Economics of Human Resource Development

With special reference to vocational education and training

by Prof. Dr. Dieter Timmermann Bielefeld University, Faculty of Education

What does Economics mean?

Economics is the study of those activities which, with or without money, involve exchange trans-actions among people. Economics is the study of how people choose to use scarce or limited productive resources (land, labor, capital goods, technical knowledge) to produce various commodities (f. e. wheat, beef, concerts, roads, skills, knowledge). Economics is the study of wealth. Economics is the study of how people, organizations and society end up choosing, with or without the use of money, to employ scarce productive resources - that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. Economics analyzes the costs and the benefits of improving the patterns of use of resources. (P. A. Samuelson)
Timmermann Riyadh April 2011

What are Human Resources?

Human resources are a stock of physical, intellectual, cognitive and emotional potentials of a person, of an organization or a society at any moment in time and the sources of productive doing. At birth, the potentials of a person are defined by his or her genetic endowment of talent and abilities, its flexibility, the innate learning ability as well as the space the endowment offers for growth. Being in the world, the potentials of a person unfold by maturation and by stimulations accidentally or deliberately and systematically emanating from his or her natural and societal environment so that persons use and develop their potentials. Education, training and learning are essential stimulators in/ of the development process of human resources and of productive doing.

Timmermann Riyadh April 2011

How do Human Resources develop?

Human resources may grow with respect to quantity and quality. Human resources may simply change (their content, their quality, their structure). Human resources may also shrink and depreciate (f. e. by forgetting resp. by obsolescence of knowledge). Human resources may do both simultaneously, shrink in some respect and grow in other respect (by acquiring new knowledge people must often (try to) forget what they have learned in former times). Human resources grow or change by formal, non formal or informal learning.

Timmermann Riyadh April 2011

What does Economics of Human Resources Development mean?

Human Resources Development in economic terms means: investment in human capital, i. e. in the quantity and quality, in the economic value, in the composition of human capital a. s. f.. The ways of formation of human capital by investing can happen or be induced by means of very different activities or events: investing in education, training and learning, investing in health, investing in nutrition, investing in a bright outer appearance, improvements of the functioning of the labor market and its matching efficacy, hiring practices, migration and mobility, wage determination, antidiscrimination measures (f. e. in favor of gender and race equality), strategies and measures of unions and employer associations, and changes or introduction of laws which affect all these investments and activities.
Timmermann Riyadh April 2011

What does Economics of Human Resources Development mean?

Combining these reflections with the definition of economics by Samuelson leads to the following interpretation:
Economics of Human Resource Development is the study of how people, organizations and society end up choosing, with or without the use of money, to employ scarce productive resources - that could have alternative uses (!) to produce human capital and distribute it for its productive use in the future among various persons, groups and organizations in society. Economics analyzes the costs and the benefits of investing in human resources and of improving the patterns of use of resources in doing that

Timmermann Riyadh April 2011

The special focus: Economics of Technical and Vocational Education and Training

Economics of human resources is too broad to talk about in a conference. Necessity to focus on a much narrower issue of learning: the economics of TVET. Means to talk about the costs, returns and benefits of TVET.

Timmermann Riyadh April 2011

The Training Production Model as a frame reference

Training

Work

Cost area

Area of returns and benefits

Pedagogical objectives Client satisfaction

Pedagogical objectives

Socio-economic objec-tives/ Client satisfaction

causing of costs

Q3 / Q5
Learning output

Q8

Input

Process

Effects

Transfer

Outcome

Training courses Training methods Training contents Learning places Training technology Process combination Process standardization Process intensity Training duration Type of trainer inpu input Type of learning place inputt input Curriculum Input quantities Input prices

Outcome: productive results

Q4

Q6

Q7

Q1

Q2
Technology deficit?

The Training Production Model as a frame reference

The model helps to clearify the economics of different VET systems
Vocational schooling resp. TVET in training centers (off - the - job) Vocational schooling combined with internships Production schools Firm-specific training (so called Japanese Model including rotation between jobs/ tasks/ work places/ production units/ sections/ divisions/ compartments) Job and task specific training Dual training/ the dual training system
Timmermann Riyadh April 2011

The Training Production Model as a frame reference

The model helps to clearify the economics of different VET systems: Their differences refer to the ingredients into the vocational training production function and the combination processes which result in different distances between learning and work, in a diffe-rent relevance of the transfer processes, in different compositions of output and outcome and in different matching processes in the labor markets.

