Invest in the best or compensate the weak?: An empirical analysis of the heterogeneity of a firm's provision of human capital

Purpose – The paper aims to test whether a firm's provision of training depends on the intake quality of trainees. While a firm may just treat each trainee equally, independent of his or her intake quality, firms may alternatively also provide more training to less able individuals or focus on the most able ones. The authors develop a theoretical framework that illustrates under what circumstances a firm chooses a particular training strategy. Design/methodology/approach – The paper uses representative administrative survey data for more than 1,400 Swiss establishments. To test their theoretical predictions about a firm's training strategy, the authors apply multivariate and instrumental variable (IV) regression models. In addition, they use case study evidence from a large Swiss retailer, allowing them to analyze how different instructors in a specific firm react when confronted with apprentices of different intake qualities. Findings – The authors find that a firm's training strategy depends on a trainee's intake quality and the expected net costs of a particular training occupation. Although firms generally provide less training to less qualified trainees, the authors find that a firm is willing to compensate low-ability trainees with additional training when training is on average profitable in the short run. Practical implications – When training regulations force firms to follow an investment-oriented training strategy (net costs in the short run), then low-ability trainees will not receive additional instruction time and the dropout risk increases. Social implications – Generating a regulatory framework that allows firms to achieve a net benefit from work-based training is crucial for low-ability trainees to have the opportunity to receive additional training investments that compensate for a lack of competences when training commences. Originality/value – This paper provides novel and direct empirical evidence on how firms adjust their training provision when faced with heterogeneity in the ability of their trainees.