On-the-job training of employed workers is important because a high-skilled labor force stimulates economic growth and facilitates sectoral adjustment of the economic structure. To the extent that investments in training of workers are good for labor market performance and economic growth, it is relevant to understand the main determinants of these investments. Firm-specific characteristics will influence training investments as firms may differ in their propensity to hire less skilled workers and invest in training of these workers or to hire more skilled workers and provide less training. And, there are also common determinants of firm-sponsored training related to market imperfections. An increase in competitiveness of the product market may affect training investments while more flexible labor market will also reduce investments in training.
Our paper focuses on the effects of labor market imperfections and product market competition on training. From a theoretical point of view the effect of market imperfections can go either way. More competition in the product market may reduce training because profits and investment funds go down, but it may also increase training if a better skilled workforce makes the firm more able to compete with other firms. Similarly, the effect of labor market competition can go either way. A higher labor mobility may increase the need for training but may at the same time reduce the willingness of firms to make the investment in training because with a shorter job tenure the pay-back period is reduced. If market imperfections influence firm-sponsored training, training subsidies or regulation may be justified on the basis of well founded arguments. Firm-sponsored training stimulates human capital accumulation and thus has a positive impact on productivity.
As discussed in more detail in the next section, previous empirical research on firm-sponso-red training focuses on the effects on wages and productivity. So far, the effects of institutions, including labor market frictions and product market competition, have not received a lot of attention. Yet, in a changing economic environment in which labor markets have a tendency to become more flexible and product markets have a tendency to become more competitive through a process of international integration and globalization, these relationships are very policy relevant. Our paper focuses on the question how firm-sponsored training is influenced by labor market frictions and product market competition.
Our empirical analysis is based on Dutch matched worker-firm data. The worker data are informative on individual wages and labor market transitions by which we estimate the degree of labor market frictions. The firm data are informative on firms’ revenues and costs by which we estimate a product market power index. The estimation strategy to identify the impact of these indexes on firm-sponsored training exploits their variation across markets and over time. We use econometric techniques that control for firm unobserved heterogeneity and we perform robustness check to test whether the results might be biased by too strict parametric assumptions. We find that a decrease in labor market frictions significantly reduces firms’ training expenditures. Instead, product market competition does not have an effect on firm-sponsored training. From this we conclude that competition policy and increasing international competition will not pose adverse effects on firm-sponsored training of workers. An increase in labor market flexibility will lead to a lower training incidence. However, the size of this effect is rather small compared to the cross-sectional variation in the incidence of training.
Our paper is organized as follows. Section 2 reviews the related literature. The data are described in Section 3. Section 4 presents the indexes of market imperfections we use to test non-competitive training theories. The econometric model and estimation results are presented and discussed in Section 5. Section 6 concludes.