Timmermann Riyadh April 2011

The Training Production Model as a frame reference for the vocational schooling or training center model
Training

Work

Cost area

Area of returns and benefits

Pedagogical objectives Client satisfaction

Pedagogical objectives

Socio-economic objec-tives/ Client satisfaction

causing of costs

Q3 / Q5
output from general training

Q8

Input

Process

Effects

Transfer

Outcome

Training courses Training methods Training contents Learning places Training technology Process combination Process standardization Process intensity Training duration Type of trainer inpu Type of learning place inputt Curriculum Input quantities Input prices

Outcome: productive results

Q4

Q6

Q7

Q1

Q2
Technology deficit?

The Training Production Model as a frame reference for the schooling plus internship model
Training

Work

Cost area

Area of returns and benefits

Pedagogical objectives Client satisfaction

Pedagogical objectives

Socio-economic objec-tives/ Client satisfaction

causing of costs

Q3 / Q5
output from general training

Q8

Input

Process

Effects

Transfer

Outcome

Training courses Training methods Training contents Learning places Training technology Process combination Process standardization Process intensity Training duration Type of trainer inpu Type of learning place inputt Curriculum Input quantities Input prices

Outcome: productive results

Q4

Q6

Q7

Q1

Q2
Technology deficit?

The Training Production Model as a frame reference for specific training variants
Training

Work

Cost area

Area of returns and benefits

Pedagogical objectives Client satisfaction

Pedagogical objectives

Socio-economic objec-tives/ Client satisfaction

causing of costs

Q3 / Q5
Output from specific Learning output training

Q8

Input

Process

Effects

Transfer

Outcome

Training courses Training methods Training contents Learning places Training technology Process combination Process standardization Process intensity Training duration Type of trainer inpu input Type of learning place inputt input Curriculum Input quantities Input prices

Outcome: productive results

Q4

Q6

Q7

Q1

Q2
Technology deficit?

The Training Production Model as a frame reference for dual training

Training

Work

Cost area

Area of returns and benefits

Pedagogical objectives Client satisfaction

Pedagogical objectives

Socio-economic objec-tives/ Client satisfaction

causing of costs

Q3 / Q5
Output from general Learning output + specific training

Q8

Input

Process

Effects

Transfer

Outcome

Training courses Training methods Training contents Learning places Training technology Process combination Process standardization Process intensity Training duration Type of trainer inpu input Type of learning place inputt input Curriculum Input quantities Input prices

Outcome: productive results

Q4

Q6

Q7

Q1

Q2
Technology deficit?

How to measure the costs of TVET

Necessity of developing a cost model and need of a clear cost concept The concept:
Costs are the valued loss resp. consumption of resources which are used or used up in order to produce a specificly defined product or service, in our case TVET

Timmermann Riyadh April 2011

How to measure the costs of TVET

1. Information about costs of TVET require answer to three questions: What are the resources used (up) and their quantities used in a certain time period? The question of cost categories and subcatgeories At which places or locations can their consumption or use be observed and measured? The question of cost locations What are the cost units, i. e. who or what is the cause of the use resp. consumption of resources? What are the prices of the resources used?
Timmermann Riyadh April 2011

2.

3. 4.

Categories and types of training cost

1. personnel costs 10. Trainees Remuneration Social contribution Gratifications Subsidies for meals Compensation of travel outlays Accident insurance Work and protective clothing 11. Trainers/ Teachers Full-time: salaries, allowances Part-time: salaries allowances 12. Training Management: salaries, allowances

2. consumables/ material costs 20. instruction materials 21. demonstration materials 22. energy costs (heating, water, electricity) 23. Damage costs as to Products Machinery tools

3. capital cots/ working stock 30. Room costs depreciation interest rate maintenance cleaning levy room administration 31. Room equipment 32. machinery and tools depreciation interest rate cleaning maintenance

4. external services 41. External instruction Fees 42. excursions 42. costs for retraining trainers 43. compensation to external trainers 44. travel costs trainees/ trainers/ management 45. postage and communication

5 other costs 50. chamber fees, contract fees, examination fees 51. levy of taxes in proportion to rooms, machinery, tools (f. e. property tax) 52. pro rata insurance costs for rooms, machinery and tools 53. donations (to trainees, vocational schools)

