A crucial argument of the theory in Part I is that the free market system typically cannot be expected to lead people to acquire sufficient skills. But the problem of skills gaps in the 1990s is exacerbated by the fact that the composition of labour demand in previous decades has shifted steadily in favour of skilled workers. In short, the inability of the market system to provide sufficient training is becoming an increasingly painful problem. Chapter 7 assesses the background to the current debate on training provision, with the UK economy as focus of interest.

The chapter describes changes in the patterns of employment and wages in the UK. In UK manufacturing, the percentage share of non-manual employment in total employment rose from 16.1% in 1948 to 32.7% by 1990; the percentage share of non-manual wage costs in the total wage bill rose from 23.1% in 1948 to 42.0% in 1990. In addition, the gap between the lowest-paid and highest paid workers widened dramatically over the 1980s. Not only did the relative employment share of non-manual workers rise dramatically, but the pay of non-manuals relative to manuals increased sharply in the 1980s as well. In conventional economic terms, it appears that the relative demand curve shifted outwards.

This chapter focuses on possible explanations of this shift. One explanation is that increased international competition has dampened the wages of manual workers across industries producing traded goods. An alternative hypothesis is that technological developments (such as the introduction of computers) increase employers' demand for skilled workers within particular industries. The chapter computes the percentage of the variation in the share of non-manual employment attributable to these factors.