Chapter 3: Training

Question 1

What is human capital?

Answer 1

Refers to knowledge, skills, abilities, and other characteristics (KSAO) that people have in producing economic value

Question 2

What is human capital theory?

Answer 2

Views the acquisition of knowledge as an investment

Question 3

What are types of human capital?

Answer 3

Formal education and on-the-job training

Question 4

What are the costs of investing in education?

Answer 4

• Direct costs of going to college
• Forgone income while receiving education

Question 5

What was the “Twins Study” prove?

Answer 5

It was evidence of returns to education

Question 6

What is the discount rate?

Answer 6

the interest rate used in discounted cash flow analysis to determine the present value of future cash flows

Question 7

What is risk-free interest rate?

Answer 7

the theoretical rate of return of an investment with zero risk

Question 8

What is real interest rate?

Answer 8

the nominal interest rate minus the inflation rate

Question 9

What are factors affecting returns to education?

Answer 9

• 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

Question 10

Why is the income inequality increasing in the US?

Answer 10

• skill-biased technological change
• globalization
• decline of unionization

Question 11

What are the important features of the age-earnings profiles?

Answer 11

• earnings rise over the life cycle
• earning increase at a decreasing rate
• earning increase faster for more educated workers

Question 12

What is general human capital?

Answer 12

Having Knowledge, Skills, Abilities, and Other characteristics (KSAOs) that provide the same value to any employer in the market

Question 13

What is Firm-Specific Human Capital?

Answer 13

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

Question 14

Who should pay for general training?

Answer 14

If skills are completely general human capital, the worker should pay for 100 percent of the investment and receive 100 percent of the benefits

Question 15

Why would firms pay for general training?

Answer 15

• recruiting
• employees pay indirectly via lower pay
• develop employees who match the firm for future leadership roles
• tax arbitrage
• industry pay leader
• marketing & branding

Question 16

What is the holdup problem?

Answer 16

when one party makes a sunk investment with an economic partner, attempting to. renegotiate terms after the investment is sunk

Question 17

Who should pay for firm-specific training?

Answer 17

Firms and workers split the investment in firm-specific training and split the returns from the training

Question 18

What is one way to reduce risk of employee holdup?

Answer 18

Employee Noncompete Agreement

Question 19

What are possible clauses of Non-Compete Agreements?

Answer 19

• 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

Question 20

How does the Employee Noncompete Agreement impose a cost on employees?

Answer 20

Restricts outside options

Question 21

What are some implications of on-the-job training?

Answer 21

• 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)

Question 22

What is relationship-specific investment?

Answer 22

An investment that has no value unless the parties of the transaction continue their working relationship

Question 23

What is a major problem with relationship-specific investment?

Answer 23

Holdup problem