Strategic Business Program

Strategic Business Program Incentives and Human Resources Management Day 1

Incentives and Human Resources Management • Course Overview Day 1 • Managing Corporate Climate to Maximize Productivity • Why do some firms pay for education and other firms offer in-house training? • Do corporate climate and benefits enhance worker productivity? • How does corporate structure impact productivity?

Human Recourses Management Process of attracting, developing, and retaining enough qualified employees to perform the activities necessary to accomplish organizational objectives.

Human Recourses Management Managers must find ways to get the highest level of contribution from their workers. And they will not be able to do that unless they are aware of the many ways that their under-standing of diversity relates to how well, or how poorly, people contribute.

Human Recourses Management A distinctive approach to employment management which seeks to achieve competitive advantage through the strategic deployment of a highly committed and capable workforce, using an integrated array of cultural, structural and personnel techniques.

Human Resources Management

Human Recourses Management • Three main objectives: • Providing qualified, well-trained employees for the organization. • Maximizing employee effectiveness in the organization. • Satisfying individual employee needs through monetary compensation, benefits, opportunities to advance, and job satisfaction.

Nonwage labor costs Nonwage labor costs include: • hiring costs, • training costs, and • employee benefits. • These costs make up 20% to 30% of payroll.

Hiring costs Hiring costs include the costs associated with: • placing advertisements, • selecting candidates for interviews, • interviewing candidates, • selecting candidates for job offers, • negotiating job offers, and • processing the worker's employment paperwork.

Hiring costs • 15 days in 2009 • 23 days in 2013 • NY times article

Hiring costs differences across firms • In the secondary labor market, hiring costs are generally relatively low. • Hiring costs in the primary labor market can be very substantial, particularly when a firm is operating in a national labor market.

Training costs Training costs include: • the explicit cost of hiring trainers and using materials (such as manuals, videotapes, and capital equipment) for training purposes, • the implicit cost of using other workers, raw materials, and capital during informal on-the-job training, and • the opportunity cost of the trainee's time during training.

Newly hired employee often completes an orientation program Inform employees about company policies Employee manuals Describe benefits/programs Training Training Programs On-the-job Training Classroom and Computer-based Training Management Development Training costs

Training costs Training first 3 months

Training costs and wage offers • low wages - higher turnover rates and lower quality applicants, leading to higher training costs. • high wages - lower turnover rates and higher quality applicants, leading to lower training costs

On The Job Training Key investment of Personnel Issues Two types of training have different implications for investment General OJT: it raises worker’s productivity everywhere Specific OJT: it raises worker’s productivity in a particular firm Most training is an hybrid But returns and turnover behavior is very different in the two cases 16

General firm training • Individuals differ in their abilities skills and training • General training is applicable to many firms • General training is training that raises a worker's productivity in more than one firm.

Firm specific training • Firm-specific training is useful to the current employer, but does not have much value outside the job • Firm-specific training increases the worker's productivity only in the current firm.

General and firm-specific training • One important aspect of training is who bears the cost of the training - - the firm or the worker?

General Human Capital Worker gets general training, cost $500, raises productivity forever by $1000 per year. Suppose the firm makes the investment: What wage should the firm pay afterwards? What is an equlibrium strategy for wages and for training expenses? 20

General training $ Earnings with training An individual will invest in general training if the benefits are sufficient to compensate for the costs. Gross benefits Earnings without training Costs Experience

Can the Firm Pay? No If the firm pays, it wants to leave future wage unaltered (to recoup the investment) But productivity raises also elsewhere But other firms are willing to offer immediately after training a higher wage, so that firm can not recoup the investment 22

Costs of general training • Since general training raises the productivity of the worker in more than one firm, the costs (and benefits) of general training are expected to be borne by the worker.

Firm Specific Training • If workers bear the costs, there is no reason for the firm to keep the worker. • Worker’s firm specific training cannot be pirated by other firms • If firms bear the costs, there is no reason for workers to stay. • The compensation that the firm can offer exceed that at which any other firm can offer • But who pays for specific training?

Suppose the firm pays • The worker is indifferent between working at this firm and working elsewhere • Firm expects to recoup all the gains • But if worker quits, the firm loses all investment • Firm is at disadvantage

Suppose the Worker Pays • Worker expects the full return • The firm is indifferent between hiring the trained worker or having an outrained one • Worker is in a disadvantged position. Since the firm can threaten to fire the worker

Specific training, Solution • Wage function should split the difference between inside productivity and outside wage • Both workers and firms, have incentive to stay together (separation much less likely)

Let’s do an example: Assume: the worker has w* without training the worker can obtain w* at all firms without training during specific training the worker’s productivity falls to Wtrain and then after training productivity rises to Wpost 28

