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Do Training Funds Raise the Pace of Training? The Case of Mauritius

Listed author(s):
  • Oluyemisi Kuku
  • Orazem, Peter
  • Sawkut Rojid
  • Vodopivec, Milan

Many developing countries have tried to increase firm provision of training by providing subsidies funded by taxes proportional to the firm's wage bill. These training funds, however, may backfire if the adverse effect of the tax on training incentives outweighs the positive effects of the subsidy. We show that the value of these training funds depends critically on the extent to which firms are liquidity constrained. If the effective firm discount rate is low, the disincentives outweigh the benefits. Using an administrative dataset on the Mauritius training fund, we show that larger, high-wage and more capital intensive firms are the most likely to offer to training without the subsidy, but that the subsidy creates an increased incentives for small firms to train. As a result, the largest firms pay more in taxes than they gain in subsidies while the smallest firms receive more benefits than they pay in taxes. Consequently, the program shifts net training investments away from the firms that would normally have the greatest return from training and toward smaller firms that would normally have the lowest return from training. It is doubtful that the program actually raises the incidence of training overall.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 35729.

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Date of creation: 19 Dec 2012
Handle: RePEc:isu:genres:35729
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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  1. Daron Acemoglu & Jörn-Steffen Pischke, 1998. "Why Do Firms Train? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 79-119.
  2. David Card & Jochen Kluve & Andrea Weber, 2010. "Active Labour Market Policy Evaluations: A Meta-Analysis," Economic Journal, Royal Economic Society, vol. 120(548), pages 452-477, November.
  3. David C. Wyld, 2010. "ASecond Life for organizations?: managing in the new, virtual world," Management Research Review, Emerald Group Publishing, vol. 33(6), pages 529-562, May.
  4. Dan A. Black & Brett J. Noel & Zheng Wang, 1999. "On-the-Job Training, Establishment Size, and Firm Size: Evidence for Economies of Scale in the Production of Human Capital," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 82-100, July.
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