Evaluating firm training, effects on performance and labour demand

Abstract

A quality-adjusted measure of labour is developed, where labour efficiency depends on firm training. This specification is integrated into a flexible neoclassical cost function, representing the firm's production technology. Unlike traditional production functions, the cost function does not constrain all inputs to be substitutes and it allows capital to be fixed in the short run. These features are found to be important in the evaluation of the indirect effects of training. Short-run indirect effects arise through the relative price mechanism; an increase in labour efficiency decreases the quality-adjusted price of labour. Long-run indirect effects stem from the equilibrium adjustment of the quasi-fixed capital stock. The methodology is illustrated by means of a small firm panel data set. The results show that previous analyses have been overly restrictive in assuming all inputs to be substitutes. E.g., labour and capital are found to be long-run complements, implying that training increases long run labour demand, although the short-run effect is negative. The training outcomes are imprecisely estimated, but indicate that cost savings and productivity gains can be substantial.