An economic model of training in an industrial setting

Abstract

Within the economics of education literature there are several examples of attempts to model the behavior of students and instructors in a microeconomic framework. These attempts have focused, however, on the student's behavior toward learning in a general educational setting-a setting in which the student is assumed to desire learning for the satisfaction it brings and the future income that may be obtained upon completion of the given course of study (Becker, 1982). Similarly, the development and implementation strategies treated in literature are typically those of an academic setting (Becker, 1979). The economics of training within the industrial setting has received little attention. Yet well over $40,000,000,000 is spent annually by private, U.S. Corporations on the direct training of their employees (Carnevale, 1982). This industrial training, unlike general education, tends to be job specific and particular to a given firm or industry. Benefits of training accrue primarily to the firm and only indirectly to the individual being trained. Thus, economic models developed for general education cannot be directly transferred to industrial training situation. This article presents a microeconomic model of training and its development for a profit maximizing firm. In this model we are particularly concerned with the impact of training on the production process-the fundamental activity of the firm. We argue that since training is not part of the direct production process itself (training functions may be performed by staff positions and not line positions), its contribution to the production process must be to augment or enhance the physical and human capital that is used in the production process. In short, trainers seek to make workers more productive, but are not part of the production process themselves. When an organization undertakes a program of instructional development and training, such efforts constitute a drain on the firm's resources: The cost of instructional development and program implementation in the training period is the production lost by diverting resources from direct production. The benefit of instructional development and training program implementation is the expected gain in productivity following the training period. At the time of initiating the instructional effort this gain is a probablistic gain, the magnitude of which cannot be known with certainty. It is management's job to assess the degree to which the resources diverted from current production actually do bring about greater future production. It is our purpose to illuminate some of the underlying economic principles which impact this decision.