Firm Training and Public Policy

In this paper I analyze firm training in the dynamic context of a Blanchard-model with infinite periods. Firms provide their workers with training due to wage compression caused by frictions in the labor market. I do not only describe the stationary solution but as well the transition to long-run equilibrium. It turns out that after a positive shock to the stock of physical capital, training investments overshoot and then slowly converge to the new equilibrium level. Furthermore, I discuss some aspects of public policy like a tax on capital income and a subsidy for firm training or the combination of both policies. It turns out that a capital tax influences training investments via two opposing effects. On the one hand, it lowers the stock of physical capital and thereby the productivity of training. On the other hand, the bargaining power of workers is diminished because there are fewer firms active in the market. This leads to a higher degree of wage-compression improving the incentives to train. Principally, both effects can dominate. However, for empirically justified values for the elasticity of substitution between capital and labor, the productivity effect is more likely to prevail, implying that a tax on physical capital discourages firm training too. Since underinvestment in training is more severe than underinvestment in physical capital, it is possible that a tax on capital income increases welfare.