APPENDIX 42
Memorandum submitted by the Skills for
Business Network/Sector Skills Development Agency
I am writing to you on behalf of the Skills
for Business Network (SfBn) and in direct response to the third
inquiry you have launched concerning skill shortages and related
issues under the general theme of "The future of Manufacturing
Industry in the UK".
The SfBn welcomes the opportunity to contribute
to this inquiry, believing it is both pertinent and timely given
the wider structural skills debate being stimulated by the Leitch
Review and the five Sector Skill Councils (SSCs) covering key
parts of the UK manufacturing skills base have been consulted
in drawing together this response. For your information these
five SSCs are: Cogent (Petro-chemical, nuclear fuel, pharmaceutical
manufacturing and polymer processing), Improve (Food technology
and manufacture), Proskills (Minerals & extractive processing
industries), SEMTA (Aerospace, Automotive, electronic and marine
manufacturing) and Skillfast-UK (Apparel, footwear and textiles
manufacture).
The manufacturing sector represents a large
and significant part of the UK economy, however it is misleading
to consider "manufacturing" as a single group or industry.
For example, within the Proskills footprint alone, there are five
different industries, each with their own particular issues, culture
and needs; and this position is not unique across either the sector,
or indeed the Skills for Business Network. It is clear that variation
exists between manufacturing industries, but SSCs are best placed
to provide sectoral detail within manufacturing, although their
footprints may not be coterminous with all constituent industries
within the sector.
In the past 20 years employment in the manufacturing
sector has declined significantly and this trend, which means
that recruitment is predominately driven by replacement demand
for those who are retiring or leaving the sector, is expected
to continue into the future, albeit at a slower pace. Set against
this broad trend however, there are occupational patterns which
can be particularly strong and each SSC has unique aspects to
its' footprint which differentiate it from other parts of the
manufacturing sector. These can include a workforce with unique
age, occupational and qualifications profiles for instance, and
an emphasis on particular higher level occupations (Managers,
professionals and associate professionals and technical occupations).
Higher level skills and qualifications are linked to higher levels
of business performance and studies have shown that top performers
in UK manufacturing hired workers with, on average, an extra qualifications
level compared to the lower performers.
On the other hand, elementary occupations (skilled
trades, machine and process operatives) are all expected to experience
continuing and large declines in their share and level of employment,
whilst those remaining in the sector need to up-skill from level
2 to level 3: And in both cases such changes all have a corresponding
effect on the mix of skills, qualifications and experience required
of workers in the manufacturing sector, as well as upon levels
of innovation, the adoption of more sophisticated production processes
and higher levels of productivity.
The short appendix (five pages) supplied with
this letter, provides details on qualification levels and training
indicators, the impact of skill shortages in manufacturing and
an analysis of how skills and training links to business performance
and productivity in this sector. There are powerful factors that
shape the level and pattern of skill needs within the sector and
positive responses such as introducing new technology, reducing
the cost base, specialisation and sub-contracting are each positive
measures which are important in increasing manufacturing output
and productivity. However, greater growth is stifled by skill
shortages in the sectors workforce, whilst there also remains
a scarcity of training.
This may suggest a paradox but the experience
of some SSCs would suggest that where qualifications and training
provision does exist, particularly in the public sector, this
does not match what the majority of employers want. Indeed, the
overwhelming response which is being captured as the Manufacturing
SSCs develop their Sector Skills Agreements, is that existing
qualifications add little, or nothing to the employer's business.
Whilst the overall impact on those businesses which do not have,
or cannot find, adequately skilled staff to meet their business
objectives will be to become less competitive than other manufacturing
firms.
These findings may be uncomfortable, but to
paraphrase Lord Leitch, we all need to move outside the comfort
zone and address the real issues. The Skills for Business Network
provides a powerful, employer-led force, to both support and effect
real and lasting change. We believe that improving skills is also
an integral aspect of increasing the proportion of high performance
workplaces in the economy, as well as achieving a range of social
goals, but the evidence suggests that the level of the dialogue
between education and training providers and sector employers
is limited and that the effectiveness of this dialogue when it
does happen, is patchy.
Playing to its significant strengths, the SfBn
should focus on securing a new model of employer-led workforce
development, push for a greater emphasis on developing companies
in-house infrastructures, and work more closely with the funders
and providers of publicly funded training across both the Further
and Higher Education sectors.
