Productivy Growth and Tenure: A Test of on-the-Job Training Theories of Wage and Productivy GrowthCAHRS Working Paper Series
Abstract[Excerpt] Studies have found consistently that there is a strong positive correlation between a worker's tenure with a firm and that individual's wage rate. Becker's (1975) on-the-job training (OJT) model is the most widely accepted explanation for this association. The OJT model posits that new employees receive training early in their tenure, which raises their productivity both in and outside the firm. Competition forces the employer to pay employees who have completed this training at least as much as they are worth outside the firm less transfer costs. Jobs that offer such training are more attractive than jobs that do not, so competition forces down the entry wage of jobs that provide training below the entry wage of jobs that offer no training. During the training period, the supervisors and other workers are spending time away from other activities, helping the new employee learn the job. The new employee may also spend time in learning activities instead of production activities. In order to offer training, the employer must be compensated for the resulting sacrifice in current output. When the training provides general skills, the only way such compensation can be provided is by a further lowering of the entry wage. Thus, there are two forces that cause wage rates of new employees to rise: the increase of the employee's productivity and the decline of training expenses. When training is entirely specific, and therefore does not raise the worker's productivity in other firms, the forces causing a rising wage profile are weaker. They do not disappear, however, for a rising wage profile reduces the quit rate of trained workers, and thus protects the firm's investment in training.
Citation InformationJohn H. Bishop and Stan Stephenson. "Productivy Growth and Tenure: A Test of on-the-Job Training Theories of Wage and Productivy Growth" (1988)
Available at: http://works.bepress.com/john_bishop/59/