Formal Vocational Training Boosts Wages By 13%, Highlights IIM Indore Study On Labour Market Inefficiencies

Indore (Madhya Pradesh): Workers with formal vocational education and training (VET) qualifications earn approximately 13 per cent higher wages than those without VET or those with informal VET, according to a study by IIM Indore. The study also finds negligible wage differences (around 3 per cent) between workers with no VET and those with informal VET, especially among younger workers.

The research spearheaded by prof Ajay Sharma and co-researchers Shweta Bahl and Vasavi Bhatt, provides crucial insights into the economic benefits of formal VET and its implications for policymakers addressing labour market challenges. This study provides compelling evidence for investing in formal vocational training as a means to boost individual earnings and improve the overall efficiency of India’s labour market.

With India’s vast working-age population, these findings are a timely call for evidence-based policymaking to ensure sustainable economic growth and workforce development. “Our research has important policy implications. As we provide estimates of the returns on additional years spent obtaining VET for various age groups, this can be used for evidence-based policymaking and allocating resources for the schemes directed towards workers in various age groups,” Sharma said.

“Second, based on our findings, we can say that there should be a direct attempt from the policymakers to include workers that opt for informal channels of VET, within the formal VET system to enable them to get higher returns in the labour market. Additionally, this is likely to help them in upward occupational mobility as well as help them transition from informal to formal sector jobs.” “Lastly, the mixed results for the younger age groups highlight the need for devising a systematic plan for better SWT policies than what are in place currently,” he added.

The findings

--Sustained Wage Gap Over Time: Formal VET delivers long-term benefits with the wage advantage growing significantly as workers age. This suggests that the investment in formal VET continues to pay off throughout a worker’s career.

--Limited Benefits of Informal VET for Younger Workers: While informal VET is prevalent, it provides little to no wage advantage for new entrants (aged 15–24) compared to their non-VET counterparts. However, older workers with informal VET experience some wage gains later in their careers.

--Skill Mismatch and Youth Challenges: The study highlights the ongoing skill mismatch in India’s labour market with many graduates working in jobs requiring lower educational qualifications. This reflects broader inefficiencies in the school-to-work transition (SWT) system.