Bryan Caplan  

A Question Almost All My Labor Students Got Right

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Even famous economists occasionally tell me that, "Firms have no incentive to train workers in general job skills."  The argument: Once firms teach workers general job skills, the newly-trained workers can immediately threaten to quit unless they get a raise. 

Such a plausible argument!  But almost all of my labor economics students can easily explain why it's wrong.  Their midterm asked:
T, F, and Explain: According to human capital theory, firms have no incentive to train workers' general skills.
A typical answer:
While workers who improve their general skills can easily bargain for a raise, firms' obvious response is to pay them a below-market wage - or even a zero wage - during their training period.  Internships are an excellent example. 
I'd like to think that my students owe this insight to my stellar teaching.  But the real reason, I fear, is simply personal experience.  College students today are hungry for training in general job skills - and they know that firms are ready to provide that training.  All firms ask in exchange is unpaid labor - a deal that students nowadays are happy to take.

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COMMENTS (7 to date)
Harold Cockerill writes:

Given that hundreds of thousands of firms and millions of people within those firms train individuals in general jobs skills on an ongoing basis, there must be an incentive to do so. Are many famous economists not observing what actually happens in the real world? What else are they not observing?

I'm a carpenter, not an economist, what am I missing?

Eric writes:

As a manager, I know that all of my employees will, eventually, leave. Fact of life. No job is permanent.

I hope that the employee I hire today is not the employee that will eventually leave. If that employee remains stagnant (in terms of training only, for this discussion) that employee will most likely leave earlier than he/she would have if given appropriate training. And I probably won't be too disappointed with that departure. The employee that I initially seek may not have all the skills necessary for the job today but should by the end of the first year in the job. By making that employee better - again only in terms of training - both the employee and the firm benefit. And if, after this training and sufficient experience, the employee and the firm need to negotiate on salary, so be it. The firm needs to balance the cost of recruitment and productivity of a new employee versus the worth of the improved employee.

Glen S. McGhee writes:

And this doesn't only apply to General Work.

Doctors and Vets, and probably lawyers too, and a whole host of others, like computer network support people, get the vast bulk of their experience hands on -- that is, on the job.

But if on-the-job-training is where most of this is "learned," what is happening all those years in medical school? Is it simply wasted time? Rotting away in a pickling tank? Is all that money spent going down the drain?

The story of how we find ourselves in this wasteful trap is the story of the rise of powerful institutions that shape our lives, and yes, even shape our decisions.

Arthur_500 writes:

Firms have an incentive to train employees in order to develop them to do the work desired in the manner and culture that is desired. While internships sound great most people get paid.

Look at Wal*Mart as an example of training people to do a job in the Wal*Mart manner and culture. McDonald's trains employees every step of the McDonald's way. Wages are low and people leave for other employment but they keep training people.

Our educational institutions are terrible at training people. Colleges, and even high schools, expect students to use computers but no one ever trains them how. Students can use FaceBook but can't type a letter, a paper, or develop a presentation.

Floccina writes:

A friend recently told me that though he was an English major with no accounting experience he was hired out of college by Prudential to do accounting. He said that his boss liked to do that because he could then pay them less because most companies when they hire accountants require an accounting degrees.

MingoV writes:

I was a medical lab director. We offered training to all employees: phlebotomists, technicians, technologists, and supervisors. Doing so had direct benefits of improved performance and indirect benefits of improved morale and loyalty to the lab. The latter benefits are important when labor supply is less than demand. We rarely had employees jump ship to a competitor.

Chris Koresko writes:

A slightly different take based on an oversimplified "toy" model:

In a perfectly competitive labor market, compensation is always equal to productivity. So if new skills make an employee more productive, then compensation rises to match, and the employer gains (and loses) nothing.

But in a real labor market there are costs ("search cost") associated with establishing new employer/employee relationships. Suppose that cost falls entirely on the employee. Then, when his productivity rises due to new skills, his compensation will rise to the point that it's no longer worth his time to look for a new employer. That point will be lower than it would be in a perfectly competitive marked by an amount equal his search cost. So the employer pockets the search cost. If the training costs less than the search, the employer comes out ahead.

On the other hand, if the search cost falls entirely on the employer, then he must increase the employee's compensation to match his new productivity, and the employer's incentive to invest in improving his employees' productivity vanishes.

Based on that argument, we'd predict that employees who face high search costs would tend to get more employer-paid training, since the employers capture the benefit of it. Employees who face low search costs would tend to pay for their training themselves, since they capture the benefit.


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