Employer-Provided Training

Order Code RL30546

CRS Report for Congress

Received through the CRS Web

Employer-Provided Training

May 3, 2000

Linda Levine

Specialist in Labor Economics

Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

It is widely thought that changes which firms have implemented in recent years to improve

their competitiveness have substantially affected the skill requirements of jobs. The upgrading

of skill requirements has, in turn, prompted Congress to spur employer-provided training of

incumbent (i.e., employed) workers through the Workforce Investment Act and the American

Competitiveness and Workforce Improvement Act. This represents a marked departure from

the typical populations served by government training resources. In this report, what is known

about the intensity, content and incidence of companies’ human capital investments is explored

along with the distribution of employer-sponsored training by business and employee

characteristics. Then, the impact on employees and employers of post-school skill acquisition

is analyzed. The report also examines whether employer-supported training of incumbent

workers is underprovided and the policy implications for Congress. This report will not be

updated.

Employer-Provided Training

Summary

The consensus is that the importance of a skilled workforce to the economic

performance of nations, firms and employees has increased in recent years. To

compete in today’s fast-paced global marketplace, companies have strived to increase

the efficiency of their operations through heightened utilization of technological and

other workplace innovations. It is widely thought that these changes have

substantially affected the skill requirements of jobs. The upgrading of job skill

requirements has, in turn, prompted Congress to spur employer-provided training of

incumbent (i.e., employed) workers through the Workforce Investment Act (P.L. 105220) and the American Competitiveness and Workforce Improvement Act (P.L. 105277, Title IV). This represents a marked departure from the typical populations

served by government training resources (i.e., low-income and dislocated workers).

Employer-provided education/training lacks a clear definition. It may be tailored

to the needs of a given firm (i.e., specific training) or impart skills that are useful

across firms (i.e., general training). Training may be informal (e.g., watching or

asking others) or formal (e.g., attending on-site classes or vocational schools). These

and other variations can differentially affect the costs and benefits of incumbent

worker training. The latest available estimates, which are for the mid-1990s, suggest

that companies’ expenditures on formal training ranged between $42 billion and $52

billion. In terms of benefits, employer-supported training raises employees’ wages or

improves their job stability and increases productivity or decreases turnover at firms.

It appears that a case can be made for government to promote general

(transferable) skills training because firms could well underinvest in this activity.

However, as much remains unknown about which kinds of firm-supported training are

most effective and how much formal and informal training already is being provided,

policymakers seeking to stimulate the training of incumbent workers may want to

tread warily in this new area. The possibility of a formal training subsidy prompting

firms to substitute federal monies for their own or substituting formal for unsubsidized

informal training rather than increase the total quantity of training also implies the

need for caution. And, while the currently low unemployment rate may have

contributed to policymakers’ focus on skill development for individuals who already

have jobs, incumbent workers are virtually guaranteed some degree of employerprovided training. In contrast, unemployed persons have only their own presumably

scanty resources and, traditionally, federal training funds to draw upon to learn new

or upgrade existing skills.

To date, it appears that Congress has carefully entered the field of incumbent

worker training by devoting relatively small sums to this purpose (less than $80

million since 1999), including matching requirements in some instances and by

prohibiting the use of government resources for training that companies would have

undertaken anyway. The recency of the grants awarded to stimulate employerprovided training makes it unlikely that evaluations will be available shortly to shed

light on the federal initiative, however.

Contents

What Is Employer-Provided Training? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Intensity, Content and Incidence of Training . . . . . . . . . . . . . . . . . . . . . . . . 5

Trends in Training Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Training Content by Hours of Participation . . . . . . . . . . . . . . . . . . . . . . . . 7

Basic Employability Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Incidence of Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Informal Compared to Formal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

By Firm Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Distribution of Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Who Provides Training? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Who Gets Trained? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

The Impact of Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Returns to Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Earnings and Earnings Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Employment Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Returns to Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Employee Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Some Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Is Employer-Supported Training Underprovided? . . . . . . . . . . . . . . . . . . . . . . 20

List of Tables

Table 1. Wage and Salary Costs of Training and Hours of Training by Establishment

Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Employer-Provided Training

Education and training are two examples of human capital investments, which

are expenditures that increase the resources embodied in people. Through the

expansion of people’s knowledge and skills, human capital investments raise

productivity and income in future years.1

Knowledge and skill formation contribute to a nation’s economic performance.

To the extent that income growth per capita is caused by increases in land and

physical capital per worker, the future rate of growth will slow because additional

assets result in diminishing returns. However, the development and application of

people’s scientific and technical knowledge enable economic growth to continue by

raising the productivity of labor and other factors used in the production of goods and

services.2 The adoption, adaptation and diffusion of technological and other

workplace innovations, in turn, rely on a nation’s having a well-educated and welltrained labor force.3

The consensus is that the importance of a knowledgeable, flexible workforce to

the economic performance of nations and firms has increased in recent decades. The

industrial age was marked by incremental changes which had minimal impact on the

skill requirements of most jobs. To compete in the fast-paced global marketplace of

the post-industrial age, firms have strived to increase the efficiency of their operations

through heightened utilization of computer technology, reconfiguration of the

corporate structure and reorganization of production processes. These quantum

changes in the way business now is being conducted are widely thought to have

substantially affected the skill requirements of jobs. For example, factory workers

today might be required to operate sophisticated computerized equipment or to

participate in problem-solving teams. Firms sometimes have found that they first must

overcome deficiencies in these workers’ basic employability (e.g., computation and

communication) skills — which previously had not been much in demand — before

providing them with the specific skills necessary for implementation of workplace

innovations.4

1

Becker, Gary S. Human Capital: A Theoretical and Empirical Analysis, with Special

Reference to Education. Chicago, University of Chicago Press, 1993. (Hereafter cited as

Becker, Human Capital: A Theoretical and Empirical Analysis.)

2

Productivity is the amount of output produced per unit of input (i.e., land, labor and capital).

In the case of labor productivity, it is a measure of the goods and services produced per

worker or hour worked.

3

Mincer, Jacob. Studies in Human Capital. England, Edward Elgar Publishing Limited,

1993. (Hereafter cited as Mincer, Studies in Human Capital.)

4

Hollenbeck, Kevin. Classrooms in the Workplace. Kalamazoo, MI, W.E. Upjohn Institute

(continued...)

CRS-2

The accumulation of knowledge and skills has come to play a more important

role in the labor market prospects of workers, as well. The premium employers pay

to workers with greater educational attainment has increased considerably in the past

2 decades: men (women) with bachelor’s degrees went from earning 50% (41%)

more than men (women) with high school diplomas in 1979, to 92% (76%) more in

1998.5 As a consequence of this trend, some policymakers are interested in upgrading

workers’ skills not only for efficiency but also for equity reasons. It is hoped that

additional training will mitigate the growth in wage inequality which began in the

1970s.6

Although educational attainment is an often-used proxy for skill level, the nature

of recent workplace changes may have sped the rate at which formal education

becomes obsolete. Observers thus assert that post-school skill acquisition is now of

greater importance to adult workers who want to remain employable or to improve

their earnings. Demographic changes are believed to bolster the case for lifelong

learning as well: the aging of the labor force means that, for growing numbers of

workers, the period of formal schooling has long since passed; and the increasing

share of minorities “who, on average, experience lower high school completion rates,

lower educational attainment scores, and greater literacy problems” means more

workers could be unprepared for the labor market’s faster growing, higher paying

jobs.7

Investments in the nation’s human resources are made when students attend

secondary or post-secondary educational institutions, unemployed workers enter

government-sponsored training programs and when employees participate in workbased learning activities. This report focuses on the latter, that is, on the training

investments firms make in incumbent workers who no longer are attending school

full-time.8

Although nearly all of the government’s training resources remain focused on

low-income or dislocated workers, Congress has shown increased interest since the

late 1990s in expanding the amount of training that firms provide to their current

employees. Passed in August 1998, the Workforce Investment Act (WIA, P.L. 105-

4

(...continued)

for Employment Research, 1993. (Hereafter cited as Hollenbeck, Classrooms in the

Workplace.)

