A Framework for Assessing the Economic Benefits and Costs of Workplace Literacy Training

Upjohn Institute Working Paper 96-42

Kevin Hollenbeck

April 1996

Abstract

Many individuals are grappling with the issue of whether to provide workers with training that upgrades the workers' basic academic skills. The corollary questions that flow from this issue are how to provide the training, how much training should be provided, and who should pay for the training. Workers are interested in this issue because they want to sustain productive, well-paying careers that will support adequate standards of living. Not receiving training may jeopardize their careers and earning power. Employers are interested in this issue because their economic role is to maximize corporate profits for stockholders. In most companies, worker productivity is the most important factor in determining output levels and profitability. Public policy makers are interested in the issue because if productive workers lose their jobs, the public may end up supporting them through income maintenance payments and financing job searches through the employment service. On the other hand, if basic skills-deficient workers get training and keep their jobs, they will continue to pay taxes that support government activities. Educators are interested in the issue because they want to improve the educational system to reduce future basic skill deficiencies and because they may be involved in the upgrading of current workers.

The question that is at the core of this issue is easy to state. What should an employer do about a factor of production, be it physical capital such as a plant or machine or be it human capital, that has become unprofitable? For human capital, that is, skills and knowledge, the lack of profitability may stem from the fact that the worker's basic skills were never adequate or it may be the case that technology or workplace demands have surpassed the worker's skill levels. For both physical and human capital, the choices that employers face are limited. They can invest in upgrading the factor of production; they can continue to employ the factor and bear the losses; (Note: I am using the economic cost concept of opportunity costs. A basic skills deficient worker may be paid $8.00 an hour and be productive enough to produce $8.50 worth of product per hour. However, a trained employee or a younger employee may be willing to work for $8.00 an hour and be able to produce $10.00 worth of product. The opportunity cost of not training the worker would be $1.50 per hour even though the firm would not be losing money on the worker.) or they can replace the factor. From an economic and business management theoretical point of view, the answer is easy. Employers should choose the option that maximizes their rate of return. That is, they should choose the option where the difference between the (discounted) future benefits and the costs is the greatest. From a practical point of view, estimating the benefits and costs may be extremely difficult. Furthermore, it is undoubtedly the case that the best option will differ for different situations. There may be cases in which employers would reap large returns from modest investments in workplace literacy training. On the other hand, there may be cases in which employers would be better off by accepting the turnover and hiring costs of replacing workers. In short, it is impossible a priori to prove that it is to a firm's advantage to provide workplace literacy training. It, too, is impossible to prove a priori that it is to a firm's advantage to shed workers with basic skills deficiencies.

From a public policy point of view, it should be recognized that society may benefit or bear costs from employers' decisions about inefficient or outmoded factors of production. Thus it may be the case that from a firm's profit-maximizing perspective, it is not advantageous to provide workplace literacy training. But from the rest of society's perspective, provision of the training, is beneficial. In such cases, public policy should facilitate financial subsidies to firms.

The purpose of this paper is to present these arguments theoretically to identify the key factors that influence the employer's and society's choices; to discuss some empirical evidence from earlier studies about the payoff to individuals and firms; and to provide policy recommendations.

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