DP1360 Quitting Externalities with Uncertainty about Future Productivity

Author(s): Alison L Booth, Gylfi Zoega
Publication Date: March 1996
Keyword(s): Quitting Externalities, Uncertainty, Under-investment
JEL(s): E32, J23, J24, J41
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1360

This paper looks at the effect of quitting on the number of workers trained under conditions of uncertainty about future productivity when workers have both firm-specific and industry-specific skills. A new effect is found which works in the opposite direction to the undertraining result of Stevens (1994, 1995): A high quit rate makes investment in training less irreversible in the presence of firing costs and hence also less risky. This effect makes firms start hiring new workers at a lower level of productivity and hire more workers for a given increase in productivity. A rise in the quit rate can now either decrease or increase the number of trained workers.