Much of the usable labor market skills that workers possess are not acquired through formal schooling but rather through on-the-job training. Such training may be somewhat formal; that is, workers may undertake a struc- tural trainee program or an apprenticeship program. On the other hand, on-the-job training is often highly informal and therefore difficult to measure or even detect. Less-experienced workers often engage in ”learning by doing”; they acquire new skills simply by observing more-skilled workers, filling in for them when they are ill or on vacation, or engaging in informal conversation during coffee breaks.
1.1 Costs and Benefits
Like formal education, on-the-job training entails present sacrifices and fu- ture benefits. It thus is an investment in human capital and can be analyzed through the net present value and internal rate of return frameworks. In de- ciding whether to provide on-the-job training, a firm will weigh the expected added revenues generated by the training against the costs of providing it. If the net present value of the training investment is positive, the firm will invest; if negative, it won’t. Alternatively, the firm will invest if the internal rate of return of the investment exceeds the interest cost of borrowing. For employers, providing training may involve direct costs as classroom instruction or increased worker supervision, along with such indirect costs as reduced worker output during the training period. Workers may have to accept the cost of lower wages during the training period. The potential benefit to the firm is that a trained workforce will be more productive and will therefore make greater contributions to the firm’s total revenue. Sim- ilarly, trained workers can expect higher wages because of their enhanced 1
1.2 General and Specific Training
To understand how the associated costs and benefits are distributed among workers and employers we must distinguish between two...