Skills, productivity and human capital

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.

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.