The Economic Benefits of Training to the Individual, the Firm and the Economy

In 1988, just over a third of 17 year olds were still in full time education, by the late 1990s this had increased to nearly 60% (National Skills Task Force (2000a)). As a result of this increase, the proportion of the UK work force holding qualifications has also risen. For example, over the last twenty years, the proportion holding a Level 2 qualification has increased from just 41% to nearly 70% (National Skills Task Force (2000a)). Yet many adults still lack basic and intermediate skills. For example, the recent Moser (1999) report suggested that up to one in five adults suffered from basic literacy and numeracy problems. The National Skills Task Force (2000a) also highlighted this deficiency in basic skills (adults with no qualifications at all or those below Level 2), along with problems at the intermediate level (in particular relating to qualifications at Levels 3 and 4) . Certainly many commentators (e.g. Robinson (1999b)) have argued that there should be greater emphasis (and resources expended) on training for jobs at the low and intermediate level, rather than further expansion at the HE level. The National Skills Task Force (2000a), on the other hand, reported that "[I]ntermediate and associate professional vocational skills represent the largest skills gap by far between the UK and our other European competitors...". Given some evidence of a rising demand for intermediate skills (National Skills Task Force (2000c)), this may be particularly concerning.

For those who have already left the education system, training (both on-the-job and off-the-job) is obviously a key means to acquire skills, and in some instances formal qualifications. Keep (1999b) summarises research that points to an increase in the incidence of training in the UK over the last decade, although others have suggested that whilst there was an increase in training incidence in the 1980s, it levelled off in the 1990s (Machin and Wilkinson (1995); Green (1999a)). In any case, a large proportion of those in work never receive any training at all (Keep (1999b); National Skills Task Force (2000b)). For example, Keep (1999b) reports data from the 1998 UK Labour Force Survey which suggests that around three quarters of UK employees received no job related training in the 3 months prior to their interview. Furthermore, around half of this group had never received any training from their employer. There is also evidence that it is the already more educated workers, and those in managerial or professional jobs, who are far more likely to receive training, as compared to those in low and intermediate level jobs (Bynner and Parsons (1997); Green (1999a); Keep (1999b); Machin and Wilkinson (1995)). Those on short-term contracts, doing part-time work and working in small/medium sized firms are less likely to receive any work related training, as are older workers (Keep (2000b)). In other words access to work related training is limited in the UK and unequally distributed across different groups.

Does any of this matter? Should individuals and firms be investing more in training? Should the state be subsidising work related training to a much greater extent? From the perspective of society as a whole, one clearly also wants to identify the macro effects of training. Indeed investment in education and training is seen in many quarters as the key mechanism by which the UK can remain, or become more, internationally competitive . However, the National Skills Task Force (2000a) acknowledged the major difficulties in proving and quantifying the relationship between education and economic growth. The evidence on the relationship between training and economic performance is even weaker (Ashton and Green (1996)). Furthermore, the evidence that is available suggests that UK firms train as much as their counterparts in other industrial countries (Green (1999a); Machin and Wilkinson (1995); National Skills Task Force (2000b); Robinson (1999b)), indicating that training deficiencies may not be the major explanation for any differences in economic performance between the UK and other countries.

THEORETICAL ISSUES

Human Capital theory (Becker (1964)) assumes that investments in human capital (education, training, skills) can be analysed in a similar manner to investments in physical capital. Specifically, individuals will only invest in education and training if the economic return, taking full account of the costs of the investment, is greater than the market rate of interest.

It is not always clear to whom the economic benefits of training should accrue. If training is general, so that it results in skills that are transferable, standard human capital theory suggests that the individual worker will pay for the full costs of training (directly and with lower wages) and will also reap the full economic benefits accruing (higher earnings) . If, on the other hand, training is firm-specific, one would expect the worker and firm to share the costs of training (and the benefits). However, Acemoglu and Pischke (1999) suggest that under certain conditions firms, rather than workers, might pay for general training. Specifically, if labour market frictions (unions, minimum wage) lower the relative wage (and mobility) of skilled workers, firms may pay for general training. Booth and Zoega (2000) also suggest circumstances when firms would pay for general training. In particular, if the productivity of a worker depends on the quality of his or her co-workers, then firms may be prepared to pay for general training in order to attract a higher quality work force .

The empirical evidence indicates that whilst most training is not firm specific , most is still paid for by employers (Barron et al (1999); Green (1999a)). One important implication of this is that simply observing worker wages before and after training is insufficient to properly measure the economic impact of training. Evidence on the economic benefits of training for both individuals and firms is required. There is far more evidence on the former. Furthermore, the question of who pays for training is inextricably linked to the issue of state intervention in the training market. A number of potential market failures may exist that justify state intervention but the reasons for intervention depend on who pays for training. For example, capital constraints may mean that the worker is unable to make the necessary level of investment but this may be far less of an issue if employers pay for most general and firm specific training. The poaching problem on the other hand, may make firms reluctant to take on the training investment themselves, particularly any investment in transferable skills. This may not be such an issue if individuals pay for most training in practice. All this implies that a) as is well known, such market failures may lead to an