5

CRS Report 95-1081, Education Matters: Earnings by Highest Year of Schooling

Completed, by Linda Levine.

6

The increased return to education since the 1970s has prompted speculation that the

distribution of training may have contributed to the growth in wage inequality. According to

Jill Constantine and David Neumark (Training and the Growth of Wage Inequality. Industrial

Relations, v. 35, no. 4, October 1996), the increased incidence of training among more

educated workers was not large enough to have substantially affected the wage structure.

7

U.S. Department of Labor. Involving Employers in Training: Literature Review, Research

and Evaluation Report Series 97-K. Washington, D.C., 1997. p. 13.

8

In this report, the terms “incumbent” or “employed worker” and “employee” are used

interchangeably as are the terms “business,” “company,” “employer” and “firm”.

CRS-3

220) allows states to use some of their allocations for “innovative” incumbent worker

training programs (Section 134(3)(A)(iv)(I)) and the Secretary of Labor to carry out,

through grants or contracts, demonstration and pilot projects to develop and test the

effectiveness of various training approaches directed at diverse target populations,

including upgrading skills among employed persons living and working in enterprise

communities or empowerment zones (Section 171(b) and (c)). The American

Competitiveness and Workforce Improvement Act (ACWIA) was included as Title

IV of the FY1999 omnibus appropriations act (P.L. 105-277), which was enacted in

October 1998. In Section 414(c), additional funding was provided for WIA’s Section

171(b) demonstration programs that afford technical skills training to both employed

and unemployed workers. More recently, the Administration has requested $30

million for a new incumbent worker program to be initiated in FY2001. The

competitive grant program would focus on demonstrating innovative approaches to

training/skill upgrading among non-management incumbent workers.9

What Is Employer-Provided Training?

The complexity of the activities that comprise firm-sponsored education/training

makes this question difficult to answer. It is a complicated subject to study for the

following reasons:

!

To begin with, it lacks a clear definition. Training may be tailored to

meet a business’ particular needs, but it also may impart knowledge

that would be useful to employees regardless of their place of

employment. Employers may require participation in post-school

skill development or employees may voluntarily undertake it.

Employment-based programs may be of shorter duration and have a

more remedial focus10 or a more occupational focus than schoolbased programs that confer formal academic credentials.

Alternatively, some corporate educational programs grant degrees.

Perhaps the only common feature is the involvement of the firm, in

some manner, with the post-school knowledge acquisition of its

9

The meaning of incumbent worker training varies somewhat. One solicitation for grant

applications for an incumbent worker demonstration program stated that:

While in general the term “incumbent worker training” may be used to denote any existing

efforts on the part of employers to provide training to currently-employed workers in order to

help keep these employees employed, the term will be used in the solicitation to describe

efforts to keep firms and workers competitive by keeping workers employed, averting layoffs,

upgrading workers’ skills, increasing wages earned by employees, and improving employees’

employability.

In the FY2001 budget request, incumbent worker training not only is invoked as a means of

averting layoffs/plant closings due to trade or technological innovations but also as a synonym

for lifelong learning that enables firms to build career ladders for their employees.

10

“Basic skills” or “workplace literacy” instruction focuses on developing reading and writing

English, math, English-language communication and interpersonal skills.

CRS-4

employees.The nature of employer involvement in training provision

— financial and otherwise — varies. Companies may themselves

develop and have in-house personnel lead training programs or they

may pay others to perform all or part of the training function. At the

same time, they may subsidize their employees’ skill formation

through paid time-off from work or through tuition reimbursements.

The manner of government involvement in employer-sponsored

training also varies. Firms themselves may be eligible for financial

support from state governments that provide training grants or tax

credits as part of their economic development efforts, for example.

They also may be eligible for assistance through WIA, which permits

federal funds to be spent — for the first time — on the training of

employed persons (where no public announcement of a closing has

been made). In addition, for-profit firms generally may deduct

training expenses when calculating their federal income tax

liabilities.11

! The subject is further complicated because company investments in

incumbent workers are of different types, are delivered in various

ways and are of wide-ranging content. Employer-sponsored

education and training is informal (e.g., an experienced employee

showing a new-hire how to perform a task) or formal (e.g., an

employee attending a class or seminar). While informal training

typically occurs at the workplace, formal training may take place

there or off-site (e.g., at a community college or commercial trade

school). In the case of on-site formal training, a class may be led by

an instructor located at the firm or broadcast via satellite.

Alternatively, employees may learn from interactive, multimedia

technologies. And, the content of the training may relate to the

performance of particular jobs (e.g., management skills training) or

it may have broader applicability (e.g., interpersonal skills training).

Differences in such variables as the type, location, delivery mode and

content of training could well have disparate effects on the earnings

and productivity of incumbent workers — two commonly used

outcome measures.Lastly, employer-supported education and

training is neither transparent nor centralized. Rather, it is an

amalgam of not readily observable actions being undertaken largely

on an independent basis by billions of employers, other training

providers and employees. The lack of a uniform accounting method

for business’ investments in its employees has hampered the

collection of high-quality data.12 Moreover, information needs to be

11

Businesses generally may expense training investments (i.e., account for them immediately)

rather than amortize them over time. These investments include compensation of in-house

trainers, compensation of trainees including educational assistance benefits and payments to

outside training providers.

12

“Firms do not keep good or standardized data on their training expenditures. When asked

to estimate the amount spent on training, some firms will estimate their actual program costs

while others will compute program costs plus the costs of the employee’s time spent in the

(continued...)

CRS-5

obtained from two groups (i.e., employers and employees) in order

to have comprehensive statistics on formal and informal training.

But, evidence suggests that the parties sometimes provide different

responses to survey questions.13

Thus, despite widespread agreement on the importance of employment-oriented

skill development among incumbent workers who no longer are full-time students,

large gaps remain in our understanding of the issue. The sections below set forth

what we know, first examining the intensity, content and incidence of companies’

human capital investments. Then, the distribution of training by business and

employee characteristics is explored. Next, the impact on employees and employers

of post-school skill acquisition is analyzed. The report closes with an examination of

whether employer-sponsored training of incumbent workers is underprovided and the

policy implications for Congress.

The Intensity, Content and Incidence of Training

It is difficult to measure accurately the cost of and time involved in employerprovided training, as well as its content and prevalence, because much of it occurs

informally (i.e., learning by doing, watching or by talking with others). Formal

training (i.e., learning by attending a planned activity with a defined agenda that is

conducted in a structured setting) at least has a clear start and finish, which should

make it easier to measure the cost of the activity.14 (The employees’ hourly

compensation must be multiplied by the time spent in training to derive the

opportunity cost of training to employers, i.e., value of the output forgone while

employees are being trained.) Because it is difficult to determine how much time is

spent learning informally, cost information usually is limited to formal training. It also

is problematic to ascertain the incidence of informal training because employees may

not readily recall these activities or not regard them (e.g., getting advice from coworkers) as training per se.15

12

(...continued)

program while still others will impute an overhead rate to cover fixed costs (facilities, training

staff, etc.).” Osterman, Paul. Skill, Training and Work Organization. Industrial Relations,

v. 34, no. 2, April 1995. p. 133. (Hereafter cited as Osterman, Skill, Training and Work

Organization.)

13

Barron, John M., Mark C. Berger and Dan A. Black. How Well Do We Measure Training?

Journal of Labor Economics, v. 15, no. 3, part 1, July 1997.

