Labour Contracts and Efficiency in on-the-Job Training

Abstract

Two sources of inefficiency in the provision of on-the-job training are examined: an externality between firms which arises if there is imperfect competition between firms in the labor market, and allocation inefficiency due to asymmetry of information about the value of the trained worker. The second source of inefficiency may compound the first. Various contracts between the worker and the training firm are considered. Analysis of a simple example suggests that a contract in which the wage is chosen by the firm performs best, according to the criteria of reducing both types of inefficiency.