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TRAINING: The Case for Increased Investment
By Terri Bergman
Originally published in Employment Relations Today, Winter 1994/95,
pp. 381-391.
Training is a hot topic. In 1990, the Commission on the Skills
of the American Workforce released a report recommending that all
companies invest at least one percent of payroll in the education
and training of their workers. By 1992, a number of political
candidates were advancing that recommendation. Today, in speeches
around the country, Secretary of Labor Robert Reich is heralding the
value of training and urging business to play a part in building the
skills of the American workforce.
But value for whom? Is training a good investment? And if so,
who reaps the return?
OVERVIEW
Investments in training have long been considered a means for
promoting individual, corporate, and national economic well-being
and prosperity. The returns from education and training to
individuals are said to include increased income, greater employment
security, and higher job satisfaction. Benefits to employers are
thought to include both greater productivity and increased worker
loyalty. If both companies and workers benefit, then the nation as
a whole should too, with training bringing productivity growth for
our nation, and higher standards of living for our residents.
A great deal of research backs these claims. Large-scale
surveys and econometric analyses, as well as more moderate surveys
and individual case studies, have documented training's value.
While there certainly is room for more study, enough is known now to
make a strong case -- with both the American business community and
the public -- that training has value. Is training a good
investment? Yes. Who benefits? Everyone.
Employee Benefits
The key benefits to employees of education and training are
increased wages and reduced unemployment. Education has a great
impact on individuals' earnings. Survey data show that those with
one to three years of college earn 23 percent more, and college
graduates over 70 percent more, than those with just a high school
degree. Those who leave school before getting a degree earn only
about three-fourths of what high school graduates make. *0*
The returns to training are also impressive. An econometric
study found that company training leads to a 27 percent increase in
earnings, while training from other sources provides a 13 percent
increase, and on-the-job training a 5 percent increase in earnings.
*1* Training, according to the same econometric study, also reduces
the chance of unemployment. This reduced vulnerability, it found,
persists for approximately 12 years. *2*
A joint Pacific Bell and Communications Workers of America
program demonstrates training's value to employees. Some of the
program's voluntary retraining programs prevent layoffs by training
workers in the use of new technologies. Others raise employee's
wages. In one such program, nontechnical employees earning $9 per
hour are trained for technical jobs paying $17 per hour! *3*
Company Benefits
Training's greatest value to companies is in increasing
productivity. Productivity increases are usually manifested as
improvements in employees' performance (e.g., increased skills,
increased initiative, reduced absenteeism), improvements in
production measures (e.g., increased run rates, decreased scrap
rates, increased on-time rates), and improvements in quality and
customer satisfaction.
One study of manufacturing firms found that companies with
formal training programs experienced a 19 percent greater rise in
productivity (over three years) than those without such programs.*4*
Another study found that increased formal training significantly
reduced the rates at which products had to be scrapped. Results of
this study suggested that doubling the training per employee (from
an initial average of 15 hours) would result in a 7 percent
reduction in scrap. *5*
A number of companies report significant benefits from
training. Motorola Inc. claims that every $1 it spends on training
delivers $30 in productivity gains within three years. Motorola
spent $120 million on education in 1992, 3.6 percent of payroll.
Since 1987, the company has cut costs by $3.3 billion -- not by
firing workers, but by training them to simplify processes and
reduce waste. Sales per employee have doubled in the past five
years, and profits have increased 47 percent. *6*
Training in basic skills shows productivity pay-offs as well.
