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This chapter discusses how design of training policies is strongly related to the type of market failures conducive to under-provision. The empirical evidence on the relevance of efficiency and equity issues is considered, and a political economy view of training subsidies is proposed. Furthermore, the key features of the training policies in place and the implications for training and product market reforms are examined, along with the evidence on the effect of training on turnover and the limited evidence on the importance of credit constraints. The chapter concludes that one needs to be prudent when designing public policies aimed at raising the provision of workplace training; there is no clear-cut evidence that the level of workplace training produced by firms and employees is significantly lower than the socially efficient level; governments have an important role to play in improving information about training opportunities, setting appropriate legal frameworks, and ensuring portability of skills; product and labour market reforms do affect training participation.

This chapter documents stylized facts about the distribution of workplace training in Europe (and, when possible, OECD countries) by looking at the most recent cross-comparable datasets available. In respect of discrepancies, the picture that emerges from these datasets is compared with that observed in previous literature. Among the topics discussed are: which country invests the most in training; regional differences within countries; how employers and employees share the cost of training; the amount invested by employers in training; the type of individual with a greater propensity to take training and/or be trained by his/her employer; and the degree of differences across countries. Several large cross-country datasets that are available on OECD countries are used.

Efficient provision requires that the marginal private and social benefits of training be equal to marginal private and social costs. Employers in imperfectly competitive labour markets are willing to bear the costs of general training if the increase in productivity after training is higher than the increase in wages. Since costs and returns to workplace training play an important role in both, it is natural to focus on the effects of training on wages and productivity, and training costs. While there is an extensive literature on the social returns to schooling, little is known on the size of externalities associated with training. The extensive literature that has documented the relation between human capital and income, both at the individual and at the national level, leaves little doubt that investments in human capital are crucial for economic well being. Many of these investments take place both in the household and in the educational system but substantial investment in human capital takes place after entry into the labour market. However, most of the existing literature that considers returns to human capital has focused on schooling.

Investments in human capital are central factors in economic performance and growth. When tastes and technologies are changing rapidly, human capital investments are important for maintaining high levels of competitiveness and employment. Without a workforce that is continually acquiring new skills, it is difficult to reap all the returns from technological progress. This chapter discusses one particular component of human capital — training, which refers to work-related training received while in employment. The orthodox human capital theory is revisited, along with the challenges hurled against it. The principal hypotheses regarding training are outlined and predictions as to who pays for general training and the returns to training (at both the training firms and at subsequent firms) are summarized. The impact of asymmetric information on the predictions of the orthodox human capital model is also considered, along with the effects of trade unions, minimum wages, product market regulation, and the tax system.

This introduction to the second part of the book examines workplace training in Europe in a comparative perspective. Compared to training in general, workplace training is received while in employment, and is usually, but not exclusively, provided by the employer. This is an important area to consider, not only because company training covers a substantial part of education after labour market entry, but because of the perception — rather widespread in the documents by the European Commissions on the Lisbon Strategy — that European employers do not spend enough on increasing the skills and competences of their employees. The discussion starts by looking at the facts, including the differences in average training incidence across European countries, Anglo-Saxon countries and some countries of Eastern Europe, R&D investment and training, product market regulation and training, and temporary workers and training.

Institutional factors affecting the labour and the product market differ significantly in European countries. Product market competition, for instance, is recognized to be stronger in Anglo-Saxon countries, and employment protection to be higher in Southern European countries. There is extensive literature which investigates how these institutional differences affect unemployment dynamics. The bottom line of this research is that analysing the interaction between institutions and economic shocks helps explain unemployment differences across OECD countries. This chapter reviews empirical literature regarding the question of whether labour and product market institutions affect training incidence and whether they can account for some of the variation in training outcomes observed across European countries. It is argued that most of the existing evidence is not comparative but country-specific, with a strong emphasis on the US and to a lesser extent on the UK. A European perspective is taken by matching data from the European Community Household Panel — a large dataset covering 15 EU countries — with information on time varying institutions. An empirical investigation of the relationship between training incidence and labour and product market institutions is carried out, focusing on cross-country and time series variations in institutions.