Who benefits from firm-sponsored training? Updated

Recent developments in the literature

There has lately been a renewed interest in studying the interactions between technological change and the likelihood that workers participate in training. Earlier work based on data from the National Longitudinal Survey of Youth (NLSY) from the 1990s established that production workers in manufacturing industries with higher rates of technological change were more likely to receive formal company training. More recent work using data from Germany paints a somewhat more nuanced picture. The authors find that workers in jobs more likely to be automated are less likely to participate in training, but that workers who do participate are able to move to jobs less likely to disappear because of automation [2].

As a plausible channel explaining this finding, a 2018 study reports that workers participating in training transition more frequently toward tasks less susceptible to be impacted by technological change (i.e. non-routine tasks) [3]. However, the author cannot rule out a competing explanation stating that the technological change directly impacts the menu of tasks a worker must do and that training then acts as an adaptation mechanism. Both possibilities underscore though the importance of training and the need for more research in this area.

Quantifying the potential benefits of firm-sponsored training

It can be helpful to think of firm-sponsored training as an investment in which workers and firms share both the costs as well as the benefits. Human capital theory predicts that training will have a positive impact on wages as long as it increases productivity. In view of this, economists have generally focused their attention on the returns to firm-sponsored training for workers in the form of higher wages. However, wage increases due to training may be lower than the accompanying increases in productivity in settings with perfect competition and firm-specific training, or when the wage structure of the firm is more compressed and inflexible [4]. The latter could be due to downward wage rigidity, asymmetric information, or higher labor adjustment costs due to more stringent employment protection legislation, for example. As such, focusing on productivity is likely to provide a better assessment of the real returns to firm-sponsored training.

Many studies have attempted to measure differences between the impacts of training on productivity as opposed to wages. Some have done so by using subjective measures of productivity, such as a supervisor assessment. Nevertheless, all of these studies consider the effects of training on productivity to be much higher than the effects on wages. This suggests that employers both pay more of the cost and reap most of the rewards of firm-sponsored training. One study confirms this result using Belgian data from 1997 to 2006 [5]. It finds that increasing the proportion of workers who receive training by 10 percentage points increases firm productivity by 1.7% to 3.2%; at the same time wages increase only from 1% to 1.7%. Therefore, firms appear to be the main beneficiary of the benefits of training when considering productivity rather than only focusing on wages.

The different types and methods of training

Firm-sponsored training can be classified into two types: classroom and on-the-job training. On-the-job training is informal and typically takes place during work hours at the workplace. Classroom training is more formal and can take place outside the workplace and outside regular working hours. Most studies have focused on formal classroom training only, which is quite problematic given how much training is informal in reality.

The methods of training delivery can differ considerably between and within the two types of training. The various methods can include: formal internal training; formal external training; seminars and talks; training on the job; job rotation (where the management of the firm moves individuals and groups of employees between two or more jobs in a structured way); quality circles (in which groups of employees meet regularly together in order to solve work-related issues and problems); and self-induced learning [6].

The subject areas of training can also vary, although very few studies have examined the benefits or returns to training at the subject level. The three most common subject areas for training are: (i) professional training; (ii) computer software training; and (iii) occupational health, safety, and environmental protection training [7]. Other common subject areas are managerial training, supervisory training, and sales and marketing training.

At a more theoretical level, it is useful to note that the distinction between classroom and on-the-job training is different from the one typically made by economists between general and specific training. General training can serve to increase worker productivity across many firms, in the sense that the skills are transferable and can be of benefit to other employers. Specific training, however, increases worker productivity only in one particular firm. When training is firm-specific, an increase in worker productivity does not necessarily lead to an increase in wages, as the skills acquired through training only benefit the worker’s current employer.

Measurement of firm-sponsored training also varies widely across studies. Most often, it is measured only by an indication of whether or not the worker received such training during the past year. Though some studies also include information regarding the duration of training (in days or hours) or regarding the money spent on training (i.e. direct expenses by the firm). At the firm level, a typical measure of human capital investment is the fraction of the workforce that received training during the past year, although more detailed measures on hours and costs can be aggregated at the firm level.

