THE ECONOMICS OF TRAINING WITH RESPECT TO THE FIRM*
| Published date | 01 March 1970 |
| Author | Michael Oatey |
| Date | 01 March 1970 |
| DOI | http://doi.org/10.1111/j.1467-8543.1970.tb00568.x |
THE ECONOMICS
OF
TRAINING
WITH RESPECT
TO
THE FIRM*
MICHAEL
OATEYt
THE
economic justification and analysis of training has been largely
neglected by training specialists, line managers and economists’ alike. The
few discussions that have appeared, though valuable, have tended to be
within restrictive frameworks of the pure training specialist
or
the pure
economista; and the purpose
of
this article
is
to present a more complete
overall framework in which to analyse training policy.
As
such there is an
emphasis on width of coverage, which
is
intended to provide a basis
for
more detailed refinement in the future.
The training officer tends to accept implicitly that ‘training pays’, yet he
equally feels that often
this
is not possible to demonstrate. Statements such
as
‘Management
will
secure more
than
a
fair return on its investment [in
training]’3 are presented with little direct evidence
or
illustration. Some
writers do suggest that
a
determination should be made as to whether
benefits exceed and that decisions will be ‘governed by the relative
long range
costs’.6
But there
is
little or no discussion on the measurement of
costs and economic benefits:
or
of the alternatives to training. Very few
publications by trainers could be said to be directed towards idenwing
training needs,
or
evaluating training schemes, using economic criteria.
*
The
article
is
a
mriredversion of
a
Mastcr’sppcr, submitted
in
May
1967
to theDcpartment
of
Educational Policy
Studies
of the UnivcrSity
o
Wirconsin,
and Written under the supervision of
Professom Burton
A.
Weisbrod and
W.
Lee
Hanson, whosc help
is
tefull acknowledged. The
per
haa
also
bcndited
from comments by M. Bromwich, D.
G.
Kvies,
k.
F.
Jackson, David
Etchen,
C.
A.
Thompn, and
in
particular
Professor Mark Blaug.
t
Research
student
in
the
aconomia
of
education
at
the London School
of
bnomia.
This
article
is
concerned with the aconomicd
of
training
with
respect
to the
firm.
For
work
which concentrates more on implications for the
trainee
and the economy
aa
a
whole,
gee
for
exam le: acob
Minm,
‘On-the-job
Trainin
Coots,
Returns, and Some Implications’,Jd
of
Po~ticdsCrmang,
Vol.
LXX,
No.
5
Part
8;
Supplement, October 1962;
C.
S.
Somcra and
E.
W. Stromsdorfier, ‘Benefit-Coat
Analysia
of Man wer Re-training’,
Ssvcnbsnlh
Ad
Con-
fmnrrojIndns~~~~~~~~~1964;BurtonA.
Wciabrod,’Conccptual
I~sues
in
Evaluating
Training
programs’,
Monthly
Lobor
Rmirw,
Vol.
69,
No.
10,
October
1966
A
notable recent exception
is
Brinley Thomas,
John
Moxham and
J.
A.
G.
Jones,
‘A
Coat-
Benefit Analysis
of
Industrial Training‘,
BritishJpMlol
ofIruh*miol
Relations,
Vol.
111,
No.
2, uly
1969. It is probably the first cost-benefit
anal
Frank
A.
&Philip,
W. M. Berliner,
anE
J.
Cribbin,
Mmurgm~lt
of
Truining
Prograw,
Richard
D.
Irwin
Jnc.,
Homewood
Illinois,
1960,
p.
21
William
McGehee
and
Paul
W.
“haycry
Truinhg
in
Business
und
Indnstty,
John Wilcy
B
Sons
Inc.,
New
York, 1961, p.
9
John
H.
Proctor and William
M.
Thornton,
Truining:
A
Hundbook
for
Linc
Munugm,
American Managtment Association,
New
York,
1961,
p.
31
(I
The benefits
of
a
training
programme are often reported
in
tern of
a
reduction in the time
needed to acquire
a
particular
skill.
