Why Do Firms Train Apprentices? The Net Cost Puzzle Reconsidered

Almost all papers on the motivation of German firms to train apprentices take as a stylised fact that training firms have to incur net costs. This notion stems practically from one source only - a series of descriptive cross section analyses of the costs and benefits of apprenticeship training conducted by the Federal Institute for Vocational Education and Training (BIBB). While an influential theoretical literature tries to motivate why firms should accept net training costs, the stylised fact itself has not been further tested. This paper therefore presents a complementary validation of the net cost hypothesis by simulating the decision personnel managers have to take when they want to replace unskilled or semiskilled employees by apprentices. It is the first causal assessment of the impact different occupational groups of apprentices have on gross enterprise profits. We use multivariate panel estimation techniques because we can hereby tackle several sources of estimation bias and reversed causality. Our paper shows that it is necessary to discriminate between different groups of occupations when assessing the costs and benefits of apprenticeship training. In particular, we find that the share of apprentices in trade, commercial, craft and construction occupations has a positive impact on contemporary gross profits and the apprentices are substitutes for unskilled or semi-skilled workers. In contrast, an increase in the share of apprentices in the manufacturing occupations reduces contemporary gross profits. This means that enterprises offering apprenticeships in manufacturing occupations do not cover their training costs during the apprenticeship period. The apprenticeship training rather is a human capital investment. This paper demonstrates the efficiency of the German apprenticeship system: it allows companies to provide general and occupation-specific skills in highly specified occupations such as manufacturing. Otherwise, it offers cost-neutral apprenticeships in occupations where skills are more general and the mobility is higher, such as commercial or trade occupations.

Mohrenweiser, Jens and Thomas Zwick (2008), Why Do Firms Train Apprentices? The Net Cost Puzzle Reconsidered, ZEW Discussion Paper No. 08-019, Mannheim, published in: Labour Economics.