Economic Rationale for Investment in Training
Because human resource investments frequently involve training, it is instructive to consider the difference between specific and general training. Nobel Laureate economist Gary Becker has written extensively on this subject. His distinction between specific and general training in human capital theory provides guidance for understanding when employers will provide training.
The decision whether to invest in training and development depends, in part, on whether the education imparts skills that are specific to the employing organization (specific training) or are general and transferable to other employers (general training). Employers generally invest in or pay part of the cost of specific training because employees cannot readily transfer such skills to other employers.
Employers recoup their investments after employees complete training by paying employees only part of the revenue derived from their increased productivity (marginal product). Conversely, conventional human capital theory predicts that
employers will pay for none of the cost of general training because employees can transfer skills developed at employers expense to other employers. Accordingly, employers would rather hire an employee who has the requisite general skills.
When employees having the requisite general skills cannot be hired, the employer must invest in general training without assurance that the unskilled employee will remain employed long enough after training for the employer to recoup the
investment.10
In reality, employers probably invest in general training more than the specific and general training rationale would suggest. A recent study has found the following:
under certain conditions [use of employment contracts and retention of employees based on productivity] the firm may share the costs of and returns on investment in general human capital and pursue no lay-off policy. General human capital will have the same implications as firmspecific
capital.11
General training can be obtained in on-the-job training as well as in formal programs such as tuition reimbursement. It also can occur unintentionally simply as a byproduct of the work situation as employees learn work skills that are applicable to other employers. Employers may make general training investments in employees by paying a wage during training, which has been reduced by the training costs.
Employers also can recoup some of their investments in general training because employees incur costs of mobility, such as the costs of finding new jobs and relocating. If the costs of mobility are high enough (moving expenses, realtors’ fees, psychological costs of moving children, etc.) the employer can pay a wage lower than the employee’s new general skills would warrant at other places of employment.
Labor economists also argue that employers are more reluctant to lay off employees in whom they have invested in specific training. (When employers pay part of the costs of general training, the firm also will be reluctant to lay off workers who have received this training.) Like general training, specific training can be obtained through formal programs. It also can be obtained through on-the-job experience, as much of what employees learn on the job tends to be of a specific nature.
Employees who receive specific training from an employer receive a lower wage after training than their productivity would warrant because no other employers have
use for these specific skills.13 Thus, it is likely that the employer will have invested more heavily in these employees and would not want to lose the investment.
Because human resource investments frequently involve training, it is instructive to consider the difference between specific and general training. Nobel Laureate economist Gary Becker has written extensively on this subject. His distinction between specific and general training in human capital theory provides guidance for understanding when employers will provide training.
The decision whether to invest in training and development depends, in part, on whether the education imparts skills that are specific to the employing organization (specific training) or are general and transferable to other employers (general training). Employers generally invest in or pay part of the cost of specific training because employees cannot readily transfer such skills to other employers.
Employers recoup their investments after employees complete training by paying employees only part of the revenue derived from their increased productivity (marginal product). Conversely, conventional human capital theory predicts that
employers will pay for none of the cost of general training because employees can transfer skills developed at employers expense to other employers. Accordingly, employers would rather hire an employee who has the requisite general skills.
When employees having the requisite general skills cannot be hired, the employer must invest in general training without assurance that the unskilled employee will remain employed long enough after training for the employer to recoup the
investment.10
In reality, employers probably invest in general training more than the specific and general training rationale would suggest. A recent study has found the following:
under certain conditions [use of employment contracts and retention of employees based on productivity] the firm may share the costs of and returns on investment in general human capital and pursue no lay-off policy. General human capital will have the same implications as firmspecific
capital.11
General training can be obtained in on-the-job training as well as in formal programs such as tuition reimbursement. It also can occur unintentionally simply as a byproduct of the work situation as employees learn work skills that are applicable to other employers. Employers may make general training investments in employees by paying a wage during training, which has been reduced by the training costs.
Employers also can recoup some of their investments in general training because employees incur costs of mobility, such as the costs of finding new jobs and relocating. If the costs of mobility are high enough (moving expenses, realtors’ fees, psychological costs of moving children, etc.) the employer can pay a wage lower than the employee’s new general skills would warrant at other places of employment.
Labor economists also argue that employers are more reluctant to lay off employees in whom they have invested in specific training. (When employers pay part of the costs of general training, the firm also will be reluctant to lay off workers who have received this training.) Like general training, specific training can be obtained through formal programs. It also can be obtained through on-the-job experience, as much of what employees learn on the job tends to be of a specific nature.
Employees who receive specific training from an employer receive a lower wage after training than their productivity would warrant because no other employers have
use for these specific skills.13 Thus, it is likely that the employer will have invested more heavily in these employees and would not want to lose the investment.
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