But the resulting economic ravings
are
seldom measured or
estimated,
to
balance
againat
the
extra
asts
to
the
firm
of the
taining.
Sec
for example, the
otherwise
interesting
case
studies
in David King,
Iruining
m‘thin
Ute
Org&.dun,
Tavistock
Publications, London,
1964
1
ofa
training
programme
to
be
published!
2
BRITISH JOURNAL
OF
INDUSTRIAL RELATIONS
Company management also appears to be uninterested; one survey of
training activities found ‘There were very few firms who had carefully
analysed the costs involved’, and that none was ‘prepared to venture
an estimate of the (economic) benefits’.’ Indeed, management is often
suspicious of training-very possibly because of this lack of economic
justification. Trainers complain of the ‘training is a luxury’* attitude,
and one comments: ‘it is only natural that management should resist
what appears to them to be
a
waste
of
m~ney’.~
Too
often training is re-
garded principally
as
a
peripheral welfare or prestige-gaining activity.
The economist’s interest in training stems from the recently developed
concept
of
‘human capital’,1° and in particular Becker’s theory of general
and specific training.ll Blaug comments that ‘Becker’s analysis is virtually
the first serious discussion of on-the-job training in
200
years of economics
and it has already left its mark on the debate about labour training that is
now going on in almost all advanced countries’.12 However, as will be
shown, it suffers from a restrictive framework which, in particular, fails to
account for the implications of recruitment and imperfect labour mobility.
Finally, in criticizing Becker, Eckaus suggests that ‘on-the-job training is
an “unavoidable” joint product with the firm’s regular output’-hence the
costs of training cannot be completely separated from those
of
production,
and therefore are not completely mea~urab1e.l~
Thus ‘training’ has been characterized as desirable, dispensable and
unavoidable. In this article, training is viewed as an investment in human
capital, which can be subjected to the same positive decision criteria as an
investment in physical capital (and of course is subject to the same un-
certainty and risk). As with any investment, one must consider: the alter-
native methods
of
achieving the same objective, the measurement
of
costs
and benefits, and the time period over which the benefits may be realized.
This approach forms the main structure
of
the article, with
a
final section
on the Act:
(I)
Training and its Alternatives,
(11)
Benefits and Costs,
(111)
Benefit Time Period, (IV) Industrial Training Act.
It should be emphasized that the investment approach does not deny
P.
F.
R. Venables and W.
J.
Williams,
The
Smaller
Finn
and Technical Education,
Max
Parrish,
London, 1961, pp 160, 168. The survey was
of
112 small and medium-sized
firms
in the building
and engineering industry.
a
Douglas
H.
Fryer,
M.
R. Feinberg and
S.
S.
Zalkind,
Dcucloping
People
in Industry,
Harper
&
Brothers, New
York,
1956, p. 30.
See
also
King,
op.
ca.,
p.
xiv
M.
Al-Arabi, ‘Experience
of
Apprentice Training
in
the United Arab Republic’,
Inlrmntonal
Labour
Rcvicw,
Vol.
92,
No.
6,
December 1965, p. 497
lo
For
a useful collection
of
papers on human capital and its application to education and
training see
M.
Blaug (ed.),
Economics
of
Education
1,
Penguin
Books,
1968
(A
second volume
was
published in 1969.)
l1
Gary
S.
Becker,
Human
Capitd:
A
Tluoretical
and
Empirical
Analyis,
with
Special
Rcfercnce
to
Educution,
Columbia Univenity
Press,
New
York,
1964.
The
relevant section
is
reprinted
in
M.
Blaug,
op.
cit.,
Chapter
9
(Specific training is applicable to the training firm only, while
general training
is
also useful to other firms in the labour market.
See
section
111
of
this
article.)
l3
R.
S.
Eckaus, ‘Investment in Human Capital:
A
Comment’,
Journal
of
Political Economy,
Vol.
71, No. 5, October 1963, p. 502. Reprinted in
M.
Blaug,
op.
cit.,
Chapter 10
M.
Blaug,
op.
cit.,
p. 135
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