Training programs targeted toward lower skilled workers to a much greater extent than is currently the case could play an important role in narrowing the wage gap. Specific strategies would include assisting firms to develop their own programs, improving the school-to-work transition for non-college-bound high school graduates, and providing displaced workers with the skills needed to take new jobs in growing sectors of the economy.Education ; Employees, Training of ; Wages

Lisa M. Lynch

English

Research Papers in Economics

54 FRBNY ECONOMIC POLICY REVIEW / JANUARY 1995
The Growing Wage Gap:
Is Training the Answer?
Lisa M. Lynch*
he papers presented in this conference high-
light three concerns with current labor mar-
ket outcomes in the United States—
stagnant or declining real wages, stagnant
productivity growth, and a widening gap in the wages of
skilled and unskilled workers. Several recent examinations
(for example, Brauer and Hickok 1994, Freeman 1994, and
Lynch 1994) have concluded that one of the solutions to
rising wage inequality is to increase the level of training
and education of the work force. This paper examines in
more detail the potential role and limitations of workplace
training in ameliorating the growing gap in earnings
across skill groups in the United States, along with its
impact on the level of wages and productivity.
In the current debate on the relative importance of
trade versus technological change or changing product
cycles as the primary explanation of the widening wage
gap, it is important to observe that many of these factors
were also experienced by other countries without a similar
increase in the wage gap (for example, see Abraham and
Houseman’s [1993] analysis of Germany, which shows no
increase in wage inequality). This suggests that there are
other institutions or factors at play that ameliorate the
effect of these factors on the distribution of wages. I would
like to argue that training and education systems are one
such source. In comparing the incidence of post-school
training investments in the United States with the inci-
dence in Germany and Japan, one ﬁnds large differences.
As shown in the chart on page 55, both Germany (in par-
ticular for those aged 20 to 24) and Japan have a higher
incidence of ﬁrm-provided training than does the United
States. This is true even though the incidence measure for
the United States is broader than that used for Germany
and Japan.1 As a result of more extensive post-school train-
ing for workers with the equivalent of a high school
degree, German and Japanese ﬁrms treat college-educated
T
*Lisa M. Lynch is William L. Clayton Associate Professor of
International Economic Affairs, Fletcher School of Law and
Diplomacy, Tufts University, and Research Associate, National
Bureau of Economic Research.
The views expressed in this article are those of the authors and do not necessarily reﬂect the position of the Federal
Reserve Bank of New York or the Federal Reserve System.
The Federal Reserve Bank of New York provides no warranty, express or implied, as to the accuracy, timeliness, com-
pleteness, merchantability, or ﬁtness for any particular purpose of any information contained in documents produced
and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.FRBNY ECONOMIC POLICY REVIEW / JANUARY 1995 55
and non-college-educated workers as much closer substi-
tutes in production than U.S. ﬁrms. Consequently, when a
major technological change occurs that switches the rela-
tive demand for skilled workers, German and Japanese
workers who are not college graduates are not affected as
much as their U.S. counterparts.
Therefore, training could play an important role
in narrowing the wage gap. Training in general increases
productivity and, consequently, the wages of workers who
experience an increase in their human capital. However, its
impact on the relative wages of workers is more ambigu-
ous. In order to narrow the current gap in earnings
between skilled and unskilled workers, training would
need to be directed disproportionately toward lower skilled
workers. At the moment these workers are the least likely
in the United States to receive post-school training (see
Lynch 1994). The U.S. training system, in contrast to
those in Europe and Japan, is highly decentralized and has
little formal structure. The possible sources of post-school
training include formal and informal employer-provided
on-the-job training, off-the-job training obtained in pro-
prietary institutions or in special programs developed in
junior or community colleges, government training pro-
grams such as the Job Training Partnership Act (JTPA),
and the military. One of the key features of the U.S. system
is that no national system exists for accrediting vocational
skills acquired on the job. Decisions to invest in training
are made by individual workers or speciﬁc ﬁrms. There is
increasing evidence that for the majority of workers in the
United States, the training content of most ﬁrm-provided
on-the-job training is generally task-speciﬁc (for example,
Lynch 1992) and not geared to preparing workers for a life-
time of skills training as technology and workplace prac-
tices change.
As shown in the chart, in 1991 only 16 percent of
U.S. workers said they had received formal skills training
in their current job, yet recent survey data suggest that
nearly half of all establishments in the United States in
1993 provided some type of formal skills training. How
can we square the ﬁnding that many ﬁrms provide training
with the fact that few workers seem to get it? Furthermore,
what is the impact of this apparent paradox as a possible
explanation of the rising wage gap across skill groups in
the United States during the 1980s? While it appears that
rising skill requirements require ﬁrms to provide more
workplace training, this training is being concentrated
among a small percentage of the work force. As a result,
technical and managerial workers are receiving intensive
workplace training beyond their already extensive formal
