The skills mismatch holding back UK growth

By Michele Palladino

For advanced economies such as the UK, industrial competitiveness depends not only on innovation and investment, but also on having the skills needed to translate these strengths into productive activity. As the UK seeks to grow the sectors prioritised in its Modern Industrial Strategy, the supply, composition and deployment of skills will be critical to whether businesses can expand, adopt new technologies and create high-value employment.

Drawing on Section 4 of the UK Innovation Report 2026, this blog explores the UK’s skills position through evidence on school-age attainment, participation in education and employment, graduate output, labour-market returns and skills shortages. The evidence reveals a mixed picture: relatively strong educational performance and substantial STEM graduate output coexist with high rates of young people outside education and work, a comparatively small engineering graduate pipeline, and persistent shortages in occupations central to the Industrial Strategy.

What do PISA and NEET data tell us about the UK skills challenge?

Early in September 2026, the OECD published the results of the 2025 edition of the Programme for International Student Assessment (PISA 2025), the world’s largest international comparative assessment of 15-year-old students. PISA examines how effectively students can apply their knowledge and skills in science, mathematics and reading to real-world challenges. The 2025 edition involved 760,000 students across 91 countries and economies.

The results prompted widespread discussion in the UK media about how the country’s performance compares with that of other OECD countries. Across the OECD, performance in science and mathematics has weakened. Between 2015 and 2025, average science scores declined modestly, while mathematics scores fell by 22 points. Yet the UK remained above the OECD average in both subjects in 2025: UK students scored 511 in science, compared with an OECD average of 482, and 488 in mathematics, compared with 463 across the OECD.

But school-age performance is only one part of the skills picture. In August 2026, the Commons Library published a briefing on young people not in education, employment or training (NEET). Time spent NEET is associated with a greater likelihood of future unemployment, lower wages and lower-quality work, as well as poorer physical and mental health.

The research briefing also shows that in 2025, 14% of young people aged 15-24 years old in the UK were classified as NEET, placing the UK among the OECD countries with the highest NEET rates. Only six OECD countries recorded a higher rate, and only one of these – Portugal – was in the European Union. The contrast is striking: relatively strong school-age performance coexists with a sizeable group of young people who are disconnected from education and work.

Taken together, these figures point to a broader challenge for the UK Industrial Strategy. The issue is not simply whether the UK develops skills, but whether those skills are translated into continued learning, employment and productive work.

Industrial Strategy will intensify demand for post-secondary skills

The UK Modern Industrial Strategy, launched in 2025, identifies eight sectors (IS-8) with the highest potential to drive economic growth. These sectors are already more graduate-intensive than the economy as a whole: graduates accounted for an average 64% of IS-8 employment in 2025, compared with 52% of total UK employment (Figure 1).

Future demand will raise the bar further. Skills England estimates that the IS-8 sectors will require an additional 623,000 jobs between 2025 and 2030 in “priority occupations” – roles expected to grow, already facing skills shortages, in high demand, or of high importance to the sector. Around 82% of these new jobs will require post-secondary education or above.

Achieving the objectives of the UK Industrial Strategy will require more than simply increasing the number of graduates. It will depend on closer coordination across schools, further and higher education providers, employers and government to ensure that young people develop the right skills, remain connected to education and training, and move into the occupations where demand is expected to grow. The challenge is therefore one of alignment: linking the supply of skills more effectively with the needs of priority sectors, while reducing the gaps that emerge between educational attainment, participation and labour market demand.

Engineering remains a relative weakness within UK STEM output

At the aggregate level, the UK has a relatively strong output of graduates in STEM and health disciplines. In 2023, 41.3% of new UK Bachelor’s graduates were in STEM or health, close to the United States (41.7%) and Germany (41.4%), above the OECD average (39.4%), and below Korea (48.8%) and China (46.6%) (Figure 2).

