Working Paper: CEPR ID: DP2099
Authors: Margaret Stevens
Abstract: 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.
Keywords: vocational training; human capital investment; credit constraints; uncertainty; labour market frictions
JEL Codes: J24; J31; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulating firms to compel them to provide more training (M53) | Pareto improvement (D61) |
| Regulatory interventions (G18) | Training outcomes (M53) |
| Underinvestment in training (J24) | Capital market problems (G10) |
| Training levy (M53) | Improved training investments (J24) |
| Subsidy financed by wage taxation (H29) | Address capital market issues (G18) |
| Training levy (M53) | Address poaching externalities in an imperfectly competitive labor market (J79) |