Dividing the Costs and Returns to General Training

Mark A. Loewenstein and James R. Spletzer

Abstract

Unlike other data sets, recent data from the National Longitudinal Survey of Youth have information on who bears the explicit costs of training. The data indicate that the employer almost always pays the explicit cost of training that the worker receives on the employer's premises and often pays for the explicit costs of what appears to be general training: seminars or training programs outside of work and training that a worker receives in business school, an apprenticeship program, a vocational or technical institute, or a correspondence course. Furthermore, our wage regressions indicate that completed spells of general training paid for by previous employers have a larger effect on the wage than completed spells of general training paid for by the current employer. While these results are contrary to the conventional human capital model, we present a model that demonstrates how contract enforcement considerations can lead to employers paying for purely general training. An employer in our model offers a future wage guarantee in order to provide an assurance that he will not extract excessive rents from workers who demonstrate by not quitting that they place a relatively high valuation on the employer's job. When this wage guarantee is binding, a small increase in a worker's productivity caused by an increase in his stock of human capital will not cause the employer to pay a higher wage. This sharing of the returns to general training provides the employer with an incentive to share the cost.