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This week is National Apprenticeship Week, which celebrates the impact that apprenticeships can have both for individuals, for businesses, and for the wider economy.

At their best, apprenticeships offer a fantastic opportunity to earn while you learn. They can help young people take their first steps in their career, and they can help adults to retrain or upskill. With the UK suffering from a chronic skills shortage, boosting investment in apprenticeships, and in skills more broadly, will be vital if the government is to achieve its central mission of unleashing growth. In fact, workforce training might be one of the most powerful levers the government has at its disposal: around a third of productivity growth between 2001 and 2019 was attributable to improvements in skills in the workforce.

However, the skills system in England – this policy area is devolved to Scotland, Wales and Northern Ireland –  is in need of fundamental reform. Consider the apprenticeship levy, introduced in 2016 by the Conservative government in an effort to boost employer investment in skills. The levy is a charge of 0.5 per cent of an employer’s annual pay bill over £3m. Employers can only use the funds to pay for training or assessment of apprentices they employ. Any funds unspent by the large employers who pay the levy are used, at least in theory, to cover the cost of training apprentices at smaller employers.

This policy has been a colossal failure. When the levy was introduced, investment in training in the UK was already far lower than in other advanced economies. Yet investment has actually declined in the years since, with total spending on skills falling by £3.6bn between 2015 and 2022. Since the introduction of the levy, the number of new apprentices each year has fallen by a third.

Perhaps even more concerning is the shift in investment away from those who could most benefit. Younger workers have fared particularly badly, with the number of 16-18 year olds starting an apprenticeship falling by 40 per cent since the introduction of the levy. The number of ‘starts’ at level 2 – broadly equivalent to GCSEs – has plummeted by three quarters, while the number of degree apprenticeships has soared. Increasingly, employers have invested in higher level apprenticeships for older workers and existing employees – many of whom are already well-qualified – rather than offering opportunities for young people taking their first step in their career.

The apprenticeship levy has also failed to address skills gaps that are holding growth back. The number of vacancies left unfilled due to a lack of sufficiently skilled applicants has more than doubled since its introduction, soaring from 194,000 in 2015 – the year before the levy was introduced – to 460,000 by 2022.

The levy has failed to meet the needs either of businesses or of workers, and it is in need of fundamental reform. However, while there is consensus about the failures of the apprenticeship levy, there is less clarity on what the new system should look like.

A reformed levy should be both more flexible, and more strategic. The Labour government has committed to reforming the apprenticeship levy into a ‘growth and skills levy’. This would give employers greater flexibility by allowing them to invest their levy funds in high-quality forms of training other than apprenticeships. To go further, the government should also explore how the levy could be linked to the emerging industrial strategy, both nationally and locally. This would allow us to turbo-charge training in the sectors that will be crucial to future growth – from life sciences to clean energy.

A reformed levy should seek to increase opportunities for those who could benefit most. There is an important place both for apprenticeships for older workers, and for degree-level apprenticeships. But a system which has seen a rapid decline in entry level opportunities for young people, at the same time as a huge rise in MBA apprenticeships for graduates, is accentuating, rather than alleviating, inequality. The government should explore how the new growth and skills levy could incentivise apprenticeships for younger workers, and they should consider restricting the use of levy funds on older workers who are already well-qualified.

Crucially, a reformed levy must seek to reverse the decline in employer investment in training. In the longer term, the government should explore how we could boost the revenue generated by the levy – by increasing the rate of the levy, broadening its scope, or both. This would not be popular with employers, particularly after the recent increase in employer national insurance contributions. But it would be a reasonable quid pro quo for giving them additional flexibility on how levy funds can be used.

Finally, while individual employers benefit from investment in skills, so too does the wider economy. So in addition to encouraging employer investment, we should consider whether the state should be coinvesting in skills alongside employers, helping to address skills gaps, boost productivity, and deliver on Labour’s growth plan.

Image credit: Emma Houghton via Unsplash