A Signaling/Bonding Model of Employer Finance of General Training

Abstract

[Excerpt] This paper challenges the general validity of these simple predictions. It begins in section 2 by presenting empirical evidence that (1) trainees often do not have to accept lower wage jobs in order to obtain training and (2) that employers often appear to be sharing the costs of general training with employees. In section 3 we expand and generalize Hashimoto's elegant theory of the sharing of the costs and benefits of specific training and show why with our modifications firms choose to offer front loaded compensation packages in which they appear to share the costs of general training with their employees. Employers share in the finance of general training for three reasons: (1) they have better access to capital markets than employees, (2) turnover damages the reputation of the employee so workers ask employers to put up a bond at the initiation of the employment relationship so as to minimize their risk of involuntary separation and (3) the firm providing general training is better able to assess the success of that training than any other employer and this information asymetry effectively transforms skills that are technically general into skills that are behaviorally specific. In section 4, we examine the realism of the key assumptions of the theory--workers have limited access to capital markets and suffer severe long term damage if fired-which drive the predictions of the theory. The final section of the paper uses the theory to speculate on the reasons why employer training appears to be substantially heavier in Germany and Japan than in the US.