BACK‐LOADED WAGES AND ON‐THE‐JOB TRAINING IN A FRICTIONAL LABOR MARKET

Seung‐Gyu Sim

Economic Inquiry, 2020, vol. 58, issue 1, 386-400

Abstract: This paper analyzes the coexistence of on‐the‐job (general) training and on‐the‐job search in a frictional labor market where firms post skill‐dependent labor contracts to preemptively back‐load compensation after training. The back‐loaded compensation scheme discourages trained workers' efficient job‐to‐job transition, as if they accumulated relationship‐specific capital, which induces overintensified training among more productive firms. The quantitative analysis predicts that the market equilibrium, relative to the efficiency benchmark, gets more skilled workers (training inefficiency) and less output (allocation inefficiency). It further demonstrates that efficiency loss is moderate due to positive externality and can be improved, as search friction is mitigated. (JEL J24, J31, J64)

Date: 2020
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