As work changes, firm-provided training may become more relevant for good economic and social outcomes. However, so far there is little or no causal evidence about the effects of training on firms. Pedro Martins looks at the effects of a training grants programme in Portuguese firms.
As most academics, I am fortunate to be able to update my
own skills on a regular basis. For instance, when I attend a research seminar,
I learn from colleagues that are pushing the knowledge frontier in their specific
fields. Some of their insights will sooner or later also feature in my own
teaching and research, thus increasing my performance and that of my
institution.
However, workers from other sectors typically have far fewer
opportunities to increase their skills on a regular basis. Recent research by
the European Investment Bank indicates that, on average, workers in Europe
spend less than 0.5% of their working time on training activities. In the
current context of major changes in labour markets – including artificial
intelligence and automation and perhaps even coronavirus – this training figure
seems too low.
Economics has long predicted some degree of under-provision
of training in labour markets. First, training is expensive for firms, as it typically
entails significant direct and indirect costs. Second, employers know they will
lose their investments in training if employees subsequently leave. It will be
even worse if workers are poached by competitors. Moreover, even leaving aside
the issues above, firms may struggle to estimate the effects of training on
their performance (sales, profits, etc), which will again detract them from upskilling
their workers.
The context above points to an important market failure in
training. This context may also explain in part the disappointing economic
performance of many European countries over the last years. While labour
markets have become more efficient, incentives for on-the-job training may
paradoxically have declined, as workers move more easily to other firms. However,
public policy may play a role in alleviating the under-provision of training.
Specifically, governments can subsidise training in the workplace in order to bring
its private net benefit more in line to its social value.
The new working paper featured in this blog and recently
presented at a CVER seminar (‘Employee training and firm performance: Quasi-experimental
evidence from the European Social Fund’) contributes empirical evidence to this
question. The research evaluates the effects of a €200-million training grants
scheme supported by the European Union on different dimensions of recipient
firms.
The study draws on the difference-in-differences counterfactual
evaluation methodology, comparing the outcomes of about 3,500 firms that applied
and received a training grant (of about €30,000) and around 6,000 firms that
also applied but had their application rejected. Using rich micro data from
Portugal, the country where the scheme was introduced, firms can be compared
over several years both before and after their participation in the training
grants scheme.
The results indicate that the scheme had significant
positive effects on training take up, both in terms of training hours and
expenditure. For instance, training increased by about 50 hours per worker per
year in the firms that received the grant, compared to firms that had their
applications rejected. Deadweight – funding training that would be carried out
even without the funding – appears to be very limited, in contrast to the
findings of an earlier study of a programme in the UK (link).
Moreover, the additional training conducted by firms led to a number of
important outcomes that the study can trace, including increased sales, value
added, employment, productivity, and exports. These effects tend to be of at
least 5% and, in some cases, 10% or more.
For instance, the figure below presents the average
difference in total sales between firms that received the grant and those that
did not. (Periods -9 to -1 refer to the years before the grant was awarded;
while period 0, the comparison year, is when the firm applied for the grant;
period 1 is when the firm conducted the training; and periods 2 to 10 refer to
the years after the training was conducted.)
The results indicate that total sales are 5% higher in the firm in year
2 and 10% higher in year 5. However, there were no differences between firms
before the grant was awarded, which is reassuring as to the counterfactual
nature of the study.
The employment results are also interesting as they come
from both fewer separations and increased hirings. Firms that increase their
training activities in the context of the grant appear to want to expand their
workforce but also to retain the workers they already employ. Moreover, the
employment effects are stronger when the scheme ran in periods of recession,
suggesting that training grants can also act as an active/passive labour market
policy, with a positive ‘lock-in’ impact.
In conclusion, there is a case to be made for workplaces to
become a little more similar to universities. On-the-job learning can make
firms (much) more productive - but that may require a bigger role from
governments. Training grants may be a promising tool in this regard.
