Across countries, substantial changes in skills needs are challenging labour market and training policies and contributing to skill mismatch and shortages. In most countries, large shares of employers complain that they cannot find workers with the skills that their businesses require. At the same time, in many countries, a number of college graduates face difficulties in finding job opportunities matching their qualifications.

At a time when globalisation, technological progress and demographic change are profoundly altering the types of jobs that are available, as well as how and by whom they are carried out, investing in skills is more important than ever to build resilient and inclusive labour markets that underpin social cohesion and well-being, and promote smart, sustainable and inclusive growth – as emphasised in the Europe 2020 Strategy and the European Semester process.

Globalisation, technological progress and demographic change are having a profound impact on the skills needed in the labour market. As a general trend, the demand for skilled workers is increasing and additional investments in formal education as well as in training and retraining for workers are therefore required (European Commission, 2010). But the mega-trends are also driving important structural changes. It will therefore not be enough just to invest in more skills – it will be equally important to invest in the right type of skills (European Commission, 2016).

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.

This chapter documents the use of financial incentives for steering education and training in OECD and non-OECD EU countries, providing a wealth of country examples. Following a simple taxonomy, financial incentives are classified into supplyand demand-side measures, with a further breakdown of the latter into measures targeted at individuals and those targeted at employers. Although this taxonomy is attractive, it is not always straightforward to classify measures neatly given that demand- and supply-side effects are closely intertwined. In addition, many programmes offer more comprehensive solutions which target skills supply and demand simultaneously.

This final chapter provides a brief overview of what the literature has to say on: i) best practice in the use of financial incentives; ii) framework conditions for their effective implementation; iii) the limitations; and iv) risks attached to the use of such incentives.