America’s skills crisis carries lessons for Britain

Yesterday’s FT contained one of those ominous stories that only grow in significance over time – the findings of a survey by Nielsen that reveals a huge, looming skills shortage in the US as the baby boomer generation retires.

In the next five years, America’s top 100 industrial companies face an average training bill of $100m to fill the gap between these older, retiring workers and the younger, less educated cohort coming through to replace them. It’s payday – in a very real sense – for an economy that has long been under-investing in its people. And it’s a warning sign to economies like the UK that, when it comes to investing in skills, you can’t afford to take your eye off the ball.

Despite their modest place on page 22 of the paper, it’s hard to overstate the long-term significance of findings like these. The killer reading on the topic is the excellent book by Harvard economists, Claudia Goldin and Larry Katz, The Race Between Education and Technology, which tells the story of America’s relationship with education throughout the 20th century.

The authors recall the country’s early lead in education, achieved by building one of the world’s first universal systems of free primary schooling. And they set out how, since the 1970s, that lead has been squandered: the quality of teaching in the country’s school system has decayed, high school graduation rates have flat-lined, and too many students – even among those who make it to college – have failed to reach the end of four year degrees.

There are few American ills that don’t owe something to this faltering of educational attainment. But perhaps the most dramatic consequence has been for the living standards of ordinary American workers. The supply of skilled labour may have slowed, but new technologies wait for no man: advances in computing have only accelerated, making education ever more important in the jobs market.

As a result, the returns to skills, at all levels, but particularly at the top, have increased sharply since the 1980s. This increase explains much of the rise in American income inequality in the past 30 years. And even for average workers the results have been dramatic; astonishingly, the real value of wages for the median American worker has barely increased in 30 years.

In America’s race between education and technology, then, technology has taken a commanding lead. But what does this mean for the UK? For one thing, it means that the jobs package announced yesterday by President Obama carries a lesson for the Chancellor George Osborne. Around 15 per cent of the proposed new spending is to go into education: $25 billion to modernise 35,000 crumbling schools, alongside $35 billion to prevent the layoff of up to 280,000 teachers. Obama has found an approach that targets both the current and future needs of the American workforce.

None of this is to say that the Chancellor should be finding new money for our schools, above existing budgets. Happily, the UK school system is in nowhere near the same crumbling state as that in the US. But it does remind us that, when it comes to the supply of skills, we have little room to be complacent.

Returns to skills in the UK have continued to rise in the past ten years, both in terms of wage advantages and upward mobility, even while graduate numbers have increased dramatically. Any slowing of educational expansion will likely feed through into higher wage premiums for skills and, from there, into higher income inequality. That matters not just for our long-term economic health but also for the fairness of any eventual recovery.

This post originally appeared on the New Statesman blog