Employment training toolkit: Financial incentives

What are they and what do they aim to do?

Financial incentives in employment training programmes are payments that aim to increase participation or completion of training. They may be offered to either the employer or the training participant. They may come in the form of a lump sum payment at the beginning or end of the programme, instalments during the programme, or a subsidy for the cost of participation (e.g. to the employer to cover the training course fees).

We consider the effects of financial incentives for apprenticeships in a separate toolkit.

How effective are they?

The evidence suggests that payments to either individuals or firms may increase participation in, or completion of, employment training, but that effects on employment and earnings are less likely. There is some evidence that financial incentives partially crowd out privately-funded training.

How secure is the evidence?

Generally, the evidence base on financial incentives is quite weak, meaning that the conclusions on cost-effectiveness are based on a limited number of studies. More rigorous studies are required. We found no systematic reviews of effectiveness and no meta-analysis.

We found 11 studies that examined the effectiveness of financial incentives for employment training. Four of these provided high quality evidence based on randomised control trials, while seven others provided before and after comparisons using a control group. Only two of these studies come from the UK.

We also found a further five studies that examined the effectiveness of financial incentives for apprenticeships. The findings of these studies are discussed in a separate toolkit.

Are they cost-effective?

Incentives tend to be fairly expensive, since they involve cash transfers to firms or participants and the awards need to be large enough to incentivise training. But they can also have quite strong effects on behaviour, so it is important to compare costs and benefits.

For example, the incentive element of the UK ERA programmes cost around £500-£1,000 per participant. Given the effects on behaviour this equates to a cost of £5,000-£6,000 per extra trainee (this cost also includes a career counselling component).

One thing that emerges from the evidence is that incentives to increase participation in adult training do not necessarily need to be large. One Swiss voucher programme reports sizeable positive effects for training vouchers of relatively low face value (about £90). These effects were not much smaller than for vouchers of much higher face value (£880) implying that the cheaper vouchers are five times more cost effective at promoting training (although this does not take into account potential differences in the quality of the courses taken).

In terms of employment, one evaluation in the U.S. suggests incentives to firms may cost as little as £630 per job created. However, the study only finds positive effects near administrative boundaries where the level of incentives differs, suggesting any employment effect is due to displacement (firms on one side of the border increasing employment at the expense of firms on the other side of the border).

Things to consider

• Increased participation and completion resulting from financial incentives does not necessarily translate in to increased employment or wages. This suggests programmes where financial incentives are provided need to think carefully about how they could support the transition from training to work.
• Financial incentives need not be expensive. One study finds that the lowest value training vouchers were the most cost-effective way to increase participation.Financial incentives can be expensive. Given the limited evidence base on effectiveness, the impact on participation or completion of training needs to be further monitored and evaluated. That said, more generous financial incentives can be expensive, so the impact on participation or completion needs to be carefully monitored and evaluated.
• Financial incentives will not be appropriate for every programme. Other considerations such as increased wages or a job at the end of the programmes may make the financial incentive less impactful.
• Benefits and costs may differ depending on whether the firm or the individual receives the incentive.
• Increased participation on programmes with financial incentives may come at the expense of decreased participation for other training programmes.