Effects of training on wages

The literature on the impact of training on wages is quite extensive and can be classified into three categories, which are differentiated by whether the measured outcome at the worker level is: (i) the worker’s hourly wage; (ii) wage growth at the worker level; or (iii) the workplace’s wage bill.

Regardless of the selected measurement outcome, it is difficult to measure the full extent of the effect of training on wages. First, there is the standard problem usually encountered in studies of this type, whereby certain characteristics are difficult to capture because they are not easily measurable (e.g. the innate “ability” of an employee). This can lead to an overstating, or an “upward bias,” in the estimated return to training. Second, the worker’s training history is rarely captured or observed in such studies. Omitting past training episodes that are correlated with current training and wages may also bias the estimated wage returns upward.

The most comprehensive study that considers the impact of firm-sponsored training on wages is a recent overview analysis of 71 sets of results from 38 studies [8]. The analysis shows an average wage increase of 2.6% for each occurrence of training. The authors note that returns vary by types of training and that differences in the research approach can partly explain the differences in estimates, as studies that consider potential bias in selecting the original sample obtain somewhat smaller returns.

The above study provides two additional conclusions [8]. First, that the returns to training are lower in firms outside the US. Second, that returns tend to be lower in more recent studies. The former finding is consistent with the view that firm wage structures are thought to be more compressed and less flexible in Europe than in the US due to higher binding minimum wages, monopsony power, or search costs, for example. The latter finding could be due to diminishing returns over time or, alternatively, as a result of using more sophisticated statistical techniques.

Effects of training on productivity

There are relatively few studies that measure the impact of training on worker productivity. This is perhaps due to the fact that there are correspondingly few data sets that contain information on both the firm’s productivity and its training practices. In addition, most of the early literature uses relatively small samples, which implies that the results are not necessarily representative.

Many subsequent studies do not take account of the fact that only workplaces that perceive positive net benefits for undertaking training will do so. Appropriate estimates of the impact of firm-sponsored training on productivity must take into consideration the fact that it is a firm-level decision which is influenced by factors that can be difficult to measure (e.g. management quality). The decision can also be influenced by factors that cannot be predicted (e.g. external changes in demand for the product or service). Such factors can in turn affect both productivity and training. For example, if good management is not accounted for and is linked to both higher training levels and better productivity, then the returns or benefits of firm-sponsored training will be lower than those estimated using simple estimation procedures. Returns could also be biased downward if firms conduct training programs during periods of weak demand for their products or services.

The solution to the above problems is to use firm-level or industry-level data gathered over a long period of time, which includes information on both training and productivity. This approach takes into account differences between firms and productivity “shocks” that may be related to training decisions. One such study from the UK finds a significant, positive effect of training on productivity: value added increases by 6% when the proportion of workers receiving training increases by 10 percentage points [9]. Another study from Germany finds that increasing the proportion of employees receiving training by 1% increases firm productivity by 0.76% [5].

However, neither of these studies distinguish between on-the-job and classroom training. Many studies find positive effects of general (classroom) training but no effect for specific (on-the-job) training. It is therefore important to not aggregate all types of training into one single measure.

Using “value added per worker” as a measure of productivity at the firm level, one study finds that employees who undertake classroom training are 3.4% more productive than untrained employees, whereas those who undertake on-the-job training are 1.6% more productive in terms of value added per worker [6]. The higher return to classroom training has two explanations. First, on-the-job training is more closely related to turnover and is best thought of as part of turnover cost. Second, some subject areas of training (e.g. professional training) are more amenable to classroom training than on-the-job training.

Is training a good investment for a firm?

Whereas the above-mentioned studies inform about the returns or benefits of training for workers and firms, they indicate nothing about whether firm-sponsored training is actually a worthwhile investment for the firm. It is impossible to determine if that is the case without simultaneously considering the costs of training.

One study investigates this by using a large panel data set of Portuguese firms from 1995 to 1999—effectively a census of firms with more than 100 employees—in order to determine an internal rate of return to the firm of its training investments [10]. The authors consider both the direct costs of training and its “opportunity cost” to the firm, which is the amount of time workers would have spent on production activities had they not been participating in training programs. The authors conclude that the internal rate of return is 8.6%, which is similar to other firm investments in physical capital or to formal schooling. This is understandable in the sense that it would be very surprising to find widely different results, as it would suggest that the firm could increase its return by switching from a poorly performing investment to a better one.

