DP2099 Should Firms be Required to Pay for Vocational Training?

Author(s): Margaret Stevens
Publication Date: March 1999
Keyword(s): Credit Constraints, human capital investment, labour market frictions, Uncertainty, vocational training
JEL(s): J24, J31, J38
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2099

Failure in the training market may result from credit constraints and the inability to insure against labour income uncertainty, deterring potential trainees, or labour market imperfections that create external benefits for firms. This paper constructs a model of a training market affected by both problems, and examines the rationale for training levy schemes, intended to make firms increase investment in vocational training. It is shown that regulating firms, or equivalently financing a subsidy by taxation of profits, can achieve a Pareto improvement irrespective of the cause of under-investment. However, when the levy is assessed as a proportion of wages the effect is to address capital market imperfections only.