Incentivising vocational training

Martine Udahemuka
26 July, 2018

It is not clear whether the increased visibility of vocational education and training in New Zealand is due to worsening skill shortages and/or to a change in government, but either way it is a discussion worth having.

The focus has been on what’s in it for students, and fairly so, given years of praising university education while belittling vocational education. But we should be talking about the other side of the coin too: why should employers train?

Countries with successful vocational training systems work extremely hard to ensure employer buy-in and support cost-benefit studies to understand why some firms train and others don’t.

Earlier this year, I proposed on that New Zealand could learn from the success of Germany and Switzerland’s dual vocational education and training system. It is the most popular choice for 15- and 16-year-olds who leave high school to pursue a 3-year programme in one of the hundreds of white-or blue-collar occupations on offer.

The pathway is called dual because apprentices spend at least 70 percent of their time at work and the rest in a dedicated vocational school and leads to a national professional qualification. The dual approach has been heralded as partially responsible for the European countries’ enviable youth labour market outcomes; which across the board are better than ours.

In New Zealand, out of 60,606 school leavers in 2015, only 1,435 had signed an apprenticeship contract by the following year.  That is a meagre 2.4% compared to Switzerland’s 65% and Germany’s 54%. Attempts to raise the image have not resulted in droves-more school leavers in New Zealand signing up to apprenticeships. In fact, the reverse is true: The proportion of young people starting an apprenticeship straight after school has been declining since at least 2011 while the proportion of those enrolling in a university course has been increasing. The narrative is that the apprentice path is often reserved for students who struggle to reach basic achievement levels or unable to go to university.

This then creates a negative spiral in the apprenticeship space. Employers willing to train may find it difficult to find suitable candidate so in turn, fewer companies will want to train. The school leavers who may otherwise consider the option would need to compete for too few training slots so may instead opt for for university or low skilled jobs.

In the most recent review of Industry Training, New Zealand employers said the main barrier to training inexperienced workers was cost. This was especially so because too many school leavers were leaving school barely literate or numerate.  Overall, the employers would rather hire older workers even when younger workers are cheaper. In their experience, older workers are work-ready and more stable thus demand less in recruitment and on-boarding costs.

Analyses of the dual training system show net-benefits for Swiss firms and net-costs for German firms. Most Swiss training firms gain benefits during the training as generally the apprentice’s productivity is higher than the costs of training them.  Conversely in the case of Germany, apprentices generate benefits for the training firm after the training. In this case, it is in the firm’s interest to retain high quality graduates.

Most of the difference in the net-costs results from a higher share of productive tasks allocated to apprentices in Switzerland as well as lower wages of apprentices relative to skilled workers’. That Swiss employers are not bound by a minimum wage might partially explain why almost half of the firms there that can train, train. A Swiss apprentice’s wage typically starts at 12% of the skilled-worker’s and rises to around 25% by the end of the training.  Apprentice wages in Germany are collectively bargained and the wage for a typical apprentice starts at 25% of the skilled-worker’s and goes up to about 30% by the end of the training. 

The deregulated labour market in Switzerland also means that employees are highly mobile. Almost sixty percent of graduates leave their training company within the first twelve months of training. It is therefore in the training firm’s interest to break-even whilst the apprentice is still training. In the more regulated German market, graduates tend to stay with their training employer. More than two thirds are hired by their training company upon graduation.

In both countries, employers contribute at least 60% of the training costs and Swiss employers neither receive nor demand subsidies for training apprentices.

The level of the apprentice wage relative to that of a qualified worker can make a difference in the decision to train. Where employers anticipate net-costs from taking on apprentices, wage subsidies like those introduced by the Labour-led government sound sensible.

New Zealand’s calls for more young people to consider this path need to be accompanied with cost-benefit analyses to support decisions for those employers on the fence about training.

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