Financial incentives for steering education and training

By Stijn Broecke

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At a time when globalisation, technological progress and demographic change are profoundly altering the types of jobs that are available, as well as how and by whom they are carried out, investing in skills is more important than ever to build resilient and inclusive labour markets that underpin social cohesion and well-being.

As a general trend, the demand for skilled workers is increasing and additional investments in formal education as well as in training and retraining for adults are therefore required. But the mega-trends are also driving important structural changes in the types of skills that employers need. As a result, it will not be enough just to invest in more skills – it will be equally important to invest in the right skills.

In this context, a new OECD report released today (Getting Skills Right: Financial Incentives for Steering Education and Training) explores the role that financial incentives (such as direct subsidies, tax measures and subsidised loans) can play in guiding investments in skills so as to achieve a better match between their supply and demand.

A wide range of financial incentives are used by governments. The report uses a simple taxonomy to classify measures depending upon whether they target institutions, individuals, or employers. Using this taxonomy, the report provides an overview of the extent to which, and how, countries use such tools for steering education and training decisions.

Financial incentives: A simple taxonomy

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The report breaks new ground by exploring a topic which had been relatively under-researched to date. While financial incentives have been widely used to encourage individuals and employers to invest in more education and training, no systematic attempt has been made to analyse the extent to which they are used for steering decisions. The wealth of examples contained in the report therefore offers an unprecedented opportunity for policy makers to learn about interesting and promising practice from across OECD countries.

Different approaches exist to address skills needs, and some countries rely more on financial incentives than others. However, every education and training system has built-in financial incentives, whether these have been designed deliberately or not. It is also likely that countries will increasingly rely on financial incentives for steering education and training systems as the importance of cost-sharing and market mechanisms for allocating resources grows.

If designed and used properly, financial incentives can be a useful tool for steering education and training acquisition. However, a key challenge is to foster the effectiveness of programmes and to minimise deadweight loss. Financial incentives are no panacea, and they are only one tool among many in addressing skills shortages and mismatches. Decisions about whether financial incentives are needed and in what form, should therefore be based on a careful diagnosis of the skills challenges at hand.

The effectiveness of financial incentives depends on a range of framework conditions being in place. Critically, financial incentives can only be as good as the information about skills needs that underpins them, and such information needs to be communicated effectively to individuals and employers if they are to take informed decisions about which skills to invest in. These issues are discussed in more detail in this report’s sister publication, Getting Skills Right: Assessing and Anticipating Changing Skill Needs.

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