Apprentice incentives: what works?

The federal government recently launched an inquiry into apprenticeship incentives. They are looking for a new model that will drive higher numbers of apprentices through the system.

This announcement has kicked-off a debate about the merits of wage subsidies. Some people argue they should go to employers, others say they should go to the apprentices themselves.

Put aside for now the question of whether they're a good idea at all. Which type of subsidy actually works to increase apprenticeships?

Let’s say the government subsidises employers while the wage received by apprentices remains unchanged. What will happen? You might assume apprenticeship numbers will naturally rise.

That’s a reasonable guess because that’s how most markets work. But it does assume the limiting factor in the market is the number of buyers willing to pay the going rate. Cutting the wage bill will draw more employers into the market and the apprentices will naturally materialise.

There is however another possibility. What if there are no more apprentices willing to take the deal? It's possible the apprenticeship market is ‘supply-constrained' - a concept we became very familiar with during the pandemic. Sometimes supply, not demand, needs to be stimulated.

There’s a school of thought that says the apprenticeship market is indeed supply-constrained. The idea is that young people are turning their backs on apprenticeships. A key reason, they say, is that apprentice wages are too low. "Kids these days" don’t want to work, and certainly not for $16 an hour.

If this story is true, then reducing the cost of apprenticeships to the employer won't have much of an effect because it doesn’t improve the deal for the apprentice. Subsidising employers won't entice more kids into the trades.

So what sort of market do we have? Is it limited by the number of employers willing to pay $16 per hour, or by the number of young people willing to work for that rate?

It turns out the pandemic provided a perfect natural experiment to answer this question. As part of its stimulus package, the federal government covered 50% of apprentice wages for eligible employers. Note the apprentices themselves still made the same money.

The result?

Apprenticeships boomed. And keep in mind this happened while the unemployment rate fell to 3.4%. Workers had plenty of other options, yet they still signed-up in their thousands. When the subsidies were finally cut-off in mid-2022, the numbers promptly reverted to trend.

What does this tell us?

It tells us that the number of apprenticeships is mainly determined by the number of firms willing to employ apprentices at the going rate. Decrease the price and more apprentices will be employed.

It also tells us that raising the wages of apprentices will not increase the numbers of apprentices in-training. In fact, it is likely to decrease apprenticeships if that wage increase has to be borne by the employer.

It tells us that plenty of "kids these days" are perfectly happy to work for $16 an hour for the promise of a trade certificate and everything that offers in terms of future rewards.

So if your objective is to increase the number of apprentices in-training, reducing the cost of apprentices to employers will be the quickest path to that outcome. You might believe that apprentices should be paid more, and you might be right. But don’t think it will increase apprenticeship numbers.