Otto Engineering Inc., an Illinois-based manufacturer of electrical
switches, launched a math and English program in 1988. While
classes for its 120 workers have cost Otto $100,000 per year,
productivity has increased 340 percent since the program began. *7*
Upgrading the skills of current employees is almost always more
cost effective than firing personnel with outmoded skills and
replacing them with new employees. Twelve studies based on data
from GTE Corporation and Western Electric Company compared the costs
of upgrading production workers with different levels of skills with
the costs of hiring and training a new worker, waiting for the
worker to get up to speed, and laying off the original worker. In
11 of the 12 studies, the costs of training existing workers were
lower. In the twelfth study, the marginal advantage of hiring from
outside was offset by the lower company morale. *8* A Xerox study
even found that it was more economical to retrain its surplus
professional employees in such fields as computer engineering and
computer science. *9*
The often cited concern that well-trained employees will be
hired away by firms that do not invest in their workers may be
unwarranted. One extensive study of small and mid-sized firms found
that worker retention and advancement is greater in companies with
education programs. *10*
National Benefits
Few studies have been conducted to calculate the benefits of
education and training to our nation. One frequently quoted
economic analysis found that learning on the job accounted for more
than half, and formal education for more than a quarter of the
increase in our productive capacity between 1929 and 1983. *11* A
more micro-level analysis would suggest that since training reduces
both the incidence and duration of unemployment, it would also
lessen the societal costs associated with unemployment, including
unemployment insurance payments and welfare payments.
Most claims of training's returns to society, however, rely on
inference: What's good for individuals and companies is good for
America.
THE LINK BETWEEN COMPANY AND EMPLOYEE BENEFITS
Obviously, the benefits of training to companies and
individuals are not mutually exclusive. In fact, company (and joint
company-union) training programs serve both groups simultaneously.
If training raises employee morale, firm performance improves; if
training helps firms to stay in business, employees can keep their
jobs; and if training helps firms make money, employees' incomes can
rise.
Employee Attitudes and Firm Performance
Many studies of training that document improvements in such
employee attitudes as self confidence, self esteem, job
satisfaction, and morale show improvements in firm performance as
well.
One study of small firms found that investments in workplace
education programs result in:
* Skill gains: gains in workers' reading, writing, mathematics,
and other academic skills,
* Attitudinal and behavioral improvements: improvements in
workers' motivation, self-esteem, willingness to take
responsibility, teamwork, and communication and problem solving
abilities, and
* Bottom line benefits: improvements in product quality and
greater firm productivity.
According to this study, the improvements in productivity and
quality hold up even when other variables (such as a supportive
corporate culture or firm success) are controlled. *12*
Anecdotal evidence also supports a link between employee
attitudes and firm performance.
Phoenix Specialty Manufacturing Company, a firm in rural South
Carolina with a workforce of fewer than 150 people, instituted a
basic and job-related skills training program in 1990. While
workers gained increased confidence and satisfaction from meeting
their educational goals, the company's customer rejections declined
to 7 items in 2,000, its on-time delivery rate rose to the "mid
90s," and material usage declined by 3 to 4 percent. Employees were
more willing to take responsibility for decisions, to provide
informed feedback, and to be proactive in handling preventive
maintenance. In addition, bad orders were caught before they got
out the door. *13*
Weber Metals, a manufacturer in Los Angeles, California,
provided a variety of training classes, including English as a
second language, math, spelling, computer literacy, and GED (General
Educational Development) preparation. As a result, workers felt
better about themselves, enjoyed the camaraderie of working in
teams, and were more self-assured. At the same time, the company
experienced a reduction in scrap from 20 to 2 percent, a reduction
in errors, improved production reports, improved communications, a
safer work site, and employees able to meet job standards. *14*
Wm. Dudek Manufacturing Company, a small Chicago business,
provided English as a second language and math skill classes to its
30 employees. Employees gained increased self-confidence and job
satisfaction, while the company gained better communication among
employees, employees able to work independently and as part of a
team, increased worker loyalty, and improvements in sales volume,
profit, work flow, and on-time deliveries. *15*
The United Auto Workers-Ford Education, Development and
Training Program -- a joint effort in education, training, and
worker empowerment -- raised employee job satisfaction ratings to 75
percent. This program, which encompasses more than just training,
also increased productivity at Ford by 36 percent since 1980, a
factor that led to Ford's stock value rebounding dramatically over
the last decade. In addition, for the first time in years, a U.S.
auto maker was able to reclaim the title to the best selling car in
America with the 1992 Ford Taurus. *16*
Firm Viability and Employee Security
Perhaps nowhere is the connection between employer and employee
interests so clearly linked as in the area of firm viability. Here
management and labor's interests coalesce around keeping a plant
profitable and operating, and keeping its workers employed. A
number of examples can be cited where training was able to make the
difference between a firm closing and employees keeping their jobs.
