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Chapter 1
On-The-Job Training
Much of the usable labor market skills that workers possess are not acquired
through formal schooling but rather through on-the-job training. Such
training may be somewhat formal; that is, workers may undertake a struc-
tural trainee program or an apprenticeship program. On the other hand,
on-the-job training is often highly informal and therefore difficult to measure
or even detect. Less-experienced workers often engage in ”learning by doing”;
they acquire new skills simply by observing more-skilled workers, filling in for
them when they are ill or on vacation, or engaging in informal conversation
during coffee breaks.
1.1 Costs and Benefits
Like formal education, on-the-job training entails present sacrifices and fu-
ture benefits. It thus is an investment in human capital and can be analyzed
through the net present value and internal rate of return frameworks. In de-
ciding whether to provide on-the-job training, a firm will weigh the expected
added revenues generated by the training against the costs of providing it.
If the net present value of the training investment is positive, the firm will
invest; if negative, it won’t. Alternatively, the firm will invest if the internal
rate of return of the investment exceeds the interest cost of borrowing.
For employers, providing training may involve direct costs as classroom
instruction or increased worker supervision, along with such indirect costs
as reduced worker output during the training period. Workers may have to
accept the cost of lower wages during the training period. The potential
benefit to the firm is that a trained workforce will be more productiv ...