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Reexamining the Returns to Training: Functional Form, Magnitude, and Interpretation

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  • Harley Frazis
  • Mark A. Loewenstein

Abstract

We investigate the functional form for formal training in a wage equation and derive estimates of its rate of return. The cube root fits best in our two data sets. We show that if wages are not adjusted continuously, estimating the return to training requires one lag and one lead of training. Using the cube root and a semi-nonparametric estimator, estimated returns are 150–180 percent. Adjusting for heterogeneity in wage growth, promotions, and direct costs reduces the return to 40–50 percent. We find evidence of heterogeneity in returns. Our estimates can thus be regarded as the return to training for the trained, but cannot be extrapolated to the untrained.

Suggested Citation

  • Harley Frazis & Mark A. Loewenstein, 2005. "Reexamining the Returns to Training: Functional Form, Magnitude, and Interpretation," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  • Handle: RePEc:uwp:jhriss:v:40:y:2005:i:2:p453-476
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    References listed on IDEAS

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    1. Jörn-Steffen Pischke, 2001. "Continuous training in Germany," Journal of Population Economics, Springer;European Society for Population Economics, vol. 14(3), pages 523-548.
    2. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, vol. 15(2), pages 211-245, February.
    3. Bartel, Ann P, 1995. "Training, Wage Growth, and Job Performance: Evidence from a Company Database," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 401-425, July.
    4. Jacob Mincer, 1989. "Human Capital Responses to Technological Change in the Labor Market," NBER Working Papers 3207, National Bureau of Economic Research, Inc.
    5. Andrews, Donald W. K., 1991. "Asymptotic optimality of generalized CL, cross-validation, and generalized cross-validation in regression with heteroskedastic errors," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 359-377, February.
    6. Parent, Daniel, 1999. "Wages and Mobility: The Impact of Employer-Provided Training," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 298-317, April.
    7. Jaeger, David A., 2003. "Estimating the returns to education using the newest current population survey education questions," Economics Letters, Elsevier, vol. 78(3), pages 385-394, March.
    8. James Heckman, 1997. "Instrumental Variables: A Study of Implicit Behavioral Assumptions Used in Making Program Evaluations," Journal of Human Resources, University of Wisconsin Press, vol. 32(3), pages 441-462.
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