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Training, Wages, and the Human Capital Model

Jonathan R. Veum


While there are a number of theories as to why wages increase over an individual's work life, a commonly accepted interpretation is that upward sloping wage profiles reflect investment in human capital, particularly investments in job training. The traditional human capital model predicts that training lowers the starting wage and increases wage growth. This study uses recent data from the National Longitudinal Survey of Youth (NLSY) to examine the predictions of the human capital model concerning the relationship between training and wages. In sum, the results, particularly the findings regarding training and the starting wage, do not support the conventional version of the human capital model and suggest that alternatives to the traditional model should be considered.

The results from estimating starting wage regressions indicate that there is not a negative relationship between starting wages and current company training. If anything, starting wages and company training appear to be positively related. Also, the data indicate that off-site company paid training is portable across employers, or is general. Taken together, these results suggest that firms, rather than workers, pay for general training, which is inconsistent with the standard human capital model.

The estimates from the wage growth regressions are more consistent with the human capital model. Training that is company financed has a positive impact on wage growth independent of tenure at the current job. Company training that takes place outside the work place is particularly effective in enhancing wages. This result is interesting given that this form of training appears to be the most general. Hence, while companies appear to finance training that provides skills which are useful both within and across firms, this training may differ from what is commonly considered as "on-the-job" training.