Based on the contents of this submission, the
given complexities and the position of the Network, I would like
to offer that a Skills for Business Manufacturing delegation appears
before the Select Committee to provide further evidence and answer
any questions you may have first hand.
MANUFACTURING SKILL
SHORTAGES
The Manufacturing sector represents a large
and significant part of the UK's economy. Whilst it is possible
to disaggregate it in to its component industries and present
information for each of these information is presented here for
the sector as a whole to achieve brevity. However, in several
places information is presented to give an indication of the variation
that exists between the Manufacturing industries. Furthermore,
although not co-terminus with these constituent industries, Sector
Skills Councils (SSCs) are best placed to provide the sectoral
detail within Manufacturing.
According to official sources, the number of
firms in the Manufacturing sector amounts to just over 168,000
representing 8% of all firms in the UK (SSDA Matrix, 2006). As
many of these firms are larger than average the sector accounts
for 13% (3.7 million) of UK employment (SSDA Matrix, 2006).
Over the last 20 years employment in the Manufacturing
sector has declined significantly and is expected to do so in
the future, albeit more slowly. In 1984 Manufacturing accounted
for just over 20% (5.3 million) of all UK employment. This declined
to 12% in 2004 and is projected to reach 10% (3.2 million) by
2014 (Wilson et al. 2006a). Comparisons of Manufacturing's employment
levels and shares of employment to other broad sectors of the
UK's economy are presented below in Table 1.
Table 1
LEVEL AND SHARE OF EMPLOYMENT (UK) 1994-2014
BY BROAD SECTOR
|
| 1994
| 2004 |
2014 |
|
| Level
(000s)
| Share (%) | Level
(000s)
| Share (%) | Level
(000s)
| Share (%) |
| Primary and utilities | 840
| 3.1 | 610
| 2.0 | 514
| 1.6 |
| Manufacturing | 4,275
| 15.8 | 3,552
| 11.7 | 3,170
| 10.0 |
| Construction | 1,776
| 6.6 | 2,090
| 6.9 | 1,999
| 6.3 |
| Distribution and other services | 7,745
| 28.7 | 8,830
| 29.1 | 9,237
| 29.5 |
| Business and other services | 5,897
| 21.8 | 7,816
| 25.8 | 8,771
| 27.8 |
| Non-marketed services | 6,491
| 24.0 | 7,408
| 24.4 | 7,813
| 24.7 |
| Whole economy (UK) | 27,025
| 100 | 30,305
| 100 | 31,594
| 100 |
|
Source: Wilson et al. (2006a)
Amongst the broad trend in Manufacturing for declining employment
there are of course occupational patterns and in this case they
are particularly strong. It is the occupations which are the sector's
largest and traditionally characterise the sector that suffer
most. Skilled trades, Machine and transport operatives, Elementary
occupations are all expected to experience continued and large
declines in their share and level of employment. This is contrasted
by the fortunes of higher level occupations (Managers and senior
officials, professionals and Associate Professional and Technical
Occupations) which are either projected to remain constant or
increase slightly (Wilson et al., 2006a). Such changes will have
a corresponding effect on the mix of skills, qualifications and
experience required of workers in the sector.
Furthermore it is essential to acknowledge that even in sectors
or occupations where employment levels are expected to contract
there will be an ongoing demand to fill job openings created by
retirements, occupational mobility and related reasons. This so-called
"replacement demand" may be more significant than any
changes to employment levels and outweigh any projected declines.
Therefore, a supply of skills, qualifications and experience will
still be required even in occupations projected to contract significantly.
Of course the same principal will apply to those occupations expected
to grow resulting in a higher replacement demand. A good example
of this is provided by looking at the Skilled Metal and Electrical
trade occupations. The occupations, approximately two fifths of
which are employed in the Manufacturing sector (LFS, 2005) are
forecast to lose around 340,000 jobs by 2014 (Wilson et al., 2006a).
However, a replacement demand of 385,000 jobs is anticipated with
associated skill needs.
The sector has low levels of qualifications compared to the
average for the UK shown in Table 2. Within the UK's labour force
46% are qualified to S/NVQ level 2 and below compared to 51% within
the Manufacturing sector (LFS, 2005). Variations across Manufacturing
industries are apparent with 66% of the workforce in the Textiles
industry being qualified to this level compared to 43% in Machine,
electrical and optical Manufacturing. There are also large proportions
of the Manufacturing workforce which have no formal qualifications
at all (22% in Textiles compared with 8% of Printing and publishing)
and despite forecasts for an upward shift in the highest qualification
held in line with the trend for the UK overall there will remain
a significant proportion of the sector's workforce without formal
qualifications (Wilson et al., 2006b). This position of low qualification
levels is critical when the link between business performance
and the skills of the workforce is considered below.
