Firm-Sponsored General Training in a Frictionless Labor Market

Abstract

In this paper we develop a frictionless labor market model in which a firm invests in specific and general training that is neither complement nor substitute to specific training, while the worker invests only in specific training. We use this simple model to show that, contrary to Becker's (1962) human capital theory and consistent with the evidence, firms pay for general training, while the worker receives the full return on general training, and the worker and the firm share the returns on specific investments. Furthermore, the presence of general training helps to alleviate the firm's underinvest problem in specific training and that delayed general training helps to alleviate the worker's underinvestment problem because general and specific training are strategic complements. We also show that our results are robust to long-term contracts and that several institutional arrangements that help to alleviate the underinvestment problem in specific training may also help to alleviate the underinvestment problem in general training.