Alternative mechanisms to encourage individual contributions to vocational education and training

• Financing vocational education and training has become increasingly challenging and expensive, demanding increased expenditure by employers and individuals to sustain and develop the VET system. Student fees and charges accounted for only 4.5% of recurrent revenue in 2002. State and territory governments and the federal government are the major contributors (approximately 80%), but further growth in expenditure is constrained by competing demands such as health and welfare expenditures caused by the ageing population.

• Individual investment in vocational education is influenced by weighing the costs and benefits. Returns to individuals with VET qualifications in terms of earnings and levels of employment are above those who have not completed their secondary education or who have only completed secondary studies. Nevertheless, they are still below the earning and employment levels achieved by university graduates. Returns also vary according to age, gender, type of VET qualification, duration of course and mode of study.

• To increase expenditure by individuals requires mechanisms that will expand the demand for ongoing vocational education and training and raise the perceived rate of return on investment. This could include taxation breaks, superannuation incentives and schemes that involve incentives for both individuals and employers. The system needs to target lower paid and educated groups and may require cooperation between state and territory governments and the federal government.

• Many of the mechanisms to increase demand for vocational education and training, such as taxation breaks, involve additional expenditure by governments. Consequently, governments require a broader range of policy levers that would maximise VET demand while providing incentives to maximise individual and employer contributions.

The financing of vocational education and training (VET) has become increasingly challenging over recent years and is likely to become even more so as Australia moves towards a mass system of tertiary education-that is, higher education and vocational education and training. Building such a system is expensive and some have argued that it requires public funding to be supplemented on a significant scale from private sources (Barr 2001). Growth in education expenditure by governments is likely to be constrained by upward pressure on health and welfare expenditures caused by the ageing population (Aungles, Karmel & Wu 2000). Many countries facing similar challenges have introduced or considered mechanisms that involve government, employers and individuals sharing the responsibility for the increasing resources required to fund lifelong learning.

This study identifies, describes and evaluates the range of mechanisms that attract individual investment in vocational education and training and other post-compulsory education in Australia and overseas. The key research questions for this study are as follows:

• What are the conditions that influence the propensity for individual contributions?

• What are the mechanisms that may attract individual investment in vocational education and training and other post-compulsory education in Australia and overseas?

• How appropriate and effective are these mechanisms in encouraging greater investment by individuals in vocational education and training?

• What are the administrative, financial, constitutional and other legal barriers to the implementation of these mechanisms?

• Based on findings from the above questions, which mechanisms are more likely to encourage individuals to participate and invest in vocational education and training in Australia?

Governments have introduced mechanisms largely to address concerns about participation, inequities and under-investment by individuals in education and training. Determining the effectiveness of mechanisms in increasing private expenditure has been somewhat difficult owing to a lack of:

• adequate data about which and how much individuals invest in Australia and overseas

• comprehensive policies and mechanisms to increase private investments in education and training

• reliable evaluation studies on the effects of different schemes to generate new financial resources, or their interactions with cost-effectiveness and quality.

Therefore the approach taken in this report is to describe the mechanisms introduced in different countries and to present available findings about the effectiveness of these mechanisms in encouraging participation and investment by individuals. This is followed by an evaluation of the mechanisms in the Australia context.

The information contained in this report should assist governments with a fixed budget for expenditure on education and training to design an optimal policy mix that aims to maximise participation and investment by individuals. This policy mix could include one or a number of different mechanisms such as grants to providers, savings incentives through learning accounts, underwriting income-contingent loans, income tax deductions and vouchers.

Types of mechanisms

Individual learning accounts are accounts opened by individuals to save for their education and training. Individual contributions to these accounts are usually supported by government and/or employer contributions. Many schemes are yet to be fully evaluated. Those that have been evaluated indicate that individual learning accounts are attracting investment by individuals (but not necessarily by the target groups) and measures need to be in place to ensure quality and prevent misuse.

Student loan schemes (conventional or mortgage-type loans, graduate taxes, and income-contingent loans) are cost-recovery mechanisms where students pay for at least part of the cost of education and training. As a potential mechanism for funding vocational education and training in Australia, income-contingent loans involve the graduate or former participant repaying education and training fees once their earnings are above an income threshold. Payment of the loan continues until the value of the loan has been repaid or when a maximum repayment period has been reached. Australia's Higher Education Contribution Scheme (HECS) has led to an increase in income from students for higher education and enabled an expansion of the sector. Despite raising the cost of higher education to an individual, the scheme has not been a notable deterrent to enrolment and does not appear to have affected the participation of people from disadvantaged backgrounds.

