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February 06, 2017

Do/can firms benefit from training apprentices?

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Apprenticeships offer workers the chance to learn valuable occupational skills. Apprentices earn salaries, receive instruction in relevant concepts, contribute to production, and attain occupational qualifications. For many workers, apprenticeships are far more cost-effective in entering a rewarding career than a pure classroom approach. Employers pay the wages of apprentices, sometimes finance related courses, provide a setting for hands-on learning, and supply trainers to help apprentices achieve competence in the occupation. But, why should profit-seeking firms finance apprenticeships? Human capital theory has long held that firms will only finance firm-specific training; financing general training will be unprofitable because competition will force firms to raise wages in line with the worker’s added (general) productivity.

Why, then, do patterns of firm-based occupational training investments vary widely across countries? One common answer is tradition, that firms in countries like Germany and Switzerland see hiring apprentices as a social obligation. But another possibility, one favorable to expanding the role of apprenticeship across countries and industries, is that firms themselves can derive good returns to their investments in apprenticeship. The main reason is that the costs of apprentice wages, trainer salaries, and courses can be mostly or completely recouped during the apprenticeship itself. The apprentice typically contributes to production by undertaking some tasks that would be undertaken by unskilled workers and others by skilled workers. Add in savings on hiring and training costs, reduced turnover costs, improved matches between employer positions and skilled workers, and covering unexpected absences of skilled workers, then firms can gain substantially.

Researchers have estimated the costs and benefits experienced by large numbers of apprenticeship sponsors in several countries. One analysis of 1,825 German firms and 1,471 Swiss firms incorporated apprentice contributions in undertaking tasks normally undertaken by unskilled and skilled workers and the relative productivity of apprentices compared to regular workers. Swiss firms were able to recoup their apprenticeship investments during the apprenticeships while the typical German firm managed to do so by retaining a higher share of apprentices after the training. In both countries, apprentices advanced quickly to skilled tasks. In Switzerland, the productivity of apprentices rises from 37% of a skilled worker’s level in the first year to 75% in the third (final) year.

Other studies find significant returns to apprenticeship investments by German, Canadian, and English firms. Nearly 80% of more than 4,000 employers in England and Wales were satisfied with their apprenticeship program; three in four mentioned improved productivity as a primary benefit. Most highlighted product or service improvements, better staff retention, and the introduction of new ideas and innovations. Over 40% of employers reported that apprenticeships helped them win new business. In a 2016 study, 13 US businesses offering apprenticeships all concluded that the benefits of their investments well exceeded their costs. A quantitative analysis of Dartmouth-Hitchcock Health Services and Siemens USA uncovered strikingly high (40–50%) rates of return. Major gains emerged from reduced overtime and turnover and high capacity utilization.

Like all investments, firm-financed apprenticeships can be risky. But well-structured programs recoup most costs quickly and often can generate very high returns.

Related article:
Do firms benefit from apprenticeship investments, by Robert Lerman

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We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.