Designing payroll levies for firm training

Purpose - The purpose of this paper is to investigate and recommend formal guidelines for the initial design of country-level or sectoral payroll levy systems that are intended to incentivize new firm training. The paper presents and illustrates two necessary conditions for new training to be stimulated, one involving transaction costs and the other the incentive payback. Ultimately, the purpose is to guide more successful designs for such systems in future. Design/methodology/approach - The paper is principally theoretical, but the South African levy-grant system of the late 1990s is used as a case study. The paper illustrates how World Bank data may have been used to guide the design. Findings - The paper demonstrates how during the design phase, policy makers can employ knowledge of pre-incentive training levels of firms, and possibly also estimates of unit transaction costs, to estimate the number of employees that may be positively affected. In the South African case, the actual system used may have been underspecified and unlikely to reach many employees with new training. Research limitations/implications - Future research may employ these guidelines in empirical studies of the relative success of payroll levies. Practical implications - The practical value of the paper is formal guidelines for policy makers seeking to implement such payroll levy systems. Social implications - Better design for these systems may have positive implications for productivity and social externalities while avoiding unnecessary waste. Originality/value - While there have been several more general reflections of payroll levy systems, and empirical investigations of their efficacy, this is the first paper formally modeling and testing design guidelines that can be implemented practically in the pre-implementation phase.