Research

Summary page

Research

Publication title: Employers' contribution to training

Background

Economies in the twenty-first century are under relentless pressure to increase the skill levels of their workforce. A highly skilled workforce is widely seen as being essential for prosperity in a globalised world characterised by rapid technological change. The implication is that high and growing incomes can only be sustained by high and growing levels of worker productivity, which in turn demand ever-increasing levels of worker skills.

The development of high levels of skills in the workforce is expensive, requiring a major investment of learner time, large public expenditure on the formal education system, and high levels of formal and informal on-the-job skills development facilitated by employers. There is understandable tension about just how much should be spent on skills development, and what share of this total should be borne by each of the main players (individuals and their families, governments and firms).

In contemplating the answers to these questions, it is important first of all to have an accurate view of the current size of the investment in skills, and who pays. The answer to this apparently straightforward question is surprisingly elusive. This report provides new and enhanced estimates of the employers' full contribution to skills development. It is a companion piece to the paper by Mark Cully 'Employers' contribution to training: How does Australia compare with overseas?' prepared by the National Institute of Labour Studies for the National Centre for Vocational Education Research (NCVER) in 2002. This companion paper focuses mainly on structured training, and how the Australian approach compares with that found in other countries.

The most widely used estimate of the total cost of vocational education, and of the employers' share in this cost, comes from the Australian National Training Authority (ANTA). ANTA estimates the former as $8.545 billion in 1996 and the latter as $3.886 billion (or 45% of the total). For a number of reasons, these are likely to be underestimates. One reason is that the value of employee time spent in structured training is not counted. If it were, it would add $2.3 billion to both figures, and raise the employer share of total costs to 57%.

Current incidence of employment-based training

This report uses data from the Australian Bureau of Statistics (ABS) Survey of Education and Training (1997) (a survey of employees) to identify the major types of training workers receive and to determine how this varies according to selected worker and employer characteristics. The data indicated that:

On-the-job training, whereby workers learn informally from co-workers while doing their job, is the most commonly experienced form of skills development provided by employers. This is true for men and women, for native and non-native speakers of English, for those with a little and those with a lot of formal education. On-the-job learning occurs at all ages, although it does decline somewhat with age. A satisfactory understanding of skills development in the workforce needs to pay careful attention to the contribution of skills learned informally on the job.
Employer-based training reinforces skill differences which arise from differences in formal education. Those with the least education (less than Year 12) systematically report receiving less of the main forms of employment-based training. The more formal the training, the more it is focused on those with more education.
The public sector is an important source of employer-based training. The hours of training received by public sector workers are much higher than the hours received by private sector workers and the latter are much more likely to receive no training. Estimates of the employer contribution to training should not be confused with estimates of the private sector contribution to training.

New estimates of the employer contribution to skills

In order to calculate our own, more comprehensive, estimates of the extent of learning on the job, and of the employers' contribution to this, data from the same survey are utilised. Here the approach taken to estimating the value of the employer contribution to the development of workplace skills differs from that reported above. Employer inputs into training (hours or dollars) are not measured. Instead, an indirect measure of the increase in the productivity of workers as a result of the learning of skills on the job is provided.

That workers gain skills on the job is inferred from the fact that wages are systematically higher for people who have more work experience than for people who have less. This is true even when other factors which might influence a person's wage, such as sex, formal education, occupation, industry and so on, are held constant. Economists interpret this to mean that more experienced workers are more productive (which is why employers will pay them more), and that they have become so because of skills learned on the job. Since most of these skills will have been provided by the employer in one form or another, an estimate of the extent of on-the-job learning can be obtained by observing how fast wages grow with additional years of general work experience and of tenure with the current employer.

Four main conclusions arise from this analysis:

At roughly $30 billion per annum, the estimate of the total investment in employment-based training in Australia is much larger than previously believed, and than is shown by surveys of training effort.
The government share in this larger training effort is much smaller, and the share of employers and workers is much larger than previous estimates have concluded.
In 1996 the total value of the employer contribution is estimated to be in the order of 5% of the wage bill, or roughly $16 billion.
The pursuit of privatisation, deregulation, reduced power of unions and greater competition in the labour market are likely to reduce the extent of employer-funded training in future.

Industries differ in the extent of both general training and the development of specific skills of value only to the employer. The analysis found that:

In both finance and construction, there is a high rate of general training for workers new to the workforce, but this falls rapidly as they gain some experience. Construction (along with mining and agriculture) offers very little firm-specific training.
Agriculture offers particularly low levels of both general and firm-specific training.
Recreation and communications offer low levels of general training to new workers, but quite high levels of firm-specific training.
The level of training offered within public administration is no more than average in general and specific skills (or it has a wage structure that is more divorced from productivity).
Changes in the emphasis of employment away from goods production towards service production are not likely to reduce, and may increase the overall levels of employment-based training.

Conclusion

The strength of the approach used in this report to determine the extent of employers' contribution to training is that it enables a dimension of their skill development activities (that are undoubtedly large and important enough to be included), which in the past have been routinely ignored. The limitation of the approach is that it involves views about how the labour market works which are not beyond dispute. It has also been necessary to make judgements about how the costs of obtaining skills on the job are shared between workers and employers. For these reasons, it is appropriate to view the estimates provided as approximations, rather than as precise quantifications. Where judgement has been required, this report has erred on the conservative side in valuing the employer

contribution. Unless the approach adopted here is entirely rejected, it is clear that a great deal of skill enhancement does occur informally on the job. It is implausible to suppose that this learning is not without a cost to employers; indeed, the subsidies given to firms to take on apprentices and trainees imply a belief that developing work skills on the job is costly to the employer. Clearly employers (and workers) contribute much more to the costs of developing work skills than is revealed by conventional estimates. Our estimate of an employer contribution of $16 billion per annum is approximate. However, it is likely to be closer to the mark than is the conventional figure of $4 billion. We believe that this research shows a promising approach to estimating the employer contribution to skills development in the workforce and would benefit from further refinement.