This paper presents evidence that during the first year or so of a worker's tenure, wages rise more slowly than productivity net of training costs when training is predominantly general and that many employers are, in effect, induced to share the costs and benefits of general on-the-job training with their employees. This occurs for three reasons. First, sorting, high job search costs and the reputational damages that result from premature separations make a dismissed worker's next best alternative decidedly unattractive and this causes workers to prefer front loaded compensation packages which reduce the likelihood of involuntary terminations. Second, since most young workers are liquidity constrained and cannot afford to self-finance general training, employers take advantage of their better access to credit and take over the financing of a portion of the costs of general on-the-job training. Finally, the minimum wage and union contracts prevent young workers from agreeing to the low starting wages that would be necessary if they were to self-finance general on-the-job training.
Analysis of data comparing the growth of compensation to the growth of productivity net of training costs in jobs reported to involve skills that were useful at other firms found that during the first two years of tenure that net productivity grows on average 4 to 5 times faster than compensation. While the effective specificity of training that is reported to be useful elsewhere accounts for a portion of this difference, it does not account for all of it. Consequently, one or more of the forces listed above is probably contributing to the front-loading of compensation during the first year or so on a job.
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