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Apprenticeships toolkit: Financial incentives

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What are they?

Apprenticeships are positions of paid work in a firm including training provided by the employer, typically leading to a formal qualification or title. They are provided in different forms across a variety of countries. ‘Financial incentives’ can refer to the wage paid to the apprentice during training or to subsidies given to employers to hire and train apprentices. Subsidies given to the employer may also be passed on to the apprentice in terms of a higher training wage.

We consider the effects of financial incentives for general employment training in a separate toolkit.

How effective are support measures?

The available evidence suggests that increasing training wages relative to alternative employment can have a positive effect on completion rates. Both studies that consider training wages show positive effects for some apprenticeships. But higher training wages may not affect completion rates if the apprenticeship itself delivers a high wage bonus upon completion. For example, an Austrian study found no effect for apprenticeships in ‘trades’ which pay a higher wage at completion than ‘non-trades’ (where there is a positive effect).

Employer subsidies may positively affect hiring of apprentices, but effects may vary across industries and may not occur if the subsidy is passed on to the apprentice in the form of a higher training wage. Two out of three studies that consider employer subsidies find positive effects for some apprenticeships, but one study finds that employer subsidies have no impact on apprenticeship completion.

In comparison to general employment training, additional financial incentives appear less likely to improve the take-up, or completion, of apprenticeships (see our employment training toolkit). These differences may arise because some employment training programmes combine financial incentives with sanctions, which apprenticeship programmes typically wouldn’t use. However, workers also have multiple reasons to undertake apprenticeships (higher wage job at the end, respected qualification etc.) so the effect of any additional financial incentive may be swamped by these. This conclusion is supported by the finding that there are positive effects on completion rates for apprenticeships that do not deliver a high wage premium upon completion.

How secure is the evidence?

This toolkit summarises the available ex-post (i.e. after introduction) evaluations on the impact of financial incentives. We focused on evaluation evidence from OECD countries, in English and included any evidence that scored 2 or higher on the Maryland Scale. We therefore considered any study that provided before and after evidence; or cross-sectional studies that compared individuals receiving support to those not receiving support (or that compared those receiving different levels of support). We also included more robust studies that compared changes to participants with a suitable control group.

Generally, the evidence base on financial incentives for apprenticeships is weak. More rigorous studies are required. We found no systematic reviews of effectiveness and no meta-analysis.

We found five studies that looked at the impact of financial incentives on completion or drop-out rates and the take up of apprenticeships. Two studies come from Australia, two from Germany and one from Denmark. Two studies look at the impact of the training wage (one Australian and one German) and the remaining three examine subsidies or bonuses paid to the employer.

Are wages and subsidies cost-effective?

There is a lack of discussion of cost effectiveness in the five studies considered here. However, in the three studies that examine employer subsidies, the cost of subsidies is typically around 20% of the apprentice wage. For the German apprenticeship bonus, this implies a cost of around £3,700 per apprentice. Since there are no persistent effects on take up, this programme does not appear to be cost effective.

Things to consider

  • How should training wage levels be set to encourage apprentices to finish their programme? Evidence from one study suggests that the training wage matters less for completion rates in trades where completion of the apprenticeship offers a large expected wage gain. Incentivising completion through the training wage is therefore likely to be more cost effective for apprentices in occupations where the eventual wage premium is lower.
  • How can financial incentives be designed to improve apprenticeship take-up and completion? One study finds that bonuses paid to the employer do not improve apprenticeship completion rates. Another study finds that a programme where the subsidy is passed on in the form of higher training wages does not improve take-up by firms. This suggests that the the incentive structure may need to be carefully designed to deliver specific policy aims. For example, completion rates might be better achieved by providing completion bonuses to the apprentice, and take-up by firms might be better achieved by hiring bonuses for the businesses.
  • How should employer subsidies be designed to increase take-up of apprenticeships? Evidence from one study suggests that employer subsidies increase take-up only in industries where apprentices are substitutable for other forms of low cost labour or when domestic-owned firms are prevalent. This finding suggests that employer subsidies could be targeted at the specific industries where they are likely to be effective, although this would raise concerns over displacement of other low-wage workers.
Apprenticeships toolkit: Financial incentives