It is easy to assert that a skills shortage will have a negative impact on the economy: Keynsian economic theory suggests that if skills are in short supply, prices will rise, fuelling wage and price inflation and increasing interest rates. Recent research suggests that the skills gap is not causing wage inflation yet. The 2007 National Management Salary Survey of 42,205 individuals, from trainees to chief executives, conducted by the Chartered Management Institute and Remuneration Economics, shows an average increase in earnings of 5.3 per cent, down from 5.7 per cent in 2006, the lowest movement in earnings since 1996.

Whether employers can continue to contain wage inflation remains to be seen. According to a report from Vedior, an international staffing services company, 40 per cent of respondents said an increase in salary costs is “very likely”.

However, wage inflation is only one threat to the economy. In an increasingly global market, competitiveness is also critical. The Vedior research shows that the biggest fear of respondents is declining competitiveness (23 per cent). They also worried about other issues that contribute to competitiveness, such as reduced customer satisfaction (21 per cent), increased staff turnover (19 per cent), potential loss of sales (18 per cent) and lower productivity (16 per cent).

“Skills for the future”, a report by business services firm Accenture and the Lisbon Council, a think-tank, points out that emerging economies, such as China and India, are no longer competing with the developed world on cost alone. Increasingly, they are able to challenge the developed world in highly-skilled and high value-added activity, too. If the UK is to maintain what has traditionally been a fertile source of competitive advantage, investment in skills and education will be key.

Mike Campbell, director of development at the Sector Skills Development Agency, points out that skills are a means to stimulate both productivity and access to employment opportunities. “They determine the level and rate of economic growth,” he says. “The UK’s record on employment has been outstanding by international comparison, whereas our record on productivity is relatively weak.”

Mr Campbell says that every 1 per cent increase in productivity is worth about £10bn to the UK economy. The average productivity gap we have with the 15 pre-accession European Union states is 8 per cent and the gap with Ireland is 19 per cent. “If we had the same productivity as Ireland,” he explains, “we could work a four-day week and have the same standard of living. Between 20 per cent and 25 per cent of the productivity gap is associated with skills deficiencies, so skills are important for the wider economic agenda, yet our position in the international skills league is not good and is not improving.”

“Skills for the future” argues that the growth opportunities presented by globalisation place a premium on aspects of competitive advantage, such as knowledge, adaptability and innovation. “The shift to a knowledge economy brings with it more interaction with information and technology; increased demand for complementary skills that offer comparative advantage beyond routine tasks; and a higher premium attached to the ability to learn new skills,” says the report.

This finding is echoed by “Developing the Future”, a recent survey from Microsoft which reveals that the knowledge economy, which includes financial services, information technology, business services and the creative sector, accounts for 40 per cent of gross domestic product and is expected to rise to 50 per cent by 2010. It also reveals that private sector investment in intangible assets, such as software, research and development and brand value, is approximately £127bn.

The report indicates that a staggering 70 per cent of information technology graduates chose jobs outside the profession in 2005-2006. “The technology sector is vital to the growth and prosperity of the UK as a whole, because of its prominent role within the developing UK knowledge economy which is so important to future prosperity and to the UK’s ability to compete in the global economy,” says the report. “The question facing the UK is whether there will be enough people working in the primary IT sector to develop the tools, applications and technologies that will be needed in other sectors that are heavily IT dependent, such as financial services.”

In a recent report from business services company LogicaCMG, “The Knowledge Gap, Who will build the UK’s 21st century infrastructure?”, 92 per cent of respondents reported that technical expertise is key for sustained growth. However, 69 per cent have little or no knowledge management processes in place.

“A quarter of business costs could be saved by more effective knowledge management, saving the utilities sector alone £3bn annually,” says Judith Halkerston, managing director of LogicaCMG’s utilities business. “The scale and scope of the knowledge gap and its potential impact on the economy should not be underestimated: 90 per cent of companies are aware of the issue, but very few have a solution in place. Without immediate action, the knowledge gap could become too large to bridge.”

Mr Philpott believes that the biggest threat to the economy is that a lot of businesses may not have the necessary skills to upgrade their products and services to meet competitive pressures, which will hinder productivity gains for the economy. “You end up having to compete at the ‘bargain basement’ end of markets, where it is difficult to compete on cost and you lose out to overseas competition,” he says. “You need to enhance quality to compete up-market and that is where the underlying skills problem lies.”

He is also concerned that the skills gap could increase earnings inequality and intensify social cohesion issues. “Poverty and social disadvantage hinder education, so the next generation may not gain the skills that the economy will require in the future,” he says. “We must address the problems of rising inequality now, so we are not storing up difficulties for the future.”

However, the “Skills for the future” report points out that changes to the formal education system can only be implemented across multiple time horizons with potentially significant lead times. A reform to the primary education system implemented today will only have a tangible impact on the labour market in 10 to 15 years.

“Improving the skill levels of the population should be seen as a necessary, but not a sufficient, condition for raising economic performance,” concludes Prof Green. “It needs to be accompanied by increased investment and an increased demand for skills by employers, too many of whom are content to soldier on without modernising their production methods.”