How can we kickstart investment in human capital?

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Regulation and persuasion are ineffective. Is there a third way to encourage investment?

At certain stages in the economic cycle it is widely regarded as important that as many employers as possible ramp up the kinds of activity that help grow productivity.

Traditionally governments encourage businesses to take on more apprentices or invest in other training and skill development activity. Investment in new technology or other forms of capital is another favourite. In recent months we have also had both the prime minister and the director general of the CBI calling for firms to increase wages. In the health and wellbeing arena we’ve seen Simon Stevens, who heads up NHS England, calling for more employers to invest in interventions to promote workforce health.

All of these calls from government have a strong evidence base. But one of the things that unites them is that, beyond persuasion, awareness-raising and entreaty, no modern government is prepared to go much further in encouraging employers to ‘do the right thing’. We live in times where even the hint of heavy-handed intervention by the state is regarded as unacceptable – even if the economy and society at large stand to benefit.

So if regulation is out of the question and polite persuasion is ineffective, is there a third way to kickstart investment in human capital?

One of the suggestions raised by Stevens in his ‘Five Year Forward View’ of the NHS was tax incentives. More specifically, he suggested that employers could receive tax breaks for setting up jogging clubs, group weigh-ins and slimming clubs to help combat obesity.

The logic of using tax breaks in this situation is that if the government wants employers to implement initiatives that go beyond their legal duty of care and to have a wider societal impact and public health benefits, then the ‘deal’ should involve some help or a ‘nudge’ from the government. This may, argue supporters, encourage firms who haven’t considered health and wellbeing interventions to do so.

The argument for providing tax incentives for health and wellbeing programmes is that if such initiatives become tax free, then the demand for them will rise. As part of the new ‘Fit for Work’ service, employers can claim up to £500 per employee for evidence-based workplace interventions. Though it is too early to assess their impact, at least the government has conceded the principle that tax breaks have a part to play in the policy mix.

But what about other people management practices such as skills training? Might there be a place for bolder measures to incentivise reluctant employers to invest in training? This might comprise targeted incentives to embolden firms to ‘grow their own’ talent rather than rely on recruiting from outside.

Before we can embrace tax incentives fully, however, we need to address two concerns that those cautious souls in HM Treasury will always raise. First is ‘deadweight’. How can we be sure that tax breaks are not just subsidies for firms who are already virtuous? Second, do the activities we want to incentivise actually reach the right target audiences?

These barriers can be overcome with some imagination and goodwill on the part of HM Treasury, employers, and training and workplace health providers. Carefully calibrated measures to adjust the tax or National Insurance system to ‘lubricate’ change and to increase virtuous behaviour among employers might make an important contribution to the productivity growth that we so badly need.

Stephen Bevan is director of the Centre for Workforce Effectiveness at The Work Foundation

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