Returns to Trainees in a Highly Regulated Labor Market

Human capital formation enhances worker productivity and firm performance. However, firms may not fully internalize the financial benefits from investing in employee skill-building, which can disincentivize worker training and suggest roles for government support. We examine such tradeoffs in the context of physician training (i.e., “residency” programs). Using the universe of Medicare inpatient and outpatient records from 2014-2019 and differences-in-differences analyses, we show that hospitals’ productivity and revenues grow by 10-20% after underwriting a procedure-oriented residency––though heterogeneity exists. The hospitals benefiting from trainee labor conservatively net over $2 million in steady-state, revealing substantive private incentives to finance physician training.