Training At The Workplace: The Positive Impact Of Training

01 Mar 1998

Local trade unions encourage firms that provide training at the workplace to train more than they otherwise would. In other words, they overcome the natural tendency of training firms to under-invest in training. This conclusion, propounded by Professors Alison Booth and Monojit Chatterji in the latest issue of the Economic Journal, is of obvious importance given the widespread belief that the UK workforce is under-trained relative to our competitors. It suggests that local unions, much maligned and believed to be damaging to economic prosperity, do in fact have a positive role to play in improving economic performance.

Booth and Chatterji sought to understand why firms under-invest in training of their workforce and what role trade unions have to play in this process. They noted that much training is employer-led and provided. During the training process, trainees have low productivity but the training enhances their future productivity. Hence the nature of the decision to train employees is an investment decision: current sacrifice in return for future gain. There is already a plausible body of research arguing that unfettered firms will typically under-invest in training. This occurs because part of the returns to training may be captured by firms other than the training firm.

Employer-provided workplace training increases the productivity of employees both in the training firm itself as well as with potential rival firms. But it is very likely that the productivity of a trained employee is greatest in the firm that trains him or her, because some part of the training is firm-specific. Hence the gain to society is greatest if trained employees stay with their training firm. If employees quit or are poached by rivals, some of the value from training is lost. The lower the number of trained employees who quit the training firm to work in rival firms, the greater the gain from training.

Once employees are trained, the training firm has to decide how much to pay them. If it pays a very low wage, a large number will quit to join rival firms, but the wage bill for those it retains will be low. If it pays a very high wage, there will be fewer quits but the wage bill will be high. Both high wages and high quits are damaging to the training firm's profits.

The training firm resolves this dilemma by striking a balance between these extremes and selects an appropriate intermediate wage at which some quits will occur. This wage is set at a level that enables the firm to capture all of the rent associated with the training. The firm is able to anticipate that its wage policy will result in some quits, and therefore will choose to train fewer employees than is socially desirable.

This is exactly where a local trade union will have a positive role to play. Once employees are trained, their bargaining situation vis-à-vis the firm is different. They can form a union to extract a higher wage from the firm and thereby get a share of the rents associated with the training. The trade union does this on behalf of trained employees by obtaining a higher wage for them.

Before the training process begins, the firm will anticipate that a local union will form and demand a higher wage, resulting in lower quits of trained employees. Since there will be less training wastage, the firm will respond by offering to train more employees and promise to pay them a higher wage when the training is complete. Trainees will respond positively to this offer: they too can anticipate the union forming and thus obtaining a higher wage.

The crucial role of the union lies in providing a mechanism whereby the firm''s offer to pay a higher wage is credible. In the absence of the union, there is nothing to make trainees believe that the firm will pay a higher wage post-training. Both trainees and the firm know that, in the absence of a union, the firm will pay only that wage which gives the firm maximum profits in the post-training era. It is the voice provided by the union that ensures the credibility of a high wage offer for trained employees, and guarantees fewer wasteful quits.

Booth and Chatterji pointed out that a local trade union is not the only way of ensuring that a suitably high wage is paid to trained employees by the training firm. In a legal structure where long-term contracts could be easily enforced, the same result would obtain. The difference here would be that the credibility of a high future wage for trained employees would be guaranteed by the courts. We are a long way from such a situation in the UK where the duration of a wage contract is rather short - typically one year. This structure does not lend itself comfortably to encompassing the kind of long-term wage contract that is necessary to get the most out of investment in training. It is in this context that a local trade union has a special role to play.

''Unions and Efficient Training'' by Alison Booth and Monojit Chatterji is published in the March 1998 issue of the Economic Journal. Booth is at the ESRC Research Centre on Micro-social Change at the University of Essex; Chatterji is in the University of Dundee''s Economics Department. Their research received financial support from the ESRC, the Leverhulme Trust, the DTI and the DfEE.

Monojit Chatterji

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