Skills, productivity and human capital

Lead Research Organisation: Institute for Fiscal Studies
Department Name: IFS Research Team

Abstract

The planned programme of research aims to address four issues:

R&D, innovation and the wages of workers in low-skilled occupations
An understanding of how increases in innovation and productivity feed through into the living standards of different groups in society should be central to an industrial strategy and the design of skills policy. We plan to examine the relationship between the wages of workers and the innovativeness of the firms for which they work, for workers of different skill levels and workers doing different kinds of tasks. Of particular interest are the wages of low-skill workers, which vary considerably between firms. Our preliminary analysis suggests that the premium from working in an innovative firm (as opposed to a non-innovative firm) is higher for workers in low-skilled occupations than for workers in high-skilled occupations. Our research aims to distinguish between the main possible reasons for the differences.

The Longer Term Gains from productivity
In order to more fully assess how the gains from R&D, innovation and productivity improvements are distributed we need to know not just how they feed through into pay, but also what impact they have on more complete measures of living standards, such as lifetime incomes and consumption. This requires a detailed understanding of the mechanisms that stand between wages and living standards, such as the tax and transfer system, the assets that households have available, and how firms and households respond to productivity shocks. Our research will examine these mechanisms using detailed household and longitudinal data.

Entrepreneurs, business growth and the tax system
The number of company owner-managers has doubled since 2008, with 40% of the growth in the workforce coming from people working through their own business. It is increasingly important for an industrial strategy that aims to support businesses to start and grow to understand the characteristics of start-ups, the drivers of these recent trends and the effects that changing structure of the labour market is having on productivity and growth. Of particular interest is the extent to which the individuals that are starting new companies are entrepreneurial (in the sense that they invest) as opposed to individuals who choose to operate through an incorporated form simply to access significant tax benefits. A key question is to what extent the tax system helps or hinders small business growth. We propose to address this issue directly by exploring how owner-managers respond to taxes, including the effect of taxes on the size and investment of companies.

Higher Education
Understanding what drives the choices that young people make over higher education is important for governments and students. The choice of subject and institution can result in very different lifetime earnings, which has important implications for living standards and social mobility, as well as for the long-run cost of higher education finance. In this project we seek to understand what factors affect individuals' choices. The data we use will tell us which university characteristics are most important for students when they make their choices about where and what to study. Our model will enable us to estimate the increase in demand associated with (for example) a large increase in teaching quality at a given university. This latter point will enable us to better understand whether universities choose to focus resources on areas which are particularly important predictors of demand, and whether this has changed following the reforms to the higher education system. This work is particularly relevant in the current policy environment - the Teaching Excellence Framework is explicitly targeted at influencing students' choices, through improving information available, and could have strong implications for the incentives universities face.

Planned Impact

The work will be of key interest to policy makers within government and Whitehall. We intend to maximise the impact of our work in several ways, drawing on the IFS's extensive experience in the area.

R&D, innovation and the wages of workers in lower skilled occcupations: We will hold a workshop/seminar to discuss the drivers of wages among low-skilled workers, and the policy implications of our findings. We will issue a short policy piece on wages of low-skilled workers and the potential impacts of Brexit on low-skilled workers

Longer term gains from productivity. We plan a half-day roundtable event on techniques for using longitudinal data to model the relationships between wages, taxes and benefits, and lifetime incomes; involving officials from BEIS, HMT and DWP, and leading academics and users of micro-simulation tools. We will issue a short policy piece on the effects of entering the labour market on long-run living standards when the economy is weak.

Entrepreneurs, business growth and the tax system: We will hold a half-day event to showcase new description of the small business population and how it has been changing. The event will include a presentation of results on how entrepreneurs respond to tax, and a discussion of how this work informs tax policy design. The participants will include officials from BEIS, HMT, HMRC and ONS. We will issue a short policy piece on characteristics of the small business population.

Higher Education: We plan a workshop to discuss and receive feedback on methodology to identify the impact on lifetime earnings involving participants from BEIS, UKGI, DfE and ONS. We will present findings and policy implications at a Higher Education policy event with participation of policymakers, press and sector experts

We will meet with officials from key departments, with whom the IFS already has good links, to make sure that our work is well-understood and relevant to the policy context. Our outputs will be accompanied by non-technical summaries of our main findings that will be made available on the IFS website (which had an average of over 160,000 visits over the past year). Wherever appropriate, we will make key findings from our research available in a visually engaging and interactive way via our website using new tools and techniques. Our recent experience in producing video 'explainers' indicates that the production of short, informative video clips (available on the IFS website and through its YouTube channel) will be another effective way to reach non-academic audiences including the general public. Our results will also be press-released and distributed using the IFS's extensive press mailing list. Those involved in the bid have extensive experience with the media including with broadcast interviews and we would draw on this as appropriate. Previous work by those involved in the bid has featured on the front pages of national newspapers and been the lead item on national news programmes. We will in addition make use of the IFS's presence on social media. Any outputs (including summaries and blog posts) will be promoted via the IFS's twitter feed (@theIFS, which now has over 20,000 followers) as well as the IFS's Facebook site.

