Financing Workforce Development in a Devolutionary Era

Stuart Andreason
Federal Reserve Bank of Atlanta
Community and Economic Development Department
Discussion Paper 2016-2
April 2016

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Workforce development financing has changed significantly over the last 25 years. In 2008, federal funding for the traditional workforce development system was 83 percent lower in real terms than it had been in 1980. As the federal system plays a smaller role in workforce development financing, the job training landscape better represents a "marketplace" where students and job seekers use federal training vouchers and grant and student loan money from various sources, primarily the Higher Education Act's Pell Grant and Federal Student Loan programs. Additionally, increasing volatility in the labor market has changed the relationship between employer and employee, leading to the need for a very different workforce development delivery and financing system than currently exists. These trends mark changes in the way that the broad workforce development financing system is consumer driven rather than driven by government or institutional priorities. Also, federal workforce development financing often carries significant restrictions on its use, limiting access to funding for innovative workforce development programs.

In the context of less centralized decision making, declining federal formula funding for workforce development financing, and increasingly complex and changing training needs, workforce development programs and state and local governments often find themselves responsible for developing and funding training. Devolution of responsibility for workforce funding has led to nascent innovation in state and local financing of workforce training, but many of the models have not been widespread. This paper examines the potential for some of these newer models of financing, such as bonding incremental payroll tax and social impact bonds as well as several prospective training models, including income-share agreements.

JEL Classification: J08, J20, J28, H30

Key words: workforce development, workforce development finance, workforce development funding, social impact bonds, workforce development bonds, income-share agreements


The author would like to thank Paula Tkac from the Federal Reserve Bank of Atlanta and Ed Strong from the Corporation for a Skilled Workforce for their thorough and insightful review of this paper. Timothy Rudd from MDRC, Larry Good from the Corporation for a Skilled Workforce, and Jeanne Zimmermann, Karen Leone de Nie, Will Lambe, and Mels de Zeeuw of the Federal Reserve Bank of Atlanta also provided significant reviews, edits, and comments to the work as well. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Comments to the authors are welcome at stuart.andreason@atl.frb.org.