14

Brown, Charles. Empirical Evidence on Private Training in: Commission on Workforce

Quality and Labor Market Efficiency. Investing in People: A Strategy to Address America’s

Workforce Crisis. Washington, D.C., U.S. Government Printing Office, September 1989.

(Hereafter cited as Brown, Investing in People.)

15

The National Longitudinal Survey of the High School Class of 1972 and the Current

Population Survey training supplements (1983 and 1991), which query individuals or

households, yield much lower incidences of informal training than the surveys of the Small

Business Administration and the Employment Opportunity Pilot Projects, which query

(continued...)

CRS-6

Trends in Training Costs

Annual approximations of formal training expenditures for the 1980s generally

cluster between $12 billion and $30 billion.16 The American Society for Training and

Development (ASTD) produced a more recent estimate by combining data from the

U.S. Bureau of Labor Statistics’ Survey of Employer-Provided Training, the National

Household Education Survey, and the ASTD Benchmarking Forum. In 1995, firms

in the private sector incurred $25.2 billion in direct costs and $27.1 billion in indirect

costs related to formal training for a total of $52.3 billion.17 In contrast, survey data

from the U.S. Bureau of Labor Statistics (BLS) show that during 1994 employers

spent about $16.6 billion on selected direct costs of formal training.18 And, between

May and October 1995, employers’ payments for selected indirect costs of formal

training (i.e., trainees’ wages and salaries) were about $12.8 billion.19 Thus, for an

entire year in the mid-1990s the cost of formal training was about $42.2 billion. For

the mid-1990s, then, the latest available estimates suggest that companies’

expenditures on formal training ranged between $42 billion and $52 billion.

Employers appear to have increased their commitment to the formal training of

incumbent workers in recent years. According to a BLS survey of employers in the

private nonfarm sector with at least 50 employees on their payrolls, 69.2% raised their

expenditures on formal training during the early 1990s while just 5.2% lowered them.

15

(...continued)

employers. This discrepancy suggests that workers may not remember informal training very

well or they may not consider informal practices to be training while employers do. Barron,

John M., Mark C. Berger and Dan A. Black. On-The-Job Training. Kalamazoo, MI, W.E.

Upjohn Institute for Employment Research, 1997. (Hereafter cited as Barron, Berger and

Black, On-The-Job Training.)

16

Mangum, Stephen L. Evidence on Private Sector Training in Commission on Workforce

Quality and Labor Market Efficiency, Investing in People.

17

ASTD’s measure of direct costs includes in-house expenses for curriculum development,

salaries and benefits for training personnel and contractors, purchase and maintenance of

equipment and the space used for training, as well as outside expenses for tuition

reimbursement, contributions to union- and trade association-sponsored training funds,

travel/living expenses of employees while attending off-site training and payments to outside

training providers. ASTD’s measure of indirect costs includes the wages/salaries and fringe

benefits of employees while receiving training. Bassi, Laurie J., with Anne L. Gallagher and

Ed Schroer. The ASTD Training Data Book. VA, ASTD, 1996. (Hereafter cited as Bassi,

Gallagher and Schroer, The ASTD Training Data Book.)

18

BLS’ measure of direct training costs includes the following: wages and salaries of in-house

trainers, payments to outside trainers, tuition reimbursements and contributions to union- or

trade association-sponsored training funds. Unlike ASTD’s measure of direct costs, it

excludes payments for equipment, supplies, space, travel time and the benefits of in-house

trainers.

19

While ASTD’s measure captures as part of indirect costs the benefits of trainees, BLS’

measure is limited to trainees’ wages and salaries. In addition, BLS’ sample excludes

establishments with fewer than 50 employees while ASTD’s sample includes them. Frazis,

Harley with Maury Gittleman, Michael Horrigan and Mary Joyce. Results from the 1995

Survey of Employer-Provided Training. Monthly Labor Review, June 1998.

CRS-7

Larger firms were more likely than smaller firms to have increased the financial

resources devoted to formal training over the period.20 Another employer survey, this

one designed by the National Center on the Educational Quality of the Workforce

(EQW), similarly found that 57% of private for-profit firms with at least 20 employees

expanded their training activities during the first half of the 1990s.21 Companies

continued to raise the level of training investments during the second half of the 1990s

as well.22

Training Content by Hours of Participation

Employees averaged 10.7 hours in formal training activities during the MayOctober 1995 period, two-thirds of which involved job-skills development.

Computer-related instruction absorbed the most time (2.1 hours per employee),

followed by professional and technical skills training (1.3 hours per employee) and

production- and construction-related skills training (1.1 hours per employee).

Although management skills training was the most prevalent type of job-skills training

that establishments provided,23 it accounted for comparatively few hours (0.8 per

employee).

The development of more broadly applicable skills took up the remaining onethird of formal training time. Much of this time was spent in communications,

employee development and quality training (1.4 hours per employee) and occupational

safety training (1.2 hours per employee). Not only did employees attend more

activities related to occupational safety training (0.6 activities per employee) than any

other type of formal training, but many firms also offered instruction on this subject

(72%). In contrast, orientation training was as prevalent among firms as safety

training according to the BLS employer survey, but it accounted for much less of an

employee’s work time (0.6 hours and 0.1 activities per employee).

The content of informal training closely reflects that of formal training.

Employees reported that production/construction training and computer training

accounted for more hours than other kinds of informal job-skills training.

Occupational safety and communications/employee development/quality training

20

U.S. Bureau of Labor Statistics. BLS Reports on the Amount of Employer-Provided

Formal Training. USDL 96-268, July 10, 1996. (Hereafter cited as BLS, BLS Reports on

the Amount of Employer-Provided Formal Training.)

21

National Center on the Educational Quality of the Workforce. First Findings from the

EQW National Employer Survey. Philadelphia, PA, University of Pennsylvania, 1995.

(Hereafter cited as National Center on the Educational Quality of the Workforce, First

Findings from the EQW National Employer Survey.)

22

McMurrer, Daniel P., with Mark E. Van Buren and William H. Woodwell, Jr.. The 2000

ASTD State of the Industry Report. VA, ASTD, 2000.

23

About 67% of private nonfarm establishments with at least 50 employees offered formal

training in management skills in May-October 1995, according to BLS Reports on the

Amount of Employer-Provided Formal Training.

CRS-8

accounted for more hours per employee than other kinds of informal general-skills

training.24

Basic Employability Skills. Somewhat surprisingly in light of oft-heard

accounts about the inadequacy of workers’ basic skills,25 relatively few employees

surveyed by the BLS said that they received or spent much time participating (either

on a formal or informal basis) in workplace literacy training.26 Similarly, results from

the BLS and EQW employer surveys show that practically no time or funds were

expended on formal remedial instruction.27 And, smaller firms appear to be even less

likely than larger firms to offer workplace education programs.28 While

acknowledging such findings, ASTD nonetheless found it “somewhat significant” that

any businesses teach employability skills because “such training covers the very basic

types of skills that public education is intended to provide.”29

The Incidence of Training

Informal Compared to Formal. Almost all incumbent workers at private

nonfarm establishments with 50 or more employees in the mid-1990s had received

informal training while with their current employers (95.8%). Formal training was

less prevalent, with 84.4% of incumbent workers having participated.30

Results from other sources similarly show that the incidence of informal training

greatly surpasses that of formal training. A 1992 U.S. Small Business Administration

(SBA) survey of private nonfarm employers found that just 6.9% of newly hired

employees received off-site formal training and 20.5% received on-site formal

training. In contrast, 90.6% of new-hires received informal training from management

24

BLS. BLS Reports on the Amount of Formal and Informal Training Received by

Employees. USDL 96-515, December 19, 1996. (Hereafter cited as BLS, BLS Reports on

the Amount of Formal and Informal Training Received by Employees.)