Publications

10 25 50
 
Description This project aimed to have an immediate impact on the UK policy debate surrounding skills and productivity and to contribute to the academic literature in these areas. The grant directly informed the UK policy debate. The grant also led to several very successful events, including two half-day events (one on 'Poverty and low pay in the UK: the state of play and the challenges ahead' and one on 'Self-employment and entrepreneurship: lessons from tax records and challenges for policy') and a residential conference on 'The role of tax in the industrial strategy'. Each event bought together senior policy makers, practitioners and academics to discuss how research informs policy issues. The events worked to further develop links between IFS researcher and decision makers.

The project has also led to significant contributions to the academic literature and to increased understanding of:

> the potential implications of trade for low-skilled workers - we found that men with high school level education are most exposed to the negative effects of a change in trading relationships;

> the consequences of entering the labour market when the economy is weak - we found that the 'scarring' impacts of a recession were substantially mitigated for those young people who were able to insure themselves by continuing to live with their parents;

> how different techniques can be combined with longitudinal data to model the relationships between wages, taxes and benefits, and lifetime incomes - this has built our capacity to model the effects of policy;

> the characteristics of the self-employed - by using data from tax records we have been able to paint a much more detailed picture of the incomes of this fast growing group and have revealed particularly large falls in income since the financial crisis;

> how lifetime earnings, taxes and student loan repayments vary across university graduates- we found significant heterogeneity along subject studied and institution attended.

We have also been investigating the potential implications of trade for low-skilled workers. We organised a public lecture on the winners and losers of free trade at the University of Manchester. Our work has also considered the potential impacts of Brexit and other changes in trade policy. We attended events held by the Women's Budget group on Brexit's impacts and wrote a blog piece on the potential impacts of Brexit for low-skilled women in particular. We have also participated in two panel discussions on the economic impacts of Brexit.
Exploitation Route Our findings have already informed our own research plans and we will build on the findings, data sets created and techniques studied to take forward research on the formation of skills and human capital, the drivers of incomes and productivity and the effects of tax and benefits policy.

We expect both the findings to be of use to other researchers studying these issues.
Sectors Education,Financial Services, and Management Consultancy,Government, Democracy and Justice

 
Description A presentation at EEA-ESEM conference 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Professional Practitioners
Results and Impact Preentation at EEA-ESEM conference by Laura van der Erve
Year(s) Of Engagement Activity 2018
 
Description Entering the Labour Market in a Weak Economy: Scarring and Insurance 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other audiences
Results and Impact Presentations on the effects of entering the labour market when the economy is weak on subsequent living standards using long-running UK household survey data.

Presented at the 74th Annual Congress of the International Institute of Public Finance, Finland, in August 2018 by Robert Joyce.

Presented at the Royal Economic Society Annual Conference, Sussex, in March 2018 by Jonathan Cribb.
Year(s) Of Engagement Activity 2018
 
Description Presentation 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Industry/Business
Results and Impact Presentation on How do small busienss owners respond to the tax sysem? By Kate Smith, Helen Miller and Thomas Pope.
Year(s) Of Engagement Activity 2018
 
Description Presentation at NBER Summer Institute 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Other audiences
Results and Impact Presentation titled 'Where is the subsidy going? Using administrative data to value English income contingent student loans by subject and university', presented at the NBER Summer Institute by Laura van der Erve
Year(s) Of Engagement Activity 2018
 
Description Presentation at self employment and entrepreneurship policy event 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact A talk given by Kate Smith, Helen Miller and Thomas Pope titled 'Self-employment and entrepreneurship: lessons from tax records and challenges for policy' at an IFS held policy event on 04/06/2018.
Year(s) Of Engagement Activity 2018
 
Description Presentation to SOLE conference 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Presentation to the SOLE conference by Laura van der Erve
Year(s) Of Engagement Activity 2018
 
Description Roundtable discussion on distributional analysis using panel data 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Other audiences
Results and Impact Tom Waters, Robert Joyce, and Joseph Woods took part in a discussion with various policymakers, analysts, academics, on distributional analysis using panel data, especially with application to Universal Credit in July 2018.
Year(s) Of Engagement Activity 2018
 
Description Tax and Industrial Structure - some economics 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Industry/Business
Results and Impact This presentation was given by Helen Miller at the IFS Residential Conference, Downing College Cambridge on 14 September 2018
Year(s) Of Engagement Activity 2018
 
Description The distributional impacts of Universal Credit: a long-run perspective 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Tom Waters presented on the distributional analysis of tax and benefit reforms at the 2018 WPEG conference in Sheffield.
Year(s) Of Engagement Activity 2018
 
Description Where is the subsidy going? 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Other audiences
Results and Impact Presentation given on 28/03/2018 by Jack Britton
Also given by Laura van der Erve at the Society of Labour Economists on 05/05/2018, the NBER summer institute on 10/07/2018, and at the EEA-ESEM conference on 29/08/2018
Year(s) Of Engagement Activity 2018