At the end of 1985, Motorola Inc. had decided to move all
production of cellular phones to the far east. The general manager
in Illinois convinced the corporation to grant him 1 1/2 years to
increase cellular phone productivity and quality. He redesigned the
phone, adopted new production techniques, and altered human resource
practices. To support these changes, he instituted programs to
upgrade the skills of the hourly workforce. The results of all of
these changes were impressive enough to keep the plant open. *17*
United Electric Controls, a small manufacturer located outside
Boston, provided structured and informal training on just-in-time
inventory, single minute exchange of dies, and mistake proofing the
means of production. The company has not needed to hire new
personnel, nor has it had any significant layoffs, in the last three
years. *18*
Shelby Die Casting Company, in Shelby, Mississippi, was
considering closing its 100-employee facility. The company
introduced a skills enhancement program that enabled it to adopt
self-managed work teams and total quality management, keep its
operation in business, and produce its first profits in six years.
Shelby's scrap rates fell, absenteeism declined, and turnover
dropped. The company's turnaround enabled employees to keep their
jobs. *19*
Rockford Process Control Inc., a custom metal-assemblies maker,
credits training with helping it achieve the productivity
improvements that led to an increase in its workforce. In the late
1980s, Rockford Process Control started sending its 60 employees to
Rock Valley Community College. The employees studied just-in-time
production, problem-solving, and other techniques that helped
Rockford cut defects, speed production, and, according to founder
Paul Colloton, land Honda as a major client. Rockford's workforce
has increased to 125, and, by year end, its revenues are expected to
double from its 1990 level to $12.5 million. *20*
In addition to keeping workers employed in their current jobs,
training programs can increase workers' overall employability in the
job market. Gilroy Foods Inc., a small food product company,
introduced a large-scale technical training program linked to an
employee career ladder. Benefits to the company included increased
equipment utilization, improved product and service quality,
increased productivity and value added per worker, and reduced
recruitment costs. Benefits to employees included enhanced self-
esteem and self-confidence, increased work responsibility, better
chances of advancement and higher compensation, and improved
employability in the company and in the labor market as a whole.
*21*
This link between training and employability in the broader
labor market is supported by more general research. One study
implied that the basic skills training provided by employers gives
employees expertise they can use to get new and better jobs
elsewhere. *22* In addition, an econometric study found that
company training and on-the-job training from previous jobs are
associated with increased earnings in current jobs. This finding
suggests that training is portable, and supports the view that
trainees can use learning on the job to get new jobs elsewhere if
that becomes necessary. *23*
Firm Profitability and Employee Incomes
Training efforts that increase firm profitability can boost
employee compensation through a variety of means, including higher
salaries, advancement opportunities, and productivity bonuses.
A program run jointly by Corning Inc. and the American Flint
Glass Workers Union is credited with enabling Corning to produce the
high quality products it needs to stay competitive and provide
workers with good wages. *24*
Superior Technical Ceramics Corporation, a small manufacturer
in Vermont, developed and delivered a basic skills and technical
training program that dramatically decreased the time engineers
spent setting up work stations and supervising workers, and improved
production efficiency. Employees that successfully completed the
program received promotions that greatly increased their earnings.
*25*
Gilroy Foods Inc., Wm. Dudek Manufacturing Company, and Shelby
Die Casting Company all introduced training programs that increased
firm productivity. Advancement opportunities were increased at all
three companies. *26*
A United Auto Workers-Ford Education, Development and Training
Program reduced production costs, cut absenteeism, boosted product
quality by 52 percent, and enabled workers to share in the
productivity increases through a profit sharing plan. *27*
Delta Wire, a small, family-owned manufacturing company located
in Clarksdale, Mississippi, instituted a functional context basic
skills program that decreased non-conforming material from 6 or 7
percent to 2 percent, increased productivity from 70,000 to 90,000
pounds per week, and led to a "best in class" award from Goodyear,
its largest customer. Employees at Delta Wire received a $1.50 per
hour increase in bonus pay. *28*
HIGH PERFORMANCE WORK ORGANIZATIONS AND TRAINING
Work restructuring and company training are inextricably
linked. Because employees must be prepared to carry out new
practices, training is a necessary component of all firm
restructuring efforts. This linkage between restructuring and
training does not go unnoticed: Definitions of high performance work
organizations all include some variant on "a commitment to life-long
learning."