25

Firms reported that nearly 36% of job applicants whom they tested in 1998 for literacy

and/or math skills lacked the basic qualifications for the positions sought. American

Management Association. 1999 AMA Survey on Workplace Testing: Basic Skills, Job Skills,

Psychological Measure. NY, 1999. Between 25% and 40% of hourly paid workers had some

basic skills deficiency in the early 1990s. Hollenbeck, Classrooms in the Workplace.

26

About 3% of employees spent just 0.2 hours per employee in informal basic skills training.

Under 7% of employees spent less than 0.1 hours per employee in formal basic skills training.

BLS, BLS Reports on the Amount of Formal and Informal Training Received by Employees.

27

For example, just 0.1 hours per employee or 1% of formal training hours were spent

learning basic skills according to the 1995 BLS employer survey.

28

In 1991, less than 5% of firms with under 20 employees said they had established an

education program compared to 20%-30% of firms with 200-499 employees. Bassi, Laurie

J. Smart Workers, Smart Work. Washington, D.C., The Southport Institute for Policy

Analysis, 1992. (Hereafter cited as Bassi, Smart Workers, Smart Work.)

29

30

Bassi, Gallagher and Schroer, The ASTD Training Data Book, p. 55.

BLS, BLS Reports on the Amount of Formal and Informal Training Received by

Employees.

CRS-9

or supervisors, 60.5% from co-workers and 64.5% from watching others. Among

other things, the lower incidence of formal training in the SBA compared to the BLS

survey suggests that employers are less likely to provide training that entails

substantial outlays (e.g., on tuition or transportation) to new-hires than to employees

with longer tenure who thereby have demonstrated an attachment to their firms.31

Table 1. Wage and Salary Costs of Training and Hours of Training by

Establishment Size

(May-October 1995)

Establishment size

Costs and hours

All

50-99

employees

100-499

employees

500 or more

employees

37.1

5.7

16.8

14.6

Formal training

12.8

1.3

5.5

5.9

Informal training

24.2

4.3

11.3

8.7

Per-employee wage &

salary costs of training

($)

647

462

654

754

Formal training

224

110

215

308

Informal training

423

352

439

446

Per-employee hours of

training

44.5

40.1

48.0

42.6

Formal training

13.4

8.2

13.5

16.6

Informal training

31.1

31.9

34.5

26.0

Total wages & salaries

paid to employees while in

training ($ in billions)

Source: U.S. Bureau of Labor Statistics. BLS Reports on the Amount of Formal and Informal

Training Received by Employees. USDL 96-515, December 19, 1996.

Data on hours of training also reveal that most employer-provided training is

informal. As shown above in Table 1, the typical employee spent much more time

engaged in informal than in formal training during a 6-month period in 1995 (31.1

hours and 13.4 hours, respectively). According to the SBA survey, newly hired

workers averaged considerably more time in informal than in formal training as well.

By Firm Size. Smaller businesses offer much less formal training than larger

businesses. On average, incumbent workers at establishments with 50-99 employees

were engaged in formal training one-half as long as employees of establishments with

31

Barron, Berger and Black, On-The-Job Training. Note: A nationally representative sample

of both small and large establishments were surveyed.

CRS-10

at least 500 employees. (See Table 1.) Smaller firms also spent one-third as much

per employee as firms with at least 500 employees in 1994 on such direct costs of

formal training as the wages and salaries of in-house trainers, payments to outside

trainers, tuition reimbursements and contributions to outside training funds.32

In contrast, smaller firms especially utilize informal training. At employers with

50-99 workers, employees reported that they averaged 31.9 hours of informal training

in May-October 1995, or almost 4 times the amount of formal training. (See Table

1.) At establishments with 100-499 employees, the 34.5 hours of informal training

per employee was little more than 2½ times the amount of formal training. And, at

companies with 500 or more employees, the 26.0 hours of informal training was an

even smaller multiple of formal training.

As shown in Table 1, informal training accounted for about two-thirds ($24.2

billion) of employers’ spending on the wages and salaries of participants in both

formal and informal training ($37.1 billion) during a 6-month period in 1995. While

smaller firms’ expenditures for both informal and formal training were less than those

of larger firms, the gap was widest for formal training. This again indicates the

considerable use of informal training among smaller firms.

The Distribution of Training

The surveys from which the following findings were derived differ in a number

of respects, and for that reason among others, their results sometimes disagree.

Different populations are surveyed (e.g., employers as opposed to employees, all

establishments versus only those with at least 50 employees or a nationally

representative sample in contrast to one that disproportionately includes low-wage

firms or is confined to young adults). Questions are phrased in varying ways (e.g.,

how long does it typically take an employee to become fully trained and qualified for

a particular job versus the length of training that an employee actually engaged in).

And, the time period referred to differs (e.g., training undertaken while at the current

employer or within the first 3 months on the job). Nonetheless, there are several

points on which the empirical literature agree.

Who Provides Training?

It is well-established that larger firms more often provide training, particularly

formal training, than smaller firms.33 The positive relationship between formal training

32

33

BLS, BLS Reports on the Amount of Employer-Provided Formal Training.

According to a 1993 BLS survey of formal training of private nonfarm establishments, for

example, just 69% of the smallest companies (i.e., 0-49 employees) provided formal training

compared to 98% of firms with 50-249 employees and 99% of firms with at least 250

employees. The EQW survey includes incidence data for both formal and informal training:

on average, 81% of private for-profit firms with 20 or more employees offered formal training

in 1994, while the same was true for just 75% of firms with 20-49 employees; the gap in

(continued...)

CRS-11

and firm size, even after other variables are taken into account, may be due to larger

companies’ enjoying economies of scale. Put another way, up-front expenses could

be less of a barrier to training for larger firms because they have more employees

across which to spread those costs that are little changed as the number of trainees

increases (e.g., the cost of course development or the salary of an in-house

instructor). Perhaps for the same reason, small employers that are part of multiestablishment firms are more likely to provide formal training. That is to say, multiestablishment businesses could spread fixed training expenses over a large number of

plants/offices and thereby keep down their smaller locations’ human capital costs.

Another interpretation of the direct relationship between training and firm size is that

smaller firms may be more fearful of employees being hired away by competitors.

Moreover, the production losses incurred when an employee participates in a formal

training program held off-site may be greater at smaller firms.34 Similarly, larger firms

may find it easier to free-up co-workers to informally train others without

experiencing substantial output losses.35

Firms that experience comparatively high employee turnover tend to less often

sponsor training. Training also is diminished at companies that are more sensitive to

downturns in the business cycle or that are in areas with persistently high

unemployment. A potential explanation for the inverse relationship between training

and these three variables — employee turnover, volatile product demand and high

unemployment — is that employers are reluctant to invest in employees when they

know chances are great that the worker will be laid off or quit before the cost of their

investment can be recouped.36

In contrast, industries that experience rapid technological change are more likely

to provide formal on-the-job training to their incumbent workers generally and to do

so for a larger share of their employees. By implication, technological change may

make knowledge and skills obsolete thereby promoting greater company training. But,

because the training gap between more and less educated is estimated to narrow at

firms experiencing rapid technological change, it appears that the general skills of

highly educated workers may enable them to adjust to new innovations with less

33

(...continued)

informal training is much narrower, with 97% of firms employing at least 20 employees

offering informal training versus 96% of firms with 20-49 employees. Frazis, Harley J.,

Diane E. Herz and Michael W. Horrigan. Employer-Provided Training: Results from a New

Survey. Monthly Labor Review, May 1995; and National Center on the Educational Quality

of the Workforce, First Findings from the EQW National Employer Survey.

