Author Mark Richards

The skills gap in the UK is growing: there are too many people chasing jobs at the lower end of the scale and not enough highly skilled candidates at the top end. Is there a solution? And has Brexit made the situation worse?

In our last post, we looked at the decline in real wages. Inflation for May was 2.9% and is forecast to go higher later in the year. Average pay rises are running at 2.1% – and that’s with bonuses included. However you do the maths, real wages have fallen: and if you do not receive bonuses, or if you are subject to the public sector pay cap, then the fall in the real value of your wages will be even more pronounced.

But let us dig a little deeper into those figures – because there is plenty of evidence that some people are receiving salary increases well in excess of the rate of inflation. In addition, many businesses are having to significantly increase salaries to attract the talent they need to grow, due to the skills gap. It is a very stark illustration of the law of supply and demand.

The difference has been highlighted by a report from the Resolution Foundation who note that typical hourly pay is in some cases more than a tenth lower than it was before the 2008 financial crisis. Real hourly pay – pay adjusted for inflation – was down by 11% for 22 to 39-year-olds, compared to 5% for workers in their 50s and 2% for those in their 60s. The Foundation’s figures showed that average weekly earnings fell in real terms by 0.4% in the first quarter of 2017.

The Resolution Foundation was founded in 2005 with the goal of ‘improving living standards for 15m people in the UK on low and middle incomes.’ Stephen Clarke, the economic analyst at the Foundation said,

“The pay squeeze made an unwelcome return at the start of 2017 and looks set to stay with us for the rest of the year.”

He pointed out that incomes had not recovered from the previous pay squeeze, although he did concede that the introduction of the National Living Wage had meant a positive impact since its introduction two years ago, boosting incomes by 12% in that time.

The proverbial ‘government spokesman’ was wheeled out and said,

“There are more people in work than ever before and we are working to help people keep more of their earnings by cutting taxes. The National Living Wage has given a pay rise of £1,400 a year to those on the lowest wages.”

So at the lower end of the scale, there appears to be an oversupply of labour, and that is pushing wages down. In fact, the situation is likely to get worse, not better, with further research from the Learning and Work Institute suggesting that by the middle of the next decade there will be 21.8m people chasing low and intermediate-skilled jobs, a surplus of 8.1m.

The Skills Gap: A tale of two jobs markets

But the research – which was commissioned by the Local Government Association – paints a very different picture for highly skilled and managerial jobs, where it suggests there will be 4.2m jobs that cannot be filled by the right candidate.

In fact, there is plenty of anecdotal evidence that this is already happening – that companies are fighting a ‘war for talent’ because of the skills gap and this is pushing wages up.

Companies are struggling to recruit the right people – and according to a research study by the Open University, it is costing British businesses £2.2bn a year, with the situation being exacerbated by uncertainty over Brexit.

The research found that 90% of employers have had trouble finding people with the key skills over the past 12 months. The OU suggest that the current political and economic uncertainty is making people unwilling to change jobs – even if it could mean a significant pay rise.

Businesses forced to increase pay

The problem of finding the right people has becomes so acute that businesses have been forced to inflate salaries and pay hefty fees to recruitment companies to find the talent they want. Estimates put the figures at £527m in higher salaries and a staggering £1.7bn paid to recruitment companies – and no, that does not include Paul Pogba’s agent…

Businesses forced to increase pay

More than half the firms surveyed said they had been forced to increase salaries to “well above market rate” to attract the right person to a role, with small firms saying that their average salary increase was £4,150. Larger firms had been forced to increase salaries by £5,575 – and that is before ‘on-costs’ like national insurance and pension contributions.

There appears to be a real shortage of the right people in management, with a fifth of companies saying that they had struggled to find both senior managers and mid-level managers: this despite the suggestion that more than 40% of managers lack the necessary skills to manage effectively. IT was another area where there were frequent complaints about the lack of suitably qualified people.

More than half the companies admitting to giving up on the search and hiring someone at a lower level – and then investing the money saved in training, hoping to ‘upskill’ the person they had hired.

Steve Hill, external engagement director at the Open University said that uncertainty around Brexit was making the situation worse.

“We are faced with a shrinking talent pool,” he said. “Brexit is making talented EU nationals consider a return home. UK employers will have no option other than to develop their own pool of talent.”

Is there a solution?

What is the answer to the problem? Well, according to the Local Government Association it is to give more power to… local government! They say the current skills and employment funding – worth an estimated £10.5bn a year – is “confused, fragmented, untargeted and ineffective.” It calls for central government to devolve powers to local councils to help people get the skills they need. The answer, they argue, is to give local councils the power to deliver one-stop ‘work local’ services, pulling together skill training, apprenticeships, careers advice and business support.

All that sounds perfectly logical. Then again, the sceptical among us might think, ‘Well, if the council cannot even fix a pothole…’

Clearly, a solution to Britain’s skills gap needs to be found. We cannot become a high-investment, high-enterprise economy if we do not have enough skilled, trained and talented people to drive that economy. We also need to make sure that the skills training is spread evenly throughout the country: the answer cannot be for all the talent to concentrate in London and the South East.