The returns to on-the-job training: are they the same for blacks and whites?

• Author: Sexton, Edwin A.

1. Introduction

   The trend in earnings differentials among demographic groups in general, and the status of black workers relative to white workers specifically, is a timely and ongoing topic of research. Nearly two decades of evidence suggests that while wage gains associated with increases in human capital acquisition by blacks were steady and sustained from post-World War II through the rapid progress of the 1960s, and even throughout most of the 1970s, the progress of those years slowed or ceased altogether in the 1980s.(1)

   Various explanations have been advanced in an attempt to explain the white/black wage gap and how it has changed over time. Some have focused on the important roles of education, literacy, and migration and have shown that the convergence in the earnings of blacks and whites can be largely attributed to the convergence in these human capital variables between the two groups.(2)

   Other studies have suggested that the important factor in explaining changes in the white/black wage gap has been anti-discrimination legislation such as Title VII of the Civil Rights Act of 1964 [17; 2; 5]. Recently, some have suggested that other factors, such as family background [10], educational achievement and quality [18; 20], and occupational shifts [3] are playing an increasingly important role in explaining white/black earnings differentials.

   In this paper, we contribute to the work previously done by focussing on the role that on-the-job training plays in explaining wage differentials among demographic groups and by investigating how shifts in the acquisition of training by different groups over time have impacted those differentials.(3) Specifically, we study the on-the-job training characteristics and wages of four race/sex demographic groups in 1976 and 1985: white males, black males, white females, and black females. The importance of on-the-job training on wage growth in general is demonstrated by Brown [6], and forms the basis for our hypothesis that such training models may be valuable in explaining wage differentials across demographic groups. Using a Brown-type model,(4) we confirm his fundamental finding that much of the tenure-related wage growth results from increased training. We are able to demonstrate this finding for all four race/sex groups in both 1976 and 1985.

   However, we also find significant training differences between blacks and whites. For example, blacks tend to have acquired less current training than whites. We also find differences in the impact that prior training has on earnings for the two groups. Previous training acquired by whites tends to increase earnings in their current jobs. However, we find that previous training acquired by blacks has no significant impact on their current earnings. Thus, blacks are unable to bring their previous training, or the higher earnings associated with that training, with them when they change positions. Previous training is non-portable in this manner for blacks even when the previous training was acquired at the black worker's current firm. Both lower black levels of current training and black non-portability of training help explain lower black wages. Further, we find little evidence of progress in these two areas in the decade from 1976 to 1985.

   In addition, we determine how much of the observed white/black wage differential can be attributed to training differentials and how the impact of these training differentials is changing over time. Most significantly, and especially for black men, we find that differences in human capital characteristics explain more of the white/black wage gap than do differences in the returns to those characteristics.

2. Data

   This study employs cross-sectional data from the Michigan Panel Study of Income Dynamics (PSID). Separate samples are drawn in both 1976 (Wave 9) and 1985 (Wave 18) for four specific groups: white males, black males, white females, and black females. Waves 9 and 18 of the PSID are used because on-the-job training data is available in these two years for these four race/sex groups. We choose to estimate wage equations separately for 1976 and 1985 rather than building longitudinal data sets for each race/sex group because one of the central purposes of this study is to investigate the impact of training on white/black wage differentials and how that impact has changed over time. This is best done by estimating separate year-specific wage equations. We recognize that others have demonstrated the advantage of using longitudinal data to control for heterogeneity bias [1; 6; 14]. We note, however, that our findings are similar to those obtained by other researchers who have controlled for heterogeneity bias using PSID data [6].

   Table I contains definitions for all variables included in the empirical work. These definitions are identical for both sample years and across the four race/sex groups. As indicated in Table I, in the interests of space we report on only the relevant variables in the empirical section. The samples used to estimate the wage equations which follow are limited to individuals who are 18 to 65 years of age and who are employed for wages or salaried in the nonagricultural and nonmilitary sectors.

   Definition of Training and Experience Variables

   Since we focus on training to explain existing white/black wage differentials and how they have changed over time, the derivation of the training variables is of primary importance. We generally follow previous researchers in our definitions of both the training and the experience variables in the PSID [6; 9]. For example, the PSID asks respondents the following question: "On a job like yours, how long would it take the average new person to become fully trained and qualified?" The worker's answer to this question equals the training required for their current position (TT). Total current training equals required training if the worker's experience in his current position (EXPJ) equals or exceeds his required training. Otherwise, total current training is assumed to equal the worker's experience in his current position.

   In addition to total current training (TOTALT), we also control for the job experience a worker has acquired since age 18. Job experience since age 18 is divided into three components: (1) job experience acquired in the worker's present position with his current firm (EXPJ), (2) job experience acquired in the worker's current firm prior to his present position (PEXPE), and (3) job experience acquired in previous firms (PEXP18) since age 18.

   According to traditional human capital theory, training is either general in nature (i.e., it increases the productivity of a worker at any firm), or firm-specific (i.e., it enhances productivity only at the current firm). The human capital assumption that training enhances productivity, combined with a traditional assumption of diminishing marginal returns on any investment, implies a quadratic relationship between current training received by a worker and that worker's wage. The square of total current training and the three experience variables are...