ICAEW.com works better with JavaScript enabled.

Resilience and Renewal

How to close the UK’s skills gap

Author: ICAEW

Published: 17 Oct 2023

workers employees staff factory blue overalls training UK skills gap economy

Addressing the UK’s labour supply and skills gap is no easy task, but policymakers, business, and the chartered accountants that advise them have a key role to play.

The UK government has recognised the need to address labour supply shortages in measures announced in the 2023 Spring Budget. Alongside the investment in employment support, the government announced an extension of the provision of subsidised childcare to encourage stay-at-home parents to return to work, which should be applauded given the chronic staff shortages businesses continue to face. Businesses have also long called for a revamp of the shortage occupations list to assist firms in recruiting from overseas to fill job roles where there is a clear national shortage.

However, experts also point to what firms themselves can do to ensure that they have the workers they need. “Sometimes there’s a status quo bias for businesses,” says Jon Boys, Senior Labour Market Economist at the Chartered Institute of Personnel and Development (CIPD), “They don’t think outside the box until they have to. There are big pools of talent that some sectors don’t even look at. There’s a lot of gender segregation; there are hardly any women in transport, and you don’t get a lot of men in healthcare or teaching. But necessity is the mother of invention; the hospitality sector is turning to older workers now, whereas before it had a ready supply of younger, EU workers.”

In addition to looking at alternative talent pools, businesses also need to consider the package they offer to potential employees and the measures they have in place to encourage staff retention. As the ICAEW's Business Confidence Monitor shows, staff turnover is a growing challenge in several sectors, with employees in a strong position to find alternative employment if they are unhappy. The information and communication and transport and storage sectors have been particularly hard hit. Since Q3 2021, an average of 44% of information and communication companies and 43% of transport and storage businesses have found staff turnover to be an increasing challenge compared with a year ago/previous year, placing them well above the UK average of 37%.

Staff turnover is a growing business challenge
Source: ICAEW Business Confidence Monitor

Businesses need to examine what they offer their employees beyond pure financial remuneration. Flexible working is increasingly important, particularly if employers want to attract those who are economically inactive due to long-term sickness or caring responsibilities back into the workforce.

Dan Lucy, Director of HR Research and Consulting at the Institute for Employment Studies (IES), states: “Quite a lot of people leave work or are off sick for long periods for underlying health reasons. But when you look at the reasons for leaving work, it often has to do with how the work is designed as opposed to other factors, such as health. For example, how much control an individual has over their work, how much flexibility they have, and the balance between the demands placed on them and the level of support they receive in terms of training and from management. In other words, with a bit of effort, jobs can sometimes be adjusted in relatively minor ways that help attract and retain people with caring responsibilities or health needs.”

In addition, investing in employee well-being can also serve to prevent resource shortages and encourage staff retention. A 2023 report from Business in the Community (BITC) and the McKinsey Health Institute highlighted the positive effects of investing in employee well-being in reducing costs of sickness and poor health and increasing employee productivity. The research finds that cost savings from reduced absenteeism, presenteeism and attrition combined with the positive returns from improved productivity, attraction and retention could be worth as much as £4,000-£12,000 per employee.

In short, businesses need to start seeing their workforce as a critical cause of better productivity and growth and, therefore, worthy of investment. Neil Carberry, CEO of the Recruitment and Employment Confederation, says: “There’s a bit of a culture in British business of viewing the ‘people stuff’ as a cost centre. ‘How do we keep people engaged?’ is a question that really matters. Businesses need to be thinking about their workforce as a critical part of their supply chain. When you think of it that way, they are real drivers of economic growth.”

The accounting profession can play a vital role in helping businesses change this cost-centre mindset towards staffing. The BITC report highlights how CFOs play an intrinsic role in encouraging investment in staff well-being by initiating boardroom discussions on employee well-being and putting employees at the heart of strategic decision-making.

The UK has struggled with skills shortages for more than a generation now, and as discussed in our previous article, there is no silver-bullet solution. There are, however, three steps that should be considered. First, the pathways for young people joining the workforce; second, how we retrain or improve the skills of the existing workforce; and finally, the role of technology.

