Upskill Battle: Economic Efficiency and Social Inclusion in the Knowledge Economy

High-quality vocational education and training (VET) systems have been traditionally the cornerstone of a coordinated model of capitalism that simultaneously accommodated economic efficiency and social inclusion. VET systems performed these functions by equipping large shares of the population, crucially including pupils from low socio-economic status, with high-quality skills, which fostered, in turn, smooth school-to-work transitions. Yet, these systems are rooted in the industrial and craft traditions, i.e., in those very sectors and occupations that are most affected by contemporary labour market transformations, such as technological change and globalisation that threaten jobs primarily in the middle of the skill distribution by – respectively – replacing them with machines or outsourcing them to low- and middle- income countries with lower labour costs. To what extent, then, can dual apprenticeship systems deliver economically efficient and socially inclusive outcomes today? The paper argues that dual apprenticeship systems can still combine economic efficiency and social inclusion. However, as structural transformations militate against them, active political-coalitional work is needed for dual systems to remain socially and economically viable. The argument is tested through a two-pronged empirical approach combining quantitative and qualitative methods. Firstly, time-series cross-sectional analysis spanning 20 years and covering 15 affluent democracies is employed to show that higher levels of dual VET in the upper-secondary education systems are associated with higher levels of occupational upgrading and lower levels of youth unemployment, suggesting respectively a persistently strong performance of these systems on both economic and social grounds. Secondly, the paper mobilises country case studies of three archetypical dual VET systems – Austria, Germany, and Switzerland – to show how actors in the three countries have opted for different policy choices and triggered different patterns of institutional change to uphold economic efficiency and social inclusion in their VET systems. Distinct national trajectories of reform are explained by two main factors: (i) inter-employer cleavages, in particular, the relative balance of power between large and small firms and (ii) capital-labour conflict, in particular, the relative strength of unions vis-à-vis business. The paper shows that technological change does not make VET systems redundant, as implied by theories of skill-biased technological change and routine-biased technological change, which shift the focus onto higher education instead. Rather, VET systems, provided that they are of high quality, can play a crucial role in favouring an inclusive transition to the knowledge economy. This finding carries an important broader implication, namely: technological change does not undermine the socio-economic performance of coordinated models of capitalism; quite the contrary, ‘old’ institutions can thrive in the ‘new’ knowledge economy.