Employment effects of on-the-job human capital acquisition

Abstract

This paper quantifies the combined effect on-the-job training and workers’ on-the-job learning decisions have on aggregate employment. Initially, we present an index of on-the-job human capital acquisition (OJHCA) based on data from the OECD program for international assessment of adult competencies. The data shows a positive relationship between the on-the-job training and on-the-job learning indexes and a strong positive correlation between the human capital index and employment rates across OECD economies. Next, we build a search and matching model that hinges on the training provided by firms as well as workers’ learning. The model also includes education along with taxes that increase and decrease human capital investments. We calibrate the model to the United Kingdom and analyze the role of taxes and education to explain the variation in human capital acquired on-the-job, employment and productivity across countries. We also obtain the marginal costs in every country that reproduce the levels of on-the-job human capital as observed in the data. The model is almost able to reproduce the observed differences in employment rates between the groups of countries in the highest and lowest tertiles of the OJHCA distribution, and OJHCA accounts for forty percent of the simulated employment differences. Finally, we analyze subsidies to training costs and conclude that a 10% reduction in marginal training cost increases long-term employment by almost 0.5 percentage points.