Does training pay?: Evidence from Australian enterprises

Introduction

This study has been undertaken by a team from five universities, on behalf of a Joint Venture between Flinders University, Northern Territory University and AustralAsia*Economics Pty Ltd. The study was approved by NREC in October 1998 and was completed in June 2000. NCVER supervised the conduct of the study.

A review of recent overseas studies in the United States of America, United Kingdom and Europe clearly indicates that human resource management (HRM) practices, taken together, are far and away the most powerful predictor of improvements in companies' productivity and profitability (OTFE 1998). Company commitment to the skill and training of its employees is a dominating aspect of a company's HRM practices.

The principal objective of the study was to provide pilot evidence in Australia on means by which convincing methods could be developed through which individual companies could assess for themselves whether it would pay them to shift from being 'low-training' companies to 'high-training' companies.

In fact, during the course of its evolution, the focus of the study shifted towards collecting pilot data to test a number of research designs that could form the basis for collecting the data needed to measure and assess the productivity and profitability payoff to enterprise training in the Australian context.

To achieve this goal, the study attempted to replicate survey results from significant overseas surveys using information collected on more than 90 firms in Australia, and undertaking a small number of in-depth case studies.

Testing the research designs

The research designs chosen were:

• a large employer survey undertaken for the USA Employment Opportunity Pilot Project (EOPP) by the National Institute of Education and the National Centre for Research in Vocational Education that looked at the effects on the productivity and profitability of firms from training newly recruited employees
  In our Australian pilot survey, 40 firms, evenly distributed between Perth, Darwin, Adelaide and Melbourne, were included in the study using this framework.
• a large employer survey undertaken by the United Kingdom Centre for Economic Performance (CEP) at the London School of Economics that looked at the effects on profitability of firms from the quantity and quality of training that they provide
  In our Australian pilot survey, 40 firms, again evenly distributed between Perth, Darwin, Adelaide and Melbourne, were included in the study using this framework.
• the well-known study of 'matched plants' undertaken at the United Kingdom National Institute of Economic and Social Research (NIESR) involving examination of productivity differences between German, French and British plants, that looked in particular at the effects of differences in training on the differences in productivity
  Twelve firms, again evenly distributed between Perth, Melbourne and Darwin/Adelaide were planned to be involved using this framework.
• in-depth case studies of three Australian firms (from Darwin, Adelaide and Melbourne) that undertake a good deal of training, and that believe that training pays, that looked at whether those beliefs can be sustained by the firms' own data

The EOPP and CEP surveys

The survey instruments used in the EOPP and CEP surveys were shortened and modified to reflect Australian terminology. The respondents were readily able to answer the questions, so far as we could judge.

NIESR-style matched-plants studies

Two semi-structured interview instruments were developed as a basis for undertaking six 'matched plants' studies of hotels and six 'matched plants' studies of kitchen cabinet manufacturers, based on the published output of NIESR on these two groups of businesses.

The semi-structured interview instrument for three-star hotels worked well in Darwin, Melbourne and Perth, but only five hotels could be recruited to take part. Because of hotel recruitment difficulties also, a five-star and a four-star hotel had to be included as part of the sample.

In the kitchen cabinet studies, only two firms (both in the same city) could be found, notwithstanding very substantial efforts in the other cities to identify another four companies willing to participate.

In-depth case studies

A study by the (Victorian) Office of Training and Further Education (OTFE), Return on training investment: Development of enterprise frameworks (1997) was used as a framework for discussions with three companies. This framework proved useful as a methodological framework, but also proved quite bracing for the companies, in a data-requirement sense.

Outcomes and findings from the research designs

Here, we reproduce the main findings that have emerged from the approaches taken to exploring the issue of enterprise returns to an investment in training in the Australian context:

1. Australian firms provide extensive training for their incoming employees. About half of the time of incoming employees is taken up with training over the first three months of their employment, compared with about a third of the time of incoming employees in USA firms. The main sources of this difference are the greater hours spent in Australia on formal training off the job and on informal training provided on the job by co-workers.
2. This result is associated with Australian workers paying more for their training (through accepting lower starting wages) than happens in the USA, and with employers gaining productivity increases from this training (not offset by employees' wage increases) of about two-thirds of those in the USA. In fact, nearly all the productivity gains from incoming employees' training were captured by firms in Australia compared with about half of the productivity gains in the USA. The combination of these two factors means that employer-sponsored training is probably about as profitable to Australian firms as it is to USA firms.
3. Prior education and training increases the likelihood, in Australia, that an employee will receive further training opportunities, but reduces the number of extra hours that an employee actually spends on further training. This implies that Australian firms are at least somewhat effective in their selection processes in matching trainable people to jobs requiring training.
4. Hours (quantity) of training provided by Australian firms are directly related to product-market uncertainty and unpredictability, and to other forms of capital investment in innovation, physical capital and R&D. Quantity of training is also inversely related to involuntary labour turnover. Types (quality) of training given by Australian firms are directly related to the presence of internal labour markets in firms, as well as to other forms of capital investment by firms and competitive product market conditions.
5. The profitability of firms is directly related to the quantity and quality of training provided by them and is also reflected in firms' paying above market wage rates and in difficulties in their finding suitable employees.
6. The results reported in the two preceding paragraphs appear to be largely consistent with British results also using the CEP survey instrument.
7. By contrast, preliminary results from the study of matched hotels, unlike results from the work of Prais on matched hotels at the NIESR in Britain, reveal little influence of training practices or vocational education and training (VET) qualifications on productivity levels in the hotels studied. Commitment to training in the majority of hotels studied is poor, and reactive rather than proactive. However, these results may be confounded by an inability to maintain a constant star rating across the sample of hotels investigated.
8. The preliminary review of the experiences revealed by case studies of three firms shows that enterprise returns to training can be exceptionally high, especially for training that is highly specific, rapidly accomplished, and related to the introduction of new technology or working patterns. Such training pays a firm, even if labour turnover is high.
   • For example, Company X has a labour-intensive production process. A formal induction period of five days is offered to all production line workers. The employee's chances of getting a productivity bonus each month turns out to be directly related to his or her average training test score. The only other variable that has a consistent and significant effect on the chances of getting a productivity bonus is the length of time on the job, which suggests that learning by doing is an important source of work skills and productivity.
   • Company Y introduced a new production technology involving the adaptation of high-angle rescue equipment for a tree lopping and trimming activity. The training occupied one day. It paid for itself in a fortnight. The rate of return to the company on its investment in training exceeds 500 per cent per annum.
   • Company Z changed its work culture in a particular department through an intensive training activity involving all of the staff in the department over a series of weekends. The results have been a 25 per cent increase in productivity, and a rate of return to the company on its investment in training again in excess of 500 per cent per annum.
9. Informal learning and training methods, on and off the job, were regarded by many of the businesses as generally superior to formal classroom training because real knowledge was learned in the former, while the latter was too often mostly about obtaining paper qualifications. Further, some of the most important skills from businesses' point of view were communication skills, team-working skills and leadership skills - not just task-oriented motor skills.

Conclusions

The overall results emerging from the various approaches tried in the course of this study are suggestive of a positive impact from investments in training by enterprises on their productivity and profitability.

Nevertheless, to be truly convincing, the pilot surveys and case studies undertaken in this study would need to be replicated with significantly larger samples, if the conclusions were to be based on a sound statistical footing. The conclusions are important, in a policy sense, particularly in the context of the debate that has recently emerged about reasons for the weakness of the Australian dollar relative to the USA dollar.

It is important to note, in this respect, that the Australian Bureau of Statistics (ABS) is planning to drop its training expenditure and training practices surveys. In other words, data that presently are being collected that could have been augmented to enable the assessment of the productivity and profitability investments in training by enterprises are no longer going to be.

Official data collection about training at the enterprise level is about to become worse, not better.

We would strongly recommend that the Commonwealth Government:

• either reverse this decision and reinstate these surveys, amended on the basis of the EOPP and CEP surveys trialled in this study, or, that it
• fund a new large-scale enterprise level training survey, based on the EOPP and CEP surveys trialled in this study, preferably in a longitudinal data context, perhaps attached to the present Business Longitudinal Survey, to provide a solid quantitative basis for assessing the returns to training by enterprises in the Australian context. Such information is crucial to providing a proper basis for considering policy towards enterprise level training.

We would also strongly recommend that case studies continue to be undertaken by NCVER and other training research bodies using the framework developed by OTFE (1997) to provide a steadily increasing body of evidence on the productivity and profitability of individual firms' training experiences.