34

Lynch, Lisa M., and Sandra E. Black. Beyond the Incidence of Employer-Provided

Training. Industrial and Labor Relations Review, v. 52, no. 1, October 1998. (Hereafter

cited as Lynch and Black, Beyond the Incidence of Employer-Provided Training.)

35

36

Barron, Berger and Black, On-The-Job Training.

Lillard, Lee A., and Hong W. Tan. Private Sector Training: Who Gets It and What Are Its

Effects? Research in Labor Economics, v. 13, 1992. (Hereafter cited as Lillard and Tan,

Private Sector Training: Who Gets It and What Are Its Effects?)

CRS-12

additional training than is needed by workers with fewer years of schooling.37 Other

organizational transformations have been found to have similar effects on employerprovided training. For example, firms that have implemented innovative workplace

practices (e.g., requiring employees to exercise responsibility for quality control or for

problem solving) not only exhibit a greater probability of offering formal training but

also are more likely to train a greater share of their workforces. The same findings

hold, all else being equal, for businesses that are relatively capital-intensive and have

comparatively well-educated workforces. Employer-supported training thus seems

to complement rather than substitute for investments in physical and human capital,

which suggests that concerns about businesses replacing high-skilled workers with

new technologies or low-skilled workers may not be well-founded.38

Companies that try to actively maintain a long-term relationship with their

employees appear to sponsor more training as well. According to one empirical

analysis, the hours of formal training are greater at establishments that offer more

benefits (e.g., employee assistance plans, employer-financed child care, health

insurance, pensions or paid family leave) and that have more innovative workplace

practices (e.g., pay for knowledge, job redesign or rotation, quality circles, or

teams).39 Another study similarly found that off-the-job training is more likely at firms

that feel it is important to help improve the well-being of their employees’ personal

and family lives (e.g., through the provision of family friendly benefits) and that have

instituted innovations characteristic of “high-performance workplaces” (e.g., quality

circles or total quality management).40 In contrast, various studies have come to

different conclusions about the effect of unionization on employer-provided training.41

Who Gets Trained?

Educational attainment is a significant determinant of who gets trained, even

after holding other variables constant. The probability of formal training receipt

increases with years of schooling, that is to say, education and training are

complements rather than substitutes for one another. Because individuals who enter

the labor force with relatively limited education thus face little prospect of additional

37

Bartel, Ann P., and Machum Sicherman. Technological Change and the Skill Acquisition

of Young Workers. Journal of Labor Economics, v. 16, no. 4, 1998.

38

Lynch and Black, Beyond the Incidence of Employer-Provided Training.

39

Frazis, Harley, Maury Gittleman and Mary Joyce. Correlates of Training: An Analysis

Using Both Employer and Employee Characteristics. Industrial and Labor Relations Review,

v. 53, no. 3, April 2000. (Hereafter cited as Frazis, Gittleman and Joyce, Correlates of

Training.)

40

Osterman, Skill, Training and Work Organization. Note: The positive relationship between

organizational change and the incidence of formal training also is demonstrated in research

that utilizes a survey of individuals rather than of firms. Leigh, Duane E., and Kirk D.

Gifford. Workplace Transformation and Worker Upskilling: The Perspective of Individual

Workers. Industrial Relations, v. 38, no. 2, April 1994.

41

See, for example, Frazis, Gittleman and Joyce. Correlates of Training; and Lynch and

Black, Beyond the Incidence of Employer-Provided Training.

CRS-13

structured learning once employed, company training effectively widens the skills gap

between less and more educated workers.42

Some demographic features tend to depress the chance of training receipt. All

else being equal, the probability of non-white males obtaining training was estimated

to be significantly lower than that of other males. Racial differences in the incidence

of training appear to be less evident among younger than older men. The effect of

race on training is not apparent among women or among low-income workers,

according to one analysis. It also concluded that economically disadvantaged workers

(regardless of race) are less likely to get post-school training.43

Studies have come to mixed conclusions about the impact of gender on training

receipt, in part because they have measured different things (e.g., the intensity as

opposed to the incidence of training) or have disaggregated the data in different ways

(e.g., all women as opposed to women by race or marital status). Although some

studies estimate that men and women spend about the same amount of time in

training, one determined that women were more likely to fill positions that require less

training.44 The latter finding may result from differences in job turnover by sex (a

reflection of the weaker attachment to the labor market of women generally and of

married women especially) or from discrimination.45 While there may or may not be

much of a gender gap in the overall incidence of training, the sources of training do

seem to vary by sex even after controlling for other variables: young men are more

likely to participate in company training and in apprenticeships and young women in

off-site or off-the-job training (e.g., vocational schools or seminars outside of work).46

Agreement is widespread in the economic literature that the probability of

training receipt rises with employee tenure. Consequently, those employees who

accumulate little tenure with a firm because they change jobs often or enter/exit the

labor force frequently are less likely to be offered training. At some point in the

seniority or age spectrum, however, training tapers off. This probably is, in part,

because the payoff period for the firm’s investment shortens.

There are several reasons why firms might want to delay offering training to

recently hired workers, although doing so means that they forgo the return to training

that would have occurred during the early part of the employment period. Employers

might put off the training of new-hires because they are uncertain at the outset of the

employment relationship about the likelihood of employees’ leaving before the

42

Lynch and Black, Beyond the Incidence of Employer-Provided Training.

43

Lillard and Tan, Private Sector Training: Who Gets It and What Are Its Effects?

44

Veum, Jonathan R. Gender and Race Differences in Company Training. Industrial

Relations, v. 35, no. 1, January 1996; and Barron, John M. with Dan A. Black, and Mark A.

Loewenstein. Gender Differences in Training, Capital and Wages. The Journal of Human

Resources, v. 28, no. 2, spring 1993.

45

Royalty, Anne Beeson. The Effects of Job Turnover on the Training of Men and Women.

Industrial and Labor Relations Review, v. 49, no. 3, April 1996.

46

Veum, Jonathan R. Training Among Young Adults: Who, What Kind, and For How Long?

Monthly Labor Review, August 1993.

CRS-14

companies’ investment can be recouped. Alternatively, employers might postpone

training beyond the first year of employment if they think individuals are better able

to learn after they have become acclimated to their job and to the work environment.

Companies also might delay training until they determine who are the likely candidates

for promotion and then concentrate their investments on them. Regardless of the

reason, training apparently is not limited to recently hired workers; instead, it is an

ongoing process provided to employees throughout much of their tenure at a firm.47

The Impact of Training

Workers undertake training to raise their earnings and improve their job security

over otherwise comparable individuals. For their part, employers invest in training to

increase labor productivity and to decrease costly employee turnover.

Returns to Employees

Earnings and Earnings Growth. Empirical studies unanimously confirm a

major tenet of human capital theory, which is that training plays an important role in

wage determination.48 Trained workers earn higher wages and their wages rise more

rapidly than those of comparable employees, according to numerous nonexperimental

analyses.49

The timing and size of the payoff to training could vary with the kind of training.

Specific training — defined as the development of skills that enhance the productivity

of a worker only at the firm that offers it — likely provides a fairly immediate return

to the worker. (Examples of specific human capital are knowledge of the personnel

policies or organization of work processes at a particular employer.) General

training — defined as the development of skills that enhance the productivity of a

worker at many employers — may provide a somewhat delayed return. (Examples

of general human capital are the knowledge of computer software or automotive

repair.) General skills development also may have a larger payoff because of its

greater portability across firms. In other words, employers presumably are able to

pay smaller wage premiums to retain employees who have had specific training

47

Loewenstein, Mark A., and James R. Spletzer. Delayed Formal On-The-Job Training.

Industrial and Labor Relations Review, v. 51, no. 1, October 1997.

