INDUSTRY VIEW : Sir Ron must solve the 16-plus education riddle

Ask passers-by in the street how much change they would get from a fiver for a sandwich costing pounds 1.24, and one in six of them will have trouble working it out. According to the Basic Skills Agency, many adults have serious literacy and numeracy problems.

But this is just the tip of the unskilled iceberg. Policy-makers across the political spectrum agree that something needs to be done to improve the skills of the British workforce. The question taxing their minds most heavily at the moment is who should pay the bill.

Last week the Government announced that Sir Ron Dearing is to lead a review of the funding and structure of higher education, to come up with a better way to finance the expansion of universities.

Two days later it emerged that Labour had abandoned its long-standing proposal to introduce a training levy on all employers who did not provide a critical amount of in-house training. Instead they are considering tax relief for individuals and employers who contribute to individual learning accounts.

The search is on for a fair and effective way to develop post-16 education. The current system fails on both counts. Many individuals do not acquire the skills that they and the economy need. Meanwhile the greatest subsidy goes to high-earning graduates rather than low- skilled, low-paid people. Individuals, businesses and society as a whole all gain from post-16 education. The question is how the cost of improving education should be split between the different beneficiaries.

In a paper for the Centre for Economic Performance, economists Richard Layard, Peter Robinson and Hilary Steedman argue that businesses should only pay for training when they are able to capture enough of the returns to the investment. They distinguish between "general training" which raises the productivity of employees in every way - and equips them to get better jobs elsewhere - and "firm-specific training", where the productivity gains are particular to the firm and the technology it uses. One serious disadvantage of Labour's old training levy was that it could not distinguish between general and firm-specific training. Firms that spent a lot of money on training staff to use unique technology would have escaped the levy, despite the fact that the skills they taught were useless in any other employment.

Layard and others argue that employers already provide firm-specific training, and they should not receive any extra subsidy from the state to continue doing so. But nor should they be expected to contribute to the portable vocational skills which make up general training; that should be up to the individual and the state.

The academics may be right. Unfortunately little research has been done into the kinds of returns that employers get from training, or into the reasons behind their training decisions. What is clear, however, is that employees benefit disproportionately from the kinds of training that firms undertake.

In a new paper for IPPR's Commission on Public Policy and Business, Steve Machin and David Wilkinson have analysed who receives training and who doesn't. In an examination of the Labour Force Survey they discovered that companies educate the well-educated.

In 1994 26 per cent of graduate employees had received training in the previous four weeks, compared with 18 per cent of those with A-levels or equivalent, 13 per cent of those with GCSEs and 4 per cent of those with no qualifications at all. Moreover, firms train even when employees pick up considerable financial returns as well. Those same highly educated employees who are receiving in-work training also pick up the greatest personal return from the courses they take.

This finding has several consequences for policy-makers. If individuals already have good basic education or portable vocational skills, then firms seem ready to shower firm-specific training on them.

Two problems need to be resolved. The first is ensuring that everyone gets adequate basic education. And the second is finding an effective and fair way to fund the acquisition of additional portable vocational skills.

Ideally basic education should be provided by the school system. But as long as it fails to do so, people also need access to courses at other stages in their lives. Unskilled individuals are unlikely to be able to afford the cost in advance, nor will they see huge wage returns afterwards, given that they are simply catching up with the education others received courtesy of the taxpayer. So the state will have to invest on their behalf instead. And given that there are fewer low-skill jobs available, investing in the low skilled has the added social benefit of keeping them off the street and out of the dole office.

Another possibility is to force firms to contribute towards general education for unskilled employees. Advocates of Compulsory Learning Accounts argue that employers should be obliged to contribute a certain percentage of the payroll towards an individual education fund for each member of staff. Firms will inevitably see contributions to general portable skills as another tax on employment. An alternative way to ensure businesses contribute to the skill base they benefit from is to finance broader education through the general taxation to which businesses already contribute.

But the news is not all bad for the taxpayer. There is even less reason, in the light of the IPPR evidence, to continue with such a huge subsidy to higher education. Going to university doesn't just mean a one-off boost to your earning power. It also confers access to further training and education throughout your life, so it seems reasonable that graduates should contribute to the education too. Eighteen-year-olds are rarely in a position to stump up several thousand pounds in advance, but borrowing and then repaying the money over a long period makes perfect sense.

Sir Ron Dearing will consider ways to make graduates pay towards their education without crippling them with debt, or discouraging them from going to university in the first place. Academic education is one form of portable skill. Other portable skills - such as bricklaying - may be just as useful for employees moving between jobs. But at the moment academic education absorbs all the state subsidy, while would-be bricklayers are forced to invest in themselves.

Politicians and policy-makers are right to be concerned about expanding and financing post-16 education. But they should not do so in a vacuum. Whether it be portable vocational training, or higher education, the state should take a similar approach to each.

Individuals who get the highest returns from their education should contribute most. Examining higher education in a vacuum will only produce more inequities and complications in the funding of post-16 education. Sir Ron Dearing's remit should be widened to consider everyone else's adult education too.