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Financial Incentives for Steering Education and Training

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The present report examines how governments use financial incentives to promote a better alignment between labour market needs, on the one hand, and the supply of skills, on the other. In doing so, it identifies: i) innovative models that countries may be interested in learning from; ii) best practice in the design and use of financial incentives; iii) framework conditions for their effective use; and iv) limitations and risks in the use of financial incentives.

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Aligning skill supply and skill demand: The challenges

In many countries, the responsibility for aligning skills development with labour market needs is gradually shifting from government to individuals and employers as the importance of cost-sharing and market mechanisms for allocating resources grows. However, an increased reliance on the market also brings a number of risks. In particular, it raises the risk of market failure. In this context, this chapter argues that governments will continue to play an important role in matching skills demand to supply – although the nature of this role is likely to be different. More specifically, this role becomes more indirect and will increasingly consist in “steering” the system and “nudging” institutions, individuals and firms, rather than exercising tight control over the quantity and type of skills that are provided and acquired. While there are many ways in which governments can do this, one key mechanism is the use of financial incentives.

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