WHY DO TEMPORARY HELP FIRMS PROVIDE FREE

GENERAL SKILLS TRAINING?

David H. Autor

Background

• Temporary help supply (THS) firms used to be regarded as employment agencies under state law through the 1950s and 1960s.

• But they successfully lobbied to achieve legal status of ‘employer’ in the 1970s.

• This absolved client firms from many legal obligations (e.g. firing costs) and contributed to the popularity and growth of the THS industry.

• Rather than fire them, THS firms simply do not give additional assignments to workers who perform poorly at client sites.

• A portion of the wages paid by client firms goes the THS firm.

• Hence, despite their ‘employer’ status, THS firms are in general labour market intermediaries, not end-user employers.

Key question

• The majority of THS firms offer free general (computer) skills training. Why?

• Human Capital model predicts that in competitive markets workers will themselves bear the cost of general skills training by accepting w<MP during training;

• Post-training, threat of poaching or holdup ensures w=MP

• No incentive for firms to sponsor general skills training

Autor’s answer

• To induce self-selection and screening

• Training is more valuable to high-ability workers, for whom the gains from training would exceed the costs (lower post-training wages)

• So by providing free general skills training, a firm would induce self-selection by attracting high-ability workers

• Through training these workers, firms would be able to derive private information about their (previously unobserved) ability

• In this case, THS firms become privy to saleable information about worker quality

Key features of theoretical model (1)

• 3-period model with training and ability assumed complements

• 2 groups of workers – high-belief (HB) and low-belief (LB); some low-ability workers in HB group and vice-versa

• Multiple equilibria model but only separating equilibrium relevant here: HB & LB workers apply to training & nontraining firms respectively (self-selection)

Key features of theoretical model (2)

• Workers trained in period 1; productivity revealed in period 2; low-ability workers with zero (or low) productivity drop out into secondary market; some high-ability trained workers enter secondary market for other reasons

• Outside firms can’t distinguish between them; adverse selection depresses outside wage…

• …and training firms can exploit this: Training increases productivity by more than it increases workers’ outside wage, which is all that training firms would have to pay to retain high-ability trained workers

Further exploration: Training and market competition

• Imperfect competition: Firms maximise profits by providing socially suboptimal training (marginal social benefit > marginal private cost)

• Trainees would be expected to earn less than nontrainees (lower post-training wages)

• Autor shows that as competitive pressures rise, firms optimise by dissipating monopsony profits into additional training

• Combination of increasing training and intensifying market competition training and wages rise in tandem, narrowing the wedge between trainees and non-trainees

Empirical findings

• Using data from the BLS Occupational Compensation Survey of Temporary Help Supply Services and supplementing with Autor, Levy, and Murnane 1999, Autor finds the theoretical model’s main predictions confirmed.

QUESTIONS

Question #1

• Unlikely that firms would pay (high) upfront general training costs for workers without prior knowledge of their ability

• We find out later that “establishments offering skills training are substantially more selective in hiring THS workers than non-training establishments”

• Role of self-selection unclear

• In their paper ‘Access to Training and its Impact on Temporary Workers’, Finegold, Levenson and Van Buren find that…

• “Less-educated individuals were less likely to be offered training, but were more likely to take it when offered; they also took significantly more training per year.” (emphasis added)

Related issue

• Separating equilibrium: Workers with low beliefs expect no gain from training & high future cost (through lower wages), so tend to self-select out of it

• The main problem here is that ability and training are assumed complements

• But this doesn’t seem necessary in real life e.g. even workers with low beliefs may want to take training to compensate for their lack of market-relevant skills

• Again, role of self-selection unclear

Question #2

• We’re considering only THS firms and trainees who are job-seekers and temp workers

• May not be able to generalise findings to more ‘conventional’ settings – other types of firms and trainees already in permanent employment

• Lack of external validity

Question #3

• We’re not told much about the quality of training provided by the training establishments in the sample.

The End