Chapter 3: Training (Exam #1)

5. Who should pay for training?

(1) General training - If skills are completely general human capital, the worker should pay for 100 percent of the investment and receive 100 percent of the benefits. - However, we do see exceptions. Some firms may pay for general training because of: - Recruiting: Education or training benefits may improve recruiting self selection. o Employees may pay indirectly, through lower pay. o Develop the employees who are a strong match to the firm for future leadership role. o Tax arbitrage. o Marketing & branding. (2) Firm-specific training - Holdup problem - Firms and workers split the investment in firm-specific training, and split the returns from the training.

8. Evidence of the importance of firm-specific human capital

- Altonji & Williams (2005): ten years of tenure raises log wages by 0.11. - Jacobson et. al. (1993): longer-tenured workers separating from distressed firms experienced larger decreases in wages from new employment. In addition, wage drops biggest for those who have to change industries.

3. Important features of the age-earnings profiles:

- Earnings rise over the life cycle. - Earnings increase at a decreasing rate (earnings become flatter with age) - Earnings increase faster for more educated workers.

9. Relationship-specific investment: An investment that has no value unless the parties to the transaction continue their working relationship.

- Holdup problem is the major concern where there is relationship-specific investment.

7. Implications of on-the-job training:

- How costly turnover is to the firm and the worker. - Workers will be willing to invest in FSHC when they perceive a good match & low turnover chances. - Compensation rises with FSHC - Labor market "thickness" - Firm size: workers tend to invest more in FSHC in large firms.

1. Human Capital and Human Capital Theory

Human Capital: refers to knowledge, skills, abilities and other characteristics (KSAO) that people have in producing economic value. (2) Human Capital Theory: - Gary Becker: to understand people's decision about acquiring education or skills. - Human capital theory focuses on investment and returns when people invest in education programs. - Human capital theory views the acquisition of knowledge as an investment. The payoff in the later period is in the form of money, job satisfaction, job security, prestige, etc. (3) Formal education and on-the-job training to obtain human capital

2. Return to education

Investments in Education: should be made if the present value of future earnings exceeds the present value of the costs of finishing certain education. - Benefits from a college degree: Increased future income - Costs: Direct costs of going to college + Forgone income while receiving education * Use present value of future benefits and costs for an appropriate comparison (2) Factors affecting returns to education: - The timing of costs and payoffs. - The magnitude of costs and payoffs. o Costs: Tuition; Student financial aid o Payoffs: Individual ability The length of time the returns are earned (e.g., Age when the investment is made). - Capital intensity of the job - How risky are the returns - Whether the skills will become obsolete and how soon - Individual interest (discount) rate (3) Evidence of returns to education: The "ability bias" in the studies on return to education. (The "Twins Study") (4) Increased income inequality in the US: - Skill-biased technological change (Returns to skill investments have risen dramatically since about 1980). - Globalization - Decline of unionization

6. Employee Noncompete Agreement

One way to reduce risk of employee holdup. - Possible clauses: o require adequate notice before leaving o require to describe new employer, job duties o require to train successor; introduce to clients o prohibit from recruiting colleagues to leave as well o tie vesting to non-compete performance after leaving - Restricting outside options imposes a cost on employee: o compensate through higher salary or signing bonus when making offer o if non-compete signed after employment starts, compensate with lump sum