Risk Preferences and Training Investments
Marco Caliendo, Deborah A. Cobb-Clark, Cosima Obst and Arne Uhlendorff.
Work-related training plays a key role in making internal labor markets more dynamic, improving firms’ competitive position, and ensuring that workers’ skills remain up-to-date and transferable. Promoting investments in work-related education and training is a priority for national governments and international development agencies alike. However, human capital investments inevitably involve risk. Thus, these investments depend on people’s individual risk tolerance, as well as on the nature of the risks they face and the way those risks drive potential investment returns. For instance, risk may arise from uncertainty about future payoffs to newly acquired skills or from people’s uncertainty about their own ability. Yet, training can also provide a degree of labor market insurance – likely reducing risk.
In an attempt to better understand how uncertainty affects workers’ training choices, we develop a conceptual framework that differentiates between the key investment and insurance mechanisms underpinning people’s training decisions. We expect risk-averse workers to undertake less training if workers face uncertainty about the payoff to training; however, risk-averse workers will engage in relatively more training whenever it has a large role in insuring them against future income losses. One key contribution of our study is the distinction between training that is transferable (i.e. general training) to other employment contexts and training that is not (i.e. specific). Here, we expect risk preferences to play a larger role in general training decisions than in specific decisions because the returns to specific training largely accrue to firms rather than workers.
In our empirical analysis with data from the German Socio-Economic Panel, we find that those with greater affinity for occupation-related risk are more likely to invest in general training, indicating that, on average, the investment risk of training generally dominates its insurance benefits. However, there is no relationship between risk preferences and specific training investment, which confirms that risk attitudes play a larger role in those training decisions in which the returns accrue to them rather than firms.
November 4, 2020