48

See, for example, Altonji, Joseph G., and James R. Spletzer. Worker Characteristics, Job

Characteristics, and the Receipt of On-The-Job Training. Industrial and Labor Relations

Review, v. 45, no. 1, October 1991; Lynch, Lisa M. Private-Sector Training and the Earnings

of Young Workers. American Economic Review, v. 82, no. 1, March 1992; and Mincer,

Studies in Human Capital.

49

Employees may not be randomly selected for training, in which case trainees could have had

higher wages or greater productivity than non-trainees even without training. To avoid

overstating the impact of training per se, the studies discussed above identify those factors

available in the particular database being used that are known to effect the chance of being

trained (e.g., education level or firm size) and control for them when estimating the return to

training for employees and employers.

CRS-15

because their skills would not be equally valued and therefore equally rewarded by

other employers.50

Consequently, some studies have analyzed the impact on earnings and earnings

growth of different kinds of formal training. But, very few surveys explicitly inquire

whether training is specific or general. They instead may ask about the source of the

training, with some sources (e.g., the company) thought to offer training with greater

specific content than others (e.g., vocational-technical school). Their results,

discussed below, are sometimes contradictory or inconclusive.

One analysis found that participation in formal company training and attendance

at off-the-job seminars, which may impart specific or general skills, were positively

related to wage levels.51 Participation in company training improved the wage growth

of men and women. Attendance at seminars did so for men only. The rate of earnings

gains also was estimated to be directly related to the length of vocational-technical

training but unrelated to its incidence. This suggests that, in the case of vocational

training, what is important to producing a return on investment is not just

participating in the program but actually completing it. Notably, proprietary

institutions other than vocational-technical schools (e.g., correspondence courses and

business schools) did not appear to raise workers’ earnings growth, at least not within

the 4-year period under study.52

Not only was formal company training estimated to have a significant positive

impact on earnings growth in another study, but so too were apprenticeships and

correspondence schools. In addition, business and vocational-technical school

training as well as apprenticeships appear to have a delayed impact on earnings gains.

These findings seemingly contradict those described in the preceding paragraph,

perhaps because the reference period of research must be longer to pick up the wage

effects from certain training sources. Company training, in contrast, seems to have

a more immediate impact on wage growth but the impact lessens over time. Company

training includes formal programs staffed in-house, vendor training held at the

worksite but run by an outside training provider and outside seminars that employees

leave the worksite to attend. Of the three, only vendor training was found to have no

influence on wage growth.53

Interestingly, the wage effect of training appears to be larger if employers pay

for their employees’ school-based training than if the employees pay for it

50

Becker, Human Capital: A Theoretical and Empirical Analysis.

51

Off-the-job training includes business school, nursing programs, vocational-technical

institutes, barber and beauty schools, flight school, correspondence courses, seminars or

training programs outside of work, vocational rehabilitation centers and other.

52

Veum, Jonathan R. Sources of Training and Their Impact on Wages. Industrial and Labor

Relations Review, v. 48, no. 4, July 1995.

53

Lengerman, Paul Adrian. The Benefits and Costs of Training: A Comparison of Formal

Company Training, Vendor Training, Outside Seminars, and School Based Training. Human

Resource Management, fall 1996, v. 35, no. 3. (Hereafter cited as Lengerman, The Benefits

and Costs of Training.)

CRS-16

themselves.54 One interpretation of this finding is that companies are better than

workers at choosing training that provides skills which are most job-relevant. If so,

government subsidies to promote incumbent worker training may be more effective

at raising employees’ earnings if they are offered to firms rather than to individuals

through, for example, vouchers. But, an alternative explanation of the smaller wage

effect for employee-financed school-based training is that individuals may elect to

acquire skills that improve their career mobility in the future rather than skills that

immediately raise wages on their current jobs.55

Another analysis also found that workers who undertook either formal company

or off-the-job training had higher wages than workers who did not. The return was

greater for company training, and particularly for completed programs. It did not

seem to matter whether the company training took place while the worker was at the

prior or current employer. This result suggests that company training may not be

synonymous with the development of specific skills. Rather, company training

appears to impart skills that are valued equally regardless of who is the employer.56

Other researchers similarly have concluded that, because current employers reward

employees for skills they acquired while at previous firms, the skills largely are

general and are recognized as such by other employers.57

Employment Stability. Here too the issues are not only whether training

benefits workers through reduced unemployment but also whether certain kinds of

training are more effective than others at enabling workers to find and keep jobs.

Studies have most often examined training’s effect on wages, with much less analysis

of training’s impact on job stability or on the other outcome variables discussed

shortly in this report.

According to one study that looked only at young men, training is associated

with a reduced likelihood of unemployment and this effect may continue for 12 years.

Of the sources of training, the impact of company training on the incidence of

unemployment was the most enduring at almost 13 years. Training provided by

business or technical schools was not found to significantly inhibit unemployment. Of

54

In addition to Lengerman, The Benefits and Costs of Training, other studies that make the

same point are Bowers, Norman, and Paul Swaim. Recent Trends in Job Training.

Contemporary Economic Policy, v. 12, January 1994; Grubb, Norton. The Varied Economic

Returns to Postsecondary Education: New Evidence from the National Longitudinal Study of

the Class of 1972. Journal of Human Resources, v. 28, no. 2, spring 1993; and Loewenstein,

Mark A. and James R. Spletzer. Dividing the Costs and Returns to General Training.

Journal of Labor Economics, v. 16, no. 1, January 1998.

55

Lynch, Lisa M. Private-Sector Training and the Earnings of Young Workers. American

Economic Review, March 1992.

56

Parent, Daniel. Wages and Mobility: The Impact of Employer-Provided Training. Journal

of Labor Economics, v. 17, no. 2, 1999. (Hereafter cited as Parent, Wages and Mobility: The

Impact of Employer-Provided Training.)

57

Loewenstein, Mark A., and James R. Spletzer. General and Specific Training. Journal of

Human Resources, v. 34, no. 4, fall 1999. (Hereafter cited as Loewenstein and Spletzer,

General and Specific Training.) and Veum, Jonathan. Training, Wages and the Human

Capital Model. Southern Economic Journal, v. 65, no. 3, 1999.

CRS-17

the types of training, professional/technical training most reduced the probability of

unemployment but its impact lasted less than 12 years. In contrast, the positive

impact of semiskilled manual training on employment stability was determined to

persist for 12.2 years. And, managerial training did not significantly effect the

likelihood of unemployment.58

Returns to Employers

Productivity. The effect of training on labor productivity has been particularly

difficult to empirically ascertain because surveys of individuals that include training

questions do not also include questions about employers’ economic performance.

The dearth of information has led researchers to rely on a very few employer surveys

or to use subjective measures of productivity.

One study of manufacturers found those that implemented new formal training

programs after 1983 experienced significant productivity increases during the 19831986 period. However, the extremely low response rate of surveyed establishments

tempers the reliability of the analysis.59

Another employer-based study that used as a training variable the number of

workers involved in training in 1990 and 1993 did not find a significant impact on

productivity. But, the training variable itself probably contributed to the result as it

did not capture the accumulated training of all workers. In contrast, the study also

determined that the proportion of time spent in off-the-job training was directly

related to productivity in manufacturing establishments. The researchers suggest this

positive effect results from lower output losses because the training occurred outside

work hours or from the advanced nature of this type of training. In the

nonmanufacturing sector, computer skills development was found to have a positive

effect on productivity. Perhaps, then, the productivity effect at some establishments

is due more to the content than to the incidence of training.60

Still other employer-based studies utilized a firm’s subjective rating of its

employees’ productivity. The time spent in formal and informal training was

estimated to be positively related to productivity growth.61 In addition, formal and

informal company training received from a previous employer were found to increase

productivity. Off-the-job training seems to generate even more substantial, longer

lasting productivity gains for the worker’s subsequent employers.62

58

Lillard and Tan, Private Sector Training: Who Gets It and What Are Its Effects?

