Substitution between wages and on-the-job training in an optimal labor contract

Abstract

This paper explores the substitution between wages and on-the-job training in a labor-contracting model in which training investment is negatively related to the specificity of training. A worker who has acquired general training as a positive externality of on-the-job training suffers from overtraining when quitting causes the worker to pay a quit penalty and the alternative job is not highly dependent upon the previous investment in training. It is the overtraining that can jeopardize the substitution between wages and on-the-job training. Unlike some earlier studies, this study finds that the optimal training/wage profiles are sensitive to who pays the training as well as to the degree of specificity of on-the-job training.