Another study able to precisely estimate the internal rate of returns to investments in training uses detailed worker and firm data from the garment district in India [11]. The authors find modest wage returns to the firm’s investment in soft-skills training—mostly communication—and a large productivity effect, implying important net returns for firms.

Which workers benefit most from training?

Empirical studies on what explains differences in the incidence of training are surprisingly consistent in their conclusions: workers who receive more firm-sponsored training are younger, more highly educated, and more likely to have an occupation as managers than those who do not receive such training. The reasons for these differences are unclear. The costs of training more highly educated workers could be lower, or alternatively the returns to training such workers may be higher. Whatever the case, the higher incidence of training for more highly educated workers is consistent with a greater return on the investment.

Lower returns on investment may also explain the lower incidence of training for older workers. However, it is also possible that older workers decline training because they have a lower time horizon in which to recoup their investment.

At the firm level, the most common finding is that smaller firms provide less training, particularly formal classroom training. However, even studies that consider informal on-the-job training find a lower incidence of training among small- and medium-sized firms. This result is typically explained by informational or credit constraints, in that smaller firms have fewer resources to use on research and information gathering about training programs. In addition, they have less access to credit in order to invest in training.

Some more recent studies examine how labor market institutions or sectors can affect training levels. One particular forthcoming study focuses on the gender training gap and finds that while women receive less training in the private sector, they are participating more in the non-profit sector. In fact, better training opportunities even explain in part the higher representation of women in that growing sector. Yet another forthcoming study finds that structures of employee representation and formalized human resource policies are positively associated with higher rates of training participation among low-skilled workers.

The link between training and innovation

Relatively few studies have investigated firm-sponsored training as a determinant of firm-level innovation performance. This paucity of studies is surprising, as there are numerous reasons to believe that training is essential to successful innovation.

Canadian data from 1999 to 2006 show that workplaces that offer training appear much more likely to innovate. The rates of innovation for workplaces that offer classroom training are on average twice as high as those of workplaces that do not. For example, 39% of workplaces that offered classroom training during this time frame introduced product innovation, whereas only 22% of workplaces that did not offer classroom training introduced such innovation. The comparison is even more striking for the introduction of new processes, that is, 31% versus 13%. The impact of on-the-job training seems to be just as strong (Figure 2).

One study argues that continuous training guarantees access to leading-edge knowledge and thus increases firm innovation [12]. The authors find that firm-sponsored training had a positive and statistically significant impact on innovation among German firms during the period 1997–2001. Their results show that a 10 percentage point increase in training intensity translates into a 10 percentage point higher propensity to innovate.

Distinguishing between routine innovation (that is, significant improvements to existing products or processes), and radical innovation (that is, the development of new products or processes), the authors find that training has an impact only on routine innovation. They hypothesize that radical innovation depends on the intrinsic abilities of the workforce—in terms of creativity, inventive talent, and the desire to work in teams, and so on. Moreover, because radical innovation can be perceived as fraught with risk, firms might favor training for routine innovation in order to keep abreast of technological progress.

A recent study distinguishes between classroom and on-the-job training and finds that both impact innovation performance in Canada [13]. Findings also show that the impact fades over time, underscoring the importance of continuous training investments to support innovation.

Different types of firm investment can be complementary

There is strong evidence that investments in certain types of physical capital, like information and communication technology (ICT), and simultaneous investments in human capital can be complementary. For example, ICT physical capital is complementary with cognitive and analytical tasks that require more training, in the sense that as ICT equipment becomes more advanced and sophisticated, more advanced training for employees is also required.

In this vein, one study examines three different measures of human capital: (i) the educational structure of a firm’s workforce; (ii) a firm’s occupational structure; (iii) and the use of workplace practices to increase a firm’s stock of human capital [14].

The third measure includes how important education is in hiring decisions, the proportion of workers who received training in the past year, and the importance of cross-training, whereby an employee is trained to fulfil another duty or function in a different part of the organization.

The authors find that both work organization and ICT capital stock per worker predict greater investments in human capital. Firms with high levels of ICT and work organization exhibit high levels of investments in human capital strategies, regardless of the existing amounts of human capital.