Table 2
QUALIFICATION LEVELS IN THE MANUFACTURING SECTOR
|
| Manufacturing
| Whole Economy (UK)
|
|
| S/NVQ 5 | 4%
| 7% |
| S/NVQ 4 | 21%
| 24% |
| S/NVQ 3 | 23%
| 22% |
| S/NVQ 2 | 29%
| 28% |
| S/NVQ 1 | 10%
| 9% |
| None | 12%
| 9% |
|
Source: SSDA Matrix 2006.
Productivity
Output from the sector has grown year on year since the mid
1980s and is forecast to rise by 17% over the period 2004-14 to
represent 15% of all UK output (Wilson et al., 2006a). At £44,000
a year per employee Manufacturing productivity (Gross Value Added)
is higher than the average for all UK employees (£30,200)
(SSDA Matrix, 2006). However, there are great variations between
industries. For example productivity levels in the Petro-Chemical
industry are more than twice as high as those in the Textiles
industry (£54,000 and £24,000 per employee per year
respectively).
The productivity of the sector is also reflected internationally.
The productivity gap between the UK and the US since 1990 has
not changed greatly but the sectoral composition giving rise to
the gap has shifted considerably. The gap has narrowed in sectors
such as gas and water, in business services and in Manufacturing.
The share of the gap accounted for by Manufacturing has declined
more than any other sector since 1990 (Griffith et al., 2003).
Notwithstanding this, UK Manufacturing productivity levels are
77% of those in the US (SSDA Matrix, 2006). On behalf of the Skills
for Business network the SSDA commissioned a review of the evidence
linking skills, productivity and business performance and a flavour
of this evidence is given later.
Thus with the aid of technology, a reduced cost base, specialisation
and sub-contracting positive trends are evident in Manufacturing
output and productivity. However, greater growth is stifled by
skills shortages in the sector's workforce.
Skills shortages and training
Not only are current levels of qualifications generally low
in Manufacturing there are also important skill shortages and
a scarcity of training. Of all vacancies the proportion reported
as hard to fill by Manufacturing employers because they cannot
find a suitable candidate with the required skills, experience
or qualifications (Skills Shortage Vacancy) in each of the four
UK countries is higher than respective national averages. In England
and Scotland 29% of all vacancies in the sector are SSVs compared
to the national average of 25% (IFF, 2005 and FSS, 2004). The
picture is worst in Northern Ireland with 33% of all vacancies
being SSVs compared to the average of 19% (DEL, 2002). The figures
for Wales are 18% and 14% respectively (GFK NOP, 2005). The range
of variation between Manufacturing industries can be highlighted
by looking at the situation in England where 46% of all vacancies
in Basic Metals manufacture are SSVs compared to 17% in the manufacture
of Food, drink and tobacco (IFF, 2005). Within Manufacturing as
a whole SSVs are concentrated in two occupations; Skilled trades
(37% of all SSVs) and Process, plant and machine operatives (25%
of all SSVs) (IFF, 2003). This serves to reinforce the earlier
point that even in declining occupations there remains a need
to meet the demand for skills.
Almost all (96%) employers in England experiencing a SSV
stated it was impacting negatively on their business with the
most commonly cited impact being increased workload for existing
staff (81%). Around half of employers with SSVs suggested they
had lost business, endured delays to product development and experienced
difficulties providing required levels of customer service due
to SSVs.
Nearly a fifth (18%) of establishments in the sector in England
also report that one or more of their current workforce is not
skilled sufficiently for their current role (ie has a skills gap)
compared to average of 16% for all sectors in England (IFF, 2005).
As a proportion of all employment in the sector skills gaps represent
6% which is equal to the all England average. In other countries
of the UK skills gaps are no more acute in the sector than each
country's respective average. The fact that the level of gaps
are not significantly different from the national, all sector
averages does not mean we can rest assured as three quarters of
employers in the sector with a skills gap in their workforce report
they impact negatively on their business (IFF, 2003). The most
common impact cited by nearly half (47%) of all employers with
a skills gap was increased operating costs. Other impacts such
as loss of business to competitors at home or abroad, delayed
product development, poor customer service and product quality
levels, and difficulties introducing new working practices were
each cited as an effect by at least one third of employers with
a skills gap.
