Policy Review Banner

Blessings of Liberty

Wednesday, May 1, 1996

The 1996 presidential primaries have pushed the plight of American workers to the top of the nation's political agenda. Some commentators argue that unfair foreign competition and callous executives have destroyed the social contract between employers and employees. Others say that inexorable economic and social trends, such as the Information Revolution, are enlarging the prospects for highly skilled workers while displacing those with less education.

        All sides seem to agree that America must raise the educational level of its workers. But would-be reformers often forget that the largest educational system in the United States is neither the public schools nor institutions of higher learning. It is the education and training workers receive from their employers or in the private marketplace.

        Workers learn new skills, information, and problem-solving strategies virtually every day, in formal courses or on the job. Motivated by competition and the search for greater value, many businesses try to raise productivity through training programs. In the long run, such efforts pay off in larger profits, better products, and higher wages.

        Training magazine's annual survey of employee-training programs helps to clarify the issue. In 1995, about 50 million workers received some kind of formal training, up 25 percent since 1990. Employers spent more than $50 billion on formal training in 1995. Based on a ratio of formal to informal training documented in other studies, one can estimate that firms spent approximately $300 billion in informal training that same year, including the cost of supervision and lost-production time.

        Nearly 90 percent of companies with more than 100 employees provided courses in management skills or basic computer skills. Many also taught skills in communication, supervising, and clerical work. While 70 percent of employers provided training for middle managers and executives, only about 40 percent did so for salespeople and production workers. Such workers are more likely, however, to receive informal, on-the-job training not included in these statistics.

        Why do companies train their employees? Workers who become more skilled in their jobs are more productive. Also, studies show that training can raise employee loyalty and reduce turnover, in part because workers often find their skills to be more valuable at the firm where they were acquired.

        One way to gauge the value of workplace training is to see how many workers needed some to qualify for the jobs they currently hold. A 1991 survey by U.S. Bureau of Labor Statistics (BLS) found that 57 percent of workers said they needed training to qualify for their current jobs. About half of those workers learned such skills on the job. Another 21 percent received their training from formal company programs. Much smaller percentages said they obtained necessary skills from high school or post-secondary educational programs. Similarly, when BLS asked workers where they had received any training to improve skills, formal and informal company programs again accounted for about three-quarters.

        One interesting finding of the study was that many workers with college degrees earn less than workers without college degrees who nevertheless have obtained specific training for their jobs. BLS economist Alan Eck wrote that company-provided training programs, particularly formal ones, "have more of an impact on increasing those workers' earnings than does any other source of training."

        Corporate training programs run the gamut from high-tech training centers to on-the-job instruction in word processing or operating machinery. Motorola, which makes cellular phones and paging gear, is often cited as a model for its variety of training programs. The company gives all employees at least 40 hours of training a year. Much of this training occurs at Motorola University, its $120-million, 14-branch teaching center.

        In 1985, Motorola discovered that its employees lacked even the basic skills the fast-growing manufacturer needed. About 60 percent of its work force had trouble with seventh-grade math, necessary to track error rates, compute percentages, and solve other problems. Bob Galvin, then the chairman of the company, decided to devote at least 1.5 percent of payroll to training. (This has since risen to 4 percent.) All employees must have at least seventh-grade proficiency in math, and Motorola has even begun training its suppliers in statistical process control to reduce errors.

        Motorola's experience is not unusual. Forty-three percent of firms surveyed by Training magazine offered remedial education, defined in its broadest sense, including a host of academic skills. Limiting the definition just to reading, writing, arithmetic, and English as a second language, the magazine found that 22 percent of employers provided these services. That's an astounding number -- and 67 percent of those receiving remedial education are actually graduates of American high schools.

        Corporate training is an enormous enterprise that employs thousands of Americans. One company with a substantial investment in it is Manpower Inc., the largest temp agency in the United States. About one million people each year get job assignments from Manpower, and many of those workers go through a company-run program that provides training in technical and computer skills, communication, customer service, and quality control. Manpower also sells its training expertise directly to employers; almost 90 percent of Fortune 500 companies have called on Manpower to help train their employees. As of 1995, 500,000 workers in thousands of companies had benefited from Skillware, the company's computer-assisted training program.

        Some companies pay the tuition for their employees to attend community colleges or night school. Other firms contract out their training needs to private trainers. Companies such as Berlitz International have long provided corporate training in such areas as foreign languages, money management, business communication, and computer software. I recently visited a new training company in Greensboro, North Carolina, that uses interactive computer systems to train local employees faster and cheaper than nearby colleges can.

        Avco Financial Services, in Irvine, California, asked a local nonprofit literacy organization to help start an English-as-a-second-language program for its employees. The literacy council has trained dozens of Avco employees to serve as tutors for their English-language-deficient coworkers, many of whom are recent immigrants. While improving the language skills of many employees, the program has cost the company little. Both tutors and students work on language instruction on their own time. William Dudek, the president of a manufacturing firm in Chicago, created a similar English-instruction program as well as basic math classes for his employees. "We're not saints here," he says. "We're in business to make money. We just thought this was the best way to do it."

        Corporate job training is not confined to higher-skill, higher-wage occupations. Carolinas Associated General Contractors, a trade association, offers classes in construction fundamentals, math, electrical work, plumbing, carpentry, sheet metal, and mechanical skills to prospective construction workers, because its members desperately need skilled individuals.

        On a much larger scale, McDonald's U.S.A. trains thousands of young people each year in its nearly 9,000 U.S. restaurants. "Sending a kid to the Army used to be the standard way to teach kids values, discipline, respect for authority, to be a member of a team, get to work on time, brush your teeth, comb your hair, clean your fingernails," says Edward H. Rensi, the firm's president and CEO. "Now, somehow, McDonald's has become the new entry-level job-training institution in America. We find ourselves doing things in that role that we would never have imagined we would do."

        Of course, companies must subject training expenses to a rigorous cost-benefit test. The 1995 Training magazine survey found that business managers scrutinize training expenses to evaluate their impact on productivity. Almost two-thirds of the employers surveyed said they evaluate trainees' behavior after they return to the job, including testing workers to find out what they've learned, while about half of employers look for quantifiable changes in business results, such as sales, labor costs, or error rates.

        Despite this enormous investment in training, many workers have few or no marketable skills. The problem is one of wasted resources. Public schools spend a tremendous amount of tax money but often fail to prepare young people academically to benefit from training later on. Government-sponsored job-training programs have consistently posted mediocre returns on the billions of dollars in tax money they spent.

        Furthermore, federal and state subsidies encourage students to pursue post-secondary training in an inefficient manner. Federally guaranteed student loans and generous state subsidies entice students to enroll in colleges, but a surprisingly low percentage graduate. The time students waste in irrelevant (and often outdated) community-college and university classes might be better spent finding an employer that teaches useful skills.

        The Clinton administration and some Republican lawmakers have proposed that federal job-training programs be converted into vouchers for worker retraining. We need to go much further. Washington and the states should direct all subsidies and financial aid for post-secondary education and training directly to students and away from any particular institution. Business and payroll taxes should also be reduced to allow firms and workers to spend more of their own money on education and training. And workers should be allowed to accumulate funds (including unspent subsidies) in tax-free Educational Savings Accounts to pay for career changes and retraining in the future.

        This approach would empower workers to make their own decisions about their needs and would make better use of this country's largest and most effective educational system: private business.