How Do We Pay for It? Innovative Approaches to Financing Apprenticeship

If you ask a German or Swiss businessperson what the ROI is on their apprenticeship program, be prepared for a look of bemusement or even befuddlement. But don’t expect a string of numbers.

Apprenticeship is so deeply rooted in both countries, and has been around for so long, that the question of who pays what has been long settled: the costs are shared between employers and the government, with employers paying apprentice wages and contributing to federal and local bodies responsible for developing curricula and assuring quality, while taxpayers foot the bill for the vocational schools that apprentices attend as part of their classroom training.

But for countries that do not have such large and mature systems, expanding apprenticeship inevitably bumps up against the question of who pays for what exactly. And one of the first questions you are likely to hear from any American CEO or HR officer you ask about apprenticeship is “what’s the ROI on that?” We know that quality apprenticeship pays off, but some businesses understandably fret about overpaying their share - and more importantly about free-riding competitors - in the process the process of scaling up the national system.

Today, the U.K. will implement an innovative approach to financing the expansion of its apprenticeship system - and American policymakers should be watching. Collectively called the “apprenticeship levy,” the new system aims to solve a number of problems that face apprenticeship expansion in any system: getting employers engaged (especially smaller ones), and promoting programs for young people and in high-skill occupations. Here’s how it works:

1.  Spreading the costs of apprenticeship:

For most British employers, today’s change won’t mean a new tax at all: only large employers with over £3 million in UK payroll (about $3,750,000 - meaning about 2% of UK companies) will pay anything extra into the system. Those same employers will then receive a monthly training credit based on how much they paid in and how many of their employees live in England (they can estimate all this using a new web tool).

For example, an aerospace manufacturing company with £20 million in payroll for its UK employees, of whom 90 percent live in England, would pay a levy of £100,000 per year. Factoring in the 10% government bonus, that company would then receive about £7,000 a month - just under £85,000 a year - to spend on apprenticeship training for its employees. Of course, the company could always spend more on such training, and that’s where the nearly £3 billion in expected revenue from the large-employer levy really goes to work: 90% of any training expenses beyond the credit are reimbursed by the government.

And for smaller companies who pay no levy, it’s the same deal: 90% of all apprentice training fees are paid by the government, drastically reducing overhead costs for new apprentice sponsors. This could be a game-changer for the many small and medium-sized companies for whom the start-up costs of apprenticeship can be daunting.

It’s an ingenious design: The more a company invests in creating apprenticeships, the more they can pull out of the resources generated by the levy. Large companies will pay more into it, so they might as well use it. Smaller companies still chip in through their existing taxes and their ten-percent training contributions, but it’s much easier for them to get new apprenticeships started - benefitting their companies, job-seekers, and the local economy.

2.  Targeting youth and high-skill apprentices:

Across nearly two years of planning for the U.K.’s new apprenticeship funding system, a constant theme has been reducing complexity in calculating and disbursing funds. Previously, employers received credit for each apprentice based on that apprentice’s age and postal code - younger apprentices from disadvantaged areas got higher subsidies - which was meant to account for the higher costs of training younger or more vulnerable apprentices. It helped, but keeping the system accountable was a procedural nightmare.

Under the new rules, there is a single “adult rate” for each apprentice, set in proportion to the average cost and time to complete a given apprenticeship. Additional funding for hard-to-train apprentices isn’t gone, though: the new system still provides extra funding for apprentices who are 16-18 years old, and for 19-24 year-olds returning from medical issues or unemployment. Employers’ levy credits also get a boost if they train for high-demand STEM occupations, or if their apprentices need more coursework in English or math to become job-ready.

3.  Using technology to put employers in control:

The most important aspects of the new funding system may not be the levy itself, but the digital resources that go along with it. Beyond managing their levy payments and credits, the digital apprenticeship service

https://sfadigital.blog.gov.uk/2016/10/25/what-is-the-digital-apprenticeship-service/

will allow employers to search for established apprenticeship programs and training providers in their area, breaking down barriers to employers large and small who want to start an apprenticeship. Down the road, employers will even be able to expand their recruiting efforts by posting apprenticeship opportunities on training providers’ pages.

Taxing businesses for any reason is a heavy political lift in the United States. But with jobs and their required skills changing quickly, businesses need straightforward, sustainable, and scalable solutions. A “skills levy” might sound a bit exotic to American ears, but several  states have workforce training funds that are financed through employer taxes like unemployment insurance. Minnesota, for example, has a Workforce Enhancement Fee of .1% of taxable payroll that is used to help retrain the unemployed. One can imagine a similar fund in states interested in growing apprenticeship and looking for ways to pool resources so that both large and small companies have an incentive to participate.

Compare this approach to a tax credit, which is often proposed as a strategy for bringing employers to the table on apprenticeship. In contrast to a levy, a tax credit is a highly targeted approach that rewards individual business for employing an apprentice. While tax credits tend to be easier to sell politically, there is little evidence that they are particularly effective at bringing new employers into the fold. In fact, according to a recent report by the OECD, tax credits are among the least effective financing mechanisms to grow apprenticeship.

The U.K. has been at the forefront of a lot of policy innovation when it comes to apprenticeship, sometimes with mixed results. But finding a financing model that can help provide a stable source of funding and lower the risk and upfront costs of apprenticeship to employers is critical to any efforts to expand here in the U.S.. The apprenticeship levy is one approach that’s definitely worth watching.