Improving access for young people

When it comes to education and training for young people, the clearest message that comes across when speaking to skills experts is how limited the investment in technical and vocational training is, especially when compared with the efforts to encourage more young people into higher education. Professor David Miles, a member of the Budget Responsibility Committee at the Office for Budget Responsibility and an ex-member of the Bank of England Monetary Policy Committee, says: “I think we have a misallocation of educational resources. Too much has gone into universities, relative to what has gone into vocational training.”

The new skills package launched by the government in 2020 seeks to address this imbalance. It saw the introduction of a new set of technical qualifications, such as T-Levels and Higher Skills Qualifications, which have been placed on a par with their traditional academic equivalents of A-levels and undergraduate degrees. The new skills package is gradually being rolled out, but it will be some years before the UK reaps the benefits, with the first cohort to study for T-levels sitting their exams in 2022.

There is also the role of businesses to consider in providing vocational training. Historically, technical training took place in the workplace, but following the deindustrialisation of the UK and the shift to a more services-based economy, much of this in-service training has been lost. “The pathway for young people has become more complex,” Carberry notes. “Back in the 1960s and 1970s, large manufacturing companies such as British Leyland, British Steel and so on had brilliant engineering schools. This level of in-industry training does not exist in the same way any more. We lean very heavily on colleges, which do good work, but there is more than can be done within industry.”

Apprenticeships have traditionally been a key pathway for young people to enter the workplace and receive hands-on training. However, data from the House of Commons shows that the number of apprenticeship starts has fallen steadily over the past decade. In 2014-15, 125,900 under-19s started an apprenticeship; in 2021-22, this number stood at 77,500. Substantially more apprenticeships go to older individuals, with 165,000 apprenticeship starts going to those aged over 25 in 2021-22.

The decline in apprenticeships has only worsened since the introduction of the Apprenticeship Levy, a payroll tax on large employers to fund apprenticeships, in 2017. Accordingly, there are numerous calls for reform. The CIPD, for instance, favours a more flexible training levy to develop existing staff and refocus the provision of apprenticeships on young adults entering the workforce.

Training the existing workforce

While educating young people is critical, so too is looking after the needs of the existing workforce. As Carberry notes: “The majority of people who will go to work in 2040 went to work this morning in 2023. So, we need to train who we’ve got.” However, data from the Learning & Work Institute shows that UK companies spend half the EU average on training and that the number of days spent on training has steadily declined since 2011.

A key question is, therefore, how to reverse this trend and boost business investment in training. Carberry highlights the importance of collaboration between businesses and the public sector. “The UK is made up of smaller companies now, on average, which increases the need for collaboration. It means more partnership working, which is why the best things that are happening in the skill system are happening out of the West Midlands Combined Authority under Andy Street or in Greater Manchester with [mayor] Andy Burnham, where you’ve got a really clear, well-articulated local industrial strategy that gives people signals that if you do this course, it pays off.”

A good example of collaboration is provided by the Financial Services Skills Commission (FSSC), a member-led organisation that was launched in 2020 with the core mission to “increase the supply and diversity of talent with the right skills” in the financial services sector.

The FSSC also highlights the importance of ongoing investment and training in employees. Claire Tunley, CEO of the FSSC, states: “Recruitment alone will not address the skills shortages that financial services is facing as an industry; there has to be a focus on reskilling existing staff members. Research that we conducted with PwC shows that reskilling an employee provides cost savings of up to £49,100 when compared with the costs of recruiting or making someone redundant.”

To help its members with reskilling and upskilling programmes, a large part of the FSSC’s work is in providing support to map out their current skill situation and forecast future skills needs. “We have worked with our members to identify priority skills, both technical skills, such as cybersecurity, and behaviours, such as empathy, and put these into a framework. In using the framework, organisations can identify the areas that need to be prioritised as they carry out workforce planning and seek to understand where they need to be in five years,” says Tunley.

Lucy echoes the importance of this mapping and forecasting work: “Retention and the better use of skills within their workforce is a high-priority topic for organisations that we speak to. But the main challenge for many organisations is that they don’t understand particularly well the skills they have in their workforce. Nor do they have the mechanisms to understand things like skills adjacencies and how those with certain skill sets can be redeployed. More organisations are becoming interested in these things, but the starting point is skills-based workforce planning.”