The composition of that output tells a different story. Engineering, manufacturing and construction accounted for just 8.9% of UK Bachelor’s graduates, compared with an OECD average of 12.6%. The share was also well below China (33.2%), Germany (24.7%), Korea (20.8%), Mexico (18.7%) and Japan (16.3%).

In 2023, the UK produced around 53,000 graduates in engineering, manufacturing and construction. Skills England,meanwhile, estimates demand for approximately 180,000 qualified workers in related priority occupations between 2025 and 2030. These measures are not directly equivalent, but together they underline the scale of the engineering skills challenge and the need to align education provision more closely with employer demand.

This raises a broader question about the role of the higher education system. At a time when many universities are under significant financial pressure, decisions about the mix and capacity of courses they offer are becoming increasingly consequential. Better alignment does not simply mean producing more graduates: it means ensuring that education and training provision evolves alongside changing labour-market needs, including sufficient capacity in disciplines and pathways that are critical to the Industrial Strategy. The relatively small share of UK graduates in engineering, manufacturing and construction suggests that the composition of graduate supply, as well as its overall size, warrants attention.

The UK graduate labour market is characterised by strong wage returns for STEM disciplines

The UK is among the countries with the highest wage premium for graduates in STEM disciplines, as measured by the percentage difference in earnings of a STEM graduate from the average earnings (Figure 3).

In 2023, a UK worker with a STEM degree earned 18% more than the average worker, a premium close to that in the United States (20%) and above Germany (10%).

However, strong wage returns do not mean that all STEM skills flow directly into the sectors where they are most needed. In 2022/23, 51% of UK engineering and technology graduates entered manufacturing (30%) or professional, scientific and technical services (21%), with the remainder spread across sectors with different wage profiles.^[1]

There are also persistent differences in outcomes within the STEM workforce. Across OECD countries, the average gender pay gap for tertiary-educated women in STEM disciplines was 18% in 2023. In the UK, women with a STEM degree earned roughly 21% less than men with the same qualification.

Despite easing vacancy levels, persistent skills shortages remain a structural constraint on the UK labour market

Headline vacancy levels have eased from their post-pandemic peak, but the composition of vacancies points to a more structural problem. At the end of 2025, there were 734,000 job vacancies in the UK, down from 1.3 million in March-May 2022.Yet in 2024, skills-shortage vacancies – roles that were hard to fill because applicants lacked the relevant skills, experience or qualifications – still accounted for 27% of all vacancies.

Relative to the OECD average, the UK reported particularly high shortages in training and education, medicine knowledge and scientific knowledge, affecting occupations such as teachers, health professionals and engineers (Figure 4).

Skills England also identifies a range of engineering roles – including civil, mechanical, electrical, electronics and aerospace engineers – as priority occupations expected to experience sustained growth between 2025 and 2030.

Recruitment evidence from engineering employers reinforces this picture. In 2025, 76% reported difficulties finding people with the required skills. Specialist sustainability skills were the most frequently cited challenge (30%), followed by complex problem-solving (27%) and innovative thinking (27%). The shortage is therefore not simply about headcount; it is also about finding the specific capabilities that growing sectors require.

The UK skills challenge is one of alignment

Taken together, the data reveal a familiar tension. The UK combines relatively strong school-age performance and substantial STEM graduate output with high NEET rates, a comparatively small engineering graduate pipeline and persistent shortages in occupations central to the Industrial Strategy.

This suggests that increasing the overall supply of skills will not, on its own, resolve the UK’s industrial skills challenge. The more fundamental issue is one of alignment: supporting effective transitions from education into employment, ensuring sufficient capacity in technical and engineering pathways, and matching skills provision more closely to the capabilities that growing sectors require.

For the Industrial Strategy, this has an important implication: skills policy and industrial policy cannot be treated as separate agendas. Expanding priority sectors without addressing the occupations and capabilities on which their growth depends risks creating a constraint on the very growth the strategy is intended to generate.

Explore the UK Innovation Report 2026