Are training grants a useful policy to increase productivity? (A policy suggestion during the coronavirus pandemic.)

March 16, 2020

Recent research by the European Investment Bank indicates that workers in Europe spend less than 0.5% of their working time on training. This figure seems too low and indeed there are good economic reasons to suggest some degree of under-provision of training. First, training is expensive for firms, as it entails significant direct and indirect costs. Second, employers know they will lose their investments in training if employees subsequently leave.

Public policy may play a role in alleviating the market failure that leads to such under-provision of training. This paper contributes empirical evidence to this question. The research evaluates the effects of a €200-million EU training grants scheme on different dimensions of firms.

The study draws on a difference-in-differences methodology, comparing 3,500 firms that applied and received a training grant (of about €30,000) and 6,000 firms that also applied but had their application rejected. Using rich data from Portugal, where the scheme was introduced, firms are compared over several years both before and after their participation in the scheme.

The results indicate that the grants had significant positive effects on training take up, both in terms of hours and expenditure: training increased by about 50 hours per worker per year in the firms that received the grant. Moreover, the additional training conducted by firms led to a number of important outcomes, including increased sales, value added, employment, productivity, and exports. Quantitatively the changes in these variables are between 5% and 10%.

In conclusion, on-the-job training can make firms more productive. However, that may require a bigger role from governments. In uncertain times, like those we now live in because of the coronavirus pandemic, as many workers will be at home during possibly long periods of time, governments should consider facilitating access to (online) training.

Click here to go to the paper by Pedro S. Martins.