TRAINING, JOB SECURITY AND INCENTIVE WAGES
| Author | Margarita Katsimi |
| Date | 01 February 2008 |
| Published date | 01 February 2008 |
| DOI | http://doi.org/10.1111/j.1467-9485.2008.00442.x |
TRAINING, JOB SECURITY AND
INCENTIVE WAGES
Margarita Katsimi
n
Abstract
This paper considers the optimal level of firm-specific training by taking into
account the positive effect of training on the expected duration of workers’ current
employment. In the framework of an efficiency wage model, a short expected job
tenure represents a disamenity that reduces the penalty from shirking. As this
disamenity increases, workers have an incentive to continue providing a positive
level of effort only if they are compensated by a higher wage. We endogenize the
employment separation rate by introducing firm-specific training. Firm-specific
training creates a rent that is lost if the worker is separated from the firm. As a
result, the firm will be more reluctant to fire its trained workforce in a recession.
This implies that firm-specific training can decrease current wages because it
represents a commitment to lower future labour turnover.
I Intro ductio n
As early developments of the human capital theory suggest, workers’
uncertainty about future employment has a negative impact on investment in
firm-specific training. According to Becker (1962, 1964) and Oi (1962), workers
will be reluctant to bear the cost of this investment if there is a positive
probability of being dismissed and not benefit from investment returns. In Booth
and Chatterji (1989), workers will be induced to undertake specific training in
sectors where there is a positive probability of being redundant if a redundancy
payment is part of the firm’s contract.
This paper argues that the relationship between firm-specific training and the
level of job security is twofold
1
: Firstly, investment in firm-specific training
creates a surplus in employment relationships. The firm can enjoy part or all of
this rent as long as the worker remains employed. This implies that in a recession
the optimal policy of the firm will be to retain the employment relationship even
if the wage paid to the worker exceeds her marginal product in an alternative
job. As a result, investment in firm-specific training generates expectations for
n
Athens University of Economics and Business, and CESifo
1
In this paper, job security is defined as a negative function of the probability of being fired in
a recession.
Scottish Journal of Political Economy, Vol. 55, No. 1, February 2008
r2008 The Author
Journal compilation r2008 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
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