Choice of Training Technology in Imperfect Labour Markets

Many firms provide training to newly recruited employees in order to improve their productivity. This occurs in spite of the fact that the skills acquired by the workers are valuable in competing establishments, which may make offers to those workers and bid them away. Recent research suggests that such training may be undertaken when the expected value of the worker is higher in the incumbent firm than in outside firms. If the outside firms offers a wage which falls short of the productivity of the worker in the training firm, the latter can match this offer and still retain a surplus. The concern of the present research is with the incentives that the training firm has to match the outside wage. If the marginal cost of training a new worker is relatively low. The training firm may find it more profitable to let the current worker go, and train a new one in its stead. On the other hand, the firm will prefer to match the outside offer if it is expensive to train an additional worker and if there is a large difference between the value of the worker to the training firm and that to the outside firm. \textit{Ex ante}, the firm can choose its marginal cost of training by choosing its technology, which allows it to substitute between fixed and variable costs. In a subgame perfect equilibrium, a firm may therefore choose a technology which is inefficient in order to precommit itself to match outside offers. We investigate this choice of training technology, and the consequent pattern of retention and poaching of trained employees. We find conditions under which training firms will adopt one or the other strategy, and try to explain broad observed patterns on the basis of our theory. The model also generates predictions about the proportion of firms in an industry that will develop a training infrastructure, and the structure of training programs