6.2  Scope for intervention  

Government intervention should be considered for those types of transaction where decentralised market forces are unlikely to provide the desired levels of skills. This would occur where all of the costs or benefits are not taken into account by the parties in their decisions on investing in skills. Evidence of market failure in work-based training is a necessary but not sufficient basis for government intervention. It provides the starting point for further inquiries around the nature and effectiveness of intervening. A major consideration concerns the nature of the market failure that the intervention is seeking to correct. The choice of market failure to target, such as information asymmetries, imperfect competition, or credit constraints, will influence the design of the intervention. The scope for the government to make cost effective improvements also has to be established, given existing policy settings and the effectiveness of options for change. Regulatory and/or institutional failure may be greater for some interventions than for others. For instance, Stevens (1999) comments on a UK scheme that was complex to operate, while Jennings (1992) and Borland, Chapman, and Rimmer (1992) look at the limitations of an Australian industry levy scheme.

(i) capital market concerns

Separating out the relative importance of these market failure effects is important in the design of interventions (see OECD (2003a, p249), Acemoglu and Pischke (1999)). An initial step is to ask whether the primary problem lies in the labour or capital markets. There may be cases where workers’ demand for training exceeds the level that employers are willing to fund. The OECD (2003a, p249), David (2001, pp9-15) and Stevens (1999) have noted the possibility of workers having difficulty raising the capital needed to finance training, and causing under-investment. Conceptually, this is a similar issue to pre-employment tertiary education where the human capital generates an expected future earnings that cannot be used as collateral in borrowing. The level of this concern is unclear. The OECD considers that credit constraints may be more important for low skilled and older workers, and those working part time work and in small firms. The effect would be lessened where the employer did not pay a training wage, and/or the employee was trained in the employer’s time. In terms of policy design, a similar pattern of assistance to that occurring in formal tertiary education could encourage workers to seek off-the-job training that may not yield the sort of skills required by the firm.

(ii) labour market imperfections

As discussed earlier, there are two broad types of labour market imperfections. The first relates to the problems associated with information asymmetry and monitoring, as in recruitment when the expertise of the applicant is incompletely known. Workers and firms can adopt a number of practices that reduce these effects, such as by signalling ability with educational credentials, screening job applicants for suitability, and aligning the incentives of agents. The concern is that these steps will be only partially successful. The second broad type arises from the distribution of the costs and benefits of work-based skill acquisition between workers and employers. With wages below productivity, workers will under-invest in training. At the same time, employers can afford to fund general training. However, this level of investment may still be sub-optimal. What is not clear from arguments about market failure is the extent to which they lead to under-investment in work-based training. As noted earlier, there is little evidence on the relative importance of these two broad types of labour market imperfections, or the size of their effects. The OECD (2003a, p239) concludes similarly from its review of the evidence, that there is some indication of under-provision of training, although the extent of the problem is difficult to quantify.

There may be some scope for government to address the market failure directly. If information asymmetries about the nature and quality of training received are serious, and constrain an employee’s willingness to invest in training, then one policy option frequently adopted is for government to assist in certifying the quality of training programs. There may also be scope for making labour markets more flexible, and for reducing mobility costs. Interventions along these lines would encourage workers to be paid wages closer to their productivity. Nevertheless, designing such interventions may be difficult, and may be limited in their scope and effectiveness.

Second-best options to increase training by employers, such as through government subsidies or industry levies or regulation, do not address the causes of market failure directly, and so may have unintended consequences. With government subsidies, those bearing the costs of training are unlikely to be those receiving the benefits. Subsidised general training risks an inefficient substitution of formal general training for informal or customised training. It may also encourage employers to shift the costs of training onto taxpayers, and do little to increase training. This potential for training to focus on skills not being sought by employers may be one reason why government-funded training appears to yield poorer wage and productivity outcomes. As a result, in the design of such schemes, attention should be given to promoting training that is tailored to the needs of particular firms, and limits the scope for employer gaming.

The OECD (2003a, p249) outlines a number of co-financing arrangements used in member countries that allow employers and workers to generate more tailored training assistance packages that encourage lifelong learning outcomes. These schemes aim to increase the financing costs borne by employers and employees (as they reap most of the returns), and to strengthen the incentives for learners and providers to seek effective training options. This represents a shift from the direct subsidisation of external providers, and provides more flexibility for training programmes to be negotiated that yield the sorts of skills needed by firms. These range from tax and subsidy arrangements for employers, tax incentives and individual learning accounts for employees, and training time accounts, pay-back clauses and apprenticeships. As the OECD notes, these schemes have strengths and weaknesses which need to be taken into account in policy design. They allow schemes to reflect assessments of the relative importance of capital and labour market imperfections.

In designing interventions around work-based training, several features of the New Zealand environment would need to be taken into account.[14] The first feature is the need for lifelong learning to address skill obsolescence with technical change. A lower level of work-based training might be one factor influencing the skill shortages presently being experienced. New Zealand has lower workforce skill levels, compared with say Australia (see (New Zealand Treasury 2001a), and Parham and Roberts (2004)) The second is the more limited training opportunities faced by those entering the workforce with few educational qualifications. Where in the knowledge accumulation process are these skill deficits best addressed? Third, the relatively small size distribution of New Zealand firms, together with the relatively high level of job turnover seems likely to lead to fewer opportunities for on-the-job training.