Academic Literature

Investment in training – Implementing a training contract reduced quitting by around 15%

Firms may hesitate to provide training which is general enough that it can be used in other jobs, if employees are likely to leave shortly after being trained. A “training contract,” which penalizes the employee for quitting quickly after being trained, may help solve this problem.

Using data from a large US trucking company, we show that two different training contracts did reduce quitting after training, especially near the end of the contracts. For one contract the observed patterns of turnover closely match the predictions of a theoretical model of turnover. Our analysis shows that the contracts increased the profitability of training for the firm and decreased worker welfare relative to no contract being in place, though not necessarily relative to having no training opportunity at all.

Using plausibly exogenous contractual variation created by the staggered introduction of training contracts across training schools within a firm, we show that implementing a training contract reduced quitting by around 15%. The impacts on quitting are evident across different research designs, including difference-in-difference and event study analysis, and are strongest when workers are nearing the end of their contract. These impacts appear to be driven by making employees less likely to quit, as opposed to selecting better employees, though we caveat that our analysis faces the challenge that individuals are observed only under one contract; thus, we cannot control for individual fixed effects to employ a common test of selection vs. incentive effects of contracts. Simulating the contract changes in a structural model, we show that observed quit impacts are in line with simulated predictions; that the time path of quits exhibits aspects of optimization (for the 12-month contract but not the 18-month contract); and that the contracts significantly increase firm profits from training and decrease worker welfare.

While we find that the two contracts reduced worker welfare relative to not having a contract at this firm, this does not imply that the existence of training contracts reduces worker welfare (e.g., that worker welfare would increase if training contracts were banned). If training contracts were not available, it is possible that firms would not be willing to make as much investment in worker training, possibly limiting the number of drivers that could go into trucking.

Chosen excerpts by Job Market Monitor. Read the whole story at IZA – Institute of Labor Economics


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