Question

Standard labor market theory predicts that firms will not pay for worker general training, yet empirical studies suggest that, in fact, they do.

 Explain why standard theory predicts that firms will not pay for general training.

 Explain why empirical studies might find that firm do, in fact, pay for general training, and explain what this implies about what the most appropriate theoretical model for the labor market.

Answer 1

In the standard theory of human capital there is a sharp distinction between general and specific human capital. Skills which are only useful with the current employer constitute the specifc human capital whereas skills which are as useful with some other employer are general. Because the standard theory assumes that all labor market transactions take place in competitive markets, the worker will capture all the bene ts of his general human capital. Therefore, his employer will have no incentive to invest in these skills. In the standard theory, firms may pay all or part of the investment cost in specific human capital because these skills are not valuable to other employers and a worker who acquires more rm specifc skills will not necessarily get a commensurate increase in wages. therefore under this theory more empasis is on general training.

Empirical studies typically find that general training enhances both wages and performance and, consistent with theory grounded in labour markets, also finds evidence of a wedge between wages and production effects and that employees and employers share benefits from training both to industry- and firm-level.

standard theory is much better off as it stress on specific skills which are required to perform there job effectively in industry. this enhance there performance and also increases the output. it helps in retention of employee and that person cannot easily move out of current jon ensuring the rate of movement very low.