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Invest in the best or compensate the weak? An empirical analysis of the heterogeneity of a firm’s provision of human capital

Listed author(s):
  • Samuel Muehlemann


    (University of Bern and IZA Bonn)

  • Romy Braendli
  • Stefan C. Wolter


    (University of Bern, CESifo & IZA)

The paper aims to test whether a firm’s provision of training depends on the intake quality of trainees. While a firm may just treat each trainee equally, independent of his or her intake quality, firms may alternatively also provide more training to less able individuals or focus on the most able ones. We develop a theoretical framework that illustrates under what circumstances a firm chooses a particular training strategy. We use representative administrative survey data for more than 1400 Swiss establishments. To test our theoretical predictions about a firm’s training strategy, we apply multivariate and instrumental variable (IV) regression models. In addition, we use case study evidence from a large Swiss retailer, allowing us to analyze how different instructors in a specific firm react when confronted with apprentices of different intake qualities. We find that a firm’s training strategy depends on a trainee’s intake quality and the expected net costs of a particular training occupation. Although firms generally provide less training to less qualified trainees, we find that a firm is willing to compensate low-ability trainees with additional training when training is on average profitable in the short run. When training regulations force firms to follow an investment-oriented training strategy (net costs in the short run), then low-ability trainees will not receive additional instruction time and the dropout risk increases. Generating a regulatory framework that allows firms to achieve a net benefit from work-based training is crucial for low-ability trainees to have the opportunity to receive additional training investments that compensate for a lack of competences at the time of the start of training.

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Paper provided by University of Zurich, Department of Business Administration (IBW) in its series Economics of Education Working Paper Series with number 0086.

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Length: 28 pages
Date of creation: May 2013
Publication status: published
Handle: RePEc:iso:educat:0086
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  1. Erik Hanushek & Stephen Machin & Ludger Woessmann (ed.), 2011. "Handbook of the Economics of Education," Handbook of the Economics of Education, Elsevier, edition 1, volume 4, number 4, June.
  2. Wolter, Stefan C. & Ryan, Paul, 2011. "Apprenticeship," Handbook of the Economics of Education, Elsevier.
  3. Gary S. Becker & Nigel Tomes, 1994. "Human Capital and the Rise and Fall of Families," NBER Chapters,in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 257-298 National Bureau of Economic Research, Inc.
  4. Fabian Lange, 2007. "The Speed of Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 1-35.
  5. Lindley, Robert M, 1975. "The Demand for Apprentice Recruits by the Engineering Industry, 1951-71," Scottish Journal of Political Economy, Scottish Economic Society, vol. 22(1), pages 1-24, February.
  6. Edwin Leuven, 2005. "The Economics of Private Sector Training: A Survey of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 91-111, February.
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