August, 2000, Vol. 123, No. 8
on training investment
Inflation uncertainty and labor contracts
Précis from past issues
Return on training investment
Knowledge of the rate of return on an employer’s investment in employee training is beneficial for two main reasons: it guides firms in making training investment decisions and also helps policymakers decide on subsidies for private investments. In the article "Measuring the Employer’s Return on Investments in Training: Evidence from the Literature," (Industrial Relations, July 2000) Ann P. Bartel of the Columbia University Graduate School of Business and the National Bureau of Economic Research (NBER) maintains that if the expected return on investments is underestimated, employers will overinvest. Also, she believes a company’s return on investments in employee training may be higher than previously thought.
Bartel analyzed three components of the literature. The first dealt with large samples of firm-level or establishment-level data collected through mail or phone surveys. This component, however, provided little guidance on the rate of return. Training cost data were typically unavailable, diverse production processes may not have been modeled properly, and the bias from the endogeneity of the training decision may not have been entirely eliminated. In the second approach, the case study method, detailed data are gathered from one company to estimate the costs and returns from that company’s training program. Here, the estimated rates of return rely on the assumption regarding the skill depreciation rate. "Assuming that skills depreciate 5 percent per year, the estimated rates of return range from 7 to 50 percent," Bartel writes. The third component is company-sponsored case studies. Even though this approach has the potential to address the deficiences of the previous two components, the fact remains that few companies calculate the return on investments in employee training. And most of those that do, according to the author, use faulty methodologies that preclude relying on their results. Two well-conceived case studies reviewed by Bartel report return on investments in the range of 100 to 200 percent.
Many companies do not undertake the huge effort needed to evaluate a training program. Therefore, the companies that maintain detailed records on employee performance and characteristics are best suited for analysis. Bartel concludes that "[I]f lack of information on the ROI [rate on investments] is one cause of possible underinvestment in employee training, helping firms to measure the returns on their training investments could help resolve the underinvestment problem."
Inflation uncertainty and labor contracts
Recent labor contract renewals have produced longer contracts than in the past. In "Uncertainty and Labor Contract Duration," (NBER Working Paper 7731), Robert Rich and Joseph Tracy of the Federal Reserve Bank of New York list several such cases. For example, the Big Three auto makers and the United Auto Workers signed national contracts that were 4 years in duration in their latest round of negotiations—this was a break from a long tradition of 3-year contracts.
In their research on contracts and uncertainty, Rich and Tracy studied Bureau of Labor Statistics data for 1970–95 on major union contracts. (A contract is major if it covers at least 1,000 workers.) They observe that, while the median contract length has been fairly constant in the past few decades, the longest contracts have gotten longer. Contracts in the 90th percentile of duration have shown an upward trend since the mid-1980s.
Some of the theoretical literature on labor contracts and uncertainty suggests that contract duration should be inversely related to uncertainty. Other literature indicates that certain sources of uncertainty may cause workers to seek more insurance against income fluctuations through longer contracts.
In their analysis, Rich and Tracy explore the relationship between contract duration and several measures of inflation uncertainty. Using their preferred measure of inflation uncertainty, they find that decreases in inflation uncertainty are associated with longer contracts. They also find that this relationship extends to broader measures of uncertainty.
Downsizing differs from traditional layoffs in that the job cuts do not appear to result from drops in demand, but instead seem to be driven by a desire for operating efficiencies. In "Examining the Incidence of Downsizing and its Effect on Establishment Performance," (NBER Working Paper 7742), Peter Cappelli of the University of Pennsylvania examines the causes and consequences of downsizing.
Downsizing is a relatively recent phenomenon—Cappelli notes that the concept of downsizing appeared after the recession of the early 1980s. Surveys by the American Management Association indicated that downsizing increased in the early to mid-1990s, even as the economy was expanding.
For his analysis, Cappelli used data from the Educational Quality of the Workforce National Employer Survey. This survey was conducted by the U.S. Bureau of the Census for the National Center on the Educational Quality of the Workforce in 1994 and 1997.
Cappelli found that unionization and severance pay are associated with more downsizing. He also observed that establishments with a higher percentage of managers downsize more than those with a higher percentage of production workers; this is consistent with an attempt to move toward a flatter structure in the organization. Regarding the consequences of downsizing, Cappelli’s analysis shows that downsizing reduces labor cost per employee but it also reduces sales per employee.
We are interested in your feedback on this column. Please let us know what you have found most interesting and what essential reading we may have missed. Write to: Executive Editor, Monthly Labor Review, Bureau of Labor Statistics, Washington, DC. 20212, or e-mail MLR@bls.gov
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