Productivity, wages, and the returns to firm-provided training: fair shared capitalism?

Abstract

Purpose – The purpose of this paper is to investigate the extent to which the productivity gains associated with workplace training are shared by both the firms concerned and their workers. The approach is both theoretical and empirical as an explicit formula for the internal rate of return for firms and workers is derived; and production and cost functions are estimated in conjunction with wage and productivity equations. Design/methodology/approach – The authors use a unique linked employer-employee longitudinal dataset with detailed information on firm formal training and run regression models to obtain the determinants of the internal rate of return to firm-sponsored training. Analysis of training costs is also provided as well as the econometric framework required to control for firm heterogeneity. Findings – The results obtained from the model specifications indicate that an additional hour of training per worker results in an increase of 0.12 per cent in productivity and 0.04 per cent in wages, or an increase of 0.16 and 0.08 per cent, respectively, if one uses firm training as a stock variable. It is also found that 82 per cent of the gains in productivity are captured by firms and 18 per cent by workers. Given the training costs, it is obtained an IRR of 13 per cent for firms and 33 per cent for workers at sample means. Practical implications – Training investments are good otherwise they would not even be considered by firms. However, knowing with greater accuracy the gains captured by firms (and workers) is critical for policy makers in their decision-making process. The estimates found in the paper shows that firm training is a genuinely worthwhile investment for all participants. Originality/value – The authors derive an explicit formula for the internal rate of return to firm-sponsored training and provide workers’ and firms’ shares of the productivity gains using firm-level data. Another original contribution is that the gains enjoyed by firms are computed as net gains, that is, net of the training costs on the one hand, and net of all the gains accruing to workers through higher wages on the other.