20% of the UK workforce could be significantly underskilled for their jobs by 2030, according to research from the Industrial Skills Strategy Council. This would have wide-ranging implications, from compromising work quality and output to hindering innovation and economic growth. As businesses struggle to fill job vacancies due to the lack of skilled candidates, it is essential to understand the root causes of the skills gap, its potential impact on the future, and solutions to bridge this divide.
The UK has struggled with low productivity since the global financial crisis, seeing slower growth than comparable European economies such as France and Germany. Our bimonthly Business Outlook Tracker (BOT) surveys 600 mid-market businesses across the UK, providing insight on their expectations and priorities for the future. Their responses have confirmed that the skills gap is high on their agendas as an area holding their productivity back.
Low productivity growth is a major issue, not just for businesses, but also for their employees and the country as a whole. According to the Centre for Economic Performance, "average UK real wages today are similar to their level in 2005. On some measures, this is the longest stagnation for centuries and the cause of a host of political and social problems”. The UK faces several critical challenges as it tries to increase productivity, and this insight is the first in a new series exploring them. In addition to the skills gap, we will explore AI and technology, finite resources and Net Zero, access to capital, and infrastructure.
The skills gap is a major obstacle to driving greater productivity, and the predicted outcomes from current trends are concerning, with a number of negative impacts including:
The skills gap is caused in part by the UK workforce shrinking. This has several causes, with one of the most significant being the rise of the economically inactive – people not at work, claiming benefits or studying – since COVID-19. In March 2024, 20.6 million people aged 16 to 64 were inactive, an increase of 850,000 people from March 2020. This is partly a result of an increase in the sickness rate among working-age adults, and higher levels of youth unemployment, but they aren’t the primary drivers.
The UK is going through what the Institute of Chartered Accountants in England and Wales (ICAEW) describes as a “changeover in generations”. The Baby Boomer generation born in the 1950s to the early 70s is now retiring, and they were larger than the generations that have come after them. The Office for Budget Responsibility (OBR) had already predicted a slowdown in labour market participation due to an ageing population, but the pandemic led to an increase in early retirements that accelerated this trend - those aged 50-64 account for 68.5% of the rise in economic inactivity since March 2020.
Brexit also led to the departure of skilled European workers who have not returned, either out of their own choice or because they are now ineligible for work visas.
Rapidly advancing technology is putting businesses under increasing pressure to acquire the advanced digital skills required to support developments such as artificial intelligence (AI), automation and blockchain technology, while the education system is struggling to keep up with the skills needs of the modern economy. Thanks to a decline in skills investment, the latter has been under-resourced for some time and that is now being felt in the labour market.
This means that although the unemployment rate has been low for some time, the number of roles not filled is increasing. The graph below demonstrates this by mapping data from the Employer Skills Survey 2022 against unemployment statistics from the Office for National Statistics (ONS).
Unemployment Rate vs % of Jobs not filled due to Skill Gaps
In addition to the shortage of skilled workers, there will also be a growing surplus of redundant skills in the workforce. The increased adoption of automation and the growth of AI will mean many individuals will need to retrain to stay in employment. This issue will be worsened by the fact that specific new digital skills are expected to emerge and then be replaced quickly as the rate of change increases.
This is no small challenge - analysis from the Office for National Statistics (ONS) found that 1.5 million jobs in England are at high risk of at least some of their duties and tasks being automated in the future.
Bridging the digital skills gap will be vital, but the country will also need other specialist skills in the coming years. For example, the Labour Government’s pledge to build 1.5 million homes will require over 150,000 more skilled construction workers, according to the Chief Executive of the Construction Industry Training Board. Many of the National Wealth Fund proposals, for example channelling up to £500m into green hydrogen manufacturing, will also require more appropriately skilled labour than is currently available.
The future of the skills gap is likely to become more about the types of skills, and the level of capability that aren’t available, rather than the volume of labour missing from the market.