59

Bartel, Ann P. Productivity Gains from the Implementation of Employee Training

Programs. Industrial Relations, v. 33, no. 4, October 1994.

60

Black, Sandra E., and Lisa M. Lynch. Human-Capital Investments and Productivity.

American Economic Review, v. 86, no. 2, May 1996, Papers and Proceedings of the 108th

Annual Meeting of the American Economic Association.

61

Holzer, Harry J. The Determinants of Employee Productivity and Earnings. Industrial

Relations, v. 29, no. 3, fall 1990; and Barron, Berger and Black, On-The-Job Training.

62

Bishop, John H., The Impact of Previous Training on Productivity and Wages in Lynch,

(continued...)

CRS-18

Employee Turnover. In theory, an investment in specific human capital binds

workers to the firm that makes the investment. Expressed differently, training that is

very tailored to the needs of a given firm is expected to discourage quits or layoffs

that end the mutually beneficial relationship (i.e., employees are paid higher wages and

experience greater wage growth than they could get elsewhere because the training

is not portable and employers enjoy productivity gains that exceed the worker’s

wage). An investment in general human capital, in contrast, is not expected to affect

worker mobility because the transferability of general skills means that workers are

equally productive — and therefore can command the same wage levels and wage

growth — at any firm.

As anticipated, employer-provided training reduces the probability of employee

separations.63 While this finding supports the idea that company training is specific,

another study estimated the negative effect of employer-provided training on

employee turnover is quite small. The magnitude of the mobility effect, in addition

to the economists’ finding that current employers reward employees for training

received while at prior employers, led them to surmise that much employer-provided

is general.64

In an analysis of workplace education programs, it was found that firms which

offered general training in basic skills were more likely to report improved employee

retention. Rather than raising turnover as workers with readily portable skills leave

for or are poached by other companies, this research suggests that the acquisition of

general skills may actually lower separations.65

Some Policy Implications

Summarizing the findings on the impact of training, employer-supported training

benefits:

!

!

!

trainees through higher wages,

training firms through higher productivity, and

third parties who, in this case, are firms that hire employees with

prior general training.

The existence of positive externalities — benefits that spillover beyond the parties

immediately involved in an activity — imply that firms may not be offering an optimal

quantity of training. In deciding how much training to offer incumbent workers,

employers consider the costs and benefits of training to them. That is to say, they do

62

(...continued)

Lisa M. (ed.) Training and the Private Sector: International Comparisons. IL, The

University of Chicago Press, 1994. (Hereafter cited as Bishop, The Impact of Previous

Training on Productivity and Wages.)

63

Mincer, Studies in Human Capital; and Parent, Wages and Mobility: The Impact of

Employer-Provided Training.

64

Loewenstein and Spletzer, General and Specific Training.

65

Bassi, Smart Workers, Smart Work.

CRS-19

not take into account the positive or negative impact of their decision on others. To

the degree that having a skilled workforce confers benefits that exceed the private

return to the training firm, employers will not offer the optimal amount of training

(i.e., training is said to be underprovided). The market’s seeming failure to provide

a socially optimal level of training is a rationale for government involvement in

employer-sponsored training.

There is additional evidence which suggests that training not only generates

benefits for other firms but also for society at large. As previously discussed,

individuals with relatively more training have higher earnings and greater job security.

Consequently, they are more likely to pay higher taxes and less likely to utilize

government services (e.g., unemployment insurance or cash welfare and health

benefits). As it thus seems that employer-supported training does produce third-party

externalities and the market fails to offer it at a socially optimal level, “modest

governmental efforts to stimulate general OJT [on-the-job] and employer-sponsored

formal off-the-job training would appear to be in order.”66 (See the final section of

this report for further elaboration on this point.)

Although employer-sponsored education and training has been found to benefit

both employees and employers, the research results demonstrate that very little is

known about which kinds of training (e.g., formal versus informal training or formal

on-the-job versus off-the-job training) are most effective for employees and firms

overall, or for different kinds of employees (e.g., minorities or low-wage workers) and

firms (e.g., small employers). Accordingly, policymakers seeking to stimulate

incumbent worker training may not want to be too prescriptive about its content,

delivery mode or target population.

For equity (i.e., distributional) reasons, however, Congress may want to focus

training resources on less educated employees whose relative disadvantage upon

entering the labor force is exacerbated by the current pattern of employer-provided

formal training. Indeed, demonstration programs under WIA (or its predecessor, the

Job Training Partnership Act) and under ACWIA that focus on dislocated worker,

incumbent worker or skills shortages training sometimes have targeted groups that

historically have needed assistance in overcoming employment barriers (e.g.,

minorities, disabled and low-skilled workers) and they have included a mixture of

basic employability and occupation- or industry-related skills development.67

However, a federal subsidy targeted at less-educated or otherwise disadvantaged

workers may not induce additional training. Instead, it may prompt companies to

substitute formal for informal training of these groups. This could be the outcome of

a broad-based training incentive as well. The result of a training subsidy or mandate

66

67

Bishop, The Impact of Previous Training on Productivity and Wages, p. 194.

See, for example, the Employment and Training Administration’s press release on H-1B

technical skills training grants at: [http://www.wdsc.org/sga/awards/99-019finalsum.htm].

CRS-20

thus may be to raise expenditures on formal training, lower the amount of informal

training and leave employees’ earnings unchanged.68

This discussion assumes that policymakers would be interested in subsidizing

only formal training because of the difficulty in measuring expenditures on informal

training (i.e., distinguishing it from normal work and supervision). This assumption

is borne out by a statement in solicitations for grant applications for dislocated or

incumbent worker training demonstrations that expressly prohibits the use of federal

funds to pay participants’ salaries. While trainees’ salaries are indirect costs of both

formal and informal training, they are likely to account for more of the expenditures

on informal training which does not entail certain expenses associated with formal

training (e.g., payments to outside training providers for curriculum development and

instruction; tuition reimbursement; transportation, lodging or meals; and purchase or

maintenance of equipment and classroom space). By putting off-limits the salaries of

employees engaged in training, the language in the grant solicitation favors the

provision of formal over informal training.

As previously mentioned, however, it is not known whether the payoff to formal

training is greater than to informal training. And, it is possible that certain types of

skills may be less costly to learn (i.e., more efficiently provided) through informal

means. Consequently, the availability of a formal training subsidy may reduce the

efficiency of human capital production by encouraging the use of more expensive

methods. Further, since smaller firms are more likely than larger firms to train

informally, “a subsidy of formal training programs ... is an implicit decision to

subsidize larger firms.”69 Perhaps to compensate for this bias, the Labor Department

in one instance geared a portion of incumbent worker demonstration grants to assist

in the training of employees of small and medium-sized companies (i.e., those with

500 or fewer employees).70

Is Employer-Supported Training Underprovided?

The question of whether there is a training deficit among incumbent workers

actually is concerned with whether companies are providing the optimal level of

general training.71 Firms find it more attractive to provide specific than general

68

Barron, Berger and Black, On-The-Job Training; and Bishop, John H. What We Know

About Employer-Provided Training: A Review of the Literature. Center for Advanced

Human Resources Studies Working Paper 96-09. NY, Cornell University, School of

Industrial and Labor Relations, July 1996. (Hereafter cited as Bishop, What We Know About

Employer-Provided Training.)

69

Barron, Berger and Black, On-The-Job Training, p. 114.

70

U.S. Department of Labor. Employment and Training Administration. Job Training

Partnership, Title III, Demonstration Program: Incumbent Worker Demonstration Program.

