Training and Unions

The paper examines the optimal level of training investment when trained workers are mobile, wage contracts are time-consistent, and training comprises both specific and general skills. It is shown that, in the absence of a social planner, the firm has ex-post monopsonistic power that drives trained workers’ wages below the socially-optimal level. The emergence of trade union bargaining at the firm level can increase social welfare, however, by counterbalancing the firm’s ex-post monopsonistic power in wage determination. Local union-firm wage bargaining ensures that the post-training wage is set sufficiently high to deter at least some quits, so that the number of workers the firm trains is nearer the socially-optimal number. The paper therefore sheds some light on the stylized facts that unions are associated with fewer quits and more firm-provided training.