Training related activity in the Manufacturing sector falls
behind UK average on all indicators. Table 3 presents these for
comparison. Thus, on average, not only is the Manufacturing workforce
more poorly qualified, it receives less training. Again though,
official statistics suggest variations across Manufacturing industries
with only 11% of the Textile industry workforce having received
training in the last 13 weeks compared with 24% of those working
in the Transport equipment Manufacturing industry (SSDA Matrix,
2006).
Table 3
TRAINING INDICATORS
|
| Manufacturing
| Whole Economy
|
|
| Training Indicator | UK
| England | UK
| England |
| % of workforce participating in job related training in last 13 weeks
| 20 | |
28 | |
| % of establishments funding or arranging training for employees in last 12 months
| | 59 |
| 65 |
| Number of days spent training in last 12 months
| | 6.4 |
| 9 |
| Average spend (£) per employee in the last 12 months
| | 158 |
| 185 |
| % of staff trained in last 12 months |
| 60 | |
81 |
|
Source: SSDA Matrix, 2006
Dearden et al (2000) analysed the impact of training on performance
for a variety of measures including value-added output, profits
and wages for a group of British industries between 1983 and 1996.
They found connections between higher training and higher labour
productivity across a number of sectors. In essence, Manufacturing
firms undertaking training were found to be more productive, to
have higher capital intensity, to conduct more research and development
and have a more highly qualified workforce. They concluded that
the effects of training on wages are only about half the size
of the effects on industrial productivity and that it is misleading
to ignore the pay-off firms take in higher profits from training.
For instance, raising the proportion of workers trained in an
industry by five percentage points (say, from the average of 10%
to 15%) was associated with a 5% increase in value added per worker
and a 1.6% increase in wages. They note that this level of increase
has also been found by other researchers eg Blundell et al. (1996)
and Booth (1991).
Linking skills, training, business performance and productivity
Overall, the impact is that those business which do not have
or cannot find adequately skilled staff to meet their business
objectives are very likely to be less competitive than other Manufacturing
firms. The growth of Manufacturing productivity in the UK is therefore
being held back because of this situation. The evidence in support
of this link between skills, business performance and productivity
is provided by the Skills for Business network in Skills Pay:
The Contribution of Skills to Business Performance (Tamkin et
al., 2004) and is stronger for sectors such as Manufacturing where
outputs are more easily quantifiable than for service industries.
Higher level skills and qualifications are linked to higher
levels of business performance. Haskel et al., (2003) have shown
that the top performers in UK Manufacturing hired workers with,
on average, an extra qualification level compared to the lower
performers. They also found that higher skill levels support innovation
and more sophisticated production processes and were associated
with the production of higher quality products. Lynch and Black
(1995) found that an extra year of education raised productivity
by between 4.9 and 8.5% in the Manufacturing sector and between
5.9 and 12.7% in services.
Perhaps some of the most influential work in this area has
focused on a series of "matched plant" studies by the
National Institute of Economic and Social Research (NIESR) (Keep
et al., 2002). The impact of workforce skills and development
on productivity was considered alongside a range of other factors
such as investment in capital equipment and maintenance practices.
The studies have compared UK businesses with similar firms in
competitor countries within a variety of sectors including engineering,
food, clothing, chemical and furniture manufacture. A clear connection
between higher skills and higher productivity has been identified
particularly at the intermediate skills level. All the studies
found that the higher average levels of labour productivity in
firms in continental Europe were closely related to the greater
skills and knowledge of their workforces, especially intermediate
skills. Within Manufacturing, lower skills levels in the UK were
found to have a negative effect directly on labour productivity
and on the types of machinery chosen, the ways in which machinery
was modified in line with particular needs, the smoothness of
machinery running and the introduction of new technology. The
proportion of employees holding a relevant vocational qualification
at the intermediate level in these establishments in the UK was
well below that in Europe.
Altogether, the evidence suggests that business performance
in Manufacturing is strongly linked to the skill levels of its
workforce with high skills contributing to high performance and
low skills to low performance. Manufacturing currently makes and
stands to make a valuable contribution to UK plc in the future
but its potential performance will not be realised if action is
not taken to address current and future demand for skills in the
sector and the low levels of qualifications and training. Furthermore
and given the wide disparities across Manufacturing industries
in productivity, qualification levels, skill shortages and training
a blanket approach is unlikely to prove effective.
October 2006
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