through informal learning, interactions and exchanges of information.

A manufacturing firm located in an area where 40% of the population holds a Level 4 qualification can be nearly 14% more productive than in an area where 30% hold a Level 4 qualification.

Similarly, the value of training does not just accrue to the person who was trained. There are knock-on benefits to others in the workplace, who pick up these skills through association, copying, informal skills transmission.

Value of Skills, UKCES, (2010).

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Returns on investments

Limited number of studies to date:

The estimated return on investments in human capital among large manufacturing firms in Portugal is 24% p.a. on average, suggesting employer provided training is a sound and prudent investment, of equal value to investment in physical capital.

Almeida and Carneiro, (2005) US firms that invested more heavily in training found that “returns on investment in employee training are consistently ‘super normal’”.

Bassi and McMurrer (1998)

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Employer Perceptions

There are a huge number of surveys into employer perceptions of the value of training.

The main benefits identified by these are:

•Increased innovation•Raised productivity•Improved quality of work / products•Improved client satisfaction•Worker Satisfaction•Reduced absenteeism •Better staff retention

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Training & Survival

Colier et al. (2007) found, after taking account of factors such as sector, size & firm age, that non-training establishments are almost twice as likely to close as those that do provide training.

The failure rate of companies that did not train staff was, over a six year period, 27% compared to 11% for companies that did train their staff.

The gap was particularly large in manufacturing, construction and hospitality.

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In the recession businesses that did not invest in training were two-and-a-half times more likely to fail, whereas those that carried on training recovered more quickly.

Spending Review Briefing, NIACE, (2010).

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LSC / Populus survey of 500 employers in 2009 found that:

•81% said that employing apprentices generates higher overall productivity for their company

•66% thought their programme made them more competitive in their industry;

•A significant majority stated that that their Apprenticeships programmes allowed them to lower both recruitment (67%) and training costs (71%) while also enabling them to fill vacancies more quickly (68%) with a better calibre of job applicant (74%).

•82% thought that Apprenticeship programmes reduced staff turnover; and

•92% stated that their Apprenticeship programme created a greater level of motivation and job satisfaction among their staff.

ApprenticeshipsEmployer Benefits

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A survey of 3,800 individuals conducted in 2009 found that:

•the average salary for people completing Apprenticeships was £14,700, compared to £10,200 beforehand

•This represents a rise of nearly 45%. Wage inflation over the same period was calculated at 14.1%, which would only account for £1,500 of the £4,500 average salary rise.

•42% of Apprentices had some kind of promotion of upgrade since completing their Apprenticeship, and that

•89% of Apprentices found their job ‘very’ (55%) or ‘quite’ (34%) satisfying.

The Benefits of Completing an Apprenticeship, BMG Research / LSC, April 2009

ApprenticeshipsEmployee Benefits

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Skills and pay

Higher level qualifications on average equate to higher earnings:

• Those with GCSO or equivalent earn 15% more on average than those without

• For Level 3 add a further 13%• Add another 20% for degrees or equivalent• And yet another 23% for post grad or professional

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Value of intermediate skills

Review looking at value of Intermediate Skills (2009):

• Those with NVQ2 as highest qualification earn 4% more than those without

• All NVQ 3s are associated with positive returns ranging from 11% to 25 %

• NVQ2 gained through work – 10% more• Level 3 Apprenticeship – 22% wage premium for males

and 14% for females. Level 2 20% for males.

MODE OF AQUISITION IS CRUCIAL

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Who benefits most?

Study results vary, but generally show a significant benefit to employers, in that productivity rises are two to four times higher than wage rises.

Productivity effects of training relative to wage effects

The good news is that both benefit!

Value of Skills, UKCES, (2010)

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Discussion

• How aware are employers of the benefits of training?

• What kinds of dialogue do you have as a provider about the benefit of training for employers?

• What examples do you have of the ways in which employers measure the benefits of training?

• Do you have any examples supporting employers to better understand the benefits of learning?

• What more can you do to sell the benefits of training?