By Patricia Wruuck
Why do firms in the EU decide to invest—or not to invest—in the training of their employees? Firms are central to training provision in Europe. In 2016, participation by the adult population aged 25-64 in job-related education and training in the EU was 35.9%, the vast majority of which (89.1%) was sponsored by the employer.
Firms invest in training to increase productivity and to update continuously the skills of their workers in a constantly changing economic environment, for instance due to technological progress (automation and digitalization) or ageing.
But do firms invest enough? The almost ubiquitous diffusion of training policies in EU Member States suggests that they do not, as these policies often provide subsidies to encourage additional company training. In addition, about 20% of European firms report underinvesting in the training of their workforce (EIB, 2018).
For firms, the benefits of training are often uncertain
Economists have pointed out that firms invest less in training than the socially optimal level because of market failures due to financing constraints and externalities. In the presence of financing constraints, access to external finance is problematic or excessively costly, and training investments are hampered despite expected positive benefits. An example of externalities is when training firms do not take into account, in their decision to train, the profits made by competing firms hiring their trained workers. Underinvestment can also happen because firms, which bear training costs, cannot fully appropriate the benefits of training, which are shared with trained employees as workers and firms can bargain over wages after training has taken place – the so-called hold up problem.
Understanding the factors affecting employer-provided training is important in an economic context characterized by rising inequalities, ageing of the workforce, progressive digitalization and automation, which displaces or (substantially) changes jobs and tasks and increases the needs for re-training and the importance of adult learning. Worryingly, the evidence to date indicates that the odds of participating in on-the-job or off-the-job training is very uneven. It is significantly lower among workers in jobs that only require basic levels of education and are often at higher risk of being automated.
Huge variations in firm-provided training across Europe
In a new working paper, Employer-provided training in Europe: Determinants and obstacles, we examine the recent facts on employer-provided training in Europe, analysing firms’ training activities on the basis of two employer surveys, the European Investment Bank’s Investment Survey and Eurostat’s Continuing Vocational Training Survey.
Our analysis highlights a substantial variation in the average provision of employer training in Europe, with the share of firms providing training ranging from close to 20% in Greece to more than 90% in Latvia. While there is considerable heterogeneity, the countries showing the lowest shares of firms investing in training are all located in Southern or Eastern Europe. In 2017, according to the EIB Investment Survey, the percentage of firms not investing a single euro was above 60% in Greece, above 40% in Bulgaria, Italy and Malta, and below 15% in the Czech Republic and Slovakia.
Average training investment per employee also varied substantially across European countries, ranging from below €100 in several Eastern European countries and Greece to higher than €300 in Belgium, France, Denmark, Luxembourg, the Netherlands and Sweden. The majority of Eastern European countries – and especially Slovenia, Slovakia and the Czech Republic - also spent relatively little on training as a share of total investment, in line with a generally greater focus on tangibles in the region compared to most Western European peers.
Employee participation to employer provided training also varies within Europe. According to the 2015 wave of the Eurostat survey, close to 41% of European employees participated in continuing vocational training – ranging from less than 20% in Greece and Hungary to more than 60% in Luxembourg and the Czech Republic. The average number of hours spent in 2015 for continuing vocational training per 1 000 hours worked was 6.5, ranging from 3 in Greece and Hungary to 12.2 in Luxemburg and 13.1 in Belgium. Countries with a high participation rate also tended to have a relatively high number of hours spent for training, with the exception of the Czech Republic, where participation was highest, but the number of hours was below the sample mean. Typically, investment in training declines with firm size.
The skills targeted by training include job specific and IT skills, management and problem solving skills. The percentage of firms involved in continuing vocational training in 2015 was by far the highest (64.3%) when job-specific skills were involved, and the lowest for foreign language skills. Management skills, team working and customer handling skills were also pursued by more than 20% of firms. The focus of training activities relates to what skills are hardest to find when recruiting. According to the special EIB survey on skills and digitalisation, corporates struggle most to find job-specific skills (EIB, 2018).
What holds firms back from providing more training?
When firms are not providing training, their main reason is that they perceive the available portfolio of qualifications as in line with the current needs (about 80% of responding firms).
However, costs can also limit firms’ investments in training. Costs can vary due to firms’ size and financial situation. We find some indication that financially-constrained firms invest less in training. However, increasing access to financial markets may reduce heterogeneity in training provision across Europe only partially, as other factors including labour market institutions, product and labour market regulation and the productivity benefits of training also differ. Our results point to training investment being higher when the economy is growing, in areas which invest more in research and development, and in areas with a higher share of well-educated workers.
Our review of obstacles to firm training suggests that there is not one silver bullet to raise firms’ investment in training, but that a holistic approach is needed. Country diagnostics are required to understand and address specific combinations of the barriers that hold firms back. In addition, we argue that training policies could benefit from rigorous empirical evaluations of their effectiveness. Such analysis could help to identify the best responses to common European challenges such as population aging and digitalization. It could identify specific implications for training policies, such as how to maintain sufficient levels of training with an ageing workforce, how to tackle the low training participation of lower-skilled workers, and how to respond to rapidly changing skill needs linked to digitalization.