Education and Skills Impact Framework (ESIF) - modern apprenticeships provision: contextual summary report 2022

Return on Investment

Introduction

The analysis estimates the Return on Investment (ROI) associated with Scottish-domiciled individuals who started Modern Apprenticeships in Scotland in the 2018-19 academic year. This involves the estimation of benefits and costs associated with each level of MA, for individuals, employers and the exchequer.

Using the marginal earnings and employment returns presented in the previous section, Return on Investment (ROI) to each qualification was estimated for the cohort of Modern Apprentices beginning their programme in AY 2018-19. Lifetime earnings were estimated for completers and the counterfactual group (non-completers). Lifetime earnings are estimated by combining earning figures from LEO, earning growth rates from the Labour Force Survey (LFS) and marginal earning and employment figures presented in the previous section. Comparison of

lifetime earnings between individuals achieving the qualification and the control group provided an estimate of the increase in gross lifetime earnings from completing a qualification. This provided the basis to calculate the net benefit to the modern apprentice, the employer and the exchequer based on the total costs and benefits unique to each, as listed in Figure 1. Results are disaggregated by qualification level and gender, reflecting the characteristics of a typical modern apprentice within those groups. Calculations apply to Scottish-domiciled individuals living anywhere in the UK after completion of their qualification.

Results presented are net present values (NPVs) calculated using discount and inflation rates from the HM Treasury Green Book and Office for Budget Responsibility (OBR) forecasts, respectively. This is a standard methodology to discount future benefits.

The approach to estimating costs and benefits for the ROI model is summarised in Figure 1 on the next page.

Figure 1 - Overview of benefits and costs associated with Modern Apprenticeships

ROI to MAs

+ Students/graduates Exchequer

Benefits during study:

• Net apprentice wages during training (BEIS Apprentice Pay Survey)

Benefits post-study:

• Enhanced net earnings post-completion (LEO & LFS data)

- Costs (all during study only):

• Foregone net earnings (counterfactual; LEO & LFS data)

- Costs (all during training only):

• SDS and SFC funding contributions (SDS & SFC data)
• SDS Administrative costs (SDS data)
• MA employer incentive funding (SDS data)
• Foregone tax and NI contributions (counterfactual; LEO & LFS data)

Employers

Benefits during training:

• Foregone wage costs and NI employer contributions during training (counterfactual; LEO & LFS data)
• MA productivity during training (SDS MA Employer Survey data)

Benefits post-study:

• MA employer incentive funding (SDS data)
• Productivity gains post-training

Costs during training:

• MA wage costs + NI employer contributions during training (BEIS Apprentice Pay Survey)
• MA recruitment costs + training and supervision costs (SDS A pprentice Employer Survey)
• Forgone productivity during training

Costs post-study:

• Enhanced net earnings post-completion (LEO & LFS data)

Individuals

Table 10 presents return on investment expressed as lifetime net benefit per learner and benefit-to-cost ratios associated with the completion of an MA. The ROI estimates are net present values, representing the difference in lifetime earnings (after costs) between MA completers and the control group. For example, a typical male apprentice qualifying with an MA level 3 is estimated to earn £84,473 more over a lifetime than a comparable individual who started but did not complete a similar MA. This is equivalent to a benefit-to-cost ratio of 2.8 to 1 for the individual – in other words, a male apprentice completing an MA at level 3 receives an average additional return of £2.80 for every pound that he spends on gaining the qualification (compared with a non-completer).

Note: Relative to a non-completer control-group

Key findings:

• MA completion is consistently associated with positive net benefits to the individual, across both levels for male and female MAs. Similarly, benefit-to-cost ratios are consistently higher than 1, indicating that the benefits associated with completing an MA outweigh the costs.
• In addition to net additional earnings post-completion, apprentices’ wages during their training make up a substantial share of the estimated benefits to learners.
• The net learner benefits for male apprentices are consistently larger than for female apprentices.

Exchequer

Table 11 presents the ROI to the Scottish Exchequer (the net return to public investment). The return on investment to the Exchequer represents the difference in exchequer net income between qualifiers and the relevant control group, over an individual’s lifetime. For example, females who completed a level 3 MA provide the public purse with a net benefit of £25,324 over their lifetime compared to non-completers with similar characteristics. This is equivalent to a benefit to cost ratio of 4.1 to 1 for the public purse – in other words, a female apprentice completing a level 3 MA generates an additional return of £4.10 for every pound of public investment (compared with a non-completer).

Note: Relative to a non-completer counterfactual

Key findings:

• Qualifying with an MA is associated with a positive return on investment for the Exchequer as compared to individuals who begin but do not complete an MA. This is the case across both levels for male and female MAs.
• The largest income returns on investment for the exchequer are for male apprentices who complete at SVQ level 3, whereas the return to investment in female MAs completing at SVQ level 2 is more modest. This reflects lower average wages for female apprentices who complete level 2 MAs.

Employers

Finally, Table 12 presents estimated ROI measures associated with the completion of MAs from the employers perspective, relative to a non- completer. The employer ROI associated with MAs here is assessed from the perspective of all employers (as a group) irrespective of whether they train Modern Apprentices or not – in other words, the analysis is not adjusted for the likelihood of an MA learner remaining with or leaving their training employer. As an example of ROI in Table 12, from employers’ perspective, male MAs who complete a level 3 MA provide a net benefit of £63,464 with respect to non- completers with similar characteristics. Similarly, MA completion for these individuals is associated with a benefit-to-cost ratio of 1.2, with respect to non-completer counterfactual – in other words, investing in a male apprentice who successfully completes a level 3 MA generates an average additional return of £1.20 for every pound of employers’ investment (compared with hiring a non-completer who drops-out at the very start of their apprenticeship).

The method used to estimate this productivity benefit captures the direct productivity benefits accrued by the employer who hired the training employee, productivity spillovers of the training on other workers (including those that might not have received the training), as well as the industry-level productivity spillovers accruing to other firms.

This analysis is of a particularly exploratory nature, given the relatively limited evidence on and difficulty associated with estimating both the benefits and costs borne by employers associated with apprenticeship training. As a result, the estimates presented here should be interpreted with caution.

*Caution due to small sample sizes.

Key findings:

• In general, there are significant net benefits to employers associated with Modern Apprenticeships (vs. employing non-completers).
• The largest type of benefit relates to the productivity gains incurred by employers post-training. Here, productivity is estimated by wages.