You are in charge of the employee training program at the Nordhaus department st

Question

You are in charge of the employee training program at the Nordhaus department store An untrained employee at Nordhaus produces exactly 100 units of net revenue for the firm every year (think of units as thousands of dollars). 100 is also exactly what the untrained employee could cam at some other job, and 100 is therefore what you need to pay untrained employees to induce them to stay at your firm. Doing so cams you exactly zero economic profits. As training director, you have the option of giving your employees training. The skills learned arc completely firm-specific. Training takes two years, during which the employee produces only 50 units of net revenue per year. Once trained, a Nordhaus employee produces 150 units of net revenue per year. The longest any worker stays with Nordhaus is five years. Set up a spreadsheet showing a worker's five-year productivity stream if she receives no training, and if she docs receive training at Nordhaus. What would be her wage each year if the worker and firm split both the costs and benefits of training 50/50? (do not put this wage into the spreadsheet). Suppose the firm and worker agreed, up front, that the worker would bear only 20 percent of both the costs and returns to this training. What would the worker's wage be in the first year? Now, letting s be the worker's share in both the costs and benefits of training, add a column to your spreadsheet that calculates the worker's wage in each of the five years she might be with Nordhaus. Allow for "inputtable" values of s and set s=2 in your base case. Add two more columns to your spreadsheet, one showing the worker's "job rents" (i.e. wages received from Nordhaus minus the best available wage elsewhere) in each year, the other showing the firm's profits in each year, both assuming that the specific training docs in fact take place. What is the simple sum of profits and worker rents from training over the five years? Is this training a good investment if the discount rate is zero and no workers quit? Now assume that turnover of Nordhaus employees is fixed at c percent of the workforce each year. Use 10 percent as your base case value of c but allow for "input table" values of c. Continue to assume a zero discount rate. Use your spreadsheet to calculate the value of expected profits after quits each year. (All the workers are there for sure in the first year, i.e. quits happen at the end of the year). Add these up over the five years. Is training now a good investment for Nordhaus? What is the effect of raising c on the value of the investment in specific training? Using your spreadsheet, experiment with alternative values of c to find the highest turnover rate that makes this training a good investment for Nordhaus. Docs this "critical" value of c depend on the worker's share in the training investment, s? Why or why not?

Explanation / Answer

a)

if the worker and firm split both cost and benefit equally than wage for worker during training will be 75 units ( cost of 50 units will be spliited between the two , that's why worker eill be paid above 50 what actually produced )

after training, subsequent years, wages will be 125 because net benefit of 50 aditional units will be equally shared by firm and worker

b) if only 20 % of cost and benefits will be beared by worker than , first year wage= 90

( total cost of training in 1st yr = 50, but only 20% will be beared by worker so his wages will decrease by 10 units)

c)

if discount rate is 0 and no worker quits , then over 5 yrs, net profit will be of 50 (by adding entries in last row) , so Training is good investment

d)

if turnover rate is 10%, c=.10

then expected profit at the end of 1 yr will be= profit from above table ( all workers will work 1st yr)

                                                                    =-40

2nd yr=-40(0.9)= -36

3rd yr= 40(0.9)2=32.4

4th yr=40*.(.9)3=29.16

5th yr=40(0.9)4=26.24

total profit over 5 years= 11.80

so firm will continue training

e) when the total profit of 11.80 at turnover rate of 10% will become zero then firm will not provide training.

that is when loss in first two years becomes greater or equal to profits in subsequent 3 years.

c value doesn't affect the decision because whatever will be s, it doesn't matter as share of firm will be equal in both cost and benefit and if benefits are going to be always grater than cost at any value of s if turnover rate c is not very high

1 yr 2 yr 3yr 4yr 5yr productivity without training 100 100 100 100 100 productivity with training 50 50 150 150 150

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