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The 2020-21 Commonwealth Budget contained several temporary subsidy schemes to increase the employment and workforce skills of young people. Schemes included the JobMaker Hiring Credit and the Supporting Apprentices and Trainees providing subsidies to businesses to hire additional young employees.

The limited period of these schemes reflects the Government’s objectives of a short-term fiscal stimulus, equity and employment opportunities for the young, and some contribution to additional human capital and a more productive economy over the long term.

A key to sustained economic growth over the long term is the human capital and skills of the workforce. Ultimately, higher living standards primarily flow from higher productivity. Also, a larger economy provides the easiest way to pay down the large public debt generated by the COVID-19 recession.

This blog discusses serious market failures in the acquisition of skills and human capital, primarily by young employees but also retraining of older members of the workforce. It aims to provide a background case for revisiting the arguments for a policy strategy of long-term government support for post-school skill acquisition involving work-integrated learning.

Why is there a lack of investment by employers and employees?

There are numerous directions of market failure facing employers and employees, which result in markets generating too little investment in skills and human capital.

For the investing employer, should young employees shift employer after skills have been gained, the employer is likely to miss some of the employee’s enhanced productivity. From the employer perspective, some of the training benefits become external benefits for the employee and other employers.

For employees, short-termism can result in under-investment in skill acquisition. Perhaps more important, financial market failures associated with the absence of collateral limit the ability of employees seeking to invest in additional skills to borrow to fund skill acquisition by fees and/or lower short-term wages.

A contentious market failure argument involves claims that the added human capital of young workers provides external benefits to society via lower unemployment rates, better citizens, better health and lower draws on public health outlays, and so forth.

A tax problem

A key market failure and disincentive for employees to invest in human capital is the operation of the income tax system.

In general, employees are unable to deduct fees paid for skill acquisition from taxable income. But, once the skills are obtained and higher wages are received, government takes a share of the additional income via the progressive income tax system.

That is, unlike most investment in physical capital where the up-front outlays are a deduction and the income generated is taxable, for individual investment in additional human capital, the extra returns are taxed but there is no tax reduction for the investment outlay.

The need for long-term government intervention

Market failures noted above for apprentices and traineeships, and for work-integrated learning in general, are akin to those for other forms of post-school human capital investment, including university and TAFE. They are long-term structural policy issues. The 2020-21 Commonwealth Budget short-term measures are inadequate on this count.

Further, it would be desirable for a set of long-term policy interventions to be determined in the wider context of supporting in a neutral and equitable way the many different paths and options for investment in human capital.

Another challenge for effective operation of the market for employee and employer decisions on investment in training and skill acquisition is available information on the characteristics and quality of training programs and of trained employees. Such information has public good properties, and the market failure provides a necessary condition for government provision of information, and likely also regulations and quality standards and their monitoring. This important area is another topic.

Policy recommendations

Several policy options are available to increase investment for additional human capital to correct market failures.

Subsidies could be provided for approved programs, and then to either employees or employers. Ideally, the subsidy rate would approximate the marginal external benefits.

A more generally available system of government provided income contingent loans could offset the financial market failure, and if subsidised also contribute to internalising external benefits.

More liberal tax deductions for education and training fees in the system of income taxation, such as carry forward of expenses or carry back for older workers, could counter some of the asymmetric treatment of investment outlays and additional income returns.

Clearly the details are challenging, including quantity and duration of subsidy, inter-government relations, and so forth. Multiple objectives and situations point to a comprehensive package of different policy instruments.


Other Budget Forum 2020 articles

Blink and You’ll Miss It: What the Budget Did for Working Mums, by Miranda Stewart.

Economic Stimulus through a Gender Lens: Why the Budget Did Not Deliver, by Helen Hodgson.

Progressivity and the Personal Income Tax Plan, by Sonali Walpola and Yuan Ping.

Getting Coherence into the Equity Debate – Part 3, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 2, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 1, by Andrew Podger.

What Has Volunteering Got to Do With the Budget? By Sue Regan.

Talk of Aspiration Is Not Borne Out in Federal Budget Papers, by John Hewson.

Asymmetric Taxation of Business Income and Losses, by John Freebairn.

Economic Security for Older Partnered Women and Widows: Fixing Gaps in Australia’s Superannuation System, by Monica Costa, Helen Hodgson, Siobhan Austen and Rhonda Sharp.

Heroic Assumptions in Budget Omit One Major Threat: A Global Debt Crunch, by John Hewson.

Dream Budget or Not? by Shumi Akhtar.

Will Instant Asset Write-Offs Boost Jobs? by Michael Coelli.

It’s Not the Size of the Budget Deficit That Counts; It’s How You Use It, by Steven Hamilton.

Looking for Bold Reform? Get Rid of Payroll Taxes, by Robert Breunig.

It’s Time to Meet Key Social Policy Challenges in COVID Recovery, by John Hewson.

Meet the Liveable Income Guarantee, a Budget-Ready Proposal That Would Prevent Unemployment Benefits Falling off a Cliff, by John Quiggin, Elise Klein and Troy Henderson.

COVID-19 Strengthens Australians’ Belief in the Fair Go, Government Should Support the Vulnerable, by Emma Dawson.

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