The link between restructuring and training can be seen in many
of the anecdotal stories about the benefits of training. For
example, Shelby Die Casting Company's training program provided
employees with the skills to adopt self-managed work teams and total
quality management, two restructuring practices. *29*
The general manager at Motorola's Illinois cellular phone plant
introduced a number of initiatives in his effort to increase
productivity and quality. He redesigned the phone so that it
required fewer parts, adopted a just-in-time inventory system,
implemented statistical process control procedures, upgraded
measurement systems, reduced job classifications, redesigned the
work process to use teams, and eliminated quality inspectors.
Training was introduced to prepare workers to implement these
changes. Together, all of these changes -- including training --
turned the company around. Cycle time (the time it takes to convert
piece parts into finished product) decreased by a factor of 40, and
productivity of the line was five times what original industrial
engineering estimates predicted based on technical changes in the
line alone. *30*
Continuous on-the-job training and a multi-skilled, team-based
system of production are part of Corning Inc.'s and the American
Flint Glass Workers Union's total quality management program. In
this program -- which enables the production line to be rapidly
altered to produce different products -- 25 percent of an employee's
first year is devoted to training, with workers trained to acquire
interchangeable skills. The program is credited with helping the
company turn a projected $2.3 million loss into a $2 million profit.
*31*
Clearly, as companies seek to increase productivity, they must
look closely at connecting their restructuring and training efforts,
in order to make the most out of both.
CONCLUSION
The evidence is clear: Training benefits both companies and
employees, and by inference, society. The value of training is
supported by general research and anecdotal reports. Returns from
investments in training exist for both technical and basic skills
training, for large companies and small ones, and across a range of
industries. Even more value can be gained when training is linked
to the adoption of high performance work practices.
But are we training sufficiently?
American employers spend about $30 billion a year on formal
training and development, about 1.4 percent of payroll. Companies
that are training leaders spend from 2 to 4 percent of payroll on
training. *32*
However:
* Few people working outside of companies with over 10,000
employees ever receive any training. In fact, 90 percent of
all job related training occurs in only 15,000 companies,
less than 1 percent of U.S. businesses. *33*
* Only 11 percent of American employees receive employer-provided
formal (and 14 percent informal) training to prepare for their
jobs, and only 10 percent receive employer-provided formal (and
14 percent informal) training to upgrade their skills. *34*
* Certain types of individuals are much more likely to receive
training than others. In general, men receive more training
than women, whites more than nonwhites, full-time workers more
than part-time workers, and those with more education more than
those with less. Minimum wage workers receive less training
than other workers. About 70 percent of training is targeted to
managers, and professional and technical employees; very little
training goes to clerical, manufacturing, production, and
service workers. *35*
Most people viewing this data would agree that we, as a nation,
are vastly underinvesting in the skills of our current workers.
Training is a boon to individuals, companies, and the American
economy. It is a win-win endeavor -- everyone gains.
So, if training is a good investment with widespread benefits,
how can we increase our nation's investment in training?
Since the spotlight was placed on training, government
officials and policy pundits have been searching for ways to
increase companies' investments in their people. While mandating
training expenditures has generally fallen out of favor, other
options are receiving attention. These include voluntary training
commitments from companies, cooperative agreements for sharing the
costs of training among firms, collective bargaining agreements that
promote training, awards or certifications for businesses that make
substantial investments in training, collaborative arrangements
between companies and educational institutions to build workers'
skills, government-backed training loans, tax preferences for
employer-provided tuition assistance, and shifts in the tax code to
encourage training investments.
All of these ideas, along with strategies to increase
individuals' own investments in themselves, need to be pursued
further if we are to build our nation's productive capacity and
guarantee a high standard of living for American workers.
Terri Bergman is a Program Director for the National Alliance of
Business and Manager of Products and Services for the National
Workforce Assistance Collaborative, an effort to improve the
capacity of service providers, the productivity of small and mid-
sized companies, and the well-being of the American workforce.
