Firm heterogeneity, worker training and labor productivity: the role of endogenous self-selection

In productivity research with firm data, the existence of endogenous sample attrition is well known. In addition, endogenous sample selection may occur. In a simple model where heterogenous firms consider entry, exit, worker training and price setting in a monopolistically competitive market, I show that firm heterogeneity leads to self-selecting into the market, which in turn dampens the estimate of the marginal effect of worker training. To address the sample selection issue, I devise a generalized method of simulated moments estimator. Estimations with firm data from China’s shoe manufacturing industry show that an increase of one standard deviation of worker training expenditure intensity results in an around 5.6% decrease in a firm’s labor productivity, larger than the estimate without accounting for endogenous sample selection.