On-the-Job Training and On-the-Job Search

Abstract

This paper analyzes the coexistence of on-the-job training and on-the-job search in a frictional labor market in which workers engage in on-the-job search behavior and firms post skill-dependent wage-training contracts to preemptively back-load compensation and extract more surplus in earlier periods. It demonstrates that the back-loaded compensation after training makes trained workers turn down job offers from slightly more productive poaching firms, as if they accumulated job-specific or relationship specific human capital and general training is over-intensified overall. According to the calibration exercise, the market equilibrium outcome, relative to the constrained social planner's outcome, retains a larger steady state mass of skilled workers (training inefficiency), but, by discouraging efficient job-to-job transition, produces fewer units of outputs (allocation inefficiency).