Timmermann Riyadh April 2011

Cost locations and Time Structure of Vocational Training Cost locations and Time Structure of Vocational Training
vocational (part-time) school external instruction internal theoretical instruction external vocational training center excursions training technology general education vocational instruction in-company school training workshop

training off-the-job (training workshop or training corner) instruction watch how skilled workers perform training on-the-job Practice, own exercises idle and waiting time productive work time Administration tests, examinations, managing VET
Timmermann Riyadh April 2011

Cost Units of TVET

There is no natural cost unit in TVET The unit which is defined as a cost unit depends on the interest of observers. What do they want to know? Presupposing this, cost units in TVET context can f. e. be:
the average trainee in a country in a certain vocation
In the first year In the second, third or x year

In a certain sector or branch

the training course the training process

Most cost estimations choose the trainee as the basis for unit cost calculations
Timmermann Riyadh April 2011

Grosscosts, Returns and Netcosts of vocational initial in company training in the years 1972, 1980, 1991, 2000 und 2007 in Germany

Focus in the remainder is on in company training

14.787

15.288 13.933

8.522

5.856

7.900

11.692

3.474

3.377

1.281 5.145

8.931

6.033
2.193

3.596

1972

1980

1991

2000

2007

Netcosts

Returns

Grosscosts

Returns to TVET
Returns to TVET include monetary and nonmonetary (intangible) returns. They may arise during training and/ or after training. They may arise by learning at the workplace, i. e. by producing qualifications, by recruitment decisions, i. e. recruiting qualifications and by the use of qualifications. They may flow towards the individual learners, to employers resp. firms who engage in training, to third parties, to free riders, to the state and to the society. The focus will be on the returns to the training companies.
Timmermann Riyadh April 2011

Returns to TVET
The difference between gross and net costs, even the pleasure to enjoy net returns from training as about 25% of German employers and nearly all Swiss employers who engage in training, depends on the way the training sites organize their training production function. Training at the workplace is the source of returns to training during the training course. Therefore, the time structure of the training course and of the training processes is of high importance.

Timmermann Riyadh April 2011

Calculation of Training Benefits Calculation of Training Benefits

Days of productive work per year Days of productive work per year

* * *
=

Hours of trivial, easy, and difficult tasks Hours of trivial, easy, and difficult tasks

Performance degree in easy and difficult task Performance degree in easy and difficult task relative to an averagely skilled employee relative to an averagely skilled employee

Hourly wage of an averagely skilled employee Hourly wage of an averagely skilled employee

Training Benefits Training Benefits

Returns to TVET
When in company training is seen to be an alternative way of recruiting skilled workers or employees from the labor market, then another type of return to training comes into play. Filling a vacant workplace with a freshly trained person means to abstain from recruiting someone from the labor market. By internal recruiting the employers forgo the cost of external recruitment, they have an opportunity return to training. Finally, TVET has a benefit for employers by image gain.
Timmermann Riyadh April 2011

Returns to TVET
Returns and Benefits to training companies

by the trainees

by the trained recruited

by recruitment costs forgone by differences of productivity

by training
through gaining image

productive contributions by trainees

by avoiding fail costs in case of vacant workplaces by avoiding costs in case of miscast by avoiding a rise of wages Timmermann Riyadh April 2011

by being attractive for external workforce

advantages for in company continuing training

Returns to TVET
With data from 2000, the average recruitment returns were:
Costs of external recruitment Costs of working in Costs of adaptation of skills Lower wage

1.429 3.927 722 - 313 5.765

25 % 68 % 13 % -6% 100 %

Recruiting costs saved

Timmermann Riyadh April 2011

A Cost Return/ Benefit Balance (2000)

Training Costs
grosscost netcost Benefits, cannot be expressed in

Returns from training

Intangible benefits from training due to quality, attractivity, risk avoiding and image effects Costs forgone by recruitment costs saved

7.344

5.765

30.534
23.190

Returns from training by productive performance by trainees

Timmermann Riyadh April 2011

A Cost Return/ Benefit Balance Human Resource Development by training pays off, if
the complete spectrum of return dimensions is taken into account training is quality and need driven the best trainees can be kept in the firm TVET is seen and accepted to be a long run investment
Timmermann Riyadh April 2011