Addressing the skills gap will require a three-pronged approach encompassing government and the education sector, business, and individual involvement. The first step is to ensure that all three groups are clear on the required skills now, both in the short and long term. Secondly, access to training needs to be made available to people throughout their education and career lifecycles, where relevant this requires investment from businesses. Thirdly, and equally importantly, individuals need to adopt a growth mindset. They must recognise and embrace the concept of ‘squiggly careers’, in which everyone is both a teacher and a learner, career pathways evolve, change, progress upwards, downwards, or sideways as life stages evolve and opportunities arise.
Research from the Institute for the Future of Work in 2022 found that only around one in five adults participate in any form of adult education and training. This number has been declining since the 2000s, while public and private investment has also declined. Business investment in skills training has declined by nearly 20% since 2011.
The positive news is that 60% of UK employers funded or arranged training in 2022/2023; however, the Employer skill survey found that many resources are used for health and safety training compliance. While important, this type of training is not much help with improving productivity.
Our research indicates that most mid-market businesses have been addressing this over the last two years, with our October BOT research finding that 80% of mid-market business leaders know they need to invest in digital skills to prepare for growth. We hope to see more progress as this challenge becomes more pressing.
“It’s clear that there’s a strong need for further investment in skills development, with our research uncovering a need for better digital, data and technical skills. This lack of necessary skills development, when combined with lagging investment in other areas such as technology, is creating a snowball effect, stretching current people resources and ultimately contributing to heavy workloads and burnout – further exacerbating the productivity challenges facing the market.”
The decline in business spending on skills is compounded by the decline in public spending. The Institute for Fiscal Studies (IFS) suggests the total government adult education budget in 2024–25 will be 23% below its level in 2009-10. In a recent press release, they also claimed “since its peak in 2003–04, total public spending on adult skills has fallen by 31%. Alongside that, the average amount invested in training by employers has fallen by almost 30% per trainee since 2011”.
The solution isn’t just to increase budgets. Not only because, as the IFS points out, much of the decline in spending was in courses with low rates of return. The challenge outlined above is that the future of the skills gap will involve a mismatch between the skills needed today and those needed ten years from now. Careful planning will be needed in the training offered today, with a focus on continuous learning throughout an individual’s career to ensure their skills stay current.
As one part of tackling this challenge, the Labour Government has pledged to turn the Apprenticeship Levy, a key funding source for upskilling in the UK since 2017, into a "Growth and Skills Levy” that would allow businesses to spend up to 50% of their funding on a wider range of training programmes beyond traditional apprenticeships, allowing them to focus on the specific skills they say they need to grow.
Automation and the pace of change mean that any skills investment must be appropriately aligned to areas of economic growth. It must also be agile enough to adapt to innovation in the automation of roles and services. The Organisation for Economic Co-operation and Development (OECD) found that the UK could improve its productivity by 5% or more if it reduced the level of skills mismatch to that of best-practice peer nations and those with a growing demand in the economy.
As the above statistic from our Business Outlook Tracker makes clear, business leaders recognise technology as the key to greater productivity. As technology changes quickly, the skills that are needed to make the most of it change rapidly too. By investing in your workforce, training and nurturing them so they can make the most of the latest technology available, you will likely help to address the second most important factor: employee wellbeing.
This is also high on the newly elected UK Government’s agenda, with Labour’s manifesto including plans to set up “Skills England”, bringing together government, the Industrial Strategy Council and the Migration Advisory Committee to identify skills and labour needs in each part of the country, drive forward training opportunities, and ensure that skills policy is aligned with the needs of the economy.
In the King's speech, it was also stated that Skills England would engage with the Institute for Apprenticeships and Technical Education (IfATE) and the Education and Skills Funding Agency to “address bureaucracy around the approval of qualifications and the time lag between the need for programmes being identified and becoming available to learners”. This should enable more speed and agility in addressing skills gaps amid a quick pace of change.
For more insight on how your organisation can address skills gaps, contact Head of Business Transformation and People Advisory Carolyn Hicks.
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