Four ways to tackle the skills shortage

What do you do with teenagers who have no qualifications? Thirty- three per cent of teenagers drop out of full-time education at 16. By age 18, 60 per cent have gone. Yet those who leave without qualifications are far more likely to be unemployed or low-paid later on. So what are the new options to encourage them to stay on? And where will the Government find the money?

1) Carry on with the current system and hope numbers staying on continue to grow. The number of 16-year-olds staying on in education has risen substantially in the past decade.

The problem is that the pace of change is slow, and we risk creating a lost generation of unskilled - and unemployable - young people. Furthermore, the existing system may be neither the most efficient, nor the fairest use of the money.

The total cost of educating 16- to 18-year-olds at the moment is about pounds 4bn including pounds 2.5bn on education fees, pounds 700m on child benefit, pounds 700m on youth training and less than pounds 100m on additional maintenance awards.

Teenagers have little short-term financial incentive to stay on. Their mothers continue to get pounds 10.80 a week in child benefit if they stay in education, compared with around pounds 30 if they join a Youth Training programme (the successor to the controversial YTS).

At the same time, the bulk of taxpayers' money is supporting those who will not only earn most later on in life, but whose families are earning most today. Middle-class families absorb most of the subsidies. Three- quarters of the 17-year-old sons and daughters of professionals are in full-time education, compared with one in three children of unskilled manual workers.

2) Encourage more teenagers to stay on in education with financial incentives.

a) Universal Benefits: A hand-out for every 16- to 18-year-old who stays on in education or training.

Cost: Depends how high the figure is. Switching the benefit from the mother to the child could be done at no extra cost.

Problems: Could be a massive waste of money. The taxpayer could be subsidising hundreds of thousands of children who would stay on anyway.

b) Means tested benefits: Instead of handing out pounds 10 a week to everyone, government could target people for whom it really makes a difference, and give them a hefty sum.

Cost: Depends how many people you intend to help. Gordon Brown, the shadow Chancellor, has suggested using some of the pounds 700m currently spent on 16- to 18-year-olds' child benefit for this purpose.

Problems: Means-tested grants can stigmatise. No one knows if withdrawing that pounds 10 a week from low- and middle-income families might put their children off staying in education. This is why the Child Poverty Action Group is concerned about Mr Brown's proposals.

3) Give 16- to 18-year-olds more and better education options.

a) Make some form of education and training compulsory. Touted by the LSE economist Richard Layard, and the Social Justice Commission, employers would be obliged to make sure that any employee under 18 received recognised training towards national qualifications.

Cost: Someone would have to pay for the day-release at college. Another use for Mr Brown's savings from child benefit? Alternatively cash could come from students themselves.

b) Improve vocational training options. Part of the problem for teenagers who lack academic abilities is that there is little else worthwhile for them to do. Sir Ron Dearing and David Blunkett have both advocated making vocational education more attractive. But this too would cost money.

4) Persuade kids that school is OK.

The reason many children drop out at sixteen is because they hate school. Targetting discouraged children earliercould be a far more effective way to improve their qualifications and staying-on rate than any combination of cash and training schemes later on.