Human Capital – Training A. General model of post-school skills investments 1. A substantial amount of skills acquisition occurs after people leave school a. some of this involves “learning by doing” – proficiency at job tasks increases simply by performing the tasks over and over; does not require any special action by the employer (we are not going to consider this) b. some jobs also require or provide additional 1) classroom training – more generally, training away from the job task 2) on-the-job training – training that occurs while performing a job task c. we will examine an employer’s decisions whether to provide these types of training 2. Assumptions a. will consider discrete time periods b. job tenure is finite, lasts T periods c. training will take one period and will occur at the beginning of an employee’s job tenure d. no direct cost of training e. productivity of an untrained employee is constant at MP0 per period f. productivity of a trained employee is: 1) MP1 < MP0 during training 2) MP2 > MP0 in each period after training occursg. graph of the marginal productivities h. present value of training 1) for an untrained employee ∑=−++=TttMPrMPPV20100)1( 2) for a trained employee ∑=−++=TttTRMPrMPPV2211)1( 3. Training is worthwhile to the firm if PVTR > PV0 or ()102021)1( MPMPMPMPrTtt−>−+∑=− term on the left is the present discounted value of the marginal increment to productivity (marginal benefit); term on the right is the short-term loss in productivity associated with training (opportunity cost) 4. How much will the firm pay the employee in each period? 1 0 2TtMP MP2 MP0 MP1 with training without training 1 0 2TtMP MP2 MP0 MP1a. assuming competitive markets, employer faces a profitability constraint ∑∑=−=−+≤+TtttTtttMPrWr1111)1()1( b. constraint is clearly met if employer pays employee exactly her marginal product c. when can the employer pay W1 > MP1 in the first period—that is, subsidize the cost of training? can only do this if the employer can pay W2 < MP2 in later periods d. this second condition cannot occur if the worker’s post-training productivity to other firms is MP2; if this were the case, the worker could leave the firm providing the training for another firm and receive wages equal to MP2 5. Lesson is that the type of training matters a. pure general training – training that increases productivity at all firms (e.g., like learning a computer programming language or understanding general principles of accounting) b. pure specific training – training that increases productivity only at a single firm (e.g., learning a company’s special software packages or its internal accounting practices) c. for pure general training, the employee bears all of the cost of training d. for pure specific training, the firm is in a position to absorb the costs of training through a flatter wage profile1) so long as the present discounted value of the wage stream for trained workers is higher than that for untrained workers, workers will have an incentive to undergo training 2) so long as the wages at the current firm equal or exceed those offered by other firms, trained workers stay 3) note that the firm is in a position to capture the benefits associated with training e. investments and returns associated with specific training may partially explain why firms try to hold onto employees during economic downturns and why firms use lay-off policies rather than outright dismissals during downturns B. Empirical evidence regarding employer-provided training 1. Data requirements to examine these issues directly a. need indicators of training (whether and how it occurred, how long it took) b. need indicators of the direct costs c. need measures of wages before, during and after training d. information about the training itself is best provided by firms e. longitudinal information about wages is usually provided by workers f. hard to obtain all of this information together; as a result, relatively few studies have looked at direct evidence2. Most research is based on indirect evidence, usually analyses of how wages vary with job tenure and experience a. in a seminal paper, Mincer (1962) calculated 1) the value of training by examining the amount of experience needed for the earnings of people with one level of education to catch up with the earnings of people with more education 2) returns using data on apprenticeships and data on physician’s training in medical specialties b. Brown (1989) linked wage-tenure profiles with characteristics (average training requirements) of professions; found most wage growth occurred during “training periods” c. Topel (1991) 1) estimated fixed effects models of wage growth that accounted for (a) person-specific effects (estimated from multiple wage observations, including observations across firms) and (b) match-specific effects (estimated from multiple wage observations within a firm) 2) found that most wage growth occurs early in peoples’ job tenures – 10 years of job seniority worth about 25 percent more in wages 3. Problems with studies based on indirect evidence a. problems with omitted variables could lead to spurious profiles (e.g., people with lower productivity and lower wages more likely to leave over time leading to longer-tenure workers being selectively more productive and higher paid)b. other explanations for upward-sloping wage-tenure profiles 1) back-loaded compensation to encourage workers to stay with firms 2) schemes to get mobile workers to reveal themselves C. Public training programs (taken from Heckman, LaLonde and Smith 1999) 1. Characteristics a. important component of social policy – expenditures vary across countries; however, in many large OECD countries expenditures for training are nearly as large as expenditures on direct income support (e.g., unemployment insurance payments) b. intended to increase skills among people who are “structurally” disadvantaged because of either a lack of skills or a change in the demand for their skills c. encompasses many types of programs 1) classroom training (both basic skills and vocational skills) 2) subsidized wage programs and subsidized on-the-job training 3) job search assistance d. lots of heterogeneity in other aspects 1) different levels of intensity – in U.S., training programs typically run for 3-4 months; however, in some other