Vocational training shown to have positive impact on productivity and wages

An analysis sought to evaluate the impact of vocational training on individuals, enterprises and society. The results point to a positive effect on productivity and wages, although such effects appear to be lower than generally anticipated and not as evident in companies with a smaller percentage of permanent workers. The study suggests the need for further discussion regarding the potentially negative effects of vocational training on enterprises and individuals.

Background to study

A ‘Study on the returns of vocational training’ was led by a team of researchers from the Society for Social and Economic Research Ltd (Sociedade de Estudos Económicos e Sociais Lda) and commissioned by the Office of Strategy and Planning (Gabinete de Estratégia e Planeamento, GEP) of the Ministry of Labour and Solidarity (Ministério do Trabalho e da Solidariedade Social, MTSS) in 2007.

The study involves an in-depth analysis of data from the social report (Balanço Social) and personnel records (Quadros de Pessoal) of Portuguese companies for the period 1996–2005. These two instruments give access to annual data on companies – such as the economic sector of activity, the number of establishments, personnel costs, the number of employees, new recruits and dismissals, promotion and internal mobility data, information on the age structure, qualifications and gender of personnel, along with details on the number of training courses, training hours and training beneficiaries. The study estimates the results of vocational training initiatives carried out in Portugal during the period under review. The sample database includes information on 3,920 companies with more than 100 employees, covering an average of 2,026 companies and 755,964 workers each year. Thus, it is a representative sample of Portugal’s largest companies.

Impact of vocational training on workers and enterprises

In terms of its methodology, the study was based on econometric methods using models comprising variables associated with training, such as the:

• existence of vocational training activities in the form of a dummy variable with a value of 1 when it is reported in each year;

• average number of training hours per employee, as reported each year by the company in its social report.

The benefits of vocational training for workers and enterprises are estimated by considering its effects on: productivity, average wages, labour mobility, the probability of changing short-term employment contracts into permanent contracts, and merit-based promotion.

Impact on productivity

Although the effects of vocational training on productivity are, on average, positive as expected, they are lower than usually reported in the research literature. When taking into account the heterogeneity of companies, the effects of vocational training are greater on wages than on productivity. For example, regarding productivity, companies that offer vocational training show productivity levels that are 8% higher than those of companies which do not offer training. The average productivity drops to 0.67% when comparing only similar companies. In terms of the effects of training on wages, the results have revealed that in companies offering training, average wages are 3.9% higher than those in companies offering no training.

Permanent workers

The proportion of permanent workers in the company introduces a significant change in the results in terms of productivity and wages. When the company has a lower proportion of permanent workers, the effects of training on wages are likely to be negative. Only when there is a higher proportion (above 60%) of permanent workers is the impact of training on average wages likely to be positive. The effects of contracts are even more significant in terms of productivity. The impact of vocational training on productivity is only likely to be positive in companies where 70% of the workforce are permanent workers.

Mobility and promotion

Vocational training has always had an impact on the increased mobility of workers, leading to 13% greater mobility, on average, or a 5% increase when comparing similar companies. Another positive effect of vocational training is the small rise in the probability of a worker moving from a short-term to a permanent employment contract – which increases by an average of 0.6%, or by 2.8% when comparing similar companies.

In addition, vocational training has a significant impact on the probability of a greater number of merit-based promotions in enterprises: on average, the probability of promotion based on merit increases by 74%. When comparing companies with similar characteristics, this differential amounts to 24.7%, which is still a high value.

Commentary

The study results are in accordance with those generally shown in existing literature, pointing to a positive effect of vocational training on productivity and wages, although such effects appear to be lower than generally estimated. The study also gives new insight regarding the positive effects of training on labour mobility, since the enterprises that provide vocational training to their workers also show a higher percentage of workers who leave the company after concluding such training. In addition, positive effects of vocational training are shown in terms of longer contracts and merit-based promotion.

Unlike the general consensus, the study results suggest the need for further discussion regarding the potentially negative effects of vocational training on enterprises and individuals. According to the study, vocational training may have a negative impact on productivity, wages and workers’ mobility – particularly in enterprises with a lower proportion of permanent workers.

Reference

Centeno, L.G. (coord.), Novo, Á., Santandré, J., Pereira, A. and Ferreira, M., ‘Estudo sobre o retorno da formação profissional’ [Study on the returns of vocational training], Cogitum Collection No. 30, Lisbon, GEP, MTSS, 2007.

Heloísa Perista and Eudelina Quintal, Research Centre for Social Intervention (CESIS)