A voucher is a payment to an individual for use at an education and training provider of their choice, with the government and/or employer required to pay a pre-determined amount. A 'pure' voucher is a coupon with a specified financial value whereas a 'quasi-voucher' is a smart card or similar device that represents an entitlement to education and training. They aim to allow individuals to make informed choices to meet their training needs, increase competition and improve access. Vouchers in partially funded schemes require individuals to contribute to the cost of their education and training.

Paid educational leave (PEL) is legislated in many European countries to provide eligible people with an opportunity to undertake education and training for a maximum period while receiving unemployment benefits or continued payment of their salary by the employer. Evaluations indicate that: participation is greater during periods of higher unemployment; particular occupations and industries are tending to participate more than others; finding substitute labour can be difficult; and overall participation by the labour force is low. Providing individuals with greater time to undertake education and training may act as an incentive to individuals to contribute to the costs of their education and training.

Factors influencing individual investment in VET

Individual investment in vocational education and training is influenced by the individual's perceptions of the economic and non-economic rewards weighted against the costs of the investment (financial and non-financial). Benefits include: more job opportunities, higher salary, better career prospects, lower probability of unemployment, increased job satisfaction, an improved working environment, and non-earnings or external benefits such as improved health, schooling received by one's children and consumer decision-making. Costs include: direct costs (such as fees, transportation and instructional supplies for training courses), indirect costs (such as foregone earnings and foregone leisure), and the cost of capital (interest rate paid when drawing down savings to replace foregone earnings or borrowing to cover living costs during vocational education and training away from the job).

Returns to individuals from VET qualifications are significantly lower than returns for university education in Australia. Relative earnings of the population aged 25-64 years show that people with tertiary type B qualifications (certificate and diploma level, mostly issued by technical and vocational colleges) earned 39.6% less than people with tertiary type A qualifications (that is, degree level, mostly issued by universities) in 2002. The unemployment rate for those with tertiary type B qualifications was 4.1% (males) and 3.7% (females) in 2002 compared with 2.6% (males) and 2% (females) for those with tertiary type A qualifications. Returns from VET qualifications vary according to age, gender, type of VET qualification, duration of the course, and mode of study.

Common reasons cited by people for not participating in education and training include: lack of financial resources, difficulty in assessing returns and benefits, no interest or perceived need, work and time pressures, family commitments, past negative learning experiences, poor information, and having a disability. Data on barriers to study and training indicate that lack of interest or perceived need is the biggest barrier (ABS 2002). Out of 12.2 million Australians who were aged between 15 and 64 years (and not at school), over 9.7 million did not want to enrol in a school or non-school-level qualification and 9.3 million did not want to undertake training in the 12 months prior to the survey ( see footnote).

Wurzburg (2002) calls for policies and strategies to reduce the costs of learning for individuals (such as recognition of prior learning [RPL] and flexible delivery) and raise rates of return from investments. Policies and strategies also need to raise awareness of the benefits of investing, address barriers that prevent individuals from investing, and incorporate activities that reach and influence people in different market segments.

Mechanisms in Australia

Vocational education and training has a diverse funding base, relative to those of the other two major sectors. However, the state and territory governments are the major sources of funding, with student fees and charges accounting for only 4.5% of recurrent revenue in 2002. The introduction of mechanisms that have been explored in this report would face potential administrative and constitutional barriers. Some have implications for taxation and other financial systems such as superannuation. In many cases, mechanisms require the cooperation of the two levels of government, as they involve the construction of regimes of fees and charges across the VET sectors in each state.

Aungles, Karmel and Wu (2000) estimate that by the year 2020-21 technical and further education (TAFE) expenditures will have increased in real terms by 54% due to growth in the student population. The fundamental difference between the Higher Education Contribution Scheme mechanism as a means of gaining individual contributions to higher education and options in the VET sector is that the VET sector does not currently have the excess demand that provides the foundation for a Higher Education Contribution Scheme. Increasing the financial base for VET supply would involve building demand and ensuring the system's capacity to exploit this demand. This suggests the following:

Mechanisms should concentrate upon expanding demand for continuing vocational education and training, which in the main will be among people in paid employment.

• Learning accounts and, to a lesser extent, paid educational leave offer the most potential as mechanisms to achieve increased demand and investment.

• Mechanisms need to offer incentives for individuals to invest, preferably in conjunction with incentives for employers.

• Incentives could include taxation breaks, for both workers and employers, and superannuation, especially for older workers.

Given the higher propensity for higher income and better educated workers to invest in education and training, any schemes would need to have mechanisms that target participation and investment by lower paid and educated groups.

Footnote:
These figures include people who studied in the last 12 months but did not want to gain an additional qualification and people who attended training in the last 12 months but did not want additional training.