Question

Explain general and firm-specific on-the-job training. Would employers be less likely to invest in general on-the-job training if they regard women as more likely to leave? Why or why not? Would employers be less likely to invest in firm-specific training if they regard women as more likely to leave? Why or why not?

Answer 1

In principle, the optimal amount of investment in firm-specific human capital – i.e. those skills that are valuable only at the firm providing them – can be obtained only if costs and returns can be shared by the worker and the firm. Sharing is required for two reasons: i) this investment creates rents to continuing a relationship, which the parties can bargain over; and ii) although specific training is valued only at the firm that provides it – meaning that possible alternative job-offers for the worker are not increased by specific training – once training expenditures have been made, the firm incurs a greater loss if the worker quits. As a consequence, there is an incentive for the employer to increase posttraining wages to prevent voluntary quits. In contrast, only the worker will pay for general training – that is training that raises productivity at other employers to the same extent as at the employer who provides it – under perfect competition in the labour market. This occurs because only the worker can reap the benefits from this type of training, since any alternative wage offer rises proportionately with his/her productivity. However, imperfections in other markets (e.g. the capital market) may prevent workers from choosing the optimal amount of human capital investment.

In practice, firms appear to pay for general capital investments. From the economic perspective, the worker still pays for general capital investments by accepting a lower starting wage equal to $ŵ₀ = w₀ - i in return for general training. This model indicates that training is more valuable earlier in the worker’s life.

In the event that a worker separates from the firm after receiving specific training, the firm’s investment is destroyed.

Thus the firm and the worker may want to enter into contracts to share the costs and benefits of specific training. In contrast, job losses lead to no destruction of the accumulated general skills per se. Worker turnover provides a disincentive for firms to pay for specific investments.

The hold-up problem: after the firm makes specific investments in a worker, the worker may take the investments hostage by making a take-it-or-leave-it offer and threatening to quit and destroy his value, thereby appropriating the returns to investment. In the hold-up problem, the firm recognizes that sunk investments are vulnerable to expropriation ex post, and the ex ante fear of this type of worker behavior can discourage the firm from making specific investments. This can have a disastrous effect on training.