Accountants can play a crucial role in helping businesses with their workforce planning, for instance, in aligning long-term strategic, workforce and budgetary planning or in helping to understand in more detail the business cases for reskilling vs hiring. Encouraging businesses to take a long-term view is a must. Lucy states: “If you’ve got a one-year financial planning cycle, you might only think about your workforce with a one-year timeframe when you actually need to be thinking about it in at least a three-to-five-year timeframe. Accountants can work with the business to understand how best to manage these strategic planning cycles; a close relationship with HR and other parts of the business is essential to achieving this.”

The role of technology in the future workforce

Finally, there is also the role of technology in the future workforce to consider. Getting more from the workforce will not be achieved by simply asking people to work harder but by empowering them with the required technology and capabilities. For example, ICAEW recently produced a virtual digital skills workshop for those working for small- and mid-sized practices on learning and development. Esther Mallowah, Head of Tech Policy at ICAEW, says: “There can be a lot of noise in the market about different products and technologies, which can make it difficult for smaller practices to know which products to adopt and what digital skills to develop. The workshop was aimed at helping such practices to anchor their decisions around business objectives. Existing skills can be catalogued against required skills to identify the skills gap, which can be addressed in various ways, including through schemes provided by technology vendors”.

Boys states: “[AI] is going to do something big for skills. Every day, I find a new application for it. And I don’t think it will take long to diffuse this technology because the learning curve is nothing, and the costs are low. The lesson is probably to be an early adopter.”

Yet while AI, and in particular generative AI, has the power to be transformative, there is a lot that must accompany it to make it really effective, not least strategic workforce planning and understanding the skills needed to support its application.

 “One of the most important things to consider is managing the introduction of technology into workforces,” states Carberry. Any business that has deployed a new CRM or marketing system knows it stands or falls on whether it makes life easier for people. You have to make sure that your investment in technology empowers your staff and raises their productivity, rather than damaging engagement, their productivity, and so your business.”

Labour and skills: part of a bigger picture

Labour and skills shortages have proven to be a significant challenge for UK PLC in recent years. The pandemic and Brexit have rendered these issues particularly acute at times. However, it needs to be recognised that there are also longer-term issues at play, notably a generational shift, an ageing, sicker population and a very different industrial landscape.

Government efforts to boost workforce participation and redesign technical qualifications should alleviate some of these challenges, but ultimately, businesses need to change their outlook on how they approach employee recruitment, retention and training. Workforce planning that is aligned with the strategic goals of the business is also essential. As Carberry notes: “The workforce is not separate from an industrial structure or group, it’s a vertical slice of it.”

Better recruitment, retention and training is not easy, particularly for those businesses struggling to cope with day-to-day operations in a volatile operating environment. Yet through increased collaboration across sectors and within regions, much can be achieved. The accounting profession can also play a significant role in bringing about change by helping businesses to see salaries and staff budgets as an investment, not a cost, and to see employees as a critical part of the supply chain. Chartered accountants can also support the long-term planning needs of the business and help line managers build business cases for investing in staff well-being and training.

In any economy, there are few more important jobs than finding ways to get the most from our ‘human capital’ – from the skills, experience and effort of those working in the economy. For too long, a shortage of skills has undermined business confidence, investment and growth across the UK. There are many routes we can take to change this, but they need coordinated efforts across the long term from business and policymakers.

Open AddCPD icon

Add Verified CPD Activity

Introducing AddCPD, a new way to record your CPD activities!

Log in to start using the AddCPD tool. Available only to ICAEW members.

Add this page to your CPD activity

Step 1 of 3
Download recorded
Download not recorded

Please download the related document if you wish to add this activity to your record

What time are you claiming for this activity?
Mandatory fields

Add this page to your CPD activity

Step 2 of 3
Mandatory field

Add activity to my record

Step 3 of 3
Mandatory field

Activity added

An error has occurred
Please try again

If the problem persists please contact our helpline on +44 (0)1908 248 250