Abstract
BackgroundBy applying the inventory theory to hiring skilled workers under uncertainty, the authors explain how firms decide on their optimum investment in an “inventory of skills.” This paper investigates the conditions under which firms are willing to make investments in a skilled workforce themselves rather than relying on skills produced within the education system or by other companies. By applying inventory theory to investments into apprenticeship training, the authors explain how firms decide on producing an optimum “inventory of skills” today to meet future demand. The authors derive hypotheses on how much firms are willing to invest in having a larger inventory of skilled workers depending on different types of inventory costs (overage costs, underage costs, demand structure).MethodsThe authors use data from the BIBB Cost–Benefit-Survey 2012/2013, which comprises detailed information on different costs and benefits of training investments from the firm’s perspective. The study applies a negative binomial estimation model.ResultsResults are threefold: firms are willing to invest in a larger inventory of skilled workers, i.e., to train more apprentices, first, if the costs of producing and retaining an excessive number of skilled workers (overage costs) are lower, second, if the costs of being short of skilled workers (underage costs) are higher, and third, given an identical cost structure, if it is more likely that the demand for skilled workers may be high in the future. Even more important is the relationship of the three: the combination of a firm’s critical ratio (underage costs in relation to overage costs) with its demand structure (industry volatility) is associated with a higher inventory of skills.ConclusionThe findings (particularly the relation of underage and overage costs, in combination with the demand structure) have important policy implications for firms’ incentives to invest in apprenticeship training.
Highlights
Firms have to decide in advance on how many unskilled workers, e.g. apprentices, they will train to meet an expected future demand for skilled workers who complete tasks independently and well
Our proxy for the probability that firms have a high expected demand for highly skilled workers—the industry volatility— is positively related to the inventory of apprentices: an industry that is more volatile by one unit (1 m Euro) is associated with an increase in the number of apprentices of 2.2%, which is a lot considering industry volatility reaching from 0 to 22 m Euro
In this paper, we investigate the conditions under which firms are willing to make long-term investments in a skilled workforce themselves rather than relying on skilled workers produced by other companies or within the education system
Summary
Firms have to decide in advance on how many unskilled workers, e.g. apprentices, they will train to meet an expected future demand for skilled workers who complete tasks independently and well. Previous studies did not take into account the “expected demand”, which has been modelled first by Harris (1913) in his inventory decision model This model, usually applied to warehouse stock, shows that all three components—overage costs, underage costs, and expected demand—are the drivers for firms’ decisions as to when to invest in an inventory of goods; likewise the three components are the drivers for firms’ decisions to invest in training to meet future needs rather than relying on externally trained workers when future needs are already prevalent. The inventory model considers the overage costs, underage costs, the underlying demand structure, as well as the interaction of these fundamental determinants—and is ideal to analyze our research question: A∗ = f(OC, UC, DS, DS × CR), with A*: optimal inventory of skills, i.e., optimal number of apprentices, OC: overage costs, UC: underage costs, CR: critical ratio, DS: demand structure
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