schooling, but those workers with the lowest educational
levels are the least likely to receive additional ﬁrm-pro-
vided training. In the United States, highly educated
workers are more likely to receive post-school training,
placing them in a “virtuous circle” of human capital accu-
mulation. At the same time, high school graduates and
dropouts are unlikely to receive additional post-school
training, resulting in a vicious circle of low human capital
growth. Consequently, given the changes in the workplace
that have put an increased premium on skills (changes that
have been outlined in other papers in this conference), low-
skilled workers ﬁnd themselves at an increasing disadvan-
tage in the workplace. Both their absolute and relative
wages decline vis-à-vis the wages of skilled workers.
What are the returns to training for those who do
receive it? Currently in the United States, company-pro-
vided training programs, apprenticeships, and off-the-job
training seem to increase wages of workers on the order of
4.4 to 11 percent (see Lynch 1994). However, workers in
the United States do not seem to gain from previous com-
Individuals Receiving Company Training
Percentage
United States Germany Germany￿
Age 20-24
Japan
Sources:  Current Population Survey, 1991, for the United States; OECD￿
Employment Outlook, 1991, for Germany and Japan.  Data for Germany and￿
Japan refer to 1989 while data for the United States refer to 1991.
0
20
40
60
8056 FRBNY ECONOMIC POLICY REVIEW / JANUARY 1995
pany-provided on-the-job training when they move to a
new employer. This may suggest that a great deal of com-
pany-provided training is relatively ﬁrm-speciﬁc. In addi-
tion, these estimates of the impact of training on wages
may be upwardly biased because of self-selection of more
“trainable” or motivated workers in workplace training.
Therefore, it is equally important to identify and quantify
the returns to ﬁrms of training investments in the form of
productivity gains. Unfortunately, relatively few studies
are able to measure the impact of company-provided train-
ing on the productivity of workers in the United States.
The few studies that do exist (see Lynch 1994 for a sum-
mary of these studies) suggest that training increased pro-
ductivity on the order of 16 to 17 percent. This is a very
high rate of return, but until we have a more representative
sample of establishments in the United States in which we
can control for capital and other characteristics of ﬁrms,2
the returns to training for the typical ﬁrm remain some-
what speculative.
Given the apparently high rates of return to work-
ers and ﬁrms of training, why isn’t everyone receiving
training? Firms may not provide training, especially train-
ing that workers could use throughout the economy, for a
variety of reasons. Smaller ﬁrms often have higher training
costs per employee than larger ﬁrms because they cannot
spread the ﬁxed costs of training over a large group of
employees. In addition, the loss in total production from
having one worker in off-the-job training is probably
higher for a small ﬁrm than for large ﬁrms. This is con-
ﬁrmed in the recent Bureau of Labor Statistics survey of
formal training practices of establishments in the United
States (1994). More than 50 percent of establishments with
250 or more employees have apprenticeship programs,
while only 17 percent of establishments with less than 50
employees have apprenticeship programs. Virtually all
large establishments in the survey reported some type of
formal job skills training, while only 45 percent of estab-
lishments with less than 50 employees had any formal jobs
skill training for any employees. Formal skills training in
turn appears to consist mainly of three types of skills—
management skills, computer skills, and sales and cus-
tomer relations skills (Bureau of Labor Statistics 1994).
Production workers are not receiving as much skills
upgrading as workers in other occupations.
Another reason why ﬁrms may not be willing to
invest in worker training is high employee turnover. In
fact, training itself may contribute to worker turnover: if
new skills (such as computer skills, communication skills,
or problem solving) are valuable to other employers, the
ﬁrm risks having the worker hired away. Therefore, ﬁrm-
speciﬁc training that is only useful to a single ﬁrm (orienta-
tion, speciﬁc equipment training) is a more sensible invest-
ment for ﬁrms than more general training. This would not
be a problem if workers could readily borrow money to
ﬁnance general training themselves, or if employers could
pay workers lower wages during general training periods.
But workers cannot easily borrow money for workplace
training. In addition, since we do not have any system of
national accreditation of general skills acquired in the
workplace, workers are reluctant to invest (by accepting
lower wages during general training periods) even in more
general training if the marketplace has difﬁculty in identi-
fying and paying higher wages for general training that has
been provided by a ﬁrm.
Firm size and employee turnover can generate
alternative strategies within the industrial sector with
regard to ﬁrm-provided training. Larger ﬁrms with better
developed internal labor markets can provide more in-
house training, while smaller ﬁrms must hire workers
with skills already in place. This differential corporate
strategy could be a partial explanation for some of the ris-
ing variance in earnings within groups. However, in order
to argue that there is underinvestment in training, we
need to believe that there is a market failure in the invest-
ment in training in the United States. This failure may
take the form of imperfect capital markets that discourage
workers from investing in general skills training, or of
regulations that raise the costs to ﬁrms of providing more
general skills training. Alternatively, the failure could be
due to scale effects that make training more expensive for
smaller ﬁrms.
So, without getting bogged down in the percent-
