Chapter 3: Training Flashcards
What is human capital?
Refers to knowledge, skills, abilities, and other characteristics (KSAO) that people have in producing economic value
What is human capital theory?
Views the acquisition of knowledge as an investment
What are types of human capital?
Formal education and on-the-job training
What are the costs of investing in education?
- Direct costs of going to college
- Forgone income while receiving education
What was the “Twins Study” prove?
It was evidence of returns to education
What is the discount rate?
the interest rate used in discounted cash flow analysis to determine the present value of future cash flows
What is risk-free interest rate?
the theoretical rate of return of an investment with zero risk
What is real interest rate?
the nominal interest rate minus the inflation rate
What are factors affecting returns to education?
- the magnitude of costs and payoffs
- the timing of costs and payoffs
- the length of time the returns are earned
- how risky are the returns
- will & when the skills become obsolete
- individual interest (discount) rate
Why is the income inequality increasing in the US?
- skill-biased technological change
- globalization
- decline of unionization
What are the important features of the age-earnings profiles?
- earnings rise over the life cycle
- earning increase at a decreasing rate
- earning increase faster for more educated workers
What is general human capital?
Having Knowledge, Skills, Abilities, and Other characteristics (KSAOs) that provide the same value to any employer in the market
What is Firm-Specific Human Capital?
Having Knowledge, Skills, Abilities, and Other characteristics that provide value only to the current employer and have no value to other employers in the market
Who should pay for general training?
If skills are completely general human capital, the worker should pay for 100 percent of the investment and receive 100 percent of the benefits
Why would firms pay for general training?
- recruiting
- employees pay indirectly via lower pay
- develop employees who match the firm for future leadership roles
- tax arbitrage
- industry pay leader
- marketing & branding
What is the holdup problem?
when one party makes a sunk investment with an economic partner, attempting to. renegotiate terms after the investment is sunk
Who should pay for firm-specific training?
Firms and workers split the investment in firm-specific training and split the returns from the training
What is one way to reduce risk of employee holdup?
Employee Noncompete Agreement
What are possible clauses of Non-Compete Agreements?
- require adequate notice before leaving
- require to describe new employer, job duties
- require to train successor, introduce to clients
- prohibit from recruiting colleagues to leave as well
- tie vesting to non-compete performance after leaving
How does the Employee Noncompete Agreement impose a cost on employees?
Restricts outside options
What are some implications of on-the-job training?
- turnover becomes costly
- workers will invest in FSHC when they perceive a good match and low turnover chances
- compensation rises with FSHC
- labor market “thickness”
- firm size (invest more in FSHC in large firms)
What is relationship-specific investment?
An investment that has no value unless the parties of the transaction continue their working relationship
What is a major problem with relationship-specific investment?
Holdup problem
