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1. Introduction
The perceived shortage of skilled labor has been highlighted as a serious problem for firms in many industrialized countries. For example, the U.K.-based web site Management Issues reports the results of a company survey undertaken by Lloyds TSB that shows that "... more than four out of ten companies have had problems recruiting skilled staff this year [2003]."1 A study undertaken at WZB Berlin shows that this is not a localized issue, and reports similar findings on skill shortages for the U.S., Germany, France, and other European countries.2 The Republic of Ireland, the country to which the data in this paper relate, is no exception to this trend because, notwithstanding its substantial growth performance over the last decade, skill shortages have also been identified as one of its major problems in the short and medium term.3,4
In order to deal with this issue, governments face a number of policy options. One obvious measure is to use training in order to improve skills of workers in the labor market.5 In fact, many countries have implemented policies to provide financial assistance for firms to increase their training activities, as, for example, in the U.S. (Holzer et al. 1993) and Ireland. A legitimate question to ask is, of course, whether these programs encouraging firms to provide formal training to employees are effective. More specifically, do training subsidies encourage firms to spend more on formal training, or are they just used to finance expenditure that would have occurred even in their absence? Implicitly, the support of training relies on the assumption that there is some sort of market failure(s) so that the actual level of training provided is lower than its social optimum. In the literature on training, two imperfections have been pointed out as the potential cause of such underprovision--labor market and capital market imperfections; see Stevens (1999) for a review. Thus, evidence regarding a link between training subsidies and training provision can be interpreted as indirect evidence regarding the role of such market failures in the underprovision of training.
Importantly, as far as we are aware, the link between firm expenditure on training and government support has, as of yet, not been directly empirically addressed in the literature.6...