Training, wages and the human capital model.

• Author: Veum, Jonathan R.

1. Introduction

   Enhancing the skills of American workers through increased job training is often deemed necessary for the United States to compete in the global market. Yet, primarily because of a lack of data, there is little research into the role training plays in increasing the productivity and wages of workers. While there are a number of theories as to why wages increase over an individual's work life, a commonly accepted interpretation of this relationship is that wages increase over time due to investments in human capital, particularly investments in job training.

   The human capital model (Becker 1962; Mincer 1962) suggests that an individual's decision to invest in training is based on an examination of the net present value of the costs and benefits of such an investment. Individuals are assumed to invest in training during an initial period and receive returns to the investment in subsequent periods. Workers pay for training by receiving a wage while being trained that is lower than what could be received elsewhere. Since training is thought to make workers more productive, workers collect the returns from their investment in later periods through higher marginal products and higher wages.

   Human capital models usually decompose training into specific training, which increases productivity in only one firm, and general training, which increases productivity in more than one firm. Purely general training is financed by workers, and the workers receive all of the returns to this training. In contrast, employees and employers will share in the costs and returns of specific training. Despite these differences between general and specific training, the model predicts that both forms of training lower the starling wage and increase wage growth.

   Recent improvements in the available data on training have produced a growing body of literature that analyzes the different aspects of the human capital model and documents the consequences of training. In particular, most studies find that training received from the current employer is associated with increased wage growth (Duncan and Hoffman 1979; Mincer 1988; Barron, Black, and Loewenstein 1989; Brown 1989; Altonji and Spletzer 1991; Barron, Black, and Loewenstein 1993; Barrel 1995). However, there have been only limited tests of other aspects of the human capital model. For instance, Barron, Black, and Loewenstein (1989) and Parsons (1989) find no statistically significant relationship between training and the starting wage. Also, although Barron, Berger, and Black (1993) find that training has a negative effect on the starting wage, the estimated effect is small relative to the impact of training on productivity.

   In addition, there is mixed evidence as to whether training is specific or general. Lynch (1992), using data from the early years of the National Longitudinal Survey of Youth (NLSY), concludes that company training is primarily firm-specific. In contrast, a recent study using the NLSY data by Loewenstein and Spletzer (1998) indicates that firms often pay the direct costs of training that takes place outside the workplace. They find that these employer-financed forms of training have a lasting impact on wages for those who switched employers after training, suggesting that these forms of training are general. They hypothesize that firms and workers enter into wage contracts that allow firms and workers to share in the costs and returns to general training.

   Similarly, others have suggested that alternatives to the traditional human capital model should be considered. For instance, Bishop (1996) offers a number of possible explanations as to why employers might finance general training, such as uncertainties about workers' skills, liquidity constraints, and the presence of federal regulations. Similarly, Acemoglu and Pischke (1996) attempt to explain why German firms pay for apprenticeship training, a form of training that offers a number of skills that are not firm-specific. The authors hypothesize that firms pay for general training because the current employer has more information about a worker's ability than potential employers. The existence of this asymmetric information provides the firm with some monopsony power and allows the firm to extract rents from the worker. Since the firm obtains part of the worker's marginal product, it has an incentive to provide training and increase the worker's marginal product. The worker may be reluctant to pay for the training, however, since the worker receives only part of the return from the training.

   Despite these recent analyses of the human capital model, no study to date has directly tested the predictions of the traditional human capital model relating to starting wages, wage growth, and the specificity of training. For instance, Loewenstein and Spletzer (1998) examine the relationship between training and wage levels in a particular year but do not examine the relationship between training and starting wages or wage growth. They also use data from a relatively short time period (1988-1991), so that their results reflect only the short-term effects of training on wages.

   In this paper, recent data from the NLSY over a relatively long time (1986-1996) are used to directly test the implications of the standard human capital model. Measures of time spent in training programs are the key variables of interest. To preview the results, there is evidence that some forms of initial training are inversely related to the starting wage. Employer-financed training appears to be portable across employers or to have a general component. Training that is financed by employers is also particularly effective in enhancing wage growth. Taken together, the results provide partial support for the traditional human capital model.

   The paper proceeds as follows. In the next section, a description of the data used here is provided. Section 3 presents results from estimating the effect of training on starting wages, while section 4 provides estimates from wage growth equations. Section 5 offers some concluding remarks.

2. The Data

   In this analysis, data from the NLSY are used to examine the effect of prior and current training on starting wages and wage growth. A number of previous studies using the NLSY, such as those by Lynch (1992) and Parsons (1989), have used information from the 1979-1986 surveys, where time spent in private sector training is available only for programs that last over one month. In subsequent years, the training questions in the survey were changed so that respondents were asked about all types of training (up to four programs) since the last interview, regardless of duration.(1) Consequently, this past research using the pre-1986 data from the NLSY captures the effects of participation in relatively formal training...