ENDNOTES
0. Monthly Labor Review, U.S. Department of Labor, Bureau of Labor
Statistics, October 1993, p. 34.
1. Lee A. Lillard and Hong W. Tan, Private Sector Training: Who
Gets It and What Are Its Effects?, Rand, Santa Monica, CA, March
1986, p. 48.
2. Lee A. Lillard and Hong W. Tan, Private Sector Training: Who
Gets It and What Are Its Effects?, Rand, Santa Monica, CA, March
1986, p. 60.
3. Michael Kane and Ann S. Meltzer, Upgrade Training for Employed
Workers, Pelavin Associates, Inc., Washington, DC, August 1990, pp.
5-9-10.
4. Ann Bartel, "Productivity Gains from the Implementation of
Employee Training Programs," Industrial Relations. From High
Performance Work Practices and Firm Performance, U.S. Department of
Labor, Washington, DC, August 1993, pp. i, 3, and 19.
5. Harry Holzer, et. al., "Are Training Subsidies for Firms
Effective? The Michigan Experience," Industrial and Labor Relations
Review. From High Performance Work Practices and Firm Performance,
U.S. Department of Labor, Washington, DC, August 1993, pp. ii, 4,
and 26.
6. Ronald Henkoff, "Companies that Train Best," Fortune, March 22,
1993.
7. Business Week, July 19, 1993. From "News & Trends: Small
Business Finds Training Success," Technical Skills Training, Nov/Dec
1993, p. 3.
8. D.L. Ward, Hiring Versus Training: A Cost Perspective, Work in
America Institute, Inc., Scarsdale, NY, 1986. From Michael Kane and
Ann S. Meltzer, Upgrade Training for Employed Workers, Pelavin
Associates, Inc., Washington, DC, August 1990, p. 1-8.
9. Casner-Lotto, J. & Associates, Successful Training Strategies,
Jossey-Bass, San Francisco, 1988. From Michael Kane and Ann S.
Meltzer, Upgrade Training for Employed Workers, Pelavin Associates,
Inc., Washington, DC, August 1990, p. 1-8.
10. Laurie J. Bassi, Smart Workers, Smart Work: A Survey of Small
Businesses on Workplace Education and Reorganization of Work,
Southport Institute for Policy Analysis, Washington, DC, 1992, p.
37.
11. Edward F. Denison, Trends in American Economic Growth, 1929-
1982, Brookings Institution, Washington, DC, 1985.
12. Forrest P. Chisman, The Missing Link: Workplace Education in
Small Business, Southport Institute for Policy Analysis, Washington,
DC, 1992, pp. 11-12.
13. Thomas E. Faison, Mary P. Vencill, J. William McVey, Kevin M.
Hollenbeck, and William C. Anderson, Ahead of the Curve: Basic
Skills Programs in Four Exceptional Firms, Southport Institute for
Policy Analysis, 1992, pp. 1-17.
14. Thomas E. Faison, Mary P. Vencill, J. William McVey, Kevin M.
Hollenbeck, and William C. Anderson, Ahead of the Curve: Basic
Skills Programs in Four Exceptional Firms, Southport Institute for
Policy Analysis, 1992, pp. 18-30.
15. Thomas E. Faison, Mary P. Vencill, J. William McVey, Kevin M.
Hollenbeck, and William C. Anderson, Ahead of the Curve: Basic
Skills programs in Four Exceptional Firms, Southport Institute for
Policy Analysis, 1992, pp. 31-39.
16. A Report on National Training Policy to the AFL-CIO Executive
Council, AFL-CIO, 1993, p. 20. This report cited S. Schlossberg and
S. Fetter, "U.S. Labor Law and the Future of Labor-Management
Cooperation," The Labor Lawyer, 1986, p. 16.
17. Adam Seitchik and Jeffrey Zornitsky, Employer Strategies for a
Changing Labor Force: A Primer on Innovative Programs and Policies,
National Commission for Employment Policy, Washington, DC, July
1990, pp. 140-142.
18. Karl O. Haigler and Sondra G. Stein, Workplace Literacy Training
in Modernizing Manufacturing Environments, National Governors'
Association, Washington, DC, 1992, pp. 47-52.
19. Robert L. Reid, "On Target: Building Up Basic Skills,"
Technical & Skills Training, Feb/Mar 1994, pp. 25-26.
20. Lois Therrien, "Retooling American Workers," Business Week.
21. Michael Kane and Ann S. Meltzer, Upgrade Training for Employed
Workers, Pelavin Associates, Inc., Washington, DC, August 1990, pp.
5-11-12.
22. Anthony P. Carnevale and Janet W. Johnston, Training America:
Strategies for the Nation, American Society for Training &
Development and National Center on Education and the Economy,
Washington, DC, 1989, p. 47.
23. Lee A. Lillard and Hong W. Tan, Private Sector Training: Who
Gets It and What Are Its Effects?, Rand, Santa Monica, CA, March
1986, p. 48.
24. A Report on National Training Policy to the AFL-CIO Executive
Council, AFL-CIO, May 1993, p. 22. This report cited John Hoerr,
"Sharpening Minds for a Competitive Edge," Business Week, Special
Report, December 17, 1993, p. 72; and "Case Study: Corning's
Approach," Workforce Strategies, Bureau of National Affairs,
February 2, 1993, pp. WS-7-8.
25. Adam Seitchik and Jeffrey Zornitsky, Employer Strategies for a
Changing Labor Force: A Primer on Innovative Programs and Policies,
Research Report 90-01, National Commission for Employment Policy,
July 1990, pp. 149-156.
26. Michael Kane and Ann S. Meltzer, Upgrade Training for Employed
Workers, Pelavin Associates, Inc., Washington, DC, August 1990, pp.
5-11-12; Thomas E. Faison, Mary P. Vencill, J. William McVey, Kevin
M. Hollenbeck, and William C. Anderson, Ahead of the Curve: Basic
Skills programs in Four Exceptional Firms, Southport Institute for
Policy Analysis, 1992, pp. 31-39; and Robert L. Reid, "On Target:
Building Up Basic Skills," Technical & Skills Training, Feb/Mar
1994, pp. 25-26.
27. A Report on National Training Policy to the AFL-CIO Executive
Council, AFL-CIO, 1993, p. 20. This report cited S. Schlossberg and
S. Fetter, "U.S. Labor Law and the Future of Labor-Management
Cooperation," The Labor Lawyer, 1986, p. 16.
28. Karl O. Haigler and Sondra G. Stein, Workplace Literacy Training
in Modernizing Manufacturing Environments, National Governors'
Association, 1992, pp. 15-19.
29. Robert L. Reid, "On Target: Building Up Basic Skills,"
Technical & Skills Training, Feb/Mar 1994, pp. 25-26.
30. Adam Seitchik and Jeffrey Zornitsky, Employer Strategies for a
Changing Labor Force: A Primer on Innovative Programs and Policies,
National Commission for Employment Policy, Washington, DC, July
1990, pp. 140-142.
31. A Report on National Training Policy to the AFL-CIO Executive
Council, AFL-CIO, May 1993, p. 22. This report cited John Hoerr,
"Sharpening Minds for a Competitive Edge," Business Week, Special
Report, December 17, 1993, p. 72; and "Case Study: Corning's
Approach," Workforce Strategies, Bureau of National Affairs,
February 2, 1993, pp. WS-7-8.
32. Anthony P. Carnevale, Leila J. Gainer, and Janice Villet,
Training in America: The Organization and Strategic Role of
Training, Jossey-Bass Publishers, San Francisco and Oxford, 1990, p.
232.
33. Curtis Plott, "Statement of Curtis Plott, President and Chief
Executive Officer, the American Society for Training and
Development, on Creating Workable Models for Retraining," submitted
to the Manufacturing Task Force of the Northeast-Midwest
Congressional Coalition, Lakeland Community College, OH, December
20, 1993, pp. 2-3.
34. Anthony P. Carnevale, Leila J. Gainer, Janice Villet, Training
in America: The Organization and Strategic Role of Training,
Jossey-Bass Publishers, San Francisco and Oxford, 1990, p. 232.
35. Patrice Flynn, "The Heterogeneity of Job Training Investments,"
presented at the U.S. Bureau of the Census, Center for Economic
Studies, September 23, 1993, pp. 7-8.
.