Federal Register, v. 63, no. 240, December 15, 1998, p. 69103-69116. Information on

awards is available at: [http://www.wdsc.org/sga/awards/99-002award.htm].

71

See pages 14 and 18 for a discussion of this and other concepts that are used in this section

(continued...)

CRS-21

training because the former does not impart portable skills (i.e., skills that are useful

throughout the labor market). Put another way, firms are willing to share with their

employees in the costs of specific skills development because they are fairly sure of

benefitting from it: as specific skills raise productivity only at the training firm,

employees earn higher wages than they would be able to command elsewhere; specific

training consequently reduces employee turnover and allows the firm to recoup its

training expenses by paying wages that are less than the workers’ productivity in the

post-training period. In contrast, employers are unwilling to share in the costs of

general skills development: as general skills are equally useful to many companies,

the training firm must pay employees wages equal to their productivity in the posttraining period; if the training firm fails to give employees the entire return to training,

they will leave for firms that will pay them a wage commensurate with their

transferable skills. Thus, businesses do not have an incentive to pay for general

training while incumbent workers do.72

The human capital model predicts that employees will pay the full cost of general

training by borrowing money, earning a lower wage during training periods or

accepting a lower starting wage for jobs that offer general training. If these things

occur, there theoretically should not be underinvestment in training. However,

employees cannot readily borrow funds to pay for general training and employees

could be reluctant to self-finance training because they are uncertain of its rewards.73

So, if incumbent workers actually had to pay the full cost of general training,

underinvestment would be likely. Further, employers may not be able to pay workers

a lower wage conditioned on training receipt because of such things as minimum wage

legislation, collective bargaining agreements or competition from other firms.74

Indeed, there is empirical evidence which suggests that the starting wages of workers

who receive training are not depressed (or barely so) and that post-training wage

growth is smaller than productivity improvements.75 In addition, there are abundant

examples of companies that do not reduce their employees’ wages while paying the

expenses associated with participation in literacy programs, problem-solving classes

or other general skills instruction. All of this implies that — contrary to standard

training theory which is predicated on a perfectly competitive labor market76 —

71

(...continued)

of the report.

72

Becker, Human Capital: A Theoretical and Empirical Analysis.

73

Ritzen, Jozef M.M. Failure for General Training, and Remedies, in: Stern, David, and

M.M. Jozef Ritzen (eds.) Market Failure in Training? Germany, Springer-Vergal, 1991.

(Hereafter cited as Stern and Ritzen, Market Failure in Training?)

74

Bishop, What We Know About Employer-Provided Training.

75

Barron, Berger and Black, On-The-Job Training; and Bishop, John H. On-The-Job

Training of New Hires in Stern; and Ritzen, Market Failure in Training?.

76

In a perfectly competitive labor market, its numerous firms are wage-takers (i.e., they do

not have control over the employee’s wage). “The market” (i.e., firms collectively) determines

the wage, which is equal to the marginal product of labor. Alternatively, in a non-competitive

labor market characterized by one or a few firms, employers are not wage-takers. Rather than

the market determining the wage, these monopsonistic firms have power over the wage and

(continued...)

CRS-22

employers pay a large share of the costs and garner a large part of the returns to

training.77

It has been suggested that imperfections in the labor market enable firms to reap

some benefit from and therefore to pay toward general training as they do toward

specific training. For example, a firm may be able to offer employees with

transferable skills a below-market wage in the post-training period and still retain

them because other businesses are unwilling to equally reward new-hires for skills

whose quantity and content they cannot accurately judge. The fact that employerprovided skill development typically is not accredited permits training firms to gain

from this asymmetry of information in the labor market. Further, the termination of

an employment relationship is not costless either to the employee who must search for

another job or to the employer who must hire a replacement. The presence of search

and hiring costs thus may serve to temper employee turnover. Moreover, general

skills may complement specific skills so employers are willing to provide instruction

in the former to enhance the value of the latter to the firm.78 In addition, each worker

may have a bundle of general skills — in effect, a firm-specific skill mix — that is

more useful to the current employer than to other employers and thereby reduces

worker mobility.79

But, if employees do not foot the complete bill for general skills development

and employers instead share in its cost, the likely outcome — given the possibility of

employee turnover — is underprovision of general training. When deciding how

much general training to offer incumbent workers, a profit-maximizing firm will

compare its current costs for employee training with its future productivity gains. The

training firm will not factor into its decision any benefits that might accrue to

subsequent employers, to the employees who change employers or to society-at-large.

But, as demonstrated by the research previously reviewed, employees who change

companies do benefit through higher wages from the training acquired while at

previous firms and similarly, companies do benefit through higher productivity from

those employees who received training while at previous firms. The presence of these

spillover effects, which training firms do not consider, means that employers likely err

on the side of offering too little general skills training.80

76

(...continued)

are able to set it at less than the marginal product of labor (i.e., at less than the wage that

would prevail in a competitive labor market).

77

Acemoglu, Daron, and Jorn-Steffen Pischke. Beyond Becker: Training in Imperfect Labor

Markets, The Economic Journal, v. 109, February 1999. (Hereafter cited as Acemoglu and

Pischke, Beyond Becker: Training in Imperfect Labor Markets.)

78

Acemoglu and Pischke, Beyond Becker: Training in Imperfect Labor Markets.

79

Bishop, What We Know About Employer-Provided Training.

80

An alternative way to determine whether employer-provided training is underprovided is to

compare its rate of return to that of other investments (e.g., in education or in physical capita).

There is a dearth of high-quality data from which to develop the rate of return to employersponsored training, however.

CRS-23

This suggests that there is a role for the federal government to play in employersponsored training. In light of the limited information available on what works and

what doesn’t and on how much total (formal and informal) training currently is being

provided to employees, the government may want to tread warily into this new venue

for its limited training resources. The possibility that firms could substitute federal

monies for their own resources or substitute formal for informal training rather than

increase the total quantity of incumbent worker training also implies the need for

caution. And, while the historically low unemployment rate in recent years may have

contributed to policymakers’ new focus on skill development for individuals who

already have jobs, incumbent workers are virtually guaranteed some degree of training

from their employers. In contrast, unemployed persons have only their own

presumably scanty resources and, traditionally, federal training funds to draw upon

to learn new or upgrade existing skills.

Up to this point, it appears that Congress has cautiously ventured into the area

of employer-provided training. In the case of WIA, the incumbent worker training

initiatives are small-scale demonstrations and the grant solicitations explicitly state

that federal funds should not to be used for training that employers otherwise are

capable of undertaking or that would have been provided in the absence of the grant.

While there is no matching requirement for WIA funds going toward incumbent

worker training, ACWIA does include such a requirement which mitigates the total

replacement of company resources with government resources on a given project.

Between the two funding sources, less than $80 million likely will have been

committed to incumbent worker training through 2000.81 In addition, the requirement

that incumbent worker projects involving WIA or ACWIA funds are to be evaluated

hopefully will inform any further legislative proposals in this policy area (e.g., the

request for a new incumbent worker program in the FY2001 budget). The recency

of many of the awards involving employer-provided training makes it unlikely that

evaluations will become available shortly, however.82

81

Grants totaling $33.1 million were awarded in 1999 and 2000 under Title III of the Job

Training Partnership Act (WIA’s predecessor) and under ACWIA for the training of

incumbent or unemployed workers ($20.7 million and $12.4 million, respectively). Grant

solicitations issued in March 2000 are expected to result in awards totaling $47.2 million for

the training of incumbent or unemployed workers ($7.2 million and $40 million, respectively).

82

In April 2000 a request for proposals was issued to evaluate the program year 1998

incumbent worker demonstration program under Title III of the Job Training Partnership Act.