Uncertainty and the Durability of On-the-Job Training

Abstract

In an earlier paper [5, 414-17], it was demonstrated that under conditions of certainty and competitive markets a profit-maximizing firm will, in the short run, select the quality and quantity of on-the-job training (OJT) so as to equalize the marginal benefits and costs associated with each. Moreover, the analysis extended the traditional theory [2, 8-29] to also consider the timing for retraining. Comparative static results with the model suggested that the rate of obsolescence selected by the firm will vary inversely with the interest rate, a finding consistent with more general theories of investment behavior. While that paper raised questions concerning the impact of uncertainty on the selection of OJT, it handled them by assumption [5, 414]. In what follows, we propose to reconsider these issues focusing on uncertainty in the output price facing the firm and its implications for the durability of OJT. Levhari and Weiss have recently considered the role of risk and uncertainty for individual decisions on investments in human capital. Within a two-period model where uncertainty affects the individual's earnings in the second period and therefore the marginal and average rate of return on the investments, they find that the introduction of uncertainty significantly alters the testable hypotheses. Uncertainty and the individual's