Training, Rent-Sharing and Unions

We investigate two dimensions of investment in general human capital on-the-job: the number of workers trained and the intensity of training for each worker. In the benchmark case, we consider wage and training decisions made by firms in an imperfectly competitive labour market. The benchmark case generates two types of market failure: too few workers are trained, and the workers who are hired receive too little training. This is caused by the firms' discount rate exceeding the social discount rate, due to a 'quitting externality'. We show that the presence of labour unions can increase social welfare by increasing training intensity, while reducing welfare by lowering the number of workers trained. Using the British Household Panel Survey, we confirm the predictions of the model.