# 4. Policy Considerations and Areas for Future Investigation _What are the policy implications of these findings? What are areas for future investigation?_

This paper confirms that OJT could be a powerful instrument in helping firms become more productive and keeping abreast of technological change. At the same time, workers benefit through wage gains at current and future employers. Thus, the first step for policy makers and practitioners would be to familiarize themselves with the empirical data on returns to OJT, as has been captured in this report. OJT programs have shown a high rate of return where studied carefully. The evidence also shows that future employers benefit from hiring previously trained workers, indicating that the social benefit is greater than the private benefit—thereby making a case for OJT as a public good of sorts. This paper clarifies the extent to which oft-mentioned theoretical constraints are real constraints and backed by data. This is critical to any evidence-based policymaking effort.

To improve how the public sector supports and engages with OJT, it would need to communicate, partner with and improve its understanding of firm-level challenges (for example, how information failures operate within firms, how human resource policies are formulated, and how to help firms upgrade skills), as well as work more closely with private firms. This would require bolstering the capacity of public institutions that work with the private sector to include skilled personnel who can effectively help the private sector.

Finally, regarding specific policy considerations, it is important to highlight that the guiding principle for any policy in this area should be to correct for market failures that prevent firms and workers from fully internalizing the costs and benefits of OJT — rather than crowding them out.<sup>23</sup> In the sections that follow, we will discuss considerations for policy makers, utilizing the framework of demand- and supply-side constraints (table 1). Conclusions follow with a discussion of areas for future research/investigation, as well as remaining open questions.

## 4.1 Demand-side considerations<sup>**_24_**</sup>

Regarding demand-side considerations, the following question is posed: What policy directions would help increase the uptake of training/complementary activities leading to an attendant increase in the demand among firms for OJT? The demand for OJT is more likely to improve in environments of high product market competition (see section 4.1.1), more information within the firm (see section 4.1.2) and improved firm management capability (see section 4.1.3). For workers, presence of aligned incentives in the form of gain sharing compensation could help increase uptake of OJT opportunities (see section 4.1.4).

### 4.1.1 Reforming product market regulation, increasing competition and trade

The literature suggests an important role for (product market) competition in encouraging the adoption of new practices and technologies. Competitive environments act as a channel to increase

> 23 The case of OJT is one of positive production externalities — a rare form of externalities. To alleviate this market failure, policies that decrease the marginal cost to the firm of providing OJT would bring levels closer to the social optimal. In order to achieve a level close to the social optimal, the marginal benefit to the firm of providing OJT would need to increase (see section 4.1 on demand-side considerations), and/or, the marginal cost would need to decrease (see section 4.2 on supply-side considerations).

> 24 These would increase the marginal benefit of providing OJT to the firm, or to all firms in the market.

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