The economics of trainingThe economics of training

• Is training important? Is training important? – Workers & firmsWorkers & firms– EconomyEconomy

• Who should pay for training?Who should pay for training?– State-firm-workerState-firm-worker

• The effects of trainingThe effects of training– WorkerWorker– FirmFirm

What is training?What is training?

• Chapman (1993)Chapman (1993)– ‘‘Training spans many boundaries, Training spans many boundaries,

including the distinction between … including the distinction between … on-on-the-jobthe-job and and off-the-joboff-the-job training, training training, training for for youngyoung workers and workers and adultadult training, training, and and formalformal or or informalinformal training through training through work experience.’ work experience.’

– E.g. Occupational labour markets e.g. E.g. Occupational labour markets e.g. professions professions •Off-the-job, formal…certificated Off-the-job, formal…certificated

1. Is training important?1. Is training important?

• (a) micro level(a) micro level– (i) Worker – on-the-job training = investment(i) Worker – on-the-job training = investment

• Age earnings profileAge earnings profile– (ii) Firm – training increases worker (ii) Firm – training increases worker

productivity …. Profits?productivity …. Profits?• (b) macro level(b) macro level

– Education & training raise labour productivityEducation & training raise labour productivity– High value added goodsHigh value added goods– International competitivenessInternational competitiveness– Economic growth Economic growth

Training systemsTraining systems

• (a) Britain(a) Britain– Low skills equilibriumLow skills equilibrium– Intermediate skills problemIntermediate skills problem

• Relatively low educational attainment & bias to ‘academic’Relatively low educational attainment & bias to ‘academic’• Too few young people enter vocational training or remain in Too few young people enter vocational training or remain in

FE/HEFE/HE• High proportion of workers receive no training\qualifications High proportion of workers receive no training\qualifications

– Skill shortages – effect on firmsSkill shortages – effect on firms

• (b) Germany (b) Germany – High skills equilibriumHigh skills equilibrium– Structured system of academic & vocational education & Structured system of academic & vocational education &

trainingtraining– Multi-skilled workforceMulti-skilled workforce– Dual skilled Dual skilled

2. Who should pay for training?2. Who should pay for training?

• Human capital theoryHuman capital theory– Training – investment decisionTraining – investment decision

•General skillsGeneral skills– Raises MP of trainees by the same amount in Raises MP of trainees by the same amount in

training & non-training firmstraining & non-training firms

•Specific skillsSpecific skills– No effect on MP of trainees that would be useful No effect on MP of trainees that would be useful

to other firmsto other firms

– Who paysWho pays•Specific = firm and worker share the cost. Specific = firm and worker share the cost.

Why?Why?

Equilibrium Equilibrium

Value insideWage inside

Wage outside4.50

6.00

Wage

Experience

Age

15

40

General trainingGeneral training

• Workers must bear the cost of trainingWorkers must bear the cost of training– Training wage: W < MPTraining wage: W < MP– Post-training wage: W = MPPost-training wage: W = MP

• If W < MP …. PoachingIf W < MP …. Poaching

• Which type of workers choose this Which type of workers choose this training? (DCF approach)training? (DCF approach)– Young, committed workersYoung, committed workers– Women versus men?Women versus men?

• Practice e.g. informational asymmetries – Practice e.g. informational asymmetries – W<MP, firms incentive to trainW<MP, firms incentive to train

3. The effects of training - 3. The effects of training - evidenceevidence

• (a) Firms (a) Firms – Productivity Productivity

•Difficult to measure – case studies (NIESR)Difficult to measure – case studies (NIESR)

•Wage returns are a lower bound estimate Wage returns are a lower bound estimate – positive wage returns (see below)positive wage returns (see below)– Effect on productivity thus much higherEffect on productivity thus much higher

– Cherry picking argumentCherry picking argument

(b) Workers(b) Workers

• (i) All training leads to positive age-(i) All training leads to positive age-earnings profile (estimation, selection)earnings profile (estimation, selection)– So there are positive returns to training (in So there are positive returns to training (in

general) – direct effect (e.g.10% over 10 yrs)general) – direct effect (e.g.10% over 10 yrs)

• (ii) Training increases the (ii) Training increases the PrPr(Promotion) (Promotion) – wage growth (indirect effect)wage growth (indirect effect)

• (iii) Training increases Pr(Employment) (iii) Training increases Pr(Employment) – ALMP & unemployedALMP & unemployed

ConclusionConclusion

• Training has many benefitsTraining has many benefits– WorkersWorkers– firmsfirms– EconomyEconomy

• Financing training is an important Financing training is an important issueissue

• State intervention?State intervention?– SubsidiesSubsidies– ALMPALMP