Firm-specific training Firm’s benefit $ Productivity with training Wage with training Worker’s benefit Worker’s cost Wage without training Firm’s cost Experience

increases the worker's productivity only at the specific firm to Wpost at all other firms, the worker is only worth w* the firm has an incentive to pay the worker at least w* (what other firms are willing to pay) but less than Wpost (to recoup some of the costs of training) Costs of firm-specific training 30

How will the firm set wages? three conditions: to maximize profit, the firm must not incur wage and training expenses that exceed the value of the worker’s productivity to attract workers, the firm must offer a wage that is at least as large as alternative firms to keep workers after training, the firm must pay a wage greater than w* 31

What will the wage structure look like? Employees and firms share the costs of specific training Wpost w1 w* w0 Wtrain Period train Period post 32

Specifit training Recap • When training is firm specific, workers and firms share the costs and benefits of the training, this reduces turnover, and provides incentives to invest • Workers who are most likely to invest in specific training are young workers and those to stay in the labor market for a long time

Implications for the firm • Firms cannot afford to train workers who will leave after the training unless they can get the workers to pay them back. This gives rise to the distinction between general and specific training • General training is useful in many firms. The firm cannot afford to pay for it unless something else is gained. • Specific training is useful primarily in this firm. The worker cannot get a higher wage elsewhere due to this training. The firm can pay for this training.

The “Hold-Up problem” • The firm can decide not to pay higher wages to the worker if the training is specific because the worker has no better alternatives. • The worker can threaten the firm with quitting because the firm will lose its investment in training. • Therefore, it is likely that the firm and worker will agree to share the training cost as well as the benefits.

Solution to the hold-up problem • Turnover should be low since the firm and the worker have reasons to continue the agreement. • We should expect to see other forms of tying the worker to the firm when training takes place.

Importance of training considerations • The value of the firm often neglects the substantial value of human capital. When you acquire another firm, the value of the acquisition may depend on your ability to retain that knowledge and training. • The value of training must be considered over a long time horizon.

Importance of training considerations • Workers often “invest” by selecting offers that provide the most opportunity for training. These could be at lower wages. • Failure to provide promised training can increase turnover. You might want or not want this. Failure to provide the returns to training can have the same effect.

Importance of training considerations • Specific training predicts that long term employees are more productive relative to their wage. This is not typically observed past “prime-age.” • Other explanations for age-specific wage profiles?

Minimum wage and training costs • For workers to bear part or all of the cost of their training, they must be paid less during the training period. • The minimum wage sets a floor on this wage that limits the ability of workers to bear the costs of such training by accepting a lower wage. • Firms faced with such a system may respond by providing less training, thereby limiting the rate of growth of earnings for minimum-wage workers.

Efficiency Wages and Firm Training • Efficiency wages and • comparison to Firm training and wages

Hiring Investments • Firms wish to get the best possible work force at the lowest cost. • They want workers who are high quality and fast learners. • But, investigating the skill levels of workers can be expensive.

Firms rely on credentials or signals in the hiring process • an example of this is a requirement that applicants have a college degree instead of a high school degree • the use of the degree as a signal assumes that college degree holders are more productive workers than those without a college degree

Firms rely on credentials or signals in the hiring process • Firms that require a college degree do not have spend anytime (or money) investigating any high school applicants

Statistical discrimination • judging an individual by his group’s characteristics • there are potential costs to using these signals -- the firm may miss out on some good workers (who don’t have the correct signal) or may get lemons (who do have the correct signal)

Statistical discrimination Why are older workers not given the same preference as prime age workers for better paying jobs? • prejudice may be a cause • however, this could result from a firm’s desire to avoid losses on hiring and training investments • firms will not want to train applicants who are close to retirement age

Statistical discrimination • Women tend to enter the labor force and leave the labor force more often than men. • The average white woman ages 25 to 59 is 15 times more likely to go from having a job to being out of the labor force in any one month period than a comparable male worker. • The average length of job tenure for males is twice that of women.

Statistical discrimination • If tenure is shorter, then the firm will have a lower chance of recouping a worker’s training costs. • employers have economic incentives to hire employees who will remain in the labor force when high hiring and training costs are involved • Individuals within a group vary considerably, so using individual characteristics to estimate tenure may be problematic and probably does a disservice to many members of that group.

Employee benefits • legally mandated social insurance programs and • privately provided benefits. • Rewards such as retirement plans, health insurance, vacation, and tuition reimbursement provided for employees either entirely or in part at the company’s expense

Employee Benefits • 30% of total employee compensation. • Some benefits required by law: • Social Security and Medicare contributions • State unemployment insurance and workers’ compensation programs • Costs of health care are increasingly being shifted to workers. • Retirement plans have become a big area of concern for businesses.

Strategic Business Program