age of the rising wage gap that is explained by trade, tech-
nological change, capital deepening, or shifts in productFRBNY ECONOMIC POLICY REVIEW / JANUARY 1995 57
demand and product life cycles, what impact could
increased training targeted at workers who currently are
receiving relatively little training have on wages?
While the impact of trade on the overall wage gap
between skilled and unskilled workers may be quite mod-
est, it is clear that trade and increasing international com-
petition have had an impact on the wages of workers in
speciﬁc sectors such as textiles, apparel, autos, and steel.
Increased worker training in these industries should take
two forms. First, enhanced skills training to increase labor
productivity would allow workers and ﬁrms to continue
competing in these sectors by using alternative high-value-
added production systems and differentiating their produc-
tion so that they are not competing with low-wage labor
from other countries. In the automobile sector this has
occurred through a shift to just-in-time production and
greater employee involvement in quality control and deci-
sion making (à la Saturn). This change requires extensive
cross-training of workers in combination with enhanced
communication and problem-solving skills. As industries
such as steel go for a market niche strategy (for example,
mini-mills), workers need to be able to adjust to shorter
product runs with much greater variation. Again, this
involves increased cross-training. The second form of train-
ing would be targeted at displaced workers who have lost
their jobs because of technological changes or trade and
who need new skills to move to different sectors of the
economy. Current government efforts to speed up the iden-
tiﬁcation and development of appropriate training pro-
grams for this type of worker should improve the
employment and wage prospects of this group.
Since many (but not all economists) seem to focus
on technological change as the major source of the widen-
ing wage gap, training might play an important role in
assisting workers to adjust to technological changes.
Revamping the school-to-work transition process to bet-
ter equip young workers who will not complete a college
degree to acquire the skills they need would be useful.
The experiences of other countries suggest that effective
workplace training programs are characterized by three
factors—coinvestment, certiﬁcation, and codetermina-
tion. Coinvestment increases the commitment of both
workers and ﬁrms to the training process. Certiﬁcation
enables workers to accept lower wages during training
periods because they know that at the end they will be able
to document their more general training. Finally, codeter-
mination guarantees that workplace training is not too nar-
row in content, or too ﬁrm-speciﬁc.
But addressing the school-to-work transition in
the United States does not develop institutional support
for those workers already in the work force who ﬁnd their
skills increasingly obsolete. Firms have historically been
the only source of human capital accumulation for incum-
bent workers. Therefore, there is a need to assist ﬁrms to
develop and expand their training programs, especially for
unskilled workers. At the same time, additional support
should be provided for incumbent workers who need to
return to school.
Let us be clear that training is not some magic
elixir that will solve all the problems associated with rising
wage inequality, falling real wages for unskilled workers,
and stagnant productivity growth in the United States.
Training for training’s sake will not eliminate the wage
gap. Any revision of our training system for new entrants
into the labor market would affect relative wages only after
a long lag, because new entrants represent a small propor-
tion of the overall work force. At the same time, incum-
bent worker training, such as that found in Germany,
requires substantial ﬁnancial and institutional support,
including a national system of certiﬁcation and testing
(with codetermination of the content of training between
employers and workers), government funding of off-site
classroom training, and assistance from ﬁnancial institu-
tions and local chambers of commerce. In conclusion, even
if we were able to reform our training system tomorrow for
both new entrants and incumbent workers and to reduce
the wage gap to its pre-1980s level, the demand for
increased training and education would not stop. Since the
external forces of international trade and technological
change are unlikely to diminish in the future, education
and training will continue to be important to maintain and
improve living standards and to raise productivity.58 FRBNY ECONOMIC POLICY REVIEW / JANUARY 1995 NOTES
ENDNOTES
1. The U.S. number reflects the percentage of workers who have ever
received any training at any time with their current employer, while the
numbers for Germany and Japan are the percentage of workers trained in
the previous year.
2. Additional evidence on the productivity gains associated with
company-provided training programs will be furnished by a new study
of more than 3,000 private sector establishments in the United States
designed by the National Center on the Educational Quality of the
Workforce.
Abraham, Katharine, and Susan Houseman. 1993. “Earning Inequality in
Germany.” National Bureau of Economic Research Working Paper
no. 4541.
Freeman, Richard, ed. 1994. WORKING UNDER DIFFERENT RULES. New
York: Russell Sage.
Lynch, Lisa M. 1992. “Private Sector Training and the Earnings of
Young Workers.” AMERICAN ECONOMIC REVIEW, March: 299-312.
Lynch, Lisa M., ed. 1994. TRAINING AND THE PRIVATE SECTOR:
INTERNATIONAL COMPARISONS. Chicago: University of Chicago
Press.
U.S. Department of Labor.Bureau of Labor Statistics. 1994. “BLS Reports on
Employer-Provided Formal Training.” Press Release, September 23.
REFERENCES

The growing wage gap: is training the answer?

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The growing wage gap: is training the answer?

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