Alison Wolf

January 5, 2007

Unemployment is rising and things are getting tight over at the Treasury. In the year ahead, the Government will need to spend our money wisely on behalf of UK plc. And where better than in the field of education and training? As Lord Leitch explained in his review of skills for the Chancellor in December: "Our natural resource is our people... the case for action is compelling. There is consensus that the UK must 'raise its game'."

Fortunately, there is an initiative waiting to be launched. It is genuinely innovative, headline-grabbing and consistent with Government analyses of what our economy needs. Gordon Brown should, as a new year's resolution, steal a march on the Tories and commit himself to large training subsidies for Goldman Sachs.

Anyone gagging on their coffee has obviously failed to understand the logic driving decades of training policy, and indeed higher education policy, too. This suggests a regrettable failure to read the Government's Skills Strategy, or Further Education Reform: Raising Skills , or Lord Leitch on "Prosperity for all". But let me summarise.

For the economy to operate at its most productive level, it is important to ensure that employees' skills are developed up to the point where additional expenditure on training ceases to pay for itself in additional output. Having a workforce that is more skilled is in everyone's interests because employees will be worth more and paid more; employers will make more money to invest and pay out to shareholders; and the growth generated will trickle down.

Lurking in the woodwork, however, is market failure. The problem is that employers may be unwilling to train as much as they should. In our post-slavery, post-serfdom world, trained workers can take themselves off elsewhere. Unscrupulous rivals will poach them by offering higher wages; and, of course, those who do not spend on training will have more money to dangle.

The result is that employers may hold back from spending optimal amounts on training. They all fear that others will exploit them and stop them from reaping the benefits. Summed across the country, this could lead to a major shortfall in training. That is why Brown set Leitch to work and why Leitch recommended vast increases in government spending on workplace training.

But how do you decide how much subsidy to provide? In any programme of this sort, a good part of what our tax money pays for would probably have happened anyway, market failure or no. This dead weight is something you have to live with; but it should be outweighed by the economic benefits of the extra training - the part that otherwise would not have occurred. And you estimate those benefits by looking at the wages of the trained as opposed to the untrained. The greater the benefit, the more you conclude that additional expenditures would be economically justified - and may need a helping, subsidising hand.

It is this argument that has underpinned the Government's commitment to expanding higher education. Since graduates earn more than non-graduates, their skills must be enormously valuable to the economy; and more and more young people must therefore be helped to pay for higher education. In the case of training, the same logic demands that we give the greatest subsidies to industries that are highly competitive, with footloose employees able to chase higher salaries, and to industries that show enormous economic returns for workplace training.

Just before Christmas, the current Lord Mayor of London underscored for Financial Times readers that, with "talent and business... so mobile", the best people will "work elsewhere if the circumstances are right". The context was the multimillion-pound bonuses dominating headlines - an average of more than £300,000 a head for Goldman Sachs employees worldwide, an estimated £9 billion to be handed out around the City of London, £51 million for a trader in his mid-thirties and more than 4,000 receiving bonuses of more than £500,000.

Skills that are highly rewarded, an enormously competitive market... doesn't this suggest a mammoth market failure? Think how much better off we might be if we could overcome the reluctance to train that must be afflicting Goldman's and Lehman's and Citigroup managers. Even if additional staff were not quite as skilled as the current lot, at these levels extra trained workers should generate a splendid addition to gross national product. If the Government truly has UK plc's interests at heart, why is it wasting training subsidies on low-skill industries with paltry returns where the difference between the earnings of trained and untrained workers wouldn't pay for a month of lattes?

The Government's new flagship policy for adult training is "Train for Gain". Where better to start than in the City?

Alison Wolf is Sir Roy Griffiths professor of public sector management at King's College London.

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