LOW WORKER PROTECTION CAN REDUCE ON-THE-JOB TRAINING
Making it easier to hire and fire workers reduces firms’ incentives to invest in training
their employees. This challenges the conventional view that the ease with which
workers can lose their jobs but also gain jobs is the sign of a more efficient economy.
The study by Matteo Picchio and Jan van Ours, presented at the Royal Economic
Society’s 2011 annual conference, analyses data on workers and firms in the
Netherlands to show that:
 Increasing ‘labour market flexibility’ – by lowering compulsory redundancy
compensation, legal rights to appeal, etc. – will lower a firm’s incentives to train
its employees as the chance that workers take their skills elsewhere also
increases.
 This effect is relatively small. If the economy removed all worker protection
completely – an unlikely scenario – investments in on-the-job training would
decrease by 36% or €95 per full-time worker. The fraction of firms investing in
training would decrease by 13%.
 Increased competition among firms – brought about in part by globalisation –
does not influence on-the-job training.
 More competition may reduce training because profits fall, but it may also
increase training if a better-skilled workforce makes the firm more able to
compete.
Firm-provided training is a key factor for competitiveness of firms as it stimulates
workers’ productivity. Improving human capital through on-the-job training may help
shift the economy to higher-skilled industries and stimulate growth nationwide.
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An increase in labour market flexibility can reduce the incentives of firms to invest in the
training of their employees. The report also suggests that product market competition
does not affect firm-sponsored training.
Firm-provided training is a key factor for competitiveness of firms as it stimulates
workers’ productivity. The extent to which training of workers is important differs
between firms and is related to a series of technological, strategic and organisational
firm-specific determinants.
For example, some firms may choose to hire less-skilled workers and invest in training
of these workers, while other firms may prefer to hire more-skilled workers and provide
less training. Nevertheless, the importance of workers’ training goes beyond individual
firms: accumulation of human capital through employer-provided training may facilitate
sectoral adjustment and stimulate growth nationwide.
Recent human capital theories provide ambiguous predictions about the effect of labour
market flexibility and product market competition on training. More competition in the
product market may reduce training because profits and investment funds go down, but
it may also increase training if a better skilled workforce makes the firm more able to
compete with other firms.
Similarly, the effect of labour market competition can go either way. Higher labour
mobility may increase the need for training but at the same time reduce the willingness
of firms to make the investment in training because with a shorter job tenure the
payback period is reduced.
As theoretical predictions are unclear, empirical research is needed. This is what the
report provides, using matched worker-firm data from Statistics Netherlands to show
that:
 Product market competition does not affect firm-sponsored training.
 Labour market frictions have an impact on firm-sponsored training.
The effect of labour market frictions on firm-sponsored training, even if significantly
different from zero, is small in size. If there were an economy-wide movement towards
the most flexible labour market, firms’ investments in the training of their employees
would decrease by 36%, corresponding to €95 per full-time equivalent worker. The
fraction of firms investing in training would instead decrease by 13%.
The policy implications from this study are straightforward. There are two dominant
trends in product markets and labour markets: an increase in product market
competition due to international integration and an increase in labour market flexibility
due to a reduction in employment protection. The results imply that increasing
competition through international integration and globalisation does not pose a threat to
investments in on-the-job training.
To the extent that the differences in labour market flexibility are related to employment
protection legislation, a reduction in employment protection can reduce incentives of
firms to invest in training of workers. But the magnitude of this effect is small.
ENDS
‘Market Imperfections and Firm-Sponsored Training’ by Matteo Picchio and Jan van
Ours of Tilburg University
Contact:
Matteo Picchio
Telephone: +31.13.4662534
Email: m.picchio@uvt.nl
Jan van Ours
Telephone